RESEARCH AND ANALYSIS
Advancing Trade Facilitation Reform: The Gains to Trade in ASEAN
Ben Shepherd and John S. Wilson
What are the gains for ASEAN with trade facilitation reform? We estimate that improving port facilities, limiting unofficial payments, and improving competitiveness in the internet services sector to meet the regional average in each case would boost trade by 7.5% ($22bn), 2.3% ($6.8bn), and 5.7% ($17bn) respectively. These gains outweigh the impact of tariff cuts in ASEAN. The general thrust of our results is clear — and aligned with an increasing body of research on-going at the Bank and elsewhere: — improvements in trade facilitation have significant potential to boost trade in the ASEAN region. Renewed emphasis today placed on trade facilitation reform by ASEAN member countries is likely to bear real fruit in the future.
Many “new generation” preferential trade agreements (PTAs) include provisions related to trade facilitation. We use that term broadly to include the full set of policies designed to reduce trade transaction costs. It includes reforming customs and border procedures — essentially the scope of the WTO trade facilitation negotiations — as well as at- and behind-the-border regulatory reforms covering areas such as standards and technical regulations, trade-related infrastructure, and backbone services like transport and communications.
The Association of South-East Asian Nations (ASEAN) provides an interesting case study of how small, developing economies can move forward on trade facilitation. The overarching integration objective for ASEAN member states is now the ASEAN Economic Community. Considerable progress has already been made in liberalizing tariffs. Attention has steadily shifted to non-tariff measures that impact trade. As part of this shift, ASEAN member states adopted a Trade Facilitation Work Program in 2008, and agreed on a set of key performance indicators in 2009. From an outcome point of view ASEAN member states are notable for their heterogeneity. On metrics of trade facilitation, Singapore is one of the world’s leading performers. It has world class infrastructure, fast border clearance times, and very low trade costs as measured by the World Bank’s Doing Business project. Malaysia is also a strong trade facilitation performer, particularly in terms of the cost of moving goods across borders. A middle group of countries can be regarded as solid performers on trade costs, although other aspects of trade facilitation remain weak: Cambodia, Indonesia, Thailand, and Vietnam. The Philippines and Laos, however, are characterized by relatively high Doing Business trade costs.
Trade facilitation is about more than just the direct costs of import and export transactions, however. One common approach in the literature is to consider four pillars of trade facilitation: the quality of air transport infrastructure; the quality of maritime transport infrastructure; the extent of irregular payments in customs as a general indicator of customs administration performance; and the quality of competition among internet service providers (ISPs) as an indicator of backbone service sector performance. Using these metrics discloses a number of interesting dynamics in the region’s approach to trade facilitation.
In terms of infrastructure, Singapore is consistently ranked very highly for its ports, while Malaysia and Thailand appear to have improved slightly over recent years. The remaining countries for which data are available have remained approximately stable over recent years, with the possible exception of Indonesia, which discloses a worsening trend. That pattern is approximately the same for air transport infrastructure. In terms of the extent of irregular payments for import/export licenses, Malaysia and Thailand appear to have improved their performance slightly over recent years. Other countries have remained much the same, with the possible exception of Indonesia — it seems, once again, to be on a downward trend. As was the case for infrastructure, Singapore is well ahead of the other ASEAN member countries on this criterion.
Interestingly, the quality of competition in the internet services sector discloses more homogeneous performance than was the case for the other indicators. In 2005, all ASEAN member countries except Vietnam were clustered at around 5 on the 1-7 scale used to gauge performance in this area. This represents a slight improvement over recent years in most cases, with the exception of Singapore, which has maintained a consistently strong level of performance.
The most important stylized fact on trade facilitation in ASEAN is thus cross-country heterogeneity in most areas, which appears to be persistent over time. This heterogeneity is reflective both of income differences across countries, and explicit policy choices (such as free trade in Singapore). The presence of strong performers such as Singapore and, to a lesser extent, Malaysia and Thailand, shows that significant progress is possible for the remaining ASEAN member countries.
Using a standard approach in the literature — a gravity model — we can quantify the gains that could accrue to ASEAN from a concerted effort to boost the region’s trade facilitation performance. As a point of comparison, cutting applied tariffs to the regional average could increase intraregional trade by about 2% ($6.3bn). Improving port facilities, limiting unofficial payments, and improving competitiveness in the internet services sector so as to meet the regional average in each case would boost trade by 7.5% ($22bn), 2.3% ($6.8bn), and 5.7% ($17bn) respectively. According to our results, improving air transport to the regional average could increase trade by a very substantial margin: 42% or nearly $125bn. Although this result could reflect the importance of production networks in the region—which rely heavily on air transport — there are technical reasons to believe that it may be an overestimate.
Although it is always possible to refine quantitative estimates of reform impact, the general thrust of the results is clear: improvements in trade facilitation have major potential to boost trade in the ASEAN region, and could have effects at least equivalent to — and possibly larger than — a major round of tariff reductions. This finding is in line with a large body of previous work. It suggests that the renewed emphasis placed on trade facilitation by ASEAN member countries is likely to bear real fruit in the future.
This note is based on Shepherd, B., and J. S. Wilson. 2009. “Trade Facilitation in ASEAN Member Countries: Measuring Progress and Assessing Priorities.” Journal of Asian Economics 20 (4): 367-383.
Ben Shepherd, the Principal of Developing Trade Consultants Ltd., is a trade economist and international development consultant. He has worked on a wide range of trade and development issues with various international organizations (the World Bank, the OECD or the United Nations among others). He specializes in providing policy-relevant research, as well as capacity-building seminars for researchers working in trade and development. Ben’s particular areas of expertise include: Trade facilitation, transport, and infrastructure; Governance, institutions, and anti-corruption; Product standards, technical barriers to trade (TBT), and sanitary/phyto-sanitary measures (SPS); Trade in services, and the GATS. He holds a Ph.D. in economics from the Institut d’Etudes Politiques de Paris (Sciences Po) and was a Postdoctoral Research Associate at Princeton University's Niehaus Center for Globalization and Governance.
John S.Wilson is a Lead Economist in the Development Economics Research Group of the World Bank. He is also currently a Visiting Scholar at Columbia University. He joined the Bank in 1999 and directs empirical and policy research on trade facilitation, aid effectiveness, and regulatory reform issues, as they relate to economic development. Mr. Wilson is currently developing a new public-private partnership on trade facilitation for the Bank in the context of the Asia Pacific Economic Cooperation (APEC). He has degrees from The College of Wooster and Columbia University in New York.