**_<u>________________________________________________________</u>_**

# **1.1  Trade Costs and Competitiveness**

There are various institutional, policy and physical barriers that prevent firms from getting their goods and services to (and from) the markets on time, and with quality.

A number of empirical studies have shown that easier movement of goods and services clearly effect export competitiveness. For example, Subramanian and Arnold (2001) show that logistics accounted for no less than a third of the cost of door-to-door shipment of containerized carpets from Nepal to Germany and teabags from India to the United Kingdom. Using a similar methodology, a World Bank (1997) study of the performance of Brazilian ports reported that per-container costs for administrative procedures and customs clearance could be reduced by more than 20 percent (from $1,727 to $1,320) if international best practices were followed. Customs-related transaction costs—red tape—can represent up to 10 percent of a shipment’s value in some countries (Staples, 2002). Costs are compounded if there is corruption and delay. More efficient procedures, electronic data exchange and minimizing redundancy can provide important benefits.

In developing countries, transit costs are routinely 2–4 times higher than in rich countries. For small economies, higher logistics costs can translate directly into higher import and export prices. For countries exporting products that have a high import content, as is the case with many developing countries, small differences in transaction costs can determine whether the export venture is commercially viable or not. This particularly holds for labor-intensive industries in developing countries, where high transport costs may preclude wage growth, affecting the standard of living of workers. Reducing logistics cost can also reduce inventory levels, thus freeing up working capital for more productive uses.

Given the importance of just-in-time production systems, minimizing transit time can enable firms to outsource stages of production to geographically dispersed locations. Research by Hummels (2001) showed that rapid delivery of goods is crucial for the maintenance of multinational vertical product chains. Hummels found that each day saved in shipping time due to a faster transport mode and faster customs clearance was worth almost one percent, ad valorem, for manufactured goods. Unreliable logistic services can force firms to maintain higher inventory holdings at every stage of the production chain, necessitating additional working capital<sup>_i_</sup> .

With increased attention to the benefits of reducing non-transport barriers to trade, efforts have been made to assess the importance of trade facilitation. Empirical measures of trade facilitation are lacking, however, and progress in quantifying the impact of modern trade facilitation has been limited. Several recent studies quantify the benefits of improved trade facilitation modeled as a reduction in the costs of international trade or as an improvement in the productivity of the international transportation sector<sup>_ii_</sup> . These results show clearly that when trade transaction costs are lowered, imports and exports rise.

The analysis of capacity building in trade facilitation in the Asia Pacific Economic Cooperation (APEC) by Wilson, Mann, and Otsuki (2003), was extended in the World Bank’s _Global Economic Prospects 2004: Realizing the Promise of the Doha Agenda._ The authors find that 2 __________________________________________________________________________________________________________