Bain & Co: Trade barriers hold back billions in goods

12 February 2015 4 min. read
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Trade barriers are holding back effective trade and hence billions in goods, shows a new Bain & Company report. The firm shows that removing all barriers halfway to best practices could add $77 billion in economic value. According to the firm, while reform implementation is occurring, a focused approach may be better for increasing the streamlined movement of goods.

Trade facilitation agreements
The aim of trade facilitation agreements is to create a cross boarder agreement such that goods can move freely across borders with low administration burdens, high efficiency and in agreement with local and international regulation. In the course of history, a divergent set of rules and systems has been developed around the movement of goods, from administrative hurdles to limited market access, which has hobbled the free movement of goods. To overcome the slow movement of goods, in an often fast paced world, the international Trade Facilitation Agreement (TFA) was developed at the World Trade Organization Ministerial Conference in Bali in 2013.

In collaboration with Bain & Company and the International Trade Centre (ITC), the World Economic Forum (WEF) developed a report, titled ‘Enabling Trade: Increasing the Potential of Trade Reforms’, which considers a more focused method to implement trade reform. As it stands, the method of implementing reforms aims at improving the movement of goods, while the competitiveness of industries may not be being implemented efficiently.

Enabling Trade - Increasing the Potential of Trade Reforms

According to the consulting firm, the good news is that countries are already actively working to lower barriers to effective trade. Developing countries and least-developed countries already have an average implementation rate of 39% of Bali laid out facilitation agreements and measures. African countries have a lower rate of up-take, with 35% of agreements implemented. While advanced economies, like South Korea and Singapore, which already have well-functioning trade facilitations in place are now turning to making their boarders even more competitive.

The stakes, according to Bain & Company, are high, as implementing even a restricted set of supply chain improvements to half-way best practice could expand trade by 15% and increase global gross domestic product (GDP) by nearly 5%. Across various regions, the consultancy finds that by removing all barriers halfway to best practices in maritime trade, the economic value gained would total $77 billion, with the spin-off of in capital savings, trade and potential employment thus raising GDP levels to the dramatic levels mentioned.

Potential Cost Savings in Maritime Trade

Focused methodology
While the gains are potentially massive, the way to implement barrier lowering reforms are neither clear nor necessarily easy, the firm notes. Especially developing companies can be overwhelmed by large and “vertical” implementation, where “vertical” here means creating the conditions that serve a wide range of industries. The problem with a vertical approach is that it takes a considerable amount of energy and resources to implement broad reforms. The firm identifies that a “horizontal” approach to streamlining the cross boarder supply chain is the most effective in lowering barriers, where “horizontal” here means taking a systematic approach to potentially competitive industries and mapping out the value chain to identify barriers. By addressing the bottlenecks faced by high value industries, the country at issue is able to improve its key competitiveness in the short term, while continuing to develop broader reform to meet the Bali agreements.

Enabling trade four dimensions

However, as not all gains in the movement of goods are achieved by the Bali agreement, the consultancy finds that improvement to infrastructure and business environment have a key role to play in creative competitive markets. Thus besides issues with administration and market access, covered in the Bali agreement, the consultancy collaboration finds two other issues limiting the potential of export firms. The first is infrastructure that has a key role to play in the movement of goods. By creating key infrastructure improvements in key supply chains, the consultancy believes that competitiveness can be increased. A final issue is creating a conducive business environment, where erratic currency shocks, for instance, call deals into questions and slow the movement of goods.