Trade costs have become a focus of discussion within trade policy and academic circles in the recent past due to their increased visibility when it comes to reducing traditional trade barriers. In the context of rapid integration of the global economy and its significance for propelling growth, the imperative to reduce trade costs to become and remain competitive in the international and regional markets is well documented. However, this is more urgent in the context of the LDCs, where most of the exporting firms are Small and Medium-sized Enterprises (SMEs), where trade costs are reducing more slowly compared to those of their trading partners, where export diversification is an urgent need, which have the lowest level of participation in the global/regional value chain (GRVC) and which are amongst the landlocked countries and/or in fragile situations.
Realizing the growing need to reduce trade costs, the LDCs have been taking various initiatives either suo moto or in collaboration with the private sector, although these actions alone are not likely to contribute significantly to overcome the entire range of impediments facing the LDCs. On the one hand, LDCs are taking considerable time to undertake these reforms, either because of lack of resources or due to the absence of relevant expertise. On the other hand, other countries are reforming at a much faster pace, making it difficult for the LDCs to catch up, thereby further eroding the latter’s competitiveness in the global market. On the positive side, given that LDCs are starting with lower bases, the bang for the reform buck is likely to be higher for them compared to developed countries, which have almost reached the point of reform saturation.
The LDCs have also been receiving aid-for-trade support to address the issue of trade costs, among other things, from various bilateral and multilateral donors, as well as through the EIF – a multi stakeholder co-ordination framework that is exclusively devoted to building the LDCs’ trade capacity. Although LDCs face a host of trade-related challenges, including alleviating their supply side constraints and building their productive capacity, the focus of this chapter is exclusively on trade costs, as this features as a predominant agenda within the broad universe of aid-for-trade support.
While tariffs are an important source of government income in low-income countries, they are also a source of inefficiency and lobbying. Regional agreements are one way to reduce these trade barriers. Other measures such as the reduction of non-tariff barriers, and rationalization and harmonization of regulations, also aim to facilitate trade.
Over the last two decades, developing economies have recorded a notable increase in their share of world trade. Though the value of developing countries’ exports of goods and services has increased notably since 2000, since 2012 this growth has no longer outpaced the developed world. Developing countries’ share of global exports of goods and services has risen from 29.7 per cent in 2000 to 42.2 per cent in 2012 but has stagnated ever since to 41.5 per cent in 2019. If the baseline selected is 2015, there would be a 0.2 percentage point decrease by 2019. From 2010, developing economies’ share of global exports of goods and services has increased by 1.8 percentage points and, from 2005, 7.6 percentage points.
As far as exports of goods is concerned, developing economies’ share in world exports of goods has plateaued at around 45 per cent since 2012. In 2019, developing economies’ share of world services exports (US$6.1 trillion) reached the highest point of about 30 per cent (US$1.83 trillion), yet in 2020, this figure fell to 28 per cent, primarily due to the COVID-19 pandemic. The highest regional share of world services exports was recorded by developing Asia and Oceania at more than 24 per cent in 2019. The top three services exporters are China (4.6 per cent), India (3.4 per cent) and Singapore (3.5 per cent). They account for more than 40 per cent of developing economies’ services exports.
LDCs are a small player in world trade with a 0.96 per cent share of global goods and services exports in 2020. The 2030 Agenda sets a target to double LDCs’ share in global exports by 2020. LDCs’ share of global exports of goods and services was 0.92 per cent in 2010, slightly below the 2020 level. Taking 2005 as the base, their share in global exports of goods and services increased by 0.3 percentage points from 0.66 per cent to 0.96 in 2019. LDCs have a long way to go before doubling their share, and the target was not reached by 2020.
REMOVE TRADE BARRIERS FOR LEAST DEVELOPED COUNTRIES
To seize the opportunities of trade liberalization, LDCs need to develop supportive policies. Without these policies, the dividends from increased access to developed countries' markets cannot be fully reaped.
In order to achieve full and effective integration into the multilateral trade system, LDCs need to be helped to improve their ability to formulate appropriate trade strategies, to negotiate with trading and investment partners, to implement trade and investment rules and to effectively exploit the mechanisms available to safeguard the functioning of the multilateral trade system.
In 2020, the value of merchandise exports from LDCs was US$172.6 billion, accounting for less than one per cent of world exports (0.98 per cent), signaling the failure of the 2020 target in doubling LDCs’ merchandise exports. Their share in world merchandise exports almost doubled from 0.54 per cent in 2000 (US$35 billion) to over one per cent in 2011-2013. Since then, this trend has reversed slightly. LDCs’ share of global services exports has increased gradually to reach 0.80 per cent by 2019, but dropping again to 0.63 per cent in 2020.
