Why Business Needs to Remain Involved in Trade Agreements

While we wait for the possible closure of the Trans-Pacific Partnership (TPP) negotiations next week (fingers crossed!), it is worth pondering why businesses must be engaged as much as possible in the process of negotiations.  Without business input and pressure, officials are likely to create a final agreement that does not suit the needs of companies on the ground.

Completing an agreement is only half the battle.  Once the texts are finished, participating countries must take steps to implement their commitments.  Without business pressure, implementation measures are often half-hearted or even non-existent. 

We can see these problems in different settings across Asia.  Take, for example, trade facilitation efforts.  Asian governments have made promises to speed up and reduce costs associated with moving goods across borders in this region. 

The trade facilitation agreement (TFA) signed with great fanfare in Bali, Indonesia, in December 2013, is still awaiting ratification and implementation.  This is a signature achievement of the World Trade Organization (WTO) after more than a decade of negotiations. 

On September 18, Liechtenstein became the 17th country to have taken official steps to move the agreement towards implementation.  The agreement requires 2/3 of the WTO membership before the deal actually enters into force.  This means that more than 140 additional countries must agree to participate—preferably before the end of this year—before any of the provisions in the agreement can be activated.

While this agreement may bring substantial benefits for businesses, especially in many developing countries where getting goods across borders remains slow and expensive, businesses have not been particularly active in pushing TFA. 

In general, businesses long ago lost interest in most of the agenda under discussion at the WTO.  This is not, I will hasten to add, necessarily because the agenda itself is unimportant.  Mostly, I think, it’s because companies do not have the same type of time horizons that the WTO seems to operate on these days.  No firm can afford to spend a decade pushing topics without any clear returns from this investment.

But the net result is a bit of a chicken-and-egg dilemma.  Governments are not going to rush to negotiate or implement an agreement like TFA absent business interest.  However, businesses are loath to push on TFA without clear signs that the payoff will arrive shortly.  There is frankly little upside to convincing corporate bosses that your efforts helped Liechtenstein sign an agreement.

Another problematic area of trade facilitation can be found in ASEAN.  Although the 10 members of ASEAN made a commitment in 2005 to create by 2012 what are called National Single Windows (NSWs) for trade, not all members have actually implemented these provisions.  NSWs are intended to make it easier for firms to move goods by allowing the entry of data only once and the simultaneous processing of that information by all the relevant agencies so that arriving goods can clear customs speedily. (Note that NSWs are only the first step, as ASEAN also pledged to hook them together and create an ASEAN-wide Single Window.)

Despite significant efforts and the involvement of the ASEAN Secretariat and various ASEAN Dialogue Partners like the United States, Vietnam’s launch of its own NSW earlier this month meant that only 7 of 10 members officially have active systems.   Even here, the record from the ground is less impressive, as many businesses report obstacles to using NSWs.

Again, part of the problem has been getting significant business pressure mobilized to ensure that ASEAN governments implement commitments in a timely manner.  Businesses that have been active in this issue could be feeling burned by the extensive time it has taken for their efforts to bear fruit in the form of faster and easier trade facilitation in ASEAN.

Ironically, however, trade facilitation ought to be one of the easier topics for mobilizing business engagement with trade officials.  After all, delays at the border are obvious and costly.  It is relatively easy for a firm to show the impact of reducing barriers to their own supplies and goods at customs. 

Other elements of the trade agenda can be much harder for businesses to push.  For example, while it may be true that opening up services sectors will result in substantial benefits, even for manufacturing companies, it is harder to show clearly the bottom line impact of doing so.  Hence, getting firms to mobilize behind broader trade negotiations can be tough.

Larger agreements could result in greater benefits for companies, but they come with a trade-off:  bigger deals take longer to produce an impact.  The TPP negotiations have been under way for more than five years.  Even if we get a deal next week, the fastest timelines for implementation and entry into force is likely to be in mid-2017. 

One thing, however, is quite clear.  Absent business interest and mobilization, trade agreements are less likely to meet the needs of businesses today.  Officials will try to negotiate better deals, of course.  No one ever announced their intention to create “low quality, 19th century” outcomes. 

But getting better provisions requires sustained attention from businesses and governments.  The other megaregional agreement under negotiation in Asia, the Regional Comprehensive Economic Partnership (RCEP), is going into the 10th round of talks in Busan, South Korea.  Officials have largely had limited contact with many of the companies in this region that are likely to have an interest in RCEP rules.

