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Regionalism and Trade Facilitation: a Primer

Working paper by Maur, Jean-Christophe / World Bank, 2008

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This paper investigates when trade facilitation reform should be undertaken at the regional level. First, looking at both efficiency and implementation considerations, it confirms the perception that the regional dimension matters. Investigating where efficiency gains can be made, this research explains why national markets alone fail to produce the full scale economies and positive externalities of trade facilitation reform. Second, because trade facilitation policies need to address coordination and capacity failures, and because of the operational complexity challenge, the choice of the adequate platform for delivering reform is crucial. The lessons are that regional trade agreements offer good prospects of comprehensive and effective reform and can effectively complement multilateral and national initiatives. However, examples of implementation of trade facilitation reform in regional agreements do not seem to indicate that regional integration approaches have been more successful than trade facilitation through specific cooperation agreements or other efforts, multilateral or unilateral. Customs unions may be an exception here, and the author suggests reasons why this could be the case.

Policy ReseaRch WoRking PaPeR 4464


Regionalism and Trade Facilitation:


A Primer


Jean-Christophe Maur


The World Bank
Development Research Group
Trade Team
January 2008


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Produced by the Research Support Team


Abstract


The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development
issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the
names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those
of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and
its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.


Policy ReseaRch WoRking PaPeR 4464


This paper investigates when trade facilitation reform
should be undertaken at the regional level. First, looking
at both efficiency and implementation considerations,
it confirms the perception that the regional dimension
matters. Investigating where efficiency gains can be
made, this research explains why national markets alone
fail to produce the full scale economies and positive
externalities of trade facilitation reform. Second, because
trade facilitation policies need to address coordination
and capacity failures, and because of the operational
complexity challenge, the choice of the adequate
platform for delivering reform is crucial. The lessons are


This paper—a product of the Trade Team, Development Research Group—is part of a broader project on trade facilitation
and development supported through a Trust Fund of the U.K. Department for International Development. Policy Research
Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at JC-Maur@
dfid.gov.uk


that regional trade agreements offer good prospects of
comprehensive and effective reform and can effectively
complement multilateral and national initiatives.
However, examples of implementation of trade
facilitation reform in regional agreements do not seem to
indicate that regional integration approaches have been
more successful than trade facilitation through specific
cooperation agreements or other efforts, multilateral or
unilateral. Customs unions may be an exception here,
and the author suggests reasons why this could be the
case.









Regionalism and Trade Facilitation: A Primer*, †


Jean-Christophe Maur‡
















































Keywords: trade facilitation; customs; regional trade agreements; public goods



* This work is part of a World Bank research on trade facilitation and regional integration experiences
conducted with John Wilson and Patrick Messerlin and supported through a trust fund of the U.K.
Department of International Development (DFID). The views expressed in this paper should solely be
attributed to the author and not be construed as representing the views of DFID or the World Bank.
The findings, interpretations, and conclusions expressed in this paper are entirely those of the author.
They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries
they represent.
† The author would like to express his warm thanks to Peter Holmes, Gerard McLinden, Patrick
Messerlin, Ben Shepherd, Matthew Stern, Chris Stevens, and John Wilson for invaluable comments
and inputs. All errors remain the author’s sole.
‡ Economic Adviser, DFID and Research Fellow, Groupe d’Economie Mondiale. jc-maur@dfid.gov.uk.




Trade facilitation reform is the sum of efforts undertaken at the national, regional and


multilateral level designed to reduce trade transaction costs. Multilateral discussions on trade


facilitation have stepped up recently with negotiations in the WTO: until then trade


facilitation was addressed in the GATT in a relatively modest fashion. Other multilateral


instruments getting into more detail, such as the Kyoto Convention, have not mustered


enough momentum for reform. In parallel to multilateral efforts, recent regional trade


agreements have gradually incorporated trade facilitation dimensions (Moïsé, 2002).4


However, to date, a majority of trade facilitation efforts are undertaken unilaterally, the latter


including by low and middle income countries that were thought to lack the capacity to do


so.5




While multilateral, regional and national interventions might be competing to achieve


identical aims, they more likely coexist because of their complementarities, and by virtue of


the specific comparative advantages of each approach. However, in discussions about trade


facilitation reform, the regional dimension has not been the object of as much attention as


national and, recently, multilateral reform. Besides, when regional approaches to trade


facilitation reform have been envisaged, for instance in the context of development banks


regional work, or in regional trade agreements, the rationale for the regional dimension of


reform is not always clearly expressed. We also suspect that in many instances a narrow focus


on standalone reforms has prevailed over more holistic approaches. Of course there are


exceptions.




