Trade Facilitation and Integrity Go Hand in Hand? More than you think

2016-Integrity-Forum-calloutEvdokia Moïsé, Senior Trade Policy Analyst and Silvia Sorescu, Trade Policy Analyst, Development Division of the OECD Trade and Agriculture Directorate

Good governance and streamlined procedures are essential features of an efficient border process. Cumbersome customs and other border procedures can directly raise trade transaction costs. Weak border governance can lead to hidden costs, resulting in time delays and uncertainties in the delivery of goods across borders. Non-transparent and burdensome procedures can continue to create incentives and opportunities for corruption in the movement of goods from one country to another, thus exacerbating integrity risks and deepening the vicious circle.

Is there a role for trade liberalisation and facilitation in zeroing in on corruption and supporting integrity in trade? Yes – and a greater one than you might think. Trade negotiations have pushed the boundaries of transparency and anti-corruption mechanisms through the inclusion of specific commitments in regional agreements, thus having a dual objective of increasing market integration and reducing market opacity. An OECD review of a wide selection of regional trade agreements (RTAs) showed that these reached new ground both in their scope and their potential for attacking corruption as a barrier to trade. Most of the RTAs signed by OECD countries over the last decade have been with economies outside the OECD area; WTO-plus and WTO-beyond transparency and anti-corruption mechanisms are thus increasingly being advanced in a North-South context.

Countries at all levels of development recognise that corruption distorts resource allocations and undermines the level playing field for businesses. Such provisions have the potential to reduce information asymmetries, enhance the enforceability and accountability of regulations, as well as minimize the opportunities for discretionary behaviour of government officials and institutions. This sets high-standard best practices for future regional integration initiatives.

In addition to pursuing such commitments at regional levels, multilateral and national trade facilitation efforts can create an environment conducive to clean trade and investment by eliminating the high transaction costs related to the complexities of border clearance procedures. The transparency, predictability and simplification of trade procedures have not only the potential to reduce trade costs and promote economic efficiency but also to remove corruption incentives and opportunities.

In December 2013 at the Bali Ministerial Conference, WTO members adopted the Trade Facilitation Agreement (TFA) which contains provisions for expediting the movement, release and clearance of goods. OECD estimates based on its 2015 Trade Facilitation Indicators (TFIs) show that a full implementation of the TFA could reduce worldwide trade costs by between 11.8% and 17.5%. The highest gains would accrue to low and lower-middle income countries. Areas such as the harmonisation and simplification of trade documents and procedures, the availability of trade-related information, or automation are key in reducing trade transaction costs. Implementing elements of good governance and impartiality in border administrations also has the potential to reduce trade costs by between 0.5 and 1.1%, depending on level of development.

One of the building blocks of modern and efficient border administration is integrity, which emphasises the fight against corruption and the enhancement of good governance measures. Trade liberalisation and trade facilitation can provide the best practices to support it.

The OECD is convening the global anti-corruption community to debate on most effective measures to enhance integrity in international trade at the 2016 OECD Integrity Forum “Fighting the Hidden Tariff: Global Trade without Corruption,” on April 19-20, 2016 in Paris, France. The Forum will provide a stocktaking platform for all sectors of society to debate best approaches to prevent, detect, and curb corruption in global supply chains.

Useful links

OECD (2015), “Implementation of the WTO Trade Facilitation Agreement: The Potential Impact on Trade Costs

Lejárraga, I. (2013), “Multilateralising Regionalism: Strengthening Transparency Disciplines in Trade”, OECD Trade Policy Papers, No. 152, OECD Publishing

OECD (2009), Overcoming Border Bottlenecks: The Costs and Benefits of Trade Facilitation, OECD Trade Policy Studies, OECD Publishing

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3 comments to “Trade Facilitation and Integrity Go Hand in Hand? More than you think”

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  1. Michael - 08/04/2016 Reply

    The Georgian reforms after the 2003 Rose Revolution are quiet instructive. They managed to greatly reduce corruption in the customs service within just a few years. While they didn’t call it trade facilitation, reducing and streamlining procedures, regulations, forms to fill out, tariff lines etc. was a big part of the effort. But they also replaced staff (firing 80 percent of the old staff!), improved the infrastructure (partially to facilitate trade, partially because a nice work environment matters), and in a very public way fined and punished people bribing or taking bribes. The World Bank documented these reforms in what must be one of the most entertaining World Bank reports ever (“Fighting Corruption in Public Services: Chronicling Georgia’s Reforms”).

    While these reforms destroyed some old business models (suitcase traders or the infamous Ergneti market), they also made possible new business models (freight forwarding, hugely popular in Georgia, impossible without an efficient customs service).

  2. Ian - 09/04/2016 Reply

    Globalisation of finance, under the existing rules, has gone out of fashion politically – we read in the press.

    On trade, studies show that protectionism is rife, with the top protectionists being India, Russia and the United States [greatest advocate of globalisation?].

    Unilateralism, not the G20’s aim of multilateralism is the trend. The future of the World Trade Organisation is doubtful and the US presidential election suggests candidates want to renegotiate trade deals.

    The MD of the IMF spoke in China recently and said that effective co-operation is critical to the functioning of the international financial system. Madame Lagarde emphasised that this required collective action from all countries.

    What steps are being taken by the OECD to negotiate a change in the rules?

  3. Ian - 11/04/2016 Reply

    Trade: “What steps are being taken by the OECD to negotiate a change in the rules?”

    A former US Treasury Secretary comments on this in the FT today. Lawrence Summers notes that peace and prosperity have been enabled by the post WW2 political order. The world is growing smaller and more closely connected. However electioneering in the West shows the evolving order is widely opposed.

    Mr Summers suggests that the growth of international financial institutions has been politically prevented from keeping pace with the growth of the global economy. His recommendation is that institutions should shift from promoting integration to managing its consequences. Specifically “a shift from international trade agreements to international harmonisation agreements, where issues such as labour rights and environmental protection would take precedence over issues related to empowering foreign producers.”

    New rules for trade, capital flows and tax are proposed. The key problem surely with national, let alone cross-border, rules – especially financial – is enforcement. Governments in the US and China, for example, have a record of ignoring harmful adjudications by watchdog organisations. No idea is offered as to how this fundamental flaw can be addressed.

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