By Peter Ungphakorn
POSTED FEBRUARY 25, 2017 | UPDATED FEBRUARY 25, 2017
It’s always tempting, when a tough negotiation has concluded, to breathe a sigh of relief and proclaim “job done”. But with trade agreements, the job is rarely done. For the World Trade Organization’s shiny new Trade Facilitation Agreement, seriously hard work lies ahead if it is to achieve its potential.
On February 22, 2017, the WTO proclaimed that its new deal on slashing red tape at the border had “entered into force”, the “first multilateral deal” concluded in its 21 year history. This was a truly major achievement. But as the celebrations die down, it’s time to look at what it really means and the challenges that lie ahead.
“This is not the end of the road,” said WTO Director-General Roberto Azevêdo.
“The real work is just beginning. This is the biggest reform of global trade in a generation. It can make a big difference for growth and development around the world. Now, working together, we have the responsibility to implement the agreement to make those benefits a reality.”
Trade facilitation is about cutting red tape and streamlining customs and other procedures as goods cross borders. That includes goods in transit to and from land-locked countries.
More specifically, the border procedures covered in the agreement include governments providing information and allowing consultation on laws and regulations, how rulings and appeal are handled, impartiality and non-discrimination, fees, release and clearance of goods, cooperation between border agencies and between customs authorities, various formalities, and freedom of transit.
Here are some points to ponder:
- Achievement: it’s taken 20 rough years
- Achievement: it will have a real impact
- But it has not entered into force everywhere
- The numbers should not be taken literally
- A lot of work lies ahead by both rich and poor nations
- Oh, and by the way, is it really the first?
The ink was barely dry. The agreements of the 1986–94 Uruguay Round had been signed in April 1994. They took effect the following January, bringing into existence the World Trade Organization. The round was the largest and most complex trade negotiation ever to be concluded, and was supposed to be the one to end all trade rounds.
Then at the first WTO Ministerial Conference in Singapore in December 1996, the EU and others proposed trade facilitation as a new negotiation topic. It was packaged with three much more controversial issues — investment, competition policy and transparency in government procurement.
Opposition, particularly from developing countries meant these four “Singapore issues” were kicked into the long grass in the shape of discussion groups.
The resistance continued. When in 2001 the Doha Round was launched, the Singapore issues were only included as subject headings that would not turn into negotiations without “explicit consensus”.
It was not until 2004 — when the EU finally agreed to unbundle the four issues and a compromise could be struck — that the more palatable trade facilitation formally became a Doha Round negotiating topic. The three other issues fell by the wayside.
Work on trade facilitation continued — even after the Doha Round ground to a halt in 2008, principally over agriculture. A text was eventually agreed in the run up to the Bali ministerial conference in 2013.
Azevêdo, who had recently become director-general, introduced a new way of negotiating. Instead of working on the text in a small group of core countries and then taking it to the rest of the WTO, ambassadors from the entire membership (each with one assistant) sat through lengthy sessions as they worked line by line through the draft displayed on a screen.
Hailed at the time as a breakthrough technique to make negotiations totally inclusive (and avoid resentment at being left out), the method only worked once. Since then, the core groups have returned.
The draft agreed in Bali still had to be revised to make it legally correct. Even this was delayed until November 2014 as India held up approval while it sought changes to a decision on agriculture that it had originally agreed in Bali.
Two and a half years later, 112 countries had ratified (or “accepted”) the deal, which counts as an amendment to the WTO’s agreements. They crossed the threshold of 110, two thirds of the membership, which was needed for the agreement to take effect.
Although a latecomer to the Doha Round, trade facilitation became a priority for business associations. Import duties are now often low (apart from agriculture and some other sensitive products), meaning border processes have emerged as a significant part of trading costs.
Calculations suggest the benefits will be large. By how much depends on the assumptions and the type of economic model.
The WTO’s in-depth analysis is in its 2015 World Trade Report, with estimates for reductions in trading cost of up to 14.3%, global export expansion from $750bn to $3.6 trillion — the most frequently cited is the neat $1 trillion — and up to half a per cent per year added to world gross domestic product.
A brief survey by Cathleen Cimino-Isaacs of the Peterson Institute for International Economics think-tank cites other studies that also show “sizable potential gains”.
Understandably, the biggest gains will go to the countries that currently have the most cumbersome border procedures. If goods entering and leaving a country spend weeks at the port waiting for clearance, then the costs to that country’s trade, production and consumption are going to be high.