We are holding an event at RCEP on October 14 in Busan that seeks to bring together regional businesses and government officials engaged in this trade negotiation for the first time.  (To register to attend, please visit our website http://www.asiantradecentre.org/event-registration/ )  

Without better connections between government and businesses in the region, RCEP runs the risk of creating a trade agreement not particularly well suited to the demands and interests of the business community.  Given that trade agreements are primary intended to be a vehicle for facilitating trade by companies, a low-quality outcome in RCEP accompanied by little business interest would be an enormous missed opportunity. 

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Facilitating Trade

Trade facilitation is not the sexiest sounding topic.  Eyes tend to glaze over whenever it gets mentioned.  But the ability to move goods across borders faster and cheaper is extremely important.  Obstacles at the border are unpleasant for bigger firms and can be catastrophic for smaller companies. Consumers pay more for products than necessary.

It is not that governments are ignorant to the benefits of facilitating trade at the border.  They have tried for years to be more efficient.  At the global level, early rules dealt with freedom of goods in transit and tried to address issues of fees attached to importing and exporting products.  Some countries struck out on their own to reduce barriers at the border. 

Yet the obstacles to reform can be significant.  For instance, even with excellent intentions, standard operating procedures can be devilishly hard to shift.  Existing systems have to be modified or scrapped.  Technology needs to be upgraded.  Many of these problems require a commitment for reform plus—often—money. 

Even countries that might be counted on to facilitate trade well, like the United States, continue to have challenges.  As an example, facilities for loading and unloading container ships in the biggest ports in the U.S. are only open for business from 6 am to 6 pm during weekdays.  Ships run 24/7 and delays at the port due to limited office hours by staff members onshore are deeply problematic. 

Many countries have similar bureaucratic problems coordinating policy at borders.  Some have customs officials that work longer hours, but the agriculture ministry staff who must inspect food items may not have similar schedules, leaving perishable food items waiting for clearance. 

Companies face a myriad of obstacles at the border.  Customs officials have to inspect goods.   In some countries, inspection rates can reach 100%, meaning that every single item or container (or perhaps all food shipments or all health products) have to be looked at by someone before goods can cross borders.  In others with improved risk assessment programs, the percentage of goods that are checked is closer to 1 percent. 

Similar variations can be found in nearly every aspect of crossing borders.  The kind and type of paperwork demanded by customs and other ministries is also often different.  For any firm trying to use one of the hundreds of existing free trade agreements, the paperwork requirements are different again. 

The rules that have to be followed for companies claiming benefits under free trade deals vary as well.  In many cases, border officials struggle to cope with the complexity.  The classification of goods becomes critical, as customs agents can have tremendous flexibility in deciding which rules will apply depending on how they define a good. 

The time needed to get over land, sea and air port clearance processes also varies tremendously.  Singapore can clear cargo destined for the shipyards in as little as 23 seconds.  Other places can take days or weeks.  Each hour of delay at the border adds to the costs for the firm as merchandise is tied up in containers or in warehouses waiting for processing.

The procedures for declaring cargo also vary depending on countries.  ASEAN members have been quite progressive in aiming to create “single windows” under which (in the ideal world), a trader inputs data once on the items that need clearance.  This information is automatically sent out to all the various agencies that need to know about the arrival of goods (customs, port officials, agriculture, health, security, and so forth).   All paperwork gets seamlessly processed, with high risk shipments flagged for inspection and the rest quickly moved through the border on arrival. 

But even in ASEAN the application of the single window concept is quite uneven.  All 10 member countries are supposed to have the system in place as part of the ASEAN Economic Community (AEC) at the end of this year, but this is not ready yet.  Eventually, the members are hoping to knit their systems together so a trader in one country could have cargo data automatically routed to all 10 members without the need to do anything further. 

The desire to create larger groupings with unified systems is driven by the need to ensure consistency and ease of doing business for companies.  This same pressure lead the World Trade Organization (WTO) to focus intensively on trade facilitation as part of the latest round of negotiations. 

In December 2013, the now 160 members of the WTO announced conclusion of what is called the “Bali package.”  It contained a set of rules on facilitating trade (plus a few other items) with the goal of harmonizing and streamlining the procedures for moving goods. 

