Pascal Lamy has said that a multilateral Trade Facilitation Agreement, currently under negotiation as part of the Doha Round, which would remove barriers to trade and cut red tape in half, could stimulate the $22 trillion world economy by more than $1 trillion.

The payment of fees and charges, risk management, electronic payment, expedited shipments, authorised traders, single windows, advance rulings, are the spokes that allow the wheels of trade to move. But a disproportionate amount of these trade costs is being borne by developing countries.

A new database developed by UNESCAP and the World Bank has shown that it is far more expensive for Tunisia to trade manufactured goods to neighbouring Algeria, than to trade them with far off France. Trading agricultural goods between Algeria and Morocco is similarly double the cost of trading them between Algeria and Spain. Why is this?

Trade costs are the trade-depressing effect of separation between countries, both physically and culturally, but also the so-called “thickness of borders” – logistics performance, international connectivity, tariffs or non-tariff measures. While some obstacles are immutable, the “thickness of borders” can and should be addressed through policy interventions.

The two most important factors determining “thickness of borders” trade costs are maritime transport connectivity and logistics performance. Their effects are comparable to geographical distance, but unlike location, these issues can be easily addressed by policymakers.

The current cost of trading across borders is estimated at $2 trillion, 15% of world trade, 10% of which is the result of border and customs procedures. Infrastructural reforms to improve border management, product standards, transport and distribution would therefore have vast benefits for developing countries by significantly lowering trade costs as well as giving a much needed boost to the global economy.

With the growth of global value chains, it is vital that goods move more easily across borders, and trade facilitation is therefore a major priority. Policies are currently being negotiated in the WTO, but they must be addressed holistically to ensure maximum impact – key areas such as air and maritime transport are being handled elsewhere in the multilateral arena, but efforts to reduce trade barriers should reflect the reality of interdependent chains.

Progress to improve these issues need not wait for international agreement. There is much that national governments can do to improve the trading environment of their own countries, work which should be supported by developed countries through Aid for Trade systems.

The World Bank and UNESCAP Trade Costs Database will help policymakers pinpoint the areas where trade costs are high and diminish the barriers that make trade expensive.

summary

The current cost of trading across borders is estimated at $2 trillion, 15% of world trade, 10% of which is the result of border and customs procedures. Infrastructural reforms to improve border management, product standards, transport and distribution would therefore have vast benefits for developing countries by significantly lowering trade costs as well as giving a much needed boost to the global economy.

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