In 2019, developing economies shipped most of their exports to the United States of America (US$1. trillion), China (US$1.1 trillion) and other Asian economies. The value of merchandise exports of developing countries to EU28 in 2019 amounted to almost US$1.3 trillion. For LDCs, the top export destinations in 2019 were EU28 (US$36.4 billion), China (US$679.8 million) and the United States of America (US$15.2 million).
By 2019, LDCs in Africa and Haiti delivered goods worth US$29.9 billion to China, more than to any other economy in the world (see figure 5). LDC exports in Asia were oriented towards China and the United States of America in 2018 and 2019. The importance of the European Union as a trading partner for LDCs in Asia has increased significantly since the turn of the century, with exports reaching US$53.4 billion in 2019. Intra-regional trade is also high for LDCs from East Asia and the Pacific, and low but rising for LDCs from most other regions.
As merchandise exports of LDCs are concentrated in a few markets, including those worst affected by the COVID-19 health crisis, which makes them vulnerable to decline in demand in these countries. For example, in 2019, Angola exported around 57.6 per cent of its merchandise to China, Benin around 41 per cent to India, Burkina Faso around 54 per cent to Switzerland, Haiti around 82 per cent to the United States of America and Rwanda around 65 per cent to the United Arab Emirates.
The structure of exports by product group has changed significantly in LDCs and developing economies over the last ten years (see figure 7). In 2019, manufactured goods accounted for 36.7 per cent of total exports in LDCs – a notable increase from 2009 (23.1 percent). However, only six LDCs—Bangladesh, Cambodia, Haiti, the Gambia, Nepal and Lesotho—received more than 50 per cent of their export revenue from exporting manufactured goods in 2018. Fuels formed the second largest product group in 2019 (26 per cent), while in 2009 they accounted for over half of the exports. The share of ores, metals, precious stones and non-monetary gold increased from 12 percent to 20.1 percent in the ten years from 2009 to 2019. The proportion of food items in exports also increased from 10.2 to 13.7 per cent during the same period.
The structure of exports by product group has changed significantly in LDCs and developing economies over the last ten years (see figure 7). In 2019, manufactured goods accounted for 36.7 per cent of total exports in LDCs – a notable increase from 2009 (23.1 per cent). However, only six LDCs—Bangladesh, Cambodia, Haiti, the Gambia, Nepal and Lesotho—received more than 50 per cent of their export revenue from exporting manufactured goods in 2018. Fuels formed the second largest product group in 2019 (26 per cent), while in 2009 they accounted for over half of the exports. The share of ores, metals, precious stones and non-monetary gold increased from 12 per cent to 20.1 per cent in the ten years from 2009 to 2019. The proportion of food items in exports also increased from 10.2 to 13.7 per cent during the same period.
Travel is the only type of service export where LDCs and other developing economies have a revealed comparative advantage3. The revealed comparative advantage of travel services for LDCs reached 1.75 in 2019 and was 1.3 for other developing economies. The value is also slightly greater than 1.34 for LDCs’ transport services.
A closer look at reform measures undertaken by LDCs over the past decade in the indicators of trading across borders of the Doing Business Report shows that LDCs are undertaking far reaching and often sweeping reforms to improve their indicators as well as reduce costs. Our count shows that 21 LDCs undertook some reform measures to improve their ranking in cost of trading across border between 2006 and 2014. Some LDCs have undertaken many more reform measures than the global average number of reforms in this area, which is close to two. These LDCs are Benin (5), Madagascar (4), Rwanda (6) and Uganda (4) (World Bank, 2015a).
A review of DTISs and other published documents reveals that reforms have indeed been far reaching. Select examples are as discussed below.
Burkina Faso has considerably improved the effectiveness of transport and logistics on the Tema Ouagadougou Corridor in the period from 2008 to 2012, and due to an increased transparency, informal payments dropped by more than 50%. In Cambodia, the simplification of licensing procedures, the elimination of unnecessary steps and documents and the introduction of time limits for the issuance of licenses reduced trade costs for processed agricultural products by 30% by December 2014.
Following the simplification of export procedures, the cost to obtain export licenses for milled rice was reduced by 28% – generating about USD 700 000 annually in savings for rice exporters (World Bank, 2015a). Similarly, the number of days required for the clearance of containers at the border was halved through the computerization of customs operations using the Automated System for Customs Data (ASYCUDA) and bringing the customs system into compliance with WTO obligations. As a result, the time to export decreased from 37 days in 2007 to 22 days in 2012, and the time to import from 45 days in 2007 to 26 days in 2012.
Awareness programmes on trade facilitation for customs officials, Camcontrol, port officials and the private sector have further contributed to increased productivity at Sihanoukville Port from 10 containers/hour to 30 containers/hour (EIF, 2014).
