As trade policymakers gather in Geneva for the Aid for Trade Global Review 2017, it is an opportune moment to consider the inter-related aspects of the Global Review’s theme: “Promoting Trade, Inclusiveness, and Connectivity for Sustainable Development”.
Trade can be an engine for economic growth and development as it provides economic actors with improved opportunities to exchange the goods and services in which they have a comparative advantage. Jobs related to exports pay almost 20% more than those at non-exporting firms. As such, reducing high trade costs by improving connectivity helps promote better jobs for families and thus inclusive economic outcomes.
Since 1985, Latin American and Caribbean (LAC) countries have reduced their most-favored-nation tariffs from around 40% to 10%. Similar reductions in major trading partners, coupled with the conclusion of regional free trade agreements, which cover 80 percent of LAC’s trade, have reduced the burden of tariffs substantially but in parallel have revealed other trade costs associated with logistics, transport, and information that are on average three times higher.
Facilitating trade connectivity
Excessive red tape for moving goods across borders increase firms’ costs and make them less competitive internationally. The tools laid out in the WTO Agreement on Trade Facilitation ratified earlier this year, such as administrative simplification through the foreign trade single window, accreditation of trusted traders through the authorized economic operator, and coordinated border management, are vital for reducing trade costs. Given the technical nature of the Trade Facilitation Agreement, Aid-for-Trade will play a key role in building capacity for the implementation of its provisions going forward and reduce red tape costs in the billions. Coupled with updated procedures, digital connectivity is a necessary ingredient for the various parties involved in these trade facilitation initiatives to effectively communicate with one another and exchange data.
Additionally, digital trade is a powerful means for LAC companies, especially small- and medium-sized enterprises (SMEs), to reach global markets. One study found that e-commerce helps businesses overcome the challenges posed by distance, estimating that whereas a 10% increase in distance reduces traditional exports by 18%, it only reduces trade taking place through eBay by 3%. Moreover, the digital business model provides a toolkit (through internet connectivity, market information, logistics and payment services, and policy frameworks) for small businesses to also overcome disadvantages of scale and compete internationally. Similarly, the IDB’s 2016 study Out of the Border Labyrinth finds that programs such as Exporta Facil, by providing intermediary services together with streamlined procedures, enable SMEs to reduce costs and increase their exports.
But inclusiveness requires bold action to find new instruments such as public-private partnerships to increase broadband investments and the right regulations to fully take advantage of e-commerce’s potential: although internet penetration in Latin America is above the global average, there are wide differences between countries as well as between urban and rural coverage within countries. And limited access to credit cards or to financial services more broadly limits payment options for consumers.
Promoting inclusion by reducing transport costs
Transport costs include both international and domestic elements. Targeted infrastructure investments make it easier to access international trade networks by reducing the domestic part of transport costs. Despite higher incomes at the national level, large disparities persist within countries that are often tied to transport connectivity and trade. The IDB’s research has found that exports tend to be heavily concentrated in just a few districts with easy access to ports, while more remote areas, often with limited transportation infrastructure, are less competitive because they face higher logistics costs. In Chile, for example, the top 10 of 350 municipalities accounted for 74% of total exports. A 1% reduction in transport costs can increase Chile’s exports by an estimated 4%. And in Colombia, 98% of its 2012 exports were from the top 10 of 1123 districts.
Border regions are similarly underserved because spending by one country to improve connectivity will benefit both sides of the border, often leading to underinvestment. In their role as honest brokers, regional development banks and other regional institutions help align the costs and benefits of projects in border areas, incentivizing collective action and investments that target regional economic efficiency.
Because agricultural products are often bulky and perishable, food prices are particularly affected by high transport costs. More expensive food disproportionately affects the poor for whom it represents a higher share of household spending. But the unseen costs of supply-side constraints also have distributive effects for producers: an analysis of the tomato export supply chain from Costa Rica to Nicaragua showed that logistics inefficiencies translate into additional costs for small exporters of US$27.5 cents per kilogram of tomatoes compared with large exporters.
Distributive effects of logistics costs
Small Exporter Large Exporter
Source: IDB, World Bank, and ECLAC, 2010. Bridging Integration Gaps: Scenarios and Policy Recommendations to Promote Physical Infrastructure and Reduce Intra-Regional Trade Costs.
The high cost of information
Businesses looking to export, especially SMEs, face information costs in the form of uncertainty regarding consumer preferences, market demand, and foreign regulations. Export promotion policies aimed at overcoming information hurdles are important tools for LAC firms to identify new markets.
ConnectAmericas, the first social network for businesses in the Americas, brings new actors into the international trade by providing a platform for buyers to disseminate purchasing announcements, and for SMEs to identify clients, suppliers, partners and sources of financing. Since its launch, US$ 152 million in deals have been closed through ConnectAmericas.
As trade increasingly moves into the digital realm, our understanding of the infrastructure of trade must also grow. Specifically, broadband networks serve as the highways on which information, such as market data, electronic customs authorizations, and digital shipping manifests must travel. An IDB study estimates that on average, 10% higher broadband penetration is associated with 3.2% higher gross domestic product, 2.6% higher productivity and 67,000 new jobs.
Economic and digital integration have great potential to connect more people with value-added economic activities. By confronting supply-side factors through trade policy and trade facilitation, and by addressing transversal issues such as gender, the IDB’s Aid for Trade interventions have promoted greater access to the international economy and more inclusive trade.