The 2015 World Trade Report says (page 7):
“The range of trade cost reduction will be between 9.6% and 23.1%. African countries and [least developed counties] are expected to see the biggest average reduction in trade costs (in excess of 16%) from full implementation of the TFA [Trade Facilitation Agreement]. Full implementation will reduce trade costs of manufactured goods by 18% and of agricultural goods by 10.4%.
“Full implementation of the TFA also has the ability to reduce time to import by over a day and a half (a 47% reduction over the current average) and time to export by almost two days (a 91% reduction over the current average).”
The Trade Facilitation Agreement allows developing countries to set a condition on implementing some of the reforms — receiving assistance to help them cover the costs and introduce new technology — a first in WTO agreements. The onus is therefore as much on the donors as on the reformers.
Drowned out by the fanfare is the actual meaning of “entered into force”.
Strictly speaking, the agreement has only been activated in the ratifying countries although they will apply their streamlined processes to trade with all other WTO members equally, including those that have not ratified.
WTO rules say once the two-thirds of the membership has been reached, an amendment does enter into force, but only in ratifying countries. Therefore, the Trade Facilitation Agreement has not yet entered into force in the 51 countries that — at the time of writing — have not ratified it. They are:
Angola, Antigua and Barbuda, Argentina, Armenia, Barbados, Benin, Bolivia, Burkina Faso, Burundi, Cabo Verde, Cameroon, Central African Republic, Colombia, Congo, Costa Rica, Cuba, Congo (Democratic Republic), Djibouti, Dominican Republic, Ecuador, Egypt, Fiji, the Gambia, Guatemala, Guinea, Guinea-Bissau, Haiti, Indonesia, Israel, Kuwait, Liberia, Malawi, Maldives, Mauritania, Morocco, Namibia, Papua New Guinea, Qatar, Sierra Leone, Solomon Islands, South Africa, Suriname, Tajikistan, Tanzania, Tonga, Tunisia, Uganda, Vanuatu, Venezuela, Yemen, and Zimbabwe.
Among them are some significant traders such as Argentina, Indonesia and South Africa. Among the rest are many that would benefit most from streamlining their border procedures, particularly if they receive aid to do so.
Many countries that have not ratified may do so soon (at the moment they have until the end of 2017). Some have already submitted “Category A notifications” (listing measures they will implement immediately), even though they have not ratified (including Egypt and Indonesia). Many are actively preparing the details of what they will phase in, with and without assistance (B and C notifications).
(The rules on amending WTO agreements actually include a clause allowing the membership to expel countries that do not ratify in time. Of course, the word “expel” is not used. Instead: the country “shall be free to withdraw from the WTO or to remain a Member with the consent of the Ministerial Conference”. Incidentally, this provision seems to be the only way to kick a country out of the WTO. However, it is unlikely to be invoked here.)
It’s tempting to use simple figures to describe how important the Trade Facilitation Agreement is: “it will cut trading costs by 14.3%”, “it will increase trade by a trillion dollars”, and so on. At least Azevêdo uses “could” and “up to”.
Just as with any economic analysis this depends on the assumptions, the model and the data.
- The assumptions: almost all calculations assume that the agreement is “fully” implemented, and they say so. The 2015 World Trade Report discusses this in some detail, including an assumed length of time for full implementation. But the report is 158 pages long and pretty technical. Few will even open it.
The truth is, we are a long way away from full implementation. For a start, those 51 countries that have not yet ratified will need to do so. Then, some countries will phase in some provisions over time, and some will require aid in order to do so — promised in principle but not legally committed.
According to the Trade Facilitation Agreement database, less than half of the agreement’s coverage has been notified for implementation by developing countries, whether for immediate implementation (Category A), delayed (B) or delayed and requiring technical assistance (C). A large number of Category A notifications (93) have been submitted but they do not cover all the provisions of the agreement.
Because developing countries are still compiling their needs, more notifications in Categories B (currently 9 countries notifying) and C (currently 8) can be expected, even from countries that have notified what they will implement immediately (A).
As Cimino-Isaacs wrote:
“Of course, fully implementing the TFA will be key to realizing the gains. The agreement specifies different tiers of obligations for developed and developing countries. For developing countries, the obligations are broken down between those implemented upon entry into force, those subject to a transition period, and those to follow with additional technical assistance. This built-in flexibility is important, but also serves as a reminder that the gains will take time to materialize. Making reforms will entail costs, and measures like investment in information technology and transport infrastructure, while not prerequisites, are important complements to trade facilitation reforms. Once the agreement is ratified, the challenge for the WTO will be monitoring progress towards implementation and ensuring political commitment to deliver the reforms.”
- The model and the data: even more technical is the discussion in the 2015 World Trade Report about the methods used. (For the technically minded, computable general equilibrium (CGE) and gravity models produce considerably different estimates: see below.)
As for the data, some countries had implemented provisions that would be in the agreement. The analysis included creating index numbers from how much they had implemented and extrapolating these statistically to different categories of countries in the rest of the world.
Clearly calculations with this amount of construction are not meant to be predictions. They are estimates. However, the various estimates are consistent enough for us to conclude that the gains will be “pretty big” — if and when it’s all implemented.
Some expected benefits are much more difficult to model. One that is frequently cited is the transparency and predictability of bringing policies into the WTO system even if they would be implemented unilaterally anyway. This is what the 2015 World Trade Report says (pages 6–7):
“Given the widespread benefits from trade facilitation, every country should have an incentive to undertake reform on its own. The signing of the TFA, however, suggests that incorporating trade facilitation in a multilateral agreement creates additional benefits compared to what can be achieved unilaterally.
“It provides greater legal certainty to the changes in trade procedures. It helps in the adoption of common approaches to customs and related matters, which should increase the gains from trade facilitation by harmonizing customs procedures worldwide. By foreseeing that richer members will provide assistance and support for capacity building to developing and [least developed country] members to help them implement the TFA, the agreement helps to match the supply of capacity building with the demand for it. The TFA could also help governments address a credibility problem by integrating their trade facilitation commitments into an institution with an effective enforcement mechanism.”
WTO members will now create a Trade Facilitation Committee of the full membership, including countries that have not yet ratified. Its job will be to receive notifications describing what various members will implement and when, monitor how the agreement is being implemented and discuss related issues.
Two immediate tasks are to encourage the remaining members to ratify the agreement, and for all developing countries to complete their notifications of what they are implementing, whether immediately (A) or delayed (B) or delayed-requiring-assistance (C).
A third is to ensure the requests for technical assistance can be met. This requires well-designed assessments of needs from the developing countries concerned, and a real commitment to provide the assistance by developed countries and donor institutions.
In short, reaching agreement was one test of multilateralism. Making it work will be another.
Don’t shout this out too loud, but there are those who say trade facilitation is not the first multilateral trade deal since the WTO was created. They point to WTO deals in services on finance (twice), movement of natural persons and basic telecommunications.
But those agreements date back to 1995–97, soon after the WTO was born. That was an awfully long time ago.
The various databases and other resources available are rather confusing. You can access one, follow some links, and find yourself in another. However, the amount of available information is useful.
- WTO page on trade facilitation www.wto.org/tradefacilitation
- TFA Facility http://www.tfafacility.org/
- Trade Facilitation Agreement Notifications Database http://tfand.wto.org/Home/About#/
- Trade Facilitation Agreement Database https://www.tfadatabase.org/
THE ESTIMATES: The 2015 World Trade Report says this (page 134):
“Full implementation of the TFA has the potential to reduce trade costs by an average of 14.3 per cent. The computable general equilibrium (CGE) estimates see the TFA increasing global exports by between US$750 billion and US$1 trillion, depending on the speed and extent of implementation. The faster and more extensive the implementation, the greater the gains. TFA implementation has ramifications for the future trajectory of the global economy as well. This report estimates that over the 2015-30 horizon, implementation of the TFA could add up to 2.7 per cent a year to world export growth, and more than half a per cent a year to world GDP growth.
“The simulations using the gravity model provide higher estimates of the potential global export expansion arising from TFA implementation. They range from US$ 1.1 trillion to US$ 3.6 trillion depending on the extent to which the provisions of the TFA are implemented. Like the CGE simulation results, they show that the more fully the TFA is implemented, the greater are the gains for members.”
DISCLAIMER: This was written with the help of sources who asked not to be identified. It could not have been written without them. Consider it “Fake News” if you are so inclined
Updates: None so far
• Cape Town Port by SkyPixels CC SA 4.0
• Azevêdo + Four acceptances and a protocol: WTO
• Customs clearance: public domain CC0