Particularly for countries with firms enmeshed in global value chains or supply chains, any delays or unnecessary costs at the border are very damaging.   Countries with high barriers to entry will struggle to be competitive.  Firms that have to fill out up to 30 different forms (some or all of which need to be submitted in person or in multiple hardcopies) and wait 6 weeks for cargo clearance are not going to be able to meet delivery times and costs demanded by firms participating in supply chains. 

The Bali package goes some of the way towards addressing these issues.  For example, it requires countries to post information about all forms, documents and fees associated with moving cargo.  This information should be put online as much as possible.  Firms should be given an opportunity to comment on any proposed changes in rules or procedures with sufficient time to respond. 

Companies can ask for what is called an “advance ruling.”  This is where customs decides the classification of the good ahead of time and the officials at the border cannot suddenly reclassify an item or decide that it does not meet the rules of origin.

Bali contains a lot of language about clear posting of fees and charges, since important obstacles to trade are informal charges, shifting charges or straight out bribes demanded at the border.    The scheduled fees, duties and so forth can be paid online as much as possible. 

Some of the processing of goods clearance can take place ahead of the arrival of goods.  Countries can use schemes for Authorized Operators which allows trusted trading firms with a solid track record to have fewer inspections and faster processing times. 

In short, the rules negotiated in Bali should be extremely helpful for companies in getting costs down and delays shortened. 

However…since the heady days following approval of the deal in December 2013, the Bali package has gotten stuck.  Members were supposed to be moving to implement the deal.  For developed economies, the whole deal comes into force at once.  But, frankly, for most developed economies, the Bali package may actually provide less coverage than is actually practiced currently.  Thus the difference post-Bali implementation for efficient countries is very modest.

Where Bali matters is for developing countries that tend to have uneven implementation of trade facilitating measures, higher costs, and longer times for clearance.  For developing countries, Bali comes in three parts:  some elements will kick in immediately (on entry into force), some elements will be phased in over time on a clear timetable provided by the member country, and some elements are supposed to start pending the receipt of sufficient capacity building to implement the agreement.

The OECD estimates that full implementation of the agreement will have significant gains—particularly for low income countries.  The cost reduction could be 14.1 percent.  But partial implementation includes a rapid fall-off in benefits gained by countries and by firms trying to operate across these borders.

The WTO has already missed several deadlines for members to declare their timelines for implementation.  Another one set for the end of this year looks troubled as well. 

For the poorest members of the WTO, these delays should be deeply alarming.  For companies trying to operate in a world of patchwork rules and, often, little transparency in procedures, the implementation of Bali is badly needed.  In fact, much of the Bali package ought to be viewed as a floor rather than a ceiling.  Some of the trade agreements in Asia (especially) are, indeed, trying to go beyond Bali and to capture the gains that come from unilateral, bilateral, and regional efforts to improve trade facilitation.

***Talking Trade is a blog written by Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

The World Trade Organization, or What Happens When a Tree Falls and No One Cares

Update:  As if to prove my point, check out this headline in today's Inside US Trade:

• WTO Efforts On Doha Work Program Face Obstacles, May Miss July Deadline

  World Trade Organization members are facing such fundamental differences and are at such a preliminary stage in their efforts to devise a work program to conclude the stalled Doha round that Geneva sources expressed doubts they can meet their July 31 deadline for establishing a detailed blueprint for potential negotiations.

There is an ongoing philosophical debate about what happens when a tree falls in a forest and no one hears it.  Does the falling tree make a sound?

In Geneva, the “tree” of the World Trade Organization (WTO) might be in danger of falling.  It might have already fallen.  Either way, very few seem to even care. 

It’s a bit like watching a slow-motion disaster—a flood or a prolonged monsoon rain period that gradually overwhelms the landscape.  In the case of the WTO, the consequences of drowning will be felt (like in many disasters) by the poorest and least able to cope members of the global community.

In working with British trade officials over the past two days, I have explained how the global framework for dealing with trade in services was built in the GATT/WTO.  In the late 1980s, officials struggled with developing new rules to bring some structure, order and predictability to international trade in services.  This was a very tricky task, since services cannot be easily seen or measured.

Yet clearly, some governments were putting up barriers both large and small that blocked the trade of services like engineering, architecture, medicine, education, travel and tourism, construction and so forth.  At the time—in pre-internet days especially—it was not entirely obvious how some services could be delivered across borders easily. 

Officials had to devise systems to classify the mechanisms for providing services and then go on to discuss ways of opening up markets in services sectors and providing fair treatment of foreign service providers.  These discussions required creativity and boldness and a willingness to try something different.

