Latin America urgently needs to implement reforms to boost trade facilitation or else lag behind.
BY JOHN MURPHY
AND TARA GALVIN
If the nations of Latin America and the Caribbean needed one more warning that they are lagging in the global competition with China and other Asian dynamos, it arrived in the usually innocuous form of a World Bank report in early November. Entitled Connecting to Compete: Trade Logistics in the Global Economy, the report included a novel Logistics Performance Index (LPI) providing an in-depth, cross-country assessment of trade logistics and supply chain performance.
What is trade logistics, and why does it matter? Trade logistics is shorthand for the range of services and processes involved in moving merchandise from one country to another — “from customs procedures, logistics costs, and infrastructure quality to the ability to track and trace shipments, timeliness in reaching destination, and the competence of the domestic logistics industry,” as the World Bank study puts it. With international trade growing relative to GDP — the value of exports and imports combined is equivalent to 28 percent of GDP in the United States, 68 percent in Mexico, and 83 percent in Chile — the efficiency of trade logistics becomes extremely important.
To the surprise of many, China outperformed every single country in Latin America and the Caribbean on the LPI. This is remarkable on several fronts, not least because China has a per capita income and other development indicators that lag well behind many of Latin America’s middle income countries. Along with China, six other economies in developing Asia — Singapore, Hong Kong, Taiwan, Korea, Malaysia, and Thailand — also ranked ahead of every single Latin American or Caribbean country included in the index. Mexico came in at 56 and Brazil at 61, placing them behind the majority of European and Asian economies. (The United States achieved a ranking of 14th in the LPI.)
Competition in today’s global economy has laid bare the cost of inefficient trade logistics. Studies have shown that inefficiencies in customs and ports in Latin America and the Caribbean add anywhere from 5 percent to 25 percent to the cost of trade. At a time when the average import tariff in the region has fallen to about 10 percent, the cost of inefficient customs and ports looms as a highly significant barrier to trade.
THE TRADE FACILITATION AGENDA
From a business perspective, why does the field of trade logistics matter? Three reasons stand out — cost, speed, and reliability. Reforms in this sector — often dubbed trade facilitation — include measures to make the flow of trade cheaper, faster, and more reliable by making customs and ports procedures more efficient.
The business community agrees strongly with the findings of the World Bank and other researchers in academia. In September, the Association of American Chambers of Commerce in Latin America (AACCLA), whose 23 member AmChams represent over 80 percent of U.S. investment in Latin America and the Caribbean, released results from a survey of its members examining issues of importance for the upcoming year. More than 500 business leaders in 22 countries took part in the survey.
The results represent a call to action. Fully 62 percent of respondents rated trade facilitation reforms as the highest priority — ahead of a dozen other business priorities, including such critical issues as approval of pending trade agreements, fighting counterfeiting and piracy, and securing treaties to avoid double taxation. In short, trade facilitation is an urgent priority for the Americas.
Traditionally, the trade facilitation agenda has focused on customs procedures and requirements, port efficiency, infrastructure quality, the overall regulatory environment, automation and e-business usage. The World Bank report suggests that policymakers should add to this agenda measures to liberalize services markets to ensure that quality, competitive private services are available in sectors such as trucking, warehousing, and customs brokerage.
COST, SPEED AND RELIABILITY
Of all the factors recommending trade facilitation as a reform priority, cost is at the fore. In the World Bank’s widely praised Doing Business 2008 report, the costs of trading across borders are provided for 178 countries. Throughout Latin America, these costs are unusually high, especially when juxtaposed with developing Asian markets.
For example, in Mexico the cost to import one 20-foot container is $2,411 and to export is $1,302. Looking at Brazil, the import cost is $1,240 and the export cost is $1,090. By contrast, in China and Singapore, the import cost per container is $430 and $367, and the export cost is $390 and $416, respectively. Chile stands out as a leader in Latin America with an import cost of $685 and an export cost of $645 per container. With this cost disparity, it becomes clear why these Latin American economies are having difficulty competing.
The speed of trade logistics is equally critical, and again the comparison with Asia is unflattering for Latin America and the Caribbean. According to Doing Business 2008, the
average time for containers to clear customs and other procedures in South America is 25.8 days for imports and 22.2 days for exports. Compare this to the world leader, Singapore, where imports average three days and exports average five days to clear customs.
