# **Appendix D: Border Costs**

# **Estimate of the impact of a Deep and Comprehensive Free Trade Agreement with the European Union on Armenian Border Costs**

For the estimate of Armenian border costs associated with exporting and importing we begin with the survey of border costs undertaken by Maliszewska _et al_ ., (2008) in late 2007. They report that import and export procedures are regarded by Armenian businessmen as one of the most corrupt areas of public administration. Customs procedures are riddled by rent seeking and corruption. The results of their survey (see Maliszeswska _et al_ ., (2008, table 9.2) reveal that the average costs of exporting to the European Union are higher by 10.4 percent due to customs procedures. Although they report the results of their survey by sector, and in some sectors the reported costs are considerably higher.(as high as 60 percent), they argue that the size of the sample is too small to distinguish exporting costs by sector. We thus take the average costs of customs procedures of 10.4 percent as applying to all sectors in 2007, both for exports and imports.

To update the estimate to 2010, we employ data from the Cost of Doing Business Survey of the World Bank.<sup>32</sup> According to the Doing Business Survey, in 2007, the cost of exporting a container from Armenia was $1600, but had risen to $1731 in 2010. Prices in Armenia have risen by 27 percent between 2007 and 2010 (January to September average).<sup>33</sup> Converting the $1731 estimate for 2010 to 2007 prices, we estimate the cost of exporting a container from Armenia in 2010 are $1365 in 2007 prices (which are $1731/1.27) This suggests that the costs of exporting a container in Armenia in 2010 are .854 times the costs in 2007 ($1365/1600). Finally, we estimate that the border costs of exporting to the EU from Armenia in 2010 are 8.9 percent (which is 10.4% * .854) of export revenues. This means that for each dollar of revenue from export sales to the EU in 2010, Armenian exporters lose 8.9 cents to border costs.

Similarly for imports, the cost of importing a container into Armenia was $1880 in 2007, but had risen to $2096 in 2010. Converting the $2096 estimate for 2010 to 2007 prices, we estimate the cost of importing a container into Armenia in 2010 are $1652 in 2007 prices (which are $2096/1.27) This suggests that the costs of exporting a container in Armenia in 2010 are .88 ($1652/1880) times the costs in 2007. We estimate that the border costs of importing from the EU to Armenia in 2010 are 9.1 percent (which is 10.4% * .88) of import revenues.

Given the focus of the EU on institutional development for trade facilitation, a deep and comprehensive free trade agreement with the EU is likely to reduce these costs for exports to the EU. To estimate the extent of a reduction in these costs, we note that the border costs of exporting by the transition countries that are now members of the EU, again from the Doing Business survey. The border costs of exporting a container in 2010 are as follows: Bulgaria, $1551; Czech Republic, $1060; Estonia, $730; Hungary, $1225; Latvia, $600; Lithuania, $870; Poland, $884; Romania, $1275; Slovak Republic, $1445; and Slovenia, $1075. All have lower border costs of exporting in 2010 than the $1731 of Armenia. But the border costs of exporting a container from Bulgaria suggests that EU membership is not a magic bullet for reducing the border costs of exporting down to the level of the Baltic countries. It appears reasonable,

> 32 For the raw Doing Business data see: http://www.doingbusiness.org/Data/ExploreTopics/trading-acrossborders.

> 33 Price index data are taken from the website of the Armenian Statistical Office. See http://www.armstat.am/en/?nid=126&id=07001.

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