Trade Costs and the Post-2015 Sustainable Development Agenda

February 2015

The Open Working Group was formed in 2013 out of a United Nations Conference on Sustainable Development (Rio+20) mandate to discuss possible Sustainable Development Goals (SDGs) that will shape the post-2015 development agenda. The Open Working Group’s 2014 proposal includes calls for a rules-based, open, multilateral trading system; improved Aid for Trade support; better regional and trans-border infrastructure to promote regional connectivity; and lowering tariff barriers for exports of developing countries, including duty-free, quota-free (DFQF) market access for Least Developed Countries (LDCs). There is little new, relative to the approach taken under the Millennium Development Goals (MDGs). The only concrete trade performance target proposed, a doubling the global share of LDC exports by 2020, is already part of the Istanbul Programme of Action.

Weaknesses in the proposed trade objectives

The suggested trade objectives have conceptual and operational weaknesses. The mercantilist focus on exports as opposed to trade (both exports and imports) disregards that in practice lack of trade competitiveness is largely the result of domestic policies, including import restrictions. As firms will generally benefit from access to imported inputs that they use to produce exports – or to sell products that compete with imports – the mercantilist bias may misdirect policy attention towards interventions that will have only limited benefit. Moreover, LDCs already have DFQF access to many high-income markets. There are important exceptions such as Bangladesh exports to the US, and the large emerging economies can do more in this area, but research shows that the ”binding market access constraints” are often non-tariff measures (NTMs), including restrictive rules of origin. What matters then is helping firms overcome applicable NTMs in the relevant markets, both at home and abroad, and more generally to lower their trade costs.

The experience of East Asian countries as well as other economies that have successfully used trade to sustain high rates of economic growth over a long period illustrates the high payoffs to lowering trade and investment barriers and more generally in reducing trade costs. Market access constraints in export markets are not necessarily the binding constraint on trade expansion. In practice, autonomous reforms drive economic development. Trade agreements can help – especially for nations that are land-locked and depend on neighboring countries with sea ports – but the key need is to identify the primary sources of trade costs and to determine what governments should do to address them, and where others can/should help.

A better goal: Lowering trade costs

These observations suggest consideration be given to including a specific trade cost reduction target as part of the post-2015 SDGs. Non-tariff barriers and services trade restrictions in developing countries and inefficient border management and related sources of real trade costs did not figure much in the MDGs and this continues to be the case in the discussions on the post-2015 SDGs. Given the extant research on the links between trade expansion and growth, the importance of trade costs as an impediment to trade and the operation of international supply chains, and the role that services play in overall trade costs (transport and logistics services, related infrastructure), policy attention arguably should focus on lowering trade costs.

One option would be to set a specific trade cost reduction goal (e.g., reduce trade costs for firms operating in low-income countries by X percent by 2020). There is a precedent for adopting a trade cost target: APEC member governments agreed to a common trade facilitation performance target in two consecutive action plans starting in 2001– setting a goal of reducing trade costs by 10 percent over the 10 year period on a regional basis.  The global community could emulate this initiative, building on and learning from the APEC experience. A key requirement would be to agree on how to measure trade costs and what data and indicators to use. This requires research to develop alternative options that can inform a decision, which should aim to determine how the extant international data on trade costs and related indicators compiled by international organizations on a country-by-country basis can be used to establish a meaningful baseline and that can be tracked over time.

A global commitment to a numerical trade cost reduction target would provide a concrete focal point for both national action and international cooperation. It would send an important signal to the international business community that leaders will pursue trade facilitation initiatives. The new WTO Agreement on Trade Facilitation is an important step forward in this regard, but it only deals with one dimension. There are many reasons why trade costs may be high, including domestic trade policies, non-tariff measures at home and abroad, weaknesses in transport and logistics, restrictive services trade, and investment policies. A trade cost reduction target leaves it to governments, working with stakeholders to determine how best to achieve the target and what should be prioritized. In the process it will help incentivize the relevant international organizations to focus more of their activities on assisting governments to reduce trade costs.

Bernard Hoekman is a member of the E15 Expert Groups on Global Value Chains, the Functioning of the WTO, Services, and Competition Policy, as well as the E15 Task Force on Subsidies. He is the Co-convener of the E15 Task Force on Regulatory Systems Coherence. He is a Professor at the Robert Schuman Centre for Advanced Studies at the European University Institute and a Research Fellow with CEPR.

This blog draws on a paper for the Copenhagen Consensus Center and an EUI Policy Brief.

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