This article by Evelyn Suarez first appeared on May 9th at Adam Smith Project.
WTO’s trade facilitation deal has sweeping potential but needs public and private buy-in
It was big news, at least in international trade circles, when after 10 years of negotiations, the World Trade Organization finalized a Trade Facilitation Agreement (TFA) at its Ministerial Conference in Bali Dec. 7, 2013.
But it took almost another year, until November 27, 2014, for the WTO to overcome a last hurdle. India was blocking the protocol necessary for ratification of the agreement over food security concerns, and only after this this deadlock was broken were WTO members able to adopt the protocol of amendment which opened the way for TFA to become WTO law. TFA received the necessary two-thirds ratifications of its 164 members Feb. 22.
That marked a literal historic moment: TFA is the first and only multilateral deal concluded in the 21-year history of the WTO, and it certainly wasn’t easy.
So what is this historic agreement all about? Why is it so important? And what does it mean for business?
What is it?
I call it the TFA a blueprint for customs modernization. The Agreement also provides donor assistance for capacity building for developing and least developed countries (LDCs). That makes it different from past General Agreement on Tariffs and Trade (GATT) and WTO agreements. It gives developing and least developed countries time and money to implement the measures in the agreement, which are intended to facilitate trade and investment and provide economic stimulus.
There is a three-tiered approach to commitments for developing nations and LDCs:
• Immediate implementation, or “Category A”
• Extra time for implementation, or “Category B”
• Technical assistance and capacity building funded by donor organizations, or “Category C.”
Developing countries must identify their lists for the three categories upon entry into force of the agreement, and LDCs have an additional year to do so. Many countries have already given their notifications.
Another important aspect of TFA is that it provides private sector stakeholders with a role in its implementation by their inclusion in the National Trade Facilitation Committees (NTFCs). The private sector can actually play an important role by identifying priorities, demanding timelines and defining metrics for implementation.
So why is TFA important?
As noted by World Bank Group President Jim Yong Kim “trade is a critical component to ending poverty and boosting shared prosperity.” Trade facilitation helps developing countries reduce impediments at the border that make it difficult, if not impossible, to move goods quickly and cost-effectively. It does this by increasing port efficiency, improving customs and regulatory environments, and upgrading infrastructure to increase cross-border trade.
According to a report by the International Chamber of Commerce (ICC), improvements in trade facilitation could boost the world economy by $1 trillion annually and result in job gains of 21 million globally. That’s impressive. The Organization of Economic Cooperation and Development (OECD) estimates that implementation of the agreement could reduce trade costs by 11.7 percent to 15.1 percent.
Various aspects of the agreement, such as transparency and automated entry processing and payment of duties, are also powerful measures to address corruption at the border, a significant impediment to trade and investment in the developing world.
The short answer is governments, business and people. The border improvements can help attract trade and investment, which promotes economic development and creates jobs. Countries benefit by improved revenue collection and foreign direct investment which also creates revenue for governments.
Automation of customs entry processes and electronic payment of duties and fees ensure that revenue is collected expeditiously and winds up in the hands of government treasuries, not corrupt government officials. A country that undertakes these reforms is a better bet for business, which benefits by reduced costs associated with fewer bottlenecks and less corruption at the border.
What does it mean to business?
Companies need as much certainty as possible in their business processes to analyze the potential return on investment and evaluate the risks to justify trade and investment in a country. Burdensome customs procedures create delays and unpredictability for companies’ global supply chains. They also create opportunities for corruption at the border, creating significant enforcement risks for business given the severity of penalties of anti-corruption laws around the world.
The reforms contained in TFA go a long way to providing a more favorable environment for trade and investment by improved border processes and good governance. For example, improvements in customs processing by automation, transparency provisions such as advanced rulings and rule of law provisions such as appeal rights provide companies with more fairness, less arbitrariness and more predictability.
Now we get to the hard part again – implementation of the most important measures first on a timely basis. And who decides which are the most important processes to address first? These priorities might very well differ from country to country so a one-size approach is not necessarily the answer.
According to WTO Director-General Roberto Acevedo, “the national trade facilitations committees will have a central role in driving these reforms at the domestic level.”
Does business have a role to play?
The answer is a resounding yes. The agreement itself contemplates the private sector playing a role in implementation. A central element of the agreement is the obligation to establish in each country an NTFC with both public and private sector stakeholders “to facilitate both domestic coordination and implementation of the provisions of this agreement.”
On Jan. 23 the UN Conference on Trade and Development (UNCTAD) organized a forum in Geneva of leaders from the UN, WTO, World Bank, and World Customs Organization and the International Trade Centre (a joint agency of the WTO and UN dedicated to supporting the internationalization of small and medium-sized enterprises. The topic of discussion at the forum was “making trade facilitation a reality” and to prepare for implementation of the Agreement upon entry into force.
UNCTAD Secretary-General Mukhisa Kituyi emphasized that “supporting the National Trade Facilitation Committees and partnerships in trade is important during the present trade slow down and the increasing anti-globalization trend globally.”
The International Trade Centre Executive Director Arancha González noted that “as NTFCs bring together the public and private sectors, they will be the best placed to relay the needs of the business community to ITC and other development agencies, so that we can work together to ensure reforms happen on the ground.”
About public-private sector collaboration, William Gain, Global Program Manager for Trade Facilitation and Border Management at the World Bank Group, said “the establishment of a National Trade Facilitation Committee is the critical leadership mechanism for implementation of the TFA leveraging the essential public and private sector.”
He further commented on the available resources at the World Bank.
“The Trade and Competitiveness Global Practice within the WBG was created to bring together the WBG’s extensive global knowledge and expertise to respond to the practical needs of our client countries,” Gain said. “Working with other parts of the Bank Group we can deploy world class know-how from across the globe to analyze problems, identify reform priorities, provide advice and technical assistance as well financing and implementation support for large scale institutional development and infrastructure projects.”
Finally, World Customs Organization Director Ana Hinojosa said that the WCO would work closely with the NTFCs to share its expertise on customs, including how goods move across borders, the various processes, procedures and players involved, and the potential areas for greater efficiencies.
It’s fair to say that the NTFCs will be an important vehicle for TFA implementation and private sector engagement.
What should business be doing to provide input?
• Provide a reality check to the donors and the donor recipient country Look at a country’s Category A requirements. Do they really do what they say?
• Identify the priorities most important to business. Tell them what you need right away. Is it separating the release of cargo from the payment of duties? Is it automated entry processes and/ or electronic payment of duties? Is it expedited procedures for express shipments and perishable goods? Is it publication of regulations and rulings?
• Identify the problems business is having with Customs. This is slightly different than giving a reality check. It’s important for the business community to identify and describe the day-to-day problems it is experiencing with Customs. This is the only way to open up the discussion to solve the problems with the tools provided by TFA. For example, is there a lack of uniformity at ports? Does Customs work the hours needed by business? Is there a lack of consistency in the decisions of Customs?
• Demand a plan, timelines and metrics. Work with Customs through the NFTC to develop a plan for implementation, including timelines and metrics for measuring success.
The TFA has finally entered into force as a WTO agreement. If the benefits of the agreement are to be realized, there must be political will by countries to implement the reforms and tackle corruption at the border. But there is also a role for private sector stakeholders in working through the NTFCs. Companies work hard to comply with customs and other international trade laws.
Trade compliance and trade facilitation are two sides of the same coin. Business should demand good governance and border improvements that reduce red tape and bottlenecks. Implementation of the TFA reforms will take a long time and it will always be a work in progress. That’s the nature of such things. But it will take the public and private sectors working closely together to realize the benefits of this important Agreement.