Why it matters?
Access to international markets plays an important role in the economic development of a country. And while tariffs are still among the most widely used policy instruments to promote or restrict trade, their relative importance has declined (1). Other factors, namely trade-related transaction costs have taken precedence. Logistics and freight expenses, customs administrative fees, and border costs have become more noticeable for small traders. While the significance of small and medium sized enterprises (SMEs) in the overall economy has been recognized, SMEs have been largely absent from trade debates until recently. The World Trade Report 2016 focused on levelling the trading field for SMEs and concluded that along with fixed entry costs, cumbersome border procedures and standards are the major hurdles for SMEs (2). Given that SMEs account for the majority of firms and for the vast majority of jobs, it is important to encourage government policies aimed at facilitating the participation of SMEs in trade.
The restoration of more open trade following World War II involved major multilateral and preferential trade agreements aimed at lowering tariff and nontariff barriers to trade. For the first time economic relations and international trade were governed by a multilateral system of rules, including the General Agreement on Tariffs and Trade (GATT) and the Bretton Woods institutions. These trade agreements, combined with tremendous advances in transport and communications technology, have led to unprecedented rates of growth in international trade. Between 1996 and 2013, for example, global trade in goods grew at an annual growth rate of 7.6% on average (3). Greater international trade is strongly correlated with economic growth. A study using data from 118 countries over nearly 50 years (1950–98) found that those opening up their trade regimes experienced a boost in their average annual growth rates of about 1.5 percentage points (4).
Evidence suggests that one important channel by which international trade leads to economic growth is through imports of technology and associated gains in productivity (4). A study of 16 OECD countries over 135 years revealed a robust relationship between total factor productivity and imports of knowledge (measured by imports of patent-based technology) (6). Indeed, the study found that 93% of the increase in total factor productivity over the past century in OECD countries was due solely to these technology imports. These results suggest that international trade is a critical channel for the transmission of knowledge, which in turn improves capital intensity and economic growth.
The relationship between trade and economic growth can also be observed at the firm level. Substantial evidence suggests that knowledge flows from international buyers and competitors help improve the performance of exporting firms. A review of 54 studies at the firm level in 34 countries reveals that firms that export are more productive than those that do not (though exporting does not necessarily improve productivity) (5). This is in large part because firms participating in international markets are exposed to more intense competition and must improve faster than firms that sell their products domestically.
While access to international markets is important for all economies, developing economies are uniquely affected by trade policy. Because they are skewed toward labor-intensive activities, their growth depends on their ability to import capital-intensive products (7). Without access to international markets, developing economies must produce these goods themselves and at a higher cost, which pulls resources away from areas where they hold a comparative advantage. In addition, low income per capita limits domestic opportunities for economies of scale. A trade regime that permits low-cost producers to expand their output well beyond local demand can therefore boost business opportunities. Thus while international trade can benefit developed and developing economies alike, trade policy is clearly inseparable from development policy.
In many economies, inefficient processes, unnecessary bureaucracy and redundant procedures add to the time and cost for border and documentary compliance. Evidence from a study investigating customs procedures delays shows that customs-driven delays have a significant negative impact on firms' foreign sales through reduced number of shipments, number of buyers and exports per buyer (8). Only recently has the relationship between administrative controls and trade volumes attracted the attention of multilateral trade networks. In 2013, for example, members of the World Trade Organization (WTO) concluded a Trade Facilitation Agreement aimed at streamlining trade procedures. The Organization for Economic Co-operation and Development (OECD) estimates that fully implementing the WTO Trade Facilitation Agreement could reduce trade costs by 14.1% for low-income economies, 15.1% for lower-middle income economies and 12.9% for upper middle-income economies. Adopting even its simple (though often still costly) recommendations, such as automating trade and customs processes, could reduce costs for these income groups by 2.1–2.4% (9). A study by Carballo, et al (2016) finds that introducing new technologies, such as an electronic single window, that limit the number of interactions between firms and border agencies is associated with both an increase in the number of firms and the volume of exports of user firms (10). In measuring the time and cost associated with border and documentary compliance across 190 economies, Doing Business supports more efficient regulatory practices for trading across borders.
1. Hoekman, Bernard, and Alessandro Nicita. 2011. "Trade policy, trade costs, and developing country trade." World Development, 39(12):2069-2079.
2. World Trade Organization. 2016. “World Trade Report 2016: Levelling the trading field for SMEs. World Trade Organization, Geneva.
3. World Trade Organization. 2015. “Trade and Tariffs: Trade grows as tariffs decline.” World Trade Organization, Geneva.
4. Wacziarg, Romain, and Karen Horn Welch. 2008. "Trade liberalization and growth: New evidence." The World Bank Economic Review 22(2):187-231.
5. Madsen, Jakob B. 2007. "Technology spillover through trade and TFP convergence: 135 years of evidence for the OECD countries." Journal of International Economics 72(2): 464-480.
6. Madsen, Jakob B. 2007.
7. Krueger, Anne. 1998. "Why trade liberalisation is good for growth." The economic journal 108(458):1513-1522.
8. Martincus, Christian Volpe, Jerónimo Carballo, and Alejandro Graziano. 2015. "Customs." Journal of International Economics 96(1):119-137.
9. OECD 2014. “The WTO Trade Facilitation Agreement – Potential Impact on Trade Costs.” OECD Publishing, Paris.
10. Carballo, Jerónimo, et al. 2016. “The border labyrinth: Information technologies and trade in the presence of multiple agencies.” Inter-American Development Bank, Washington, DC.