This paper focuses on investigating more thoroughly how regional initiatives can contribute


to trade facilitation reform. As international trade and the costs associated to it involves


activities beyond a single border, the question of where the optimal level of policy


intervention lies – unilateral, regional or multilateral – needs to be examined. This requires


the application of two tests. First a “market failure” test, to assess whether regional public


intervention will deliver a welfare maximizing reform. Because markets are imperfect,


governmental intervention is sometimes needed to deliver the optimal social outcome. When


market failures cannot be remedied at the national level, addressing this becomes a


transnational issue and collective action is needed; regional solutions shall be sought when the


failing markets correspond to some well-defined set of nations.





4 We should note with different motives in sight than the ones underpinning the WTO negotiations.
5 An example is Senegal, who devised their own basic electronic single window system. Over 80 countries have
also implemented ASYCUDA electronic customs modules provided by UNCTAD.


2




Secondly, a “subsidiarity” test needs to be applied, by which actions to achieve a given policy


objective should be taken at the lowest level of government capable of effectively addressing


the problem at hand (Sauvé and Zampetti, 2000). Ideally this level of action should


correspond to the level affected by the need to provide the regional good, meaning that the


political jurisdiction matches the economic domain of benefits. Thus the most appropriate


participants will partake in the provision of regional trade facilitation and transaction costs


will be economized (Arce and Sandler, 2002).




Our working hypothesis is that in some instances regional solutions, by contrast to purely


national or multilateral ones, will offer the best prospect for meaningful trade facilitation


reform. In essence, this paper explores when regional trade facilitation reform should be


undertaken (the economic case), but also when or how this could be undertaken (the


implementation issue).




With what some perceive as the limits of multilateral trade negotiations, in particular in


relation to development and implementation issues, eyes turn again towards regional


solutions. This research does not put itself in this perspective, but rather aims at


understanding better how regionalism - a force that cannot be denied - can ideally


complement and contribute to the facilitation and liberalization of trade.




This paper sets itself in the direct continuation of the broad investigation into regionalism by


the World Bank, a research that was summarized in Schiff and Winters (2003). The specific


topic of trade facilitation, although mentioned in various outputs of this research program did


not however receive full treatment. In an earlier work the authors provide insight into the


relevance of regional trade agreements for several policies, among them transport, itself an


element of trade facilitation. They note, as we do in detail below, that “… in the presence of


economies of scale or inter-country externalities, market solutions are generally sub-optimal,


and failing to cooperate can be very costly . However, regional cooperation is not the same as


regional integration, and, indeed, there is generally rather little connection between them”


(Schiff and Winters, 2002).6 This remark alludes to the two main dimensions of regional trade


agreements investigated in this paper. First, from an economic perspective, under what


circumstances regional initiatives are optimal given market failures affecting the supply of


trade facilitation services? Secondly do regional approaches offer better and more cost-


effective prospects than other institutional solutions to achieve the objective of trade


facilitation reform?



6 On the substantive differences between regional trade and cooperation agreements, see Devlin and Estevadeordal
(2004).


3





THE ECONOMIC CASE


We start by defining what we mean by trade facilitation. There is no universal understanding


of what trade facilitation is (Wilson et al., 2002), reflecting differences, as well as some


evolution, in views of what should be the reforms undertaken to reduce the cost of trading. In


simple terms trade facilitation can be thought as the simplification of the trade interface


between partners. This trade interface is composed in a broad sense of compliance to


government rules by traders, enforcement by authorities of these rules (including taxes),


exchange of information, financing, insurance, ICT and legal services, transport, handling,


measurement and storage. We focus therefore in the rest of this paper on this broad


conception of trade facilitation as the private and public interventions that help goods cross


borders.




Government interventions in all these aspects of the trade interface affect the magnitude of


transaction costs incurred by traders. For example, the sheer diversity of government


regulations, and the replication of their enforcement causes duplication (e.g. compliance cost


with two different standards: Baldwin, 2000) and friction costs (e.g. time lost because of


repeated loading and unloading of merchandise) that regional harmonization and cooperation


could conceptually help address (Schiff and Winters, 2003: 82).




