Infrastructure and Trade Facilitation in Asian APEC

While the impact of the global economic slowdown on trade has been clear, its impact on progress in trade facilitation is less so. On the one hand, the sharp decline in trade volume and value contributed to lower transportation demand and costs, and reduced waiting times at border crossings, lessening the pressure for improvements in facilitating trade flows. On the other, the urgency of boosting remaining trade flows to support recovery has made improvements in trade facilitation that much more pressing. The precipitous drop in world trade was tied to many problems, not the least of which was access to trade financing. Improved trade facilitation holds great potential for helping Asia experience more of the benefits of globalization as the global economy recovers.Francois and Wignaraja (2008) showed that linking the three largest East Asian economies of the People’s Republic of China (PRC), Japan, and the Republic of Korea (hereinafter Korea) to the 10 nations of the Association of Southeast Asian Nations in a free trade area would bring significant benefits to the participants, ranging from a 2.6 percent to over 12 percent increase in national income. Including the South Asian economies in a broader regional agreement would increase these gains for both East Asia and South Asia.

Barriers to trade go beyond simple tariffs and include factors such as high freight costs, delays in customs clearance, unofficial payments, slow port landing and handling, and poor governance. Institutional bottlenecks (e.g., administrative, legal, financial, regulatory, and other logistics infrastructure), information asymmetries, and discretionary powers that give rise to rent-seeking activities by government officials at various steps of trade transactions also impose costs. These costs can be lowered through cooperation that facilitates trade logistics for merchandise and services in both inbound and outbound shipments. Trade transaction costs may be categorized into directly incurred costs and indirect costs. Empirical estimates of trade transaction costs vary substantially, but they have been shown to be between 1 percent and 15 percent of the value of traded goods (Walkenhorst and Yasui 2005). Direct costs (such as customs fees and port charges) tend to be relatively clear to traders, while indirect costs tend to be less clear and may affect traders in terms of the cost of carrying inventory and market depreciation (Minor and Tsigas 2008). Trade costs play a central role in determining the amount of trade. A recent study (Jacks, Meissner, and Novy 2008) found that declines in trade costs explain more than half of the pre-World War I (1870–1913) surge in trade and roughly a third of post-World War II trade growth, while a steep rise in trade costs explains the entire trade collapse in the inter-war period.

Developing Asia now accounts for a much larger share of world trade, up from roughly 14 percent in 1990 to 24 percent in 2007. The share of Asia as a whole in world trade has risen less significantly, from about 23 percent to about 29 percent, due to a drop in Japan’s share of world trade (see Table 1). Excluding Japan, East Asia’s3 share of world trade soared by over 9 percentage points between 1990 and 2007, from 13 percent to over 22 percent, with the PRC’s share more than quadrupling from about 2 percent to about 9 percent so that non-Japan East Asia now accounts for the lion’s share of Asia’s trade. Significantly, intraregional trade within non-Japan East Asia grew faster (15 percent per year) than the region’s external trade (11 percent per year). This is especially true for trade with the PRC. Whereas in 1990, the PRC accounted for nearly 9 percent of East Asia’s exports, it accounted for over 32 percent in 2007. The rapid growth of intraregional trade in particular has benefited from trade facilitation while spurring demand for greater trade facilitation efforts.The economic crisis has reduced output and trade both globally and in developing Asia. While Asia’s growth may not have been as severely affected as the world average, the impact on the region’s trade was more drastic (Figure 1).

