TFA's benefits extends well beyond cutting red tape

TFA's benefits extends well beyond cutting red tape

The Trade Facilitation Agreement (TFA) will bolster governance in developing nations, writes Russell Hillberry.

In February this year World Trade Organisation celebrated the entry into force of the Trade Facilitation Agreement (TFA), a global effort to streamline government procedures governing international trade. The primary goal of the agreement is to improve the efficiency and effectiveness of agencies that oversee trade, especially in developing countries, by reducing bureaucratic red tape at the border, simplifying customs procedures and improving enforcement capabilities through the application of technology solutions and institutional reforms.

While this is expected to significantly boost global trade, in my view the accord’s most important benefits are in its potential to improve governance in developing countries. Such changes may begin with easing trade flows, but, with any luck, improved capabilities in trade oversight will spread to other areas of a country’s bureaucracy, leading to more effective law enforcement and tax collection, improved capacity to apply IT and better communication between different government agencies.

The agreement comes into force at a time when large trade deals such as the Trans-Pacific Partnership are under fire because they benefit some industries at the expense of others, a lesson I learned as an analyst at the U.S. International Trade Commission. The TFA – which succeeded in part because the benefits of improved governance may offset economic losses elsewhere – provides momentum for the global trading system at a time when it’s sorely needed.

A snapshot of global trade
Effective government oversight of international trade flows is an enormously difficult task. In a typical month, more than $1.2 trillion of international trade arrives for import processing somewhere in the world. Thousands of products from dozens of exporting countries can be imported into a country by hundreds (or even thousands) of different companies. For example, US Customs and Border Protection processes more than 56,000 trade transactions on a typical day.

To further complicate matters, a hodge-podge of regulations and regulators govern all those products, with lots of overlap. At it simplest, customs officials are responsible for collecting tariff revenue, food safety workers ensure vegetables and processed goods meet certain standards, environmental agents search for pests and so on. A shipment of strawberries, for example, might be subject to inspection by any or all three of these agencies – and possibly others.

Global support for reform by these bureaucracies became official on Feb. 22 after Chad, Jordan, Oman and Rwanda formally announced their plans to implement the Trade Facilitation Agreement, pushing the total number of WTO members that have ratified the deal – which includes the US – above the two-thirds threshold, bringing it into force.

What the accord does
The accord, which WTO members finalized in 2013, spells out a range of programs and procedures that serve as a list of “best practices” for oversight of international trade flows. It specifies the kinds of information that governments should make available to businesses that trade internationally. It describes structures that should be in place for appealing the decisions of the oversight agencies. It outlines preferred systems and methods for selecting shipments for inspection. And it identifies ways in which the multiple agencies operating at borders can better communicate with each other, and with trading companies.

More importantly, the accord helps countries overcome the practical hurdles that have made implementing these best practices difficult. Most significantly, the richer countries in the WTO have committed to support reforms in developing countries with technical and financial expertise over an extended time period. IT solutions are especially difficult to implement in poor countries without external funds and technical assistance, and these will require extensive support. More broadly, the hope is that external assistance paired with domestic reform efforts will also reduce corruption in trade oversight agencies. Governments already interested in reform often face resistance from bureaucracies comfortable with the status quo. This is certainly true with trade oversight, because in many countries customs officials enrich themselves by taking bribes, for example.

The accord strengthens the hands of reforming governments because the legal authority of the WTO will now rest behind them, while improved technology, new appeal procedures and other strategies contained in it may be able to limit corruption.

Carrots and sticks
In my own research, I have studied specific trade facilitation reforms in Albania and Serbia. Albania adopted risk management techniques for sampling shipments for inspection. Serbia allowed prequalified companies to clear customs at their own warehouse, rather than the customs office. Both these reforms were aimed at focusing government resources on inspecting shipments more likely to run afoul of trade rules, in effect speeding up processing times for everything else.

While my coauthors and I lacked the data to establish that the reforms improved compliance, we did find that the Albanian reforms reduced the time required to clear customs and increased imports. And in Serbia, clearance times become more predictable for importing companies deemed more trustworthy.

But Albania and Serbia haven’t been doing this entirely on their own. Their desire to join the European Union has acted as a giant carrot because effective border management is a precondition for EU membership. The EU has a longstanding strategy of making accession conditional on administrative reforms, including trade facilitation reform. Beyond the carrot of membership, technical and financial assistance from the EU has also been an important ingredient supporting reform. The new Trade Facilitation Agreement essentially tries to do the same thing on a much larger scale.

The accord provides some smaller carrots and (implicitly) some sticks. The carrots are the financial aid and technical assistance that richer countries have promised to provide as part of the agreement. The sticks will come later, wielded by international trade lawyers seeking to enforce penalties through the WTO. It remains to be seen, however, if this particular bundle of sticks and carrots can motivate substantial reform.

Why the TFA matters
Estimates of the economic benefits of this agreement vary widely: from $68 billion to nearly $1 trillion per year. That translates to a gain of $9 to $133 a year for every person on the planet. The range of these estimates reflects several uncertainties. Countries may agree to implement reform, but do so imperfectly. Even if the reforms are implemented fully, their effects on the time and monetary costs of trading are uncertain. The quality of implementation and its effects on trade will also vary across countries, in ways that are difficult to predict. My own sense is that lower middle of the range represents a best guess, but the truth is that we cannot yet know.

More important than the economic benefits discussed in these analyses, however, is the question of whether these trade reforms can boost the developing country governments’ capacities to administer complex systems. If developing countries can learn to better employ IT solutions to improve border management, perhaps they can transfer these lessons to their health care systems. If they can improve enforcement and reduce corruption in their customs agencies, perhaps they can apply similar techniques in their tax collection and law enforcement agencies. It is difficult to formally track the spread of knowledge and capabilities like these, but the agreement will push governments to develop capacities they currently lack.

The bigger picture
The Trade Facilitation Agreement is the latest expansion of responsibilities granted to the WTO. The organization itself represents the culmination of a 50-year effort to build an international trading system with mutually agreed rules. The WTO’s carrots and sticks have a good chance to improve developing countries’ oversight of trade flows. If governments can apply these lessons to other aspects of governance, the economic impact of the agreement would be multiplied many times over.

Russell Hillberry is the Associate Professor of Agricultural Economics at Purdue University and consults to the World Bank on trade facilitation issues. This article first appeared on The Conversation and is republished with permission.