The relevance of geography for the tangible and intangible dimensions of the supply


chain


Country borders create costly obstacles to international trade. The empirical reality of the


“border effect” is demonstrated by the gravity model of international trade (for a recent


overview see: Anderson and Wincoop, 2002). Trade flows between pairs of countries are


proportional to their Gross Domestic Product and inversely proportional to the trade barriers


between them. It is well known from this literature that trade transactions are determined by


geography, and more broadly of non-policy elements that draw two countries closer: It is


customary to include indicators of geographic proximity such as distance and common


borders and of broader indicators of proximity such as commonality of language, legal


systems, history, etc. Some barriers to trade facilitation are associated with these “natural


barriers” which have a lot to do with geography.




Components of the international trade interface are intangible (payments for instance), and


others are tangible (physical transport). Looking first at the tangible aspects of the


international supply chain, it is relatively straightforward to identify components affected by


4




geography: transport; storage; and physical inspection and presentation of documentation at


border agencies. Taking the example of transport, international road shipping involves border


crossing, and transit through neighboring countries. Road and rail transporters have to meet


possibly different local legal regimes and standards. Different transport standards, such as


varying maximum axle loads permissible for trucks (Namibia, Zambia, Botswana),7 or


changing rail gauges width for trains necessitates unloading and reloading and disrupt the


supply chain.8 Compliance with different regulations at each border increases compliance


costs and add to the time spent there.




Enforcement of border agency controls is highly localized, often near border crossings


(although not all controls are). When crossing several borders, costs have to be incurred many


times if customs do not cooperate (at the border of the originating and destination country,


and of countries of transit). Arvis et al. (2007) talk of “triple clearance time” because of


duplicating lengthy clearances on most transit corridors in least developed countries. The cost


of duplication is also magnified by the number of regulations affecting trade implemented by


border agencies, including entry visa requirements, technical and phytosanitary standards,


security checks, tax levying, etc.9 Such requirements involve producing paper documentation


at border posts, storage in bonded warehouses and physical inspections. The tangible


elements of international trade transactions therefore strongly suggest that costs are


geographically localized. This may require local solutions: such as the sharing of border


facilities.10




However, a feature of modern trade facilitation is the elimination of costly physical


operations. Thus the tangible nature of trade transactions is being reduced: paper work is


replaced by electronic documentation - de-linking the production of documentation with the


physical flow of goods (National Board of Trade, 2003) - modern risk management and non-


intrusive techniques reduce considerably the need for physical inspection. One consequence is


that transport costs become less related to geographical distance.





7 Röschlau (2003).
8 Lack of regulatory interconnection of rail systems creates also disruptions. Before its collapse in 1977, the East
African Community (Tanzania, Kenya and Uganda) had an integrated rail network. In the 1980s the Kenya
Railways Corporation was transporting twice the volume of freight that it now carries.
http://web.worldbank.org/external/projects/main?pagePK=64283627&piPK=73230&theSitePK=40941&menuPK
=228424&Projectid=P079734 for more info.
9 De Wulf & Sokol (2005) give this example: “the United States Customs and Border Protection enforces laws on
agriculture, alien and naturalization, banks and banking, census, commerce and trade, conservation, copyrights,
crimes and criminal procedures, customs duties, food and drugs, foreign relations, internal revenue, intoxicating
liquors, money and finance, navigation, patents, postal service, public building and property, public land, railroads,
shipping, telegraphs and telephones, territories and insular possessions, transportation, war and national defense,
and international treaties, statutes, and agreements”.
10 We discuss this below in the text.


5




Does this imply that the regional dimension does not matter for intangibles aspects of


international trade? Not necessarily. The border effect also holds for services (Kimura and


Lee, 2006). Portes and Rey (2005) show that cross-border equity transaction flows, which,


because of their intangibility, one could have presumed not to be affected by transaction


costs, are subject to similar determinants as goods flows. Geography is therefore an issue.


Regional proximity indeed favors better information flows between traders, shared cultural


references, and importantly for trade facilitation, practices and common systems developed


through time.