“Speed to market” matters a great deal in today’s global marketplace. However, the Doing Business report suggests that most Latin American and Caribbean economies are squandering a potential advantage over Asian rivals. The region’s relative proximity to the U.S., Canadian, and European markets is a key competitive advantage over Asia, but it’s being squandered.
Linking cost and speed is reliability, the importance of which is highlighted by the Connecting to Compete report. When looking to improve the reliability of trade logistics, it is crucial to look at a country’s logistics services broadly. In this vein, the report suggests that policymakers should add to the traditional trade facilitation agenda measures to liberalize services markets. Doing so helps ensure that quality, competitive logistics services are available. Greater reliability in the supply chain contributes to greater direct investment, opportunities for diversification in the export market, and an overall stronger and more competitive trade environment.
It’s worth noting that advances in the liberalization of services are among the many virtues of the recent free trade agreements. El Salvador’s former economy minister Miguel Ernesto Lacayo commented frequently during the campaign for approval of the U.S.-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) that the agreement would imply 15 years’ worth of economic reform. By combining reforms in customs with trade capacity building and services liberalization as well as greater respect for the rule of law, the recent U.S. free trade agreements do precisely what the World Bank report prescribes.
THE VIEW OF TRADE LOGISTICS CUSTOMERS
Outside of the trade logistics and transportation industries themselves, customers of these services are also paying more attention to the importance of trade facilitation. Jeanne Broad, Director of International Trade at General Motors Corporation, has made the argument for a greater focus on trade facilitation reforms in the context of Latin America’s largest market, Brazil:
“Although Brazil has made substantial progress in modernizing its customs processes, transaction costs remain substantially higher in Brazil thank in the United States. For example, GM Brazil has over 70 service workers, representing a cost of over $4 million a year, processing imports and exports. Of those, nine are devoted to soliciting customs declarations from suppliers so that GM Brazil can prepare certificates of origin to qualify for trade preference programs. These nine are focusing on about 10,000 parts, while, in comparison, GM Europe has just 2.5 people soliciting declarations for 200,000 parts.” Unfortunately, this example is not unique to the automotive industry or Brazil.
For the huge number of firms across the economy that rely on the trade logistics sector to get their products to market, Broad points out that there is consensus on a remarkable number of priority reforms. These include:
- Enhancing the use of technology in order to cut down on the number of transaction papers;
- Harmonizing the data requirements for exports and import declaration;
- Reviewing the bond guarantee requirements on goods which are released early; and
- Expediting border clearance times for low-risk imports.
A GLOBAL CHALLENGE
For policymakers and business leaders seeking a roadmap to reform, the good news is that the way has been prepared. The Asia-Pacific Economic Cooperation (APEC) process has made good on trade facilitation promises and allowed its 21 member economies to win the benefits of increased trade. This was demonstrated by the success of the APEC Trade Facilitation Action Plan, which was launched in 2002.
Underscoring the usefulness of specific, outcome-tied goals, APEC ministers met the target established Action Plan of a 5 percent reduction in transaction costs (a rough analogue to trade logistics) in just three years. The APEC economies are currently working to achieve another five 5 percent reduction within a few years. The business community is keen to replicate this process in the Americas (beyond the five Western Hemisphere members of APEC).
One place for Latin America and the Caribbean to start is ratification and implementation of the revised Kyoto Convention, which provides for the simplification and harmonization of customs procedures. The convention is one of the major international instruments developed by the World Customs Organization, and it is recognized as an international standard by the global customs community. Unfortunately, while more than 50 countries have ratified the convention, not one country in Latin America or the Caribbean has done so, though some, such as Chile, are estimated to be in compliance with more than two-thirds of its provisions.
Today, Latin America and the Caribbean face the imperative of overcoming the disconnect between expressions of support for trade facilitation and the region’s stalled attempts putting these reforms into practice. The good news is that the challenge can be met, and the payoff could be both large and quick. But in an increasingly competitive world, there’s no time to dawdle.
John Murphy is Vice President for International Affairs at the U.S. Chamber of Commerce and Executive Vice President of the Association of American Chambers of Commerce in Latin America (AACCLA). Tara Galvin is Director for Western Hemisphere Affairs at the Chamber.They wrote this column for Latin Business Chronicle.
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