Lowering trade costs : a key goal in the post-2015 sustainable development agenda.
Date: 2015-01-14
Institutions: European University Institute
Subjects: Asia, business policy, competitiveness, cost-benefit analysis, developing countries, economic development, productivity, sustainable development, trade policy

ISSN 2314-9698 

Issue 2014/03 
December 
2014

Lowering Trade Costs: A 
Key Goal in the Post-2015 
Sustainable Development 
Agenda1
Bernard Hoekman2

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Highlights
The experience of countries in East Asia and an increasing number of de-
veloping nations in other regions illustrates the important contribution that 
lowering trade barriers can make to economic growth and poverty reduction. 
Firms in low-income countries tend to confront the highest trade costs. There 
is a rapidly expanding empirical literature that documents the negative ef-
fects of high trade costs on the competitiveness of firms in developing econo-
mies and on aggregate productivity. 

In  the  post-2015  era  greater  efforts  are  needed  to  help  low-income  coun-
tries  benefit  more  from  the  trading  system;  trade  barrier  reform  therefore 
remains a priority. Given that trade costs are generated by – and can be re-
duced through – a variety of policies, there is a strong case for the post-2015 
Sustainable Development Goals (SDGs) to revisit business as usual and for 
governments to adopt a specific target that will provide an operational focal 
point for both national action and international cooperation to reduce such 
costs. Not only will this ensure that the focus of the post-2015 agenda will 
be on an area where there is a high benefit-cost ratio, but it will also ensure 
greater accountability than has been the case with the pursuit of the Millen-
nium Development Goals (MDGs). 

1.  This policy brief draws in part on Hoekman, B., “The G20 and the global 
trading system: leveraging the Asia-pacific experience”, EUI RSCAS Policy 
Paper 2014/09.

2.  Bernard Hoekman is Professor at the European University Institute and Re-

search Fellow at the Centre for Economic Policy Research (CEPR).

globalgovernanceprogramme.eui.eu

Introduction

As stressed in an open letter to the UN Secretary-General 
signed by 18 leading economic development experts (The 
International Growth Centre, 14 November 2014), economic 
growth  is  critical  for  sustainable  development.  Real 
average  per  capita  incomes  in  the  East  Asia  and  Pacific 
region have been growing at 5% or higher each year for 
half a century. But this growth performance has not been 
emulated in other parts of the world. Per capita incomes 
in sub-Saharan Africa, for example, increased only 30% 
since  the  mid-1960s.  The  reasons  for  the  differences  in 
growth  performance  are  multi-facetted,  but  economic 
policies  that  increased  the  costs  –  reduced  the  incen-
tives  –  to  engage  in  international  trade  are  one  impor-
tant factor explaining the observed variation in economic 
growth.  Aggregate  growth  is  a  function  of  the  produc-
tivity  performance  of  domestic  firms,  which  in  turn 
depends  on  the  ability  of  efficient  companies  to  grow 
and realize economies of scale. The openness of markets 
to  foreign  competition  is  a  key  factor  in  this  regard, 
especially for small countries. The level of trade-related 
transactions and operating costs associated with moving 
goods  and  services  across  borders  and  the  access  firms 
have  to  intermediate  inputs  needed  for  production  and 
distribution has been shown to be a driver of economic 
performance  (see  for  example  Djankov  et  al  20103 and 
Freund and Rocha 20114). The experience of East Asian 
countries  as  well  as  other  economies  that  have  success-
fully used trade to sustain high rates of economic growth 
over  a  long  period  illustrates  the  high  payoffs  lowering 
trade  and  investment  barriers  and  more  generally  in 
reducing trade costs.

For the past decade, the economic development commu-
nity  –  governments,  international  organisations,  devel-
opment  agencies  –  have  pursued  the  Millennium 
Development Goals (MDGs), a set of specific objectives 
and goals to be achieved by 2015 that range from halving 

3.  Djankov, S., C. Freund and C. Pham, 2010. “Trading on 
Time,”  The  Review  of  Economics  and  Statistics,  92(1): 
166-73.

4.  Freund, C. and N. Rocha, 2011. “What constrains Africa’s 

exports?,” World Bank Economic Review, 25(3): 361-86.

extreme poverty rates to halting the spread of HIV/AIDS 
and  providing  universal  primary  education.  As  2015 
began to approach, efforts were launched to consider how 
to build on the progress that has been made to achieve the 
MDGs and to agree on priorities areas for action to guide 
a post-2015 development agenda. The focus of post-2015 
deliberations  has  been  to  agree  on  a  set  of  Sustainable 
Development Goals (SDGs).