Implications for trade facilitation reform


What does this mean for trade facilitation reform? First, since proximity is associated with the


existence of location-based transaction costs, this could imply that groups of countries who


incur common local transaction costs could try to address them jointly. In a way this means


that there are countries with whom it is more “natural” to cooperate with to implement trade


facilitation than others. Some economies of scale are geography dependent, such as physical


transport networks.




However, the attractiveness of geographical proximity for trade does not hold for many other


aspects of international cooperation dimensions of trade facilitation, and the “natural partner”


may be one far away. Other dimensions of trade facilitation relate to intangible costs. One


could surmise that for groups of countries that enjoy already high volumes of trade, and that


presumably already share good knowledge of the trade facilitation impediments arising in


their trade, would potentially be better placed to undertake reform together than with other


countries.




In summary, the relevance of proximity can be established for trade facilitation, but it


provides relatively little guidance in terms of rationale for regional cooperation except


perhaps a presumption that there is some role for regional intervention. Regional cooperation


should then be guided by the identification of efficiency gains realized at the scale of the


region.




There are two main dimensions to the benefits of transnational cooperation, corresponding to


the specific market or institutional failures faced by countries: first, the realization of


economies of scale, including by elimination of duplication and increasing competition;


second through the avoidance of negative and creation of positive externalities among


neighbors. Obviously, in order to make sense from a regional economic perspective, cost


6




reduction must either be more efficiently undertaken regionally than say multilaterally or


belong to costs categories that are incurred only regionally (i.e. on a geographical basis). The


question of delivery of regional public goods is particularly relevant in this respect.




Realizing socially optimal economies of scale


With many interventions and parties in the international transport of goods, and possibly the


crossing of several borders, there is plenty of scope for cost duplication for trade operators.


An important portion of these costs being fixed, eliminating any duplication will enable


efficiency gains for firms, but also allow smaller scale operators to access export markets, an


important aspect for developing countries.11 Additionally, because some of the procedures


and services that facilitate trade involve large fixed and possibly sunk costs, full economies of


scale in the administrative procedures and services to international trade transactions may not


be realized at the country level, especially in small and poor countries.




Duplication arises because similar requirements must be met repeatedly, but also because


national rules differ, therefore also increasing search costs and associated uncertainty,12 and


creating further opportunities for rent seeking and corruption. COMESA’s regional carrier’s


licensing system illustrates how duplication can be tackled. The regional license avoids


having to pay for multiple licenses (Schiff and Winters, 2003: 81). Likewise, inspection of


goods, if carried out in different places on each side of one border delays trade. Different


national regulatory requirements force traders to meet two standards instead of one: in


Tanzania registration requirements for agro-chemical pesticides are burdensome and subject


to high fees, despite the fact that Tanzania’s market for such pesticides is small and


equivalent and more efficient products are already registered and tested in neighboring Kenya


(Tanzania DTIS, 2005).13




Solutions to reduce duplication costs may involve harmonization, forming a common market


within a customs union, mutual assistance among authorities (an important facilitating



11 World Bank (2005: 85) quotes for instance the cost of certification of organic nut production in Moldova for
export to Germany which can amount to $18,000 per year, a not insignificant amount for firms in poor countries.
12 Arvis et al., 2007 examine the large impact associated with uncertainty along the supply chain created by non
harmonised regulations.
13 The Tanzania certification and testing agency pesticides “… charges relatively high fees to register an agro-
chemical and also requires three years of field testing. It does not recognize the testing done and registration of
chemicals in neighbouring countries, including Kenya. Hence, there are a broad range of newer, more effective
and safer chemicals which do not get registered in Tanzania because of the high cost and which are prevented from
being legally imported from Kenya or other neighbouring countries. The chemical registration revenue imperative
of TPRI thus appears to take precedence over a feasible solution of mutual recognition of other (including more
rigorous) testing and registration systems.”