In Lao PDR, opening Lao transit trade to all Thai truckers on the Vientiane-Bangkok Corridor reduced logistics costs by 30% (UNOHRLLS 2014). The launching of a trade portal in 2012 contributed to increased transparency and helped reduce trade costs. As a result, the clearance times for goods by non-customs agencies have reduced by 42%, from five days in 2009 to 2.9 days in 2012. More importantly, this idea is being replicated by the Malawi DTISU (2014). At the same time, Myanmar and Lesotho are trying to replicate this model.
For Sudan and Cambodia, the national trade portal is part of the recommendations going forward.
The introduction of ASYCUDA in Haiti in 2008 helped to significantly improve the logistics performance of the country, which resulted in Haiti moving from 123 in 2007 to 98 in 2010 in the LPI. In Liberia, the automation of the national business registry by the Ministry of Trade with the support of the EIF drastically reduced the time it takes to register a company, allowing Liberia to move up the in World Bank’s Doing Business ranking from 167 in 2008 to 144 in 2014.
The extension of duty-free access for products originating in the poorest countries may have limited effect if accompanied by restrictive rules of origin, by requirements of conformity to strict regulations, by standards, by testing and certification procedures or if it remains subject to the threat of antidumping, countervailing duties and safeguard actions. The costs of non-tariff barriers and the lack of adequate infrastructure to sustain export expansion are as important and critical as providing access through removal of traditional border barriers.
Specific actions are called upon to deal with these non-tariff barriers to trade.
On rules of origin, an effort is needed to promote the universal adoption of a uniform set of rules. An international agreement should be achieved to support and apply the harmonization program carried out by the World Customs Organization, expected to be concluded by the end of this year, to the trade of all countries granted duty and quota-free access to industrial markets.
On technical standards and regulations, a Standards Development Forum could be created, with the assistance of the relevant international development partners, to coordinate financial assistance for the modernization of standards infrastructures for poor countries.
The promotion of trade expansion through regulatory reform and removal of technical barriers in discriminatory standards, testing, and certification regimes is also needed. A systematic review of products subject to mandatory government testing and certification that can be moved to a declaration of conformity status should be undertaken. A multilateral "Global Conformity Agreement" (GCA) should then be developed based on this list.
In agricultural trade, the lack of progress towards harmonized, internationally accepted standards has the potential to seriously erode the gains obtained through the removal of traditional barriers. A strategic plan to accelerate the adoption of international standards for food safety set by the Codex Alimentarius Commission, animal health standards set by the International Office of Epizootics, and those for plants set by the International Plant Protection Convention (IPPC) should be developed.
On contingent protection, efforts should be made to avoid using antidumping and safeguard actions against LDCs. The small trade flows involved should make such a promise relatively painless in practice.
To seize the opportunities of trade liberalization, LDCs need to develop supportive policies. Without these policies, the dividends from increased access to developed countries' markets cannot be fully reaped. Industrial countries should assist those LDCs willing to develop consistent economic policies and give trade-related policies a high priority.
In recent years, the international community has stepped up the provision of trade-related technical assistance to LDCs. However, many LDCs have expressed frustration at the multiplicity of vertical initiatives with little horizontal coordination. The 'Integrated Framework' Program recently re-launched by six development Agencies is a potentially powerful tool to achieve better coordination in mainstreaming trade policies into national development strategies such as the PRSPs. An Integrated Framework Trust Fund was recently established for all LDCs but the Program remains heavily underfunded.
Bilateral donors, the multilateral organizations and other development partners should combine their efforts to revitalize and enhance the Integrated Framework for trade-related technical assistance. The G7 countries could contribute with a donation of $100 million to the Integrated Framework Trust Fund to assist LDCs with trade capacity building. The donor community should be invited to focus on the more vulnerable, highly indebted LDCs, in coherence with the overall development strategy laid out at the international level.
In order to achieve full and effective integration into the multilateral trade system, LDCs need to be helped to improve their ability to formulate appropriate trade strategies, to negotiate with trading and investment partners, to implement trade and investment rules and to effectively exploit the mechanisms available to safeguard the functioning of the multilateral trade system. Participation in the WTO is key in this regard.
With the entry into force of the WTO in 1995, negotiations to accede to the WTO have become more complex and difficult. As a result, since its foundation in 1995, no LDC has so far been able to gain membership of the WTO.
An agreement should be reached by WTO members to further simplify and facilitate the accession process of the poorest countries to the WTO, by refraining from formulating requests that may be excessive in view of the specific development situation of these countries. Any request for improving the normative functioning of the trading system in these countries should be accompanied by the provision of commensurate technical assistance and training aimed at facilitating the implementation of the reform required by WTO accession.