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Re-thinking Trade Policy Priorities in a Supply-Chain-Driven World

Bernard Hoekman's picture

Supply trucks in Lao. Source: World Bank.A company importing desktop computers into Russia expects border processing times of up to six weeks. Chinese customs authorities take so long inspecting drug shipments that a global healthcare company must hold nine days’ worth of inventory. Concerned about the prevalence of theft, a cell phone manufacturer must provide a security detail for overland shipments in Mexico.

These are examples of the supply chain barriers that, as a whole, are more detrimental to world trade than tariffs, according to a new report, Enabling Trade: Valuing Growth Opportunities, released today at the World Economic Forum in Davos. The study, a collaborative effort between Bain & Co., the World Bank and the World Economic Forum, concludes that a concerted effort to reduce supply chain barriers to levels observed in the best performing countries could increase global GDP by some 4.7 percent – six times more than what could be achieved from eradicating all remaining import tariffs.

The impact of supply chain barriers is illustrated in eighteen detailed case studies that illuminate issues that have become increasingly important as firms design production networks that traverse the world. No longer is trade as simple as manufacturing in one country and selling in another. Rather, goods often cross many borders, accruing components in diverse settings before ending up in a retail store. To participate in international production processes, countries must worry about a host of factors that affect the costs and reliability of the supply chain. Efficient border management is crucial, but also essential are transparent and predictable regulatory environments and good transport and telecommunications infrastructure services.

The case studies look at trade barriers through the eyes of businesses. The business perspective shows how border delays and complicated regulatory processes affect firms’ bottom lines and, ultimately, their investment location decisions. The business perspective helps emphasize the types of harm that companies incur when faced with specific hurdles. If delays in the supply chain hold up fashion-sensitive clothing, retailers will return shipments, at huge cost to apparel manufacturers. Medicines that are stuck at borders waiting for approval from regulatory authorities may spoil in the sun, meaning lost inventory for pharmaceutical companies. Manufacturers faced with an unreliable supply chain will need to keep higher stocks (at higher cost) or face the risk of production stoppages.

The businesses experience brings home the idea that often it is a combination of supply chain barriers that is toxic. The implication for policy is that governments need to “think supply chain.” Rather than mechanically seeking to tackle specific impediments to trade – such as customs clearance, product standards, rules of origin requirements, lack of competition in transport services – it is vital for policy-makers to work with businesses to determine the combination of factors that together comprise the most onerous barriers to their success.

Small businesses may suffer disproportionately from supply chain barriers to trade because navigating these barriers frequently requires upfront investments that are independent of volumes shipped. For example, small firms often cannot spend the staff time needed to understand a given country’s idiosyncratic policies and procedures. One of the case studies uses eBay data to show that merchants who use the eBay platform to sell goods internationally stick to countries where regulations are easiest to navigate. A pilot project implemented by eBay suggests that helping small and medium-sized enterprises (SMEs) navigate the regulatory regimes of importing countries could expand their volume of international sales by 60-80 percent. Given that SMEs account for much of total economic activity in many countries, such trade facilitation and expansion could have significant positive effects on employment.

Of course, not all businesses automatically have an interest in efficient trade. A government hoping to mitigate supply chain trade barriers may encounter resistance from businesses that have an interest in maintaining the status quo. If a freight-forwarding firm makes its profits by helping exporters navigate a very complex border clearance system, for example, that firm may oppose change. If a manufacturing firm has incurred significant costs to overcome specific barriers in selling into a market – for example, by building local production facilities – it may oppose change that could bring in competition.

The good news is that governments open to reform have access to excellent tools. The World Bank’s Logistics Performance Index (LPI) and Doing Business reports and the World Economic Forum’s Global Enabling Trade Report all provide data about key factors constraining trade in countries across the world. These can identify problems and work as leverage for advocacy and reform. The Bank’s LPI indicators show that significant improvements in logistics performance are possible in lower-income countries. As John Moavenzadeh (World Economic Forum), Mark Gottfredson (Bain & Co.) and I point out on the Forum’s blog, more governments (and companies) should pay attention to what high-performing countries are doing right.

But, as the case studies illustrate, data cannot tell the whole story and country comparisons only go so far. Indeed, individual interest groups and market relationships within the country are often strong forces keeping trade barriers in place. This means that each country must find its own way, and that a priority role for government is to identify the key factors that impede the efficient operation of supply chains that are most important for their nation. Often a big part of the problem is a lack of coordination between government agencies and regulatory authorities. Suggestions made in the report include establishing a mechanism that focuses policymakers attention on supply-chain efficiency issues, forming links with the business community to identify priorities for action and collect data to help monitor progress in improving administrative and regulatory processes, and paying particularly close attention to the interests of small and medium-sized enterprises.