7




practice for customs valuation),14 and mutual recognition of rulings (e.g. for transit


operations) and of certification and testing (e.g. for standards). Such cooperation is not


necessarily regional or bilateral and can also be achieved multilaterally. It may, however, be


the case that a large part of these extra costs be better addressed at the regional level because


of the political economy and complexity of such arrangements (such as mutual recognition) is


most probably better managed among a limited number of countries. Secondly,


implementation of cost reduction measures will often involve some form of regional


cooperation on the ground: for example, the creation of joint border posts enables neighboring


countries to share facilities, learn from each other and carry joint inspections thus potentially


reducing cost and time spent at the border.15




Economies of scale can also be realized on the administrative procedures and private services


delivering trade facilitation. It is however unclear to what extent there is a scale barrier to


efficient border administration, including modern practices such as single windows and risk


management. The cost of collecting customs taxes in Rwanda is relatively low, amounting to


2.5% of receipts in 2005 with capital costs representing only a small fraction (2.6%) of these


costs.16 It is also unclear to what extent compliance with new security measures imposed by


large developed countries pose a new challenge in that respect. Overall there is good evidence


that customs reform projects can be self-sustaining through increase in revenues brought by


facilitation (Moïsé, 2005) suggesting that economies of scale are exhausted at the country


level.17 Arguably this tends to rather relate to still relatively modest levels of reform, and in


particular do not involve many elements of deep integration with trading partners. Although


customs operations do not seem to be overly subject to important economies of scale in most


cases, one can nevertheless argue that there are important costs associated with the


surveillance of borders. A motivation for Norway, Sweden and Finland to sign cross border


cooperation agreements (starting in 1960) was “division of labor”; i.e. to share the cost of


individually manning the 1,630 km long border between Norway and Sweden, and the 739


km long border between Norway and Finland.18 Small administrations may not be able to



14 For a discussion, see Chapter 8 in De Wulf & Sokol (2005).
15 The benefits of joint border posts should however not be overstated. Practical implementation has proven
problematic as the incentives for the border agency of each country to cooperate on joint inspection may not exist
as import and export controls remain very different as incentives to control them (the emphasis is generally on
imports and their contribution to tax revenue).
16 Source: Rwandan Customs, http://www.rra.gov.rw/en/about/performance.pdf.
17 In Mozambique, the investments made during the initial stages of the program were recouped within 14 months
from additional revenue receipts. In Peru, increased revenue collection has helped solve many funding problems of
the administration.
18 See the communication by Norway to the WTO Trade Facilitation Negotiating Group on Border Agency
Cooperation, TN/TF/W/48, 9 June 2005. In 1995 Norway calculated the savings associated with the two
agreements: 10 new customs offices would have had to be opened on the Norwegian side of the border.
100 new customs officers would have had to be employed. This would have cost about 8 million USD in
additional investment costs and 8 million USD in recurring annual costs for the customs authorities for new


8




afford all the material and infrastructure necessary. For instance, in the current WTO


negotiations on trade facilitation, some members have called for “small vulnerable


economies” to undertake a regional approach to the implementation of some expected WTO


commitments that will require capacity building and made a specific submission for regional


trade facilitation enquiry points.19




Beyond customs operations, many developing countries are too small (and have too small


markets) to offer the full range of standards conformity assessment, which could thus benefit


from regional integration (World Bank, 2005: 90). Setting up regional accreditation bodies or


opening regional markets for accreditation bodies could be a way to provide cheaper and


better testing, building on scale economies and comparative advantage. Scarcity of technical


skills20 is indeed another reason why regional approaches can make sense for countries facing


serious shortages in these skills, which for modern trade facilitation techniques can become


an issue.




Backbone services provide crucial inputs in trade transactions: finance and insurance,


transport and logistics, handling, measurement and communication services. The delivery of


these services for trade transactions can require a scale of production beyond the national


borders.21 Insurance and financial services (letters of credit, guarantees, insurance, etc.) are


key input to the capacity to trade internationally: national operators in developing countries


may not provide them or at non-competitive prices. According to EBRD (2003) national


banking systems do not pool enough capital22 to underwrite trade transactions. Financial


guarantees for payments are often not available for small firms to allow them to export.23


Similarly, fixed costs and geographic factors confer natural monopoly characteristics to some


modes of transport (rail and maritime particularly). Ghana’s Growth and Poverty Reduction



buildings, salaries, etc. Economic operators would have incurred an estimated 39 million USD additional annual
costs due to longer waiting time and double stops at the border.

