RESEARCH AND ANALYSIS

A 21st Century Trade Agenda: Global Supply Chains and Logistics Services

Bernard Hoekman, World Bank

 
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International supply chains are an ever more prominent feature of global commerce. Production of manufactured goods is increasingly organized through global value or supply chains, with goods being processed (value being added) in multiple countries that are part of the chain. The key factor for the ability of a country to participate in supply chains is the efficiency of local trade facilitation and logistics services. Every extra day it takes in Africa to get a consignment to its destination is equivalent to a 1.5% additional tax (Freund and Rocha, 2011). Even if tariffs on export markets are zero, if firms in a country confront high cost and inefficient logistics they will not be able to compete with firms that benefit from an efficient logistics environment.

“Logistics” as such is not a focus of negotiations or cooperation between governments. Instead, the focus has historically been on reducing barriers to trade for specific products and sectors: tariffs, subsidies, and different types of nontariff barriers as well on agreeing to rules with respect to the procedures to be followed by governments in clearing goods through Customs. While these are all important areas of policy that give rise to trade costs for businesses, the lack of a “whole of the supply chain focus” in trade negotiations and trade agreements means that key factors that impact supply chain efficiency are not addressed. As such, the benefits accrued through traditional trade negotiations are significantly reduced.  An approach that centers on all of the policies that have a major impact on the efficiency of supply chains offers the opportunity of significantly enhancing the commercial relevance of trade agreements.

A key problem is that over-restrictive policies artificially “break” the supply chain by introducing discontinuity and affecting reliability. Such policies include those that are enforced at the border (over-burdensome Customs, health, security requirements, etc.).  Many of the policies that may raise costs or reduce the ability of firms to improve the efficiency of supply chains are regulatory in nature—e.g., transportation- and distribution-related standards and policies (e.g., maximum truck size requirements; axle loads; size of retail outlets; zoning restrictions for wholesale and retail operations; etc.). There may be limitations on investment in certain types of activities. Entry into a market or supply of certain services may be impeded as the result of exclusivity or preferential treatment for state-owned or state-supported enterprises (e.g. postal monopolies). The functioning of some parts of a supply chain may be impeded as a result of the exercise of market power by a dominant or monopoly supplier or entity that controls access to a gateway, facilities or networks (e.g. port operations or airport cargo handlers). In short, a variety of factors may raise the cost of operating a supply chain.  In addition to addressing these problems, more data on logistics barriers is needed.

The World Bank has compiled a logistics performance index (LPI) for some 150 countries. The LPI captures different dimensions of the determinants of the supply chain performance of countries and illustrates how customs-clearance procedures and the quality of trade-related infrastructure affect the operations of logistics services providers, as well as the importance of the quality of transport services and related intermediation– e.g., timeliness of delivery and the ability to track and trace consignments.¹ The LPI report illustrates that government policies have an important impact on logistics performance—countries that have been pursuing measures to improve border management and to facilitate trade have seen a significant improvement in LPI scores over time.  In addition to helping countries see what areas need improvement, this data and information also helps facilitate a discussion on international cooperation.

A “whole of the supply chain approach” has been advocated by the some industries in the business community. In the WTO context a proposal has been made to focus on logistics – bringing together a variety of services sectors and sub-sectors that are relevant from a logistics perspective (cargo handling, storage, warehousing, agency services and related ancillary services, as well as all freight services – air, road, rail, maritime, express/courier). Negotiating commitments on these various services – treated as a “bundle” or a “check-list”– together with parallel negotiations on trade facilitation that focus on border management procedures, and existing disciplines that pertain to product standards and technical regulations, offers the prospect of addressing many of the policies that affect the operation of global supply chains. However, to date negotiations on logistics defined as a bundle of services and relevant government policies that affect the operation of supply chains have not been successfully advanced in the WTO.

Some progress in this direction has been made in recent regional negotiations such as the Trans-Pacific Partnership, with business advocating for the elimination of barriers to trade and redundant regulation, as well as efforts to enhance cross-border physical connectivity and improve communication on and coordination of regulatory practices that impact trade.

A major element of the proposed approach in the TPP is consultation and collaboration – regular communication and interaction of officials, regulators and industry representatives with a view to identifying issues and potential solutions and monitoring progress in reducing needless policy-created supply chain costs. A premise is that cooperation needs to center on the attainment of specific performance targets (e.g., time-to-release commitments; a common list of data requirements for shipments); agreement on regulatory principles; establishment of consultation processes that allow industry to identify specific chokepoints; and mechanisms to address these chokepoints in a timely and collaborative manner.

Until progress can be made to improve the operation of supply chains through international cooperation there is much that national governments can and should do to improve the logistics environment in their own countries. The very large differences in logistics performance that are documented by the LPI are mostly a reflection of domestic factors that can be addressed by each country itself, and it is in their self-interests to do so.

References

Daudin, G., C. Rifflart and D. Schweisguth (2011) “Who produces for whom in the world economy?” Canadian Journal of Economics, 44(4): 1403-37.

Freund, C. and N. Rocha. 2011. “What Constrains Africa’s Exports?” World Bank Economic Review 25(3): 361-86.

Gawande, K., B. Hoekman and Y. Cui. 2011. “Determinants of Trade Policy Responses to the 2008 Financial Crisis,” World Bank Policy Research Working Paper 5862

World Bank. 2012. Connecting to Compete, 2012: Trade Logistics in the Global Economy. Washington DC: World Bank.

1. The most recent edition of the LPI was released in May 2012—see World Bank (2012). The LPI is based on 6,000 country assessments by some 1,000 international freight forwarders.back to text