Trade was a means of implementation for the MDGs. This 
is appropriate as trade per se should not be a goal—it is an 
instrument that can be used to enhance the welfare (real 
incomes)  of  households  in  developing  countries.  What 
matters then is to identify actions that can help firms use 
the  trading  systems.  The  actions  that  were  targeted  in 
the MDGs revolved around improving market access for 
developing countries. Trade was included as one element 
of a “partnership for development” (MDG Goal 8), with 
the partnership referring to trade agreements, including 
the  conclusion  of  the  WTO’s  Doha  Development 
Agenda (DDA) negotiations and the implementation of 
programmes to grant Least Developed Countries (LDCs) 
duty-free  and  quota-free  access  to  high  income  coun-
tries.  A  weakness  of  the  approach  taken  towards  trade 
in the MDGs was the absence of quantifiable indicators 
to  incentivise  governments  and  development  agencies 
to deal with the constraints impeding the use of trade to 
attain the MDGs. 

Particularly important in this regard was that the focus 
of the “partnership” was primarily on just one factor that 
underpins the high trade costs that inhibit greater use of 
the trading system by firms in LDCs. In practice market 
access constraints in export markets are not the binding 
constraint on trade expansion. This is illustrated by the 
diverging  trade  performance  of  East  Asian  countries  as 
compared  to  other  developing  country  regions  –  East 
Asia  has  historically  benefitted  less  from  preferential 
access  to  markets  than  other  developing  regions.  The 
post-1980 experience makes clear that in practice auton-
omous  reforms  drive  economic  development.  Trade 
agreements  can  help  –  especially  for  nations  that  are 
land-locked and thus depend on access to neighbouring 
countries with sea ports – but the key need is to identify 

2 ■  Global Governance Programme ■ Issue 2014/03 ■ December 2014

the primary sources of trade costs and to determine what 
governments should do themselves to reduce trade costs 
and where others can/should help. 

These observations suggest a focus on trade policy reform 
and trade cost reduction more broadly. Formal barriers 
to trade in the “lagging” countries are often higher than 
those  prevailing  in  East  Asia  and  the  Pacific;  the  same 
is true of trade costs more generally. Nontariff barriers, 
services trade restrictions and inefficient border manage-
ment and related sources of real trade costs do not figure 
much in the discussions on the post-2015 SDGs. Given 
the  extant  research  on  the  links  between  trade  expan-
sion  and  growth,  the  key  role  that  trade  costs  play  as 
an  impediment  to  trade  and  investment  in/operation 
of  international  supply  chains,  and  the  importance  of 
services  in  overall  trade  costs  (transport  and  logistics 
services,  related  infrastructure),  policy  attention  should 
focus  on  ensuring  that  trade  does  more  to  support  the 
achievement of overall growth objectives. 

The premise of this policy brief is that a global commit-
ment  to  significant  reductions  in  trade  costs  should  be 
part of the post-2015 sustainable development goals. In 
contrast to, for example, the 2 percentage point increase 
in economic growth over 5 years that has been adopted 
as  the  primary  focal  point  of  the  G20,  which  is  endog-
enous and not under the direct control of governments, a 
trade cost reduction goal can be mapped to specific poli-
cies  and  instruments  that  governments  do  control,  and 
has the additional advantage that pursuit of the objective 
must involve the business community in each country.

Trade targets and the post-2015 
sustainable development goals

The  High-Level  Panel  on  the  Post-2015  Agenda  (2013) 
noted the importance of ensuring that the global trading 
system is “open and fair”, that the WTO is the most effec-
tive tool to increase the development impact of trade, and 
that  a  successful  conclusion  of  the  Doha  Development 
Agenda  is  a  precondition  for  achieving  the  post-2015 
agenda.  It  called  on  bolstering  market  access  for  devel-
oping  countries,  including  preference  programmes  and 
duty-free,  quota-free  (DFQF)  market  access  for  LDCs, 

measures to simplify and reduce the negative impacts of 
rules of origin and reducing the trade-distorting agricul-
tural subsidies. This is all encapsulated in the suggested 
goal for trade: “Support an open, fair and development-
friendly  trading  system,  substantially  reducing  trade-
distorting  measures,  including  agricultural  subsidies, 
while  improving  market  access  of  developing  country 
products.”

The  Open  Working  Group  (2014)  that  was  formed  to 
discuss possible Sustainable Development Goals (SDGs) 
in greater detail includes trade objectives in three of the 
proposed 17 goals, as follows:

•	 Proposed  goal  8  -  Promote  sustained,  inclusive  and 
sustainable  economic  growth,  full  and  productive 
employment and decent work for all.