19 Communication from Barbados, Fiji, Papua New Guinea and the Solomon Islands to the WTO Negotiating
Group on Trade Facilitation, 7 July 2006, document TN/TF/W/129.
20 An essential piece of the architecture for the enforcement of technical regulations and SPS measures in
international commercial exchanges is accreditation, which offers an internationally recognized guarantee that
national processes of assessment of standards conformity can be relied on (Holmes et al., 2006 offer a good
overview of the question). In Sub-Saharan Africa there was until recently only one accredited expert, located in
South Africa, able to grant this accreditation. Now three additional experts have been trained, still in South Africa.
This confirms the view by ILAC-UNIDO (2003) that markets for accreditation and certification bodies in many
developing countries may be too small.
21 Arvis et al. (2007) for instance report how advanced logistics services are inhibited by lack of trade facilitation:
it is often impossible, note the authors, to maintain multi-country inventories or to dodge first clearance and then
re-export to the gateway country.
22 Actually payment guarantee systems require less working capital than payments in advance (which are required
when there is no guarantee) and thus help smaller agents to access international trade.
23 This has prompted the EBRD and the IFC to create international risk sharing funds in order to provide small
enterprise with access to trade finance. The risk sharing funds help international banks (confirming banks) cover
the political and commercial risk faced by local issuing banks when they cover international trade transactions.


9




Strategy (Ghana National Development Planning Commission, 2005) envisions regional


cooperation for cross-border road infrastructure development. Regional transport hubs help


realize economies of scale.24 For freight transport, the emergence of multi-modal hubs


(generally located near important existing infrastructure: air, sea or rail) generate important


economies of scale (through higher utilization of infrastructure), and efficiency gains (through


competition between modes of transport) compared to point-to-point routes (Müller-Jentsch,


2002). Transport hubs depend as much, and probably more from the liberalization of regional


transport services (such as liberalization of cabotage or air traffic rights) than the availability


of infrastructure. Indeed, transport hubs tend to be geographically mobile, suggesting the


secondary importance of infrastructure as a determinant of their location.




Lastly, regional approaches to trade facilitation can also aim to create competition. First,


among regional operators in the international trade transport and logistics chain; this will


reduce the cost of trading and increase the availability of services to exporters and importers,


thus contributing to trade creation. Arguably, better than regional competition is competition


with the world. There are nevertheless arguments in favor of a regional approach. First, it


does not have to be discriminatory. Also, as seen earlier, transport competition is increased by


the establishment of regional hubs. The negotiation of bilateral liberalization agreement in air


and maritime transport is more straightforward than multilaterally. Mattoo and Fink (2002)


indeed find that more efficient bargaining may be possible in a pluri-lateral context than in the


multilateral context for services: there is less concern that outsiders will be able to free-ride


on the reciprocal exchange of concessions than if there were a general MFN obligation.


Increased competition in trade related services is also largely dependent on some level of


regulatory cooperation, which is generally more feasible and in many cases more desirable


among a subset of countries than globally. Competition dimensions matter particularly in the


context of transit corridors.




Coastal countries can be placed in a situation of monopoly for transit services: an example is


the transport of oil products to Uganda by the Kenya Pipeline Corporation, which in the


absence of rail and road transport competitors can charge excessive prices (Uganda DTIS,


2006).25 Competition among transit corridors is also desirable and regional agreements


between more than two countries can create the conditions for the establishment of transit


agreements competing against each other. The World Bank (2005) reports that transit


agreements are often governed by unilateral or bilateral frameworks and such arrangements

24 For instance air transport hubs avoid having empty cargo on incoming or outgoing freight, a problem for small
non diversified economies.
25 Until 1996 this monopoly was even reinforced by government regulation forbidding the transport of petroleum
by road operators. This restriction is now lifted.


10




are not conducive to competition. Participants in “tour de role” and 50-50 sharing type


agreements oppose regional agreements because they want to stave off competition.




