Commentary: WTO’s Bright Spot

Pending trade facilitation agreement gives trade community cause for optimism

Originally appeared on the Adam Smith Project on February 3, 2017. Reposted with permission.

The World Trade Organization’s Trade Facilitation Agreement (TFA) is only two ratifications away from entry into force.

This is significant not only for the developing countries which will benefit from the agreement but also for U.S. companies doing business in emerging countries. Burdensome customs procedures common in developing countries can operate as market access barriers by making it difficult to clear goods or inputs. 

So what exactly is “trade facilitation?” The WTO defines it as “the simplification and harmonization of international trade procedures” covering the “activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade.”

The World Bank states that “broadly defined, these measures include anything from institutional and regulatory reform to customs and port efficiency.”

The United Nations Center for Trade Facilitation and Electronic Business defines trade facilitation as “the simplification, standardization and harmonization of procedures and associated information flows required to move goods from seller to buyer and to make payment.”

Simply put, trade facilitation would cut red tape, reduce bottlenecks and create transparency to reduce corruption, thereby moving goods through customs and across borders more efficiently.

The agreement also promises to improve regional integration, important for companies seeking to manufacture in a particular country and to serve a region.

Take, for instance, a company which might want to produce consumer goods in Ghana to serve the West African market. Cumbersome and outdated customs procedures in neighboring countries make it impossible from a business standpoint to do that.

I’ve heard of instances where a company has shipped products from one country in West Africa to Europe in order to facilitate clearance of its goods to another West African country because of poor customs procedures between neighboring countries. Regional integration is noted to be of importance to the African continent as it allows the establishment of regional value chains.

TFA is different than past multilateral agreements negotiated under the WTO/GATT in that it obligates developed countries to provide donor assistance for capacity building. There is a three-tiered approach to commitments of developing and least-developed countries (LDCs) concerning:

  1. Immediate implementation, or “Category A” commitments
  2. Extra time for implementation, or “Category B” commitments
  3. Technical assistance and capacity building funded by donor organizations, or “Category C” commitments

Developing countries must identify the three lists upon entry into force of the agreement, and LDCs have an additional year to do so. The obligation to provide donor assistance by the developed countries is also triggered by entry into force.

The bottom line is that this agreement presents an excellent opportunity for developing countries to improve their borders by facilitating trade to encourage trade and investment. It should also improve revenue collection for these countries by broader use of automated processes, which should reduce opportunities for corruption at the border.

The agreement is different from past agreements, as it provides funds for capacity building and flexibility for implementation of the reforms. However, countries must have the political will for effective implementation. Some countries use burdensome customs processes as an opportunity for corruption and protectionism. Ideally, the benefits of the agreement will accrue to those countries choosing to take advantage of it. 

TFA is a bright spot in an otherwise bleak picture for international trade, with growing protectionism and the weakening of the multilateral trading system. Let’s hope that the success stories tell a positive narrative on open and fair trade promoted by the WTO.

So what’s next for the WTO? Why do countries need to get bogged down in bilateral and multilateral trade agreements when you have the TFA? The reason is because TFA is limited to addressing customs and border procedures. It helps countries modernize their customs procedures and provides transparency and rule of law to countries’ customs administration. While this in and of itself reduces the costs of international trade, it does not address tariff reductions and other non-tariff barriers.

There is much work to be done by the WTO if members can agree on a path moving forward. Former Ambassador to the WTO and Deputy U.S. Trade Representative Michael Punke urged fellow WTO members Dec. 19 to “move beyond the traditional but empty invocations of the past and start thinking seriously about how to revitalize the WTO to make progress on the critical issues facing our people.”

Punke specifically cited economic growth, job creation, worker and environmental protections, innovation, the digital economy, small and midsized enterprises, and issues surrounding state-owned enterprises. 

President Donald Trump has indicated a lack of enthusiasm for post-World War II international liberal democratic institutions like the WTO, favoring bilateral trade agreements and protectionist measures such as tariffs or border taxes. If the United States takes such a course, it will abdicate its important leadership role at the WTO and leave the fate of the global trading system to others.

The TFA shows us that the WTO can produce positive results. Who will step up to lead the WTO and produce productive agreements to address 21st century trade?