8.a)  improve  Aid  for  Trade  support  for  devel-
oping countries, notably through the Enhanced 
Integrated Framework for LDCs. 

•	 Proposed goal 9 - Promote sustainable infrastructure 

and industrialization and foster innovation.  

9.2)  improve  regional  and  trans-border  infra-
structure  to  promote  regional  connectivity  and 
integration and to facilitate trade.

•	 Proposed  goal  17  -  Strengthen  the  means  of  imple-
mentation  and  the  global  partnership  for  sustainable 
development.

Trade

17.1)  promote  a  universal,  rules-based,  open, 
non-discriminatory  and  equitable  multilateral 
trading system. 

17.2) improve market access for exports of devel-
oping  countries,  in  particular  Least  Developed 
Countries, African countries, LLDCs5 and SIDS 6 
with a view to significantly increasing their share 
in  global  exports,  including  doubling  the  LDC 
share by 2020. 

5.  Landlocked Developing Countries
Small Islands Developing States
6. 

3 ■  Lowering Trade Costs: A Key Goal in the Post-2015 Sustainable Development Agenda

17.3) realize timely implementation of duty-free, 
quota-free market access on a lasting basis for all 
least  developed  countries consistent with WTO 
decisions and the Istanbul Programme of Action. 

This  list  is  essentially  ‘more  of  the  same’  in  the  sense 
that  there  is  nothing  new  relative  to  what  has  been  the 
focus in the MDG context, and nothing new relative to 
the approach that has historically been taken in the UN 
and the GATT/WTO to address economic development 
concerns  and  objectives.  The  only  concrete  numerical 
target  is  to  double  the  global  share  of  Least  Developed 
Countries (LDC) exports by 2020 (although it is not spec-
ified what the baseline is and whether this includes trade 
in services). In any event, this target is already included 
in  the  Istanbul  Programme  of  Action  (United  Nations, 
2011), and thus does not add or change anything.

These  goals  have  conceptual  and  operational  weak-
nesses. One problem is the mercantilist focus on exports 
as  opposed  to  trade  (both  exports  and  imports).  The 
emphasis  on  duty-free  and  quota-free  (DFQF)  market 
access  and  (implicitly)  export  promotion  (‘double 
exports’) disregards that in practice lack of competitive-
ness and limited diversification of low-income economies 
is a result of domestic policies, including import policies. 
As  firms  will  generally  benefit  from  access  to  imported 
inputs that they use to produce exports – or to sell prod-
ucts  that  compete  with  imports  –  the  mercantilist  bias 
may misdirect policy attention towards interventions that 
will have only a low aggregate 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,  but  research  has  documented 
that  the  ‘binding  market  access  constraints’  are  often 
nontariff  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. 

Finally, trade outcomes are endogenous – they are deter-
mined  by  demand  factors,  investment  decisions  by 
companies  located  in  a  large  number  of  countries,  the 

economic  cycle,  and  so  forth.  Rather  than  targeting  a 
certain  export  volume  outcome  (‘double  LDC  exports’) 
the focus should be on policies or other actions that can 
be  undertaken  by  governments  and  for  which  they  can 
and should be held accountable.

These considerations suggest alternative approaches that 
have  a  higher  likelihood  of  mobilising  policy  reform 
efforts that will help low-income countries benefit more 
from  the  trading  system.  One  option  would  be  to  seek 
agreement  on  a  measurable  trade-related  indicator  that 
is  highly  correlated  with  the  realisation  of  the  various 
trade  objectives  listed  in  the  SDG  working  group  draft 
paper and that would provide a concrete focal point for 
both national action and international cooperation. One 
candidate is to agree on a 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% over the 10 year period on a regional basis 
(APEC Policy Support Unit, 2012, APEC’s Achievements 
in  Trade  Facilitation  2007-2010  -  Final  Assessment 
of  TFAP-II,  Singapore:  APEC  Secretariat).  The  global 
community  could  emulate  this  initiative,  building  on 
and learning from the APEC experience. One possibility 
would  be  for  every  country  to  commit  to  reduce  trade 
costs by at least 5 percent in 5 years, and to use interna-
tional data on trade costs reported by companies to the 
World  Bank  on  a  country-by-country  basis  as  a  base-
line (World Bank, 2014,  Connecting to Compete, 2014, 
Washington DC: World Bank). 