Competitive pressures also hold for government agencies. By offering institutional


mechanisms through which border agencies can exchange information and benchmark each


other’s performance, regional agreements offer more transparent regulatory competition that


can foster more efficient border management. However, this is to be balanced with the other


consideration that economies of scale and specialization justify one approach for the region.26




Regional negative and positive externalities


Regional agreements can serve as a policy coordination mechanism to help prevent individual


countries to opt for national strategies that are fall short of optimal global outcomes. For


instance, countries of transit trade are often tempted to use trade restricting policies such as


seeking to set revenue maximizing fees on transit, imposing compulsory transit routes and


check points, or the use of mandatory securitized convoys. Fees and requirements will be


above the cost of services provided (this includes the use of roads, provision of security, etc.)


or strictly necessary for secure transit.27 In the worst cases motives behind these policies are


protectionists; often, this is the outcome of absence of consideration28 of negative


externalities imposed on neighbors. Such risk is particularly important when alternative


transit routes are few as this often happens in Africa.29 Domestic transport infrastructure


constraints often have regional implications, justifying from an economic point of view port


or regional airport hubs. Landlocked countries depend on the quality of the infrastructure of


eir neighbors.30


S,


the


d is


congested, transit bond regimes are financially burdensome, rail transit does not offer a




th




A finding from the diagnostic on transport and trade facilitation in Uganda (Uganda DTI


2006) is that the most important transport and trade facilitation issues are outside of


country’s direct control. Tanzania and Kenya, its coastal neighbors offer poor trade


facilitation: the port of Mombasa where 95% of Uganda’s external trade traffic is handle



26 The Tanzania DTIS (2005) raises this question about having regional accreditation organisations. In this case,
the benefits of joint approach seem high enough to justify foregoing regulatory competition.
27 McTiernan (2006) for instance reports that Benin and Togo charge very high fees for transit which incites
transport from Lagos to Accra to be done by ship.
28 Not merely oversight or neglect, but lack of incentives on the country of transit to internalise the costs of more
efficient transit.
29 A counter example is Bolivia, which has several access roads to the sea (Schiff and Winters, 2002)
30 For instance poor road conditions and border crossing procedure between Kenya and Uganda at Malaba have
made rail and water transport across Lake Victoria a competitive alternative; or because the route between Durban
and Kampala is more reliable, some traders of high value goods prefer it to much shorter routes to Dar Es Salaam
or Mombasa (Caron and Reichert, 2001).


11




competitive alternative to poor road transport and expensive pipeline transport.31 As Schiff


and Winters (2002) note, this type of externality is often asymmetric, with landlocked


countries standing to gain a lot from better transit, when the gains for the coastal partner are


much smaller (improved access to the internal market). In practice, landlocked countries have


not gained much from participation in regional trade agreements, and this is likely because


important trade obstacles have remained (Yang and Gupta, 2005).




Once again, standards and phytosanitary measures provide a further example of possible


market failure. Weak or absent enforcement of SPS in one country can mean that negative


consequences can spill over to neighbors, as is the case with Tanzania, where highly


contagious bovine diseases are not fully under control. In this context Tanzania has agreed


with SADC neighbors to a 5-year program of vaccination, surveillance and control of animal


movements (Tanzania DTIS, 2005).




As well as getting rid of negative externalities, creating positive externalities such as network


effects may substantiate regional intervention. Transport, electronic and other information


systems networks play an increasingly important role in trade facilitation reform. There are


positive externalities for neighboring countries to join existing networks rather than


developing own systems or multiplying bilateral channels of communication and exchange of


information. The European Union has developed several networks initiatives around


electronic transit systems (NCTS), satellite information (GALILEO), or Trans European


Networks on Transport. This concern is also reflected in trade action plans in developing


countries such as in the Uganda’s recent DTIS which puts emphasis on the use of EDI


interchange at the regional level, the development of a regional cargo tracking system and the


interconnection of East African Community’s customs electronic systems (Uganda DTIS,


2006). The same issue of interconnection is noted in the case of Mozambique. Mozambique’s


proprietary customs electronic system is incompatible with Asycuda++, used by


Mozambique’s Southern African neighbors, and on which they intend to build their exchange


of electronic information on transit cargo (Mozambique DTIS, 2004). Transport hubs,


mentioned earlier, also create positive externalities, such as access to multi-modal transport


platforms.





31 Arvis et al. (2007) add that because of railways poor performance and unpredictability (Tanzania Railways
Corporation has an error margin of 4 to 5 days predicting the arrival of any shipment), road transit from Kenya to
Northern Tanzania has increased by 20% over the last five years. This also explains why 75% of Rwandan trade
transits through Kenya while 50% transited through Tanzania only 3 years ago.