As Asia’s trade has grown rapidly, the nature of that trade is also changing—and with it the efficiency of international transactions. Asia’s trade is shifting from bulky goods toward lighter, often higher-value goods and weightless services. In particular, the information and communication technology (ICT) revolution has generated increased trade in ICT products and outsourced services, as well as greater migration of highly skilled professionals. More generally, the weight-to-value ratio of Asia’s trade is declining (Hummels 2009). This has important implications for the choice of transport mode, the distance and destination of trade flows, the location and fragmentation of production processes, the harmonization and standardization of customs classifications and inspections, and the demand for supporting infrastructure. The diversity of Asian economies, combined with lowering of trade costs, has helped the region to capitalize on global patterns of production fragmentation and expanding intraregional trade and development opportunities. The impacts of new investments in trade-related infrastructure are now being leveraged by coordination across borders in a wide array of trade facilitating institutional architectures and trade agreements. In this evolving international context, the role of harmonizing and strengthening soft infrastructure stands out as an essential complement for enhanced physical infrastructure. Supported by a conducive policy environment and internalizing regional spillover effects through cooperative arrangements, trade facilitation is reducing trade costs and facilitating trade expansion, regional integration, and economic growth and development.

In the case of Indonesia, Patunru, Nurridzki, and Rivayani (2009) found that soft infrastructure plays a vital role in constraining port efficiency, more so than hard infrastructure, although the two are related. Although sea port competitiveness may suffer from poor physical infrastructure such as inadequate channel depth, shortage of berths, and limited cargo handling equipment and storage and transit areas, it may also suffer from limitations in soft infrastructure, such as labor skills, regulation, bureaucracy, and other institutional factors affecting port capacity utilization. Lack of direct competition between ports controlled by the same government authority is also a critical factor. Yet port performance is crucial in the Indonesian archipelago. To raise competitiveness and efficiency, ICT is an increasingly productive complement to physical infrastructure. ICT helps to reduce the costs of finding suppliers, agreeing on contracts, monitoring their implementation, and tracking the location and status of shipments. Fink, Matoo, and Neagu (2002) found that higher telecommunications costs dampen bilateral trade flows, especially for differentiated (rather than homogeneous) products. In particular, as smaller shipments of a wider variety of higher-value-added products proliferate, the demand for ICT services rises. The same is true as the growth of trade in services outpaces that in manufactures.

At the international level, cooperation through preferential trade and investment agreements that strengthen structural reforms and increase the attractiveness of a location for foreign investment can leverage domestic policy actions and their impacts on growth, equity, and efficiency, and may help to reduce corruption. Cross-border cooperation in building and maintaining soft infrastructure can therefore lead to a reduction in trade costs and stimulate further investment in physical infrastructure, trade, production and employment, and growth, facilitating further trade expansion. While regional integration can help less developed countries and regions to access new markets, suppliers, technologies, and opportunities, and can help them to internalize negative spillover effects and capitalize on economies of scale, progress has not been even across subregions. East and Southeast Asia are generally ahead of other Asian subregions in terms of trade and regional integration. It is no coincidence that trade-related infrastructure services are generally more available and of higher quality in East and Southeast Asia.

The importance of high-quality logistics infrastructure varies by commodity depending on three factors (Arnold 2009). First is the value of the commodity per shipment unit, for example, per metric ton or TEU.4 Second is the shelf life of the commodity, reflecting physical deterioration or volatility of demand. Third is importers’ scheduling requirements; timeliness is particularly important to just-in-time manufacturers in sectors such as fashion clothing or auto parts and to retailers with coordinated national sales programs. Given its diversity, Asian trade is affected by each of these factors, particularly the supply chain implications. Logistics concerns related to higher-value-added products are also growing. During 2007–2008, the Philippines and Thailand were notable reformers and in 2008–2009 it was the PRC and Viet Nam. In 2010, 71 percent of East Asian economies were reported to have made at least one significant trade facilitation reform. On average, producers in the region require about 23 days to export whereas exporting takes only 11 days for their Organisation for Economic Co-operation and Development counterparts (Table 2). The pattern is similar for importing, with time and cost to import being slightly higher than those for exporting in the region. Comparing logistics performance internationally reveals that East Asia performs relatively well compared with other developing regions, notably South Asia, but still lags well behind high-income countries (Figure 2).

