By Michael Merriam
In recent months, research on global trade has been divided over the effects of a long negotiated trade partnership for twelve Pacific Rim nations. Signed by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam, the Trans-Pacific Partnership (TPP) is, by GDP of signatory nations, the largest free trade pact in the history of the world. With many standards and provisions, the agreement’s depths contain articles that deal with a variety of subjects ranging from intellectual property rights to environmental protection. According to the Office of the U.S. Trade Representative, there will be 18,000 different taxes on American products that will be reduced or eliminated by adoption of the TPP. Beyond the benefits to the United States, the increased trade promotion and tariff reduction of the TPP promises to advance job creation, good governance, trade competitiveness, and stable economic growth on both sides of the pacific. Most significantly, the TPP incorporates greater trade facilitation requirements than past regional trade pacts, a hopeful sign for the future of global trade.
As defined by the European Commission’s Taxation and Customs Union, trade facilitation is the “simplification and harmonization of international trade procedures including import and export procedures.” Its importance stems from the diminishing, but still positive, effects of tariff reduction on economic growth. With an average applied tariff rate of just 3.17% in 2013, the 12 pacific-rim countries to sign the TPP already have extremely low tariff rates, even before any of them actually bring the agreement into practice. In fact, along with those nations within the European Union, where the similar Transatlantic Trade and Investment Partnership (TTIP) is currently being negotiated, the TPP signatories have some of the lowest tariff rates in the world. Tariff reduction has long been an economic policy initiative and a catalyst of international and domestic growth, but as the TPP is ratified and the TTIP is negotiated much of the developed world can see tariff reduction moving toward its final effects. With already low tariffs about to be made even lower, there simply is not much more economic progress to be made through the same methods.
With tariff reduction reaching its last period as an enabler of economic growth, the pacific trade community now must look to trade facilitation measures to keep interregional trade and a dozen economies growing. Brushing aside protectionist tariffs is only part of the solution to trade barriers that are clogging the efficient flow of goods and services. Goods imported into a country often face delays that add to the cost to consumers, while not providing additional benefit to producers. Ranging from mandatory waiting periods to corruption amongst local inspectors, these costs can be just as inhibitive to trade as the tariffs that TPP eliminates, except without the small consolation tariffs provide in the form of government revenue.
The average time for imported goods to pass border compliance regulation in a TPP country is around 35 hours— an eternity compared to the 9 hours average for high-income OECD economies. Given that 8 of the 12 TPP signatories are rated by the World Bank as high-income countries, and of the remaining four all but Vietnam are rated as upper-middle income, the nations of the TPP seem to be disproportionately affected from inefficient border delays. Furthermore, the World Bank’s trading across borders indicators reveal that the average time for an import to meet documentary compliance in the TPP area is 33.5 hours, more than 8 times the high -income OECD average of just 4 hours.
Average import times illustrate a need for trade facilitation goals between Pacific Rim countries in order to more fully realize the gains of trading with one another. Recently there have been positive signs toward meeting this need. Within the TPP’s many pages is a chapter on Custom’s Administration and Trade facilitation, the presence of which signifies meaningful movement towards better trade practices. While not comprehensive in resolving all border inefficiencies, the provisions of this chapter do plan for several key advances such as required advanced rulings, special treatment for express shipments, and the timely release of goods.
The importance of these improvements cannot be underscored as non-tariff barriers frequently include a high potential for corruption and a lack of transparency. Businesses and consumers in a given supply chain are worse off if goods are idly waiting to pass through border compliance, and the incentive for individual businesses to expedite the process by offering bribes grows greater. Hypothetically, the longer the period of time it takes goods to pass border compliance the greater the opportunity for officials to solicit bribes. The same can be said of waiting periods for judicial rulings on the classification of an import or export, making ambiguous classifications a potential source of corruption.
Advanced rulings and the timely release of goods, both required by the TPP, each respectively help to lower corruption potential. These improvements are especially encouraging from the standpoint of organizations such as CIPE that work in promoting good governance in emerging markets. Similarly the chief proponent of the TPP in the United States, the USTR, points to the same goal of improved governance as one especially progressive dimension of the trade agreement. The presence of these positive steps toward better trade included in the TPP should be encouraging, not just to CIPE and the USTR, but to all. It is a clear symbol that at least among negotiators from around the pacific who worked on the pact, economists and trade experts are thinking ahead to the next great policies to create international economic growth. The identification of good governance practices and increased transparency as progressive economic policies, should be beneficial to many of the countries where CIPE partners work, especially given their cooperation on similar agendas.
Not discussed here are the regions of the world not impacted by the TPP, such as Sub-Saharan Africa, where tariff rates are still moderately high, but trade facilitation also stands to be of great significance. The elimination of non-tariff barriers does not necessarily have to follow after the reduction of tariffs, as it did in the developed world, but could perhaps precede it in underdeveloped areas where tariffs are still too large a proportion of government revenue to be immediately dismissed. While these areas certainly exist in the world, tariff reduction is certainly entering its descent. Starting with the nations of the Trans-Pacific Partnership, though hopefully not ending with them, trade facilitation policies that encourage transparency and good governance practices must be looked at to increase economic growth, reduce global poverty, and allow for the most efficient use of global resources.
Michael Merriam is Evaluations Intern for the Global Alliance for Trade Facilitation at CIPE.