12




Box 1. How regional cooperation can help: DTIS recommendations about SPS
for Tanzania

The 2005 Diagnostic Trade Integration Study conducted in Tanzania under the
Integrated Framework finds that a regional approach and cooperation for SPS and
quality standards can:


• increase trade through harmonization of standards and mutual recognition
of conformity systems (avoiding duplication);


• spread knowledge and good practices (creating positive information
externalities);


• more effectively manage trans-boundary risks (avoiding negative
externalities);


• serve to realize economies of scale and scope in the delivery of conformity
assessment;


• better enable regional enterprises to comply with extra-regional standards
where collaboration facilitates international accreditation;



The DTIS recommendations prioritize the following areas of regional cooperation:


• Streamlining of regulations (simplification and improved transparency) and
mutual recognition;


• Resource pooling (‘centers of excellence’ for the testing, registration or
other monitoring of inputs or outputs for specific products such as
pesticides, condoms or cosmetics);


• Multi-country collaboration for problem solving (surveillance and
contingency planning, but also research, pilot programs and training).



Source: Tanzania DTIS (2005: 91-98) and author




Positive externalities also arise – beyond the mere realization economies of scale described


earlier – from the provision of international finance and insurance. International provision of


such services offers the possibility to mutualize risks across a region, and contribute to


positive network effects, such as linking banks that usually do not do business with each other


and diffusing skills through the network. The principle of mutualization is applicable for other


trade related financial instruments specifically relevant to trade facilitation and transit such as


guarantees for payment of taxes and insurance. COMESA introduced the Yellow Card or


Third Party Regional Motor Vehicle Insurance scheme which allows traders to purchase


insurance covering transport in the region (Arvis, 2005). The region also plans to set up a


regional transit bond scheme. Regional guarantees (to secure the payment of duty and taxes)


can address the failure of national organizations to set up such systems, because they often do


not have the sufficient size, have only access to underdeveloped national financial services,


and international insurers are not willing to face the political and commercial risks of


developing markets. In Uganda, the cost customs bonds is estimated to add up to 4% to


import and export costs and a recommendation of the Integrated Framework diagnostic study


is to use a regional approach to reduce their incidence (Uganda DTIS, 2006). Arvis (2005)


argues that the lack of a regional customs guarantee explains why transit initiatives to


replicate the success of the European TIR system have failed so far.




13




We conclude this section by noting that there is a risk for regional initiatives to create their


own negative externalities. This, for instance, can occur when countries take part in RTAs


with policies going against trade facilitation objectives. The obvious example is the need for


rules of origin in the absence of a common external trade regime, which represent specific


difficulties in for customs enforcement (World Bank, 2005: 68). Another problem can be


created by the incentives to harmonize RTA members’ practices, ending up in adopting


higher standards than strictly necessary.32 Thirdly, there is also the risk of incoherence with


trade facilitation objectives of the policies agreed when signing the RTA: when adopting the


East African Community common external tariff, Uganda had to raise its tariff on vehicles


from 9% to 25% (customs duty and import commission), which increases the cost of transport


in Uganda (Uganda DTIS, 2006). Finally, regional trade facilitation should not result in trade


diversion effects. There are two ways in which this can happen. The most serious one is when


trade facilitation measures have their own discriminatory effect. For most trade facilitation


measures this is not the case, but it is nevertheless a possibility for several important policies,


such as mutual recognition and transport infrastructure policies, in the latter case if the


improvement of one mode of transport (road for instance) is privileged over others. More


benignly, in a second best world, trade facilitation may simply augment existing distortions if


these are left untouched.




WHICH PLATFORM TO DELIVER REGIONAL TRADE FACILITATION?


A public good perspective


The benefits from regional trade facilitation display public or quasi-public goods properties.


Public goods indeed vary in their degree of “publicness” (Sandler, 2006) and thus display


different properties. One reason why it is important to understand these properties is because


this has a bearing on understanding better how the benefits from regional trade facilitation


reform ought to be delivered.33




A public good is a good giving rise to two distinct market failures. The first failure arises


because of non excludability: providers of the good cannot prevent others from free riding by


consuming it at no cost. The second failure is caused by non rivalry: the consumption of one



32 This is a question that is difficult to assess in practice, but if one takes the example of regional trade agreements
signed by the European Union, they make clear reference to harmonization to European standards (see Maur,
2005). Otsuki, Wilson and Sewadeh (2001