However, since it was all so new, as the last big round of trade negotiations finished, most governments were reluctant to commit very much in the new General Agreement on Trade in Services (GATS).  As a result, from the moment the Uruguay Round ended, services were placed on the “built-in agenda” for further discussions the next time the new World Trade Organization met for trade liberalization negotiations.

It’s been 20 years and we are still waiting for the next round of global services talks. 

The rest of the WTO agenda remains equally stalled.  No new rules have been written for vast swaths of trade at the multilateral level in more than two decades.  The Doha Development Agenda (DDA), launched with great fanfare in November 2001, has gone almost nowhere.

But it actually gets worse than that.  The WTO General Council met in November 2014 and managed to achieve the following (after a nearly 20-year record of failure, missed deadlines, incomplete negotiations, and mounting costs):   

Decides as follows:

•  — Work shall resume immediately and all Members shall engage constructively on the implementation of all the Bali Ministerial Decisions in the relevant WTO bodies, including on the preparation of a clearly defined work program on the remaining DDA issues as mandated in paragraph 1.11 of the Bali Declaration.

•  — As per paragraph 1.11 of the Bali Declaration, Members agree that the issues of the Bali package where legally binding outcomes could not be achieved, including LDC issues, shall be pursued on priority.

•  — The deadline for agreeing on the work program mandated in the Bali Declaration shall be July 2015.

Seriously?  The tree has fallen and cannot get up.

Let’s examine the evidence here.  “Work shall resume immediately and all Members shall engage constructively on the issues.”  Keep in mind that 160 governments are members of the WTO and many keep whole embassies full of staff members permanently based in Geneva to work on trade issues.  These people have, surely, been working on something for the past 13 years.  (If not, taxpayers really ought to monitor this much more closely.)

The WTO ambassadors agreed to create a program on the DDA.  This is a trade agenda first prepared more than a decade ago.  Business is utterly uninterested in rules of the trading game that might have been appropriate at the time but may be completely useless now.  What good is it to discuss the rules and market opening for cassette tape players in a world increasingly ruled by smart phones?

Ambassadors said that they need a “clearly defined” work program to get to an outcome that hardly anyone cares about.  This must surely be the very definition of futility. 

The second bullet point (which is written so poorly that it does not make sense on its own terms) says that officials need to try to get to an agreement in areas where they were unable to get to an agreement.  I suppose it could have been worse—it could have said something like, “We agree that we have agreed on a few items.”

Finally, it finishes with the statement that the work program will be decided in another 8 months.  This is not the same thing as saying that we will finally finish the deal in a few months.  This simply says that they might, possibly, given enough good will and constructive engagement, achieve a plan to discuss the things that they have been discussing for more than a decade.  

Now, there are no doubt individuals who will fiercely argue that the WTO did or has, in fact, accomplished a bit more than I have suggested.  The General Council has agreed on, for example, a different work plan to implement a deal that they all agreed they would implement on trade facilitation more than a year ago (the Bali declaration from December 2013).  There was a little bit on food stockpiling and cotton.

But I think my broader point remains.  Take a look at what was finally agreed on issues of importance to the Least Development Country (LDC) members:

Decides as follows:

1.1. With a view to facilitating market access for LDCs provided under non-reciprocal preferential trade arrangements for LDCs, Members should endeavour to develop or build on their individual rules of origin arrangements applicable to imports from LDCs in accordance with the following guidelines. These guidelines do not stipulate a single set of rules of origin criteria. Rather, they provide elements upon which Members may wish to draw for preferential rules of origin applicable to imports from LDCs under such arrangements.

That’s it.  To help the very poorest members of the community, members ought to endeavor to use some guidelines.  Not necessarily—mind you—guidelines actually developed by the very body that claims to create rules for global trade.  But, rather, to use some guidelines as a starting point in crafting potentially individualized rules that apply only to each member. 

There are so many tragedies here it’s hard to know where to start.  However, when years and years of negotiations yield only the weakest set of guidelines for one part of one element of a deal aimed at the least developed members of a community, it is very hard to face the situation in multilateral trade with any sort of optimism.  Whether or not this particular tree made a sound when it crashed seems to make very little difference. 

Future posts will discuss some of the potential solutions (and perhaps allow my friends at the WTO to continue to talk to me in the future).  Stay tuned!