Global supply chains and trade agreements: beyond business as usual

Author: Bernard Hoekman, EUI

Over the last 30 years, governments have greatly reduced tariffs and removed many quantitative restrictions on imports. Today the international flow of goods, services and knowledge is mainly constrained by domestic policies of a regulatory nature that act to segment markets — so-called nontariff measures (NTMs).

International trade costs remain very high. They reflect a mix of discriminatory policies that inhibit the entry and operation of foreign firms that provide intermediate services and regulatory policies that apply equally to local and foreign firms and products. The latter increase costs more for foreign than domestic suppliers simply because regulations differ across countries. But more importantly, these policies raise costs across the board and thus the price of goods and services for buyers. Given that value added is increasingly generated by services and knowledge that is embodied in products, policy reform efforts aimed at lowering trade costs must include a strong focus on services.

Trade costs result from a variety of factors that drive a wedge between domestic and world prices for a product. Some of these factors are difficult or impossible to change, like geography. But a large share of observed trade costs reflect policies and factors that can be affected by policy. Frequently, one cause of excess cost is a multiplicity of regulatory norms and related enforcement requirements that are pursued independently by many different government agencies.

A recent report by the World Economic Forum (WEF), in collaboration with Bain & Co. and the World Bank, concludes that concerted action to reduce supply chain barriers could increase global GDP up to six times more than removing all remaining import tariffs. An ambitious improvement in two sources of supply chain cost, border administration procedures and transport and communications infrastructure services (with ambitious defined as all countries raising their performance in these two areas halfway to global best practice as observed in Singapore) could increase global GDP by 4.7 per cent. In contrast, the potential gains from complete worldwide tariff elimination are only 0.7 per cent of global GDP.

The impacts of NTMs on trade are certainly recognised by governments. One reflection of this is that trade agreements often deal with specific policies such as product regulation and customs valuation, and increasingly include a focus on ‘trade facilitation’ (a term which differs in meaning between the WTO and APEC). The challenge is to identify the policy actions that have the greatest impact on trade costs and to develop a credible action plan to address them.

The current approaches pursued by governments arguably are not optimal because they focus on specific policy instruments independently. What is needed is concerted action on a number of policy fronts. One way of determining priority areas is to analyse how policies impact on the efficiency of international supply chains. These are an ever more prominent feature of global commerce, with goods being processed — and value being added — in multiple countries that are part of a given value chain. Looking at the world through a supply-chain lens can help to identify both where value is added and how policies affect costs. Supply-chain barriers can arise from any policy that obstructs the easy movement of goods from one stage in a supply chain to the next. Border delays, inconsistent and redundant regulation, poor transport and communications infrastructure, inefficient or low-quality services, restrictive local-content policies, corruption and theft can all impact on supply-chain costs.

‘Thinking supply chain’, when designing trade agreements, could help increase the relevance of whatever is agreed for businesses and do more to increase incentives for investment and job creation in tradable activities. Focus on how the various policy areas being negotiated in trade agreements jointly affect supply chains is necessary.

However, international trade negotiations generally address policy areas separately in piecemeal fashion.

A supply-chain approach would be not so much product-, sector- or policy instrument-specific but would address policies of the different domestic agencies responsible for NTMs, services regulation, and the like which together constitute major barriers to effective supply chains. Processes are needed that will identify priorities for action across the different regulatory ‘silos’, establish baselines and put in place effective monitoring mechanisms to track progress and hold governments accountable. As argued in WEF (2013) this must involve the business community at all stages, as firms are the primary source of the information and data that is needed to set priorities and to monitor outcomes to allow stakeholders to track progress. An immediate question that needs to be asked by governments and stakeholders in the context of current PTAs is, to what extent are existing regional mechanisms fit for this purpose, and how can they be adapted to play such a role?

The key need is to put in place processes that can cut across government and regulatory agencies. A supply chain perspective will facilitate a focus on how different types and combinations of regulation/policies affect key dimensions of supply/production chains and reduce efficiency/raise costs. While it is important to analyse the effect of specific measures, a more cross-cutting approach along the lines suggested in the WEF report will be more relevant to business. Business needs to be part of the process in a way that goes beyond ‘consultations’ and ‘dialogue’. They have a key role to play at the front end, helping to identify what the most binding policy constraints are, and at the back end, through active participation in the monitoring of progress by providing data to governments and holding them accountable for results.

Bernard Hoekman is a Professor at the European University Institute, Florence Italy, where he directs the Research Programme on International Economics in the Robert Schuman Centre for Advanced Studies’ Global Governance Programme.

A longer version of this article was originally published in APEC Currents, the newsletter of the Australian APEC Study Centre at RMIT University.