Trade  cost  reductions  would  be  in  the  self-interest  of 
each country, but also benefit trading partners and thus 
be  a  contribution  to  the  global  public  good.  It  is  also 
fully  consistent  with  the  growth  objective,  as  lowering 
trade costs is likely to be a particularly effective mecha-
nism to increase welfare (real incomes) (see, e.g., World 
Economic  Forum,  Bain  &  Co.  and  World  Bank,  2013. 
Enabling Trade: Valuing Growth Opportunities). 

4 ■  Global Governance Programme ■ Issue 2014/03 ■ December 2014

A  global  commitment  to  a  specific,  numerical  trade 
cost  reduction  target  would  also  send  an  important 
signal to international business community that leaders 
will  pursue  trade  facilitation  initiative,  including  the 
implementation  of  the  new  WTO  Agreement  on  Trade 
Facilitation  (TFA)  (see  Hoekman,  B.,  “The  Bali  Trade 
Facilitation  Agreement  and  rulemaking  in  the  WTO: 
milestone,  mistake  or  mirage?”,  EUI  RSCAS  Working 
Paper,  2014/102).  A  trade  cost  reduction  target  would 
provide  a  concrete  focal  point  for  both  national  action 
and international cooperation along the lines of what is 
foreseen in the TFA, but not be limited to the issues that 
the  TFA  covers.  Indeed,  in  practice  it  may  be  that  the 
most important sources of trade costs and supply chain 
frictions  are  related  to  service  sector  policies  or  weak-
nesses in infrastructure, areas that are not covered by the 
TFA.  A  trade  cost  reduction  target  leaves  it  to  govern-
ments,  working  with  stakeholders  (businesses,  regula-
tors, consumer organisations), to determine how best to 
reduce trade costs. It is fully consistent with the call by 
the B20 Trade Taskforce (2014) to create national supply 
chain development strategies, as these will have to center 
on the identification of specific supply chain frictions and 
actions to address these trade costs. 

The added value of a global initiative on trade cost reduc-
tion  is  not  just  an  instrument  to  increase  real  incomes, 
but  there  is  an  important  public  good/collective  action 
dimension. Realising the objective will require high-level 
political  attention  to  achieve  the  needed  internal  coor-
dination  within  governments  and  external  coordina-
tion across governments to pursue cross-border projects 
and cooperation. A global trade cost reduction initiative 
will also incentivise the relevant international organisa-
tions to focus their activities on assisting governments to 
reduce trade costs.

Agreeing on and pursuing such a target would be econom-
ically superior to the mercantilist approach that is implicit 
in current SDG proposals. Reducing trade costs is neutral 
in the sense of benefiting exporters and importers: lower 
trade  costs  will  benefit  households  in  developing  coun-
tries  by  reducing  prices  of  goods.  Some  of  those  goods 
will be inputs used by firms that export – or that might 

start doing so if their costs fall enough. A major advan-
tage of a trade cost target is that it is left to the govern-
ments concerned – both the developing country govern-
ment  and  its  trading  partners  –  to  identify  actions  that 
will reduce them. There are many reasons why costs are 
high, including own trade policies of developing econo-
mies,  nontariff  measures  at  home  and  abroad,  a  lack  of 
trade  facilitation,  weaknesses  in  transport  and  logistics, 
etc. A trade cost reduction target leaves it to governments 
to work with stakeholders to identify how best to reduce 
prevailing excess costs. There is no one size fits all associ-
ated with achieving a trade cost reduction target. A trade 
cost  reduction  target  is  consistent  with  –  and  arguably 
superior to – all the objectives embodied in the proposed 
SDG trade-related goals.

Using a trade cost reduction target as the focal point for 
trade  reforms  post-2015  is  not  a  panacea.  It  has  some 
potential  downsides  from  an  efficiency  perspective  that 
will  need  to  be  addressed.  Thus,  the  lack  of  guidance 
given  to  governments  on  what  actions  will  lower  trade 
costs the most could result in actions being pursued that 
do not have the highest benefit-cost ratio. 

Recommendations

•	 Include a measurable trade cost reduction target as a 
sub-goal  of  the  post-2015  Sustainable  Development 
Goals.

•	 Involve the business comunity in each country in iden-
tifying interventions that will have the greatest impact 
in reducing trade costs.

•	 Conduct  careful  analysis  to  assess  what  would  have 
the greatest effect in lowering trade costs while mini-
mising required investments.

•	 Prompt  cooperation  among  governments  in  areas 
where joint (concerted) action can enhance net bene-
fits of interventions.

5 ■  Lowering Trade Costs: A Key Goal in the Post-2015 Sustainable Development Agenda

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