Trade facilitation has an indirect impact on FDI inflows by lowering the cost of spreading production across several countries in order to take advantage of their comparative advantages. Increased FDI, in turn, can further boost regional trade, adding to the effect of improvements in trade facilitation across borders. If the advantages of scattering production across economies in a region outweigh those from concentrating it together, trade facilitation makes FDI complementary to trade. For instance, in Southeast Asia’s electronics industry, where components are generally small and light (relative to value added) with relatively lower transport costs, cross-border production networks proliferated in the 1990s. This can create a virtuous cycle of trade facilitation, trade, and investment that fosters increased trade and economic growth. The above discussion outlines the necessity of investing in regional infrastructure projects and the importance of trade facilitation in growth. Along with the physical structures that are needed to improve the flow of goods, services, and workers, there is a substantial need for investment in administrative procedures including regulation, customs processes, and practices to facilitate growth and expansion of regional business opportunities. Given that these costs tend to be a higher percentage of operating costs for SMEs, the investment in trade facilitation is even more important in support of the growth in these enterprises.

We have based our estimated reductions in trade costs on several recent studies of transport enhancements in the Asia and Pacific region (see Stone and Strutt 2009 for a review of these studies). These studies examined the potential impact of reforms (either in process or already underway) in trade facilitation. For example, Banomyong (2008) constructed a detailed logistics model, following products along various corridors in Southeast Asia, and found that potential cost savings across several routes ranged from 15 percent to 60 percent. Full implementation of the Cross Border Transport Agreement in the Greater Mekong Subregion is expected to reduce trade costs by as much as 45 percent (Banomyong 2008). A JETRO (2005) study estimated cost savings from improved logistics in the region to be as high as 60 percent. Based on this review, we have applied a representative 25 percent reduction in the cost of transport across the APEC Asian region. We believe that this gives a reasonable estimate of the types of cost reductions that can be achieved through enhanced trade facilitation in the APEC Asian region as a whole.

Asia’s trade facilitation has greatly improved, but it must continue to do so in order to sustain economic growth and regional integration. Asia’s international trade is growing in value and shrinking in weight per unit value. Exports are diversifying across new markets with smaller flows, and intraregional trade in parts and components for regional production networks accounts for a growing share of total trade. These trends underscore the need for speed, flexibility, and information. Cross-border improvements that facilitate the expansion of trade along these lines will boost a country’s export competitiveness and its efficient integration into the global economy. As production becomes increasingly fragmented and traded internationally, cooperation among economies participating in production networks is becoming more important. The competitiveness of each country’s production depends on that of the other countries in a production network as well as on the efficiency of the trading links among them. They thus have a strong incentive to cooperate, particularly on reducing the costs of trading among them. Factors such as delays in customs clearance, unofficial payments, and poor governance are particularly damaging because they impede flexibility. They are also barriers to trade that need to be addressed through regional cooperation on trade facilitation measures. Improvements that reduce the costs of international trade are crucial for the region to realize the full gains from recent and prospective trade policy liberalization. This should be a priority in negotiations on bilateral and regional trade agreements, and one that can provide an added commitment to reform. The empirical analysis presented here has shown the significant gains from a reduction—even a relatively modest one—in trade costs. GDP in the region increases and trading patterns diversify. An examination of individual trends has shown that when trade costs are lowered, it allows countries to move into new areas of trade. Some economies, such as Thailand in the scenario presented here, may experience an initial decline in overall exports as the economy moves out of traditional markets and into higher-value-added sectors. However, such temporary adjustments are not long lived and policymakers need to be aware of this transition process and develop appropriate measures to manage the process.

The paper has also shown that some markets expand regionally while for others, growth facilitates trade with economies outside the region as well. However, regional market gains dominate and for those markets outside the region, the changes are not large relative to the gains between Asian APEC partners. The analysis has highlighted the importance of considering the direction of individual trade flows and the goods involved when planning trade facilitation policy measures, and developing policies to handle the inevitable adjustment costs to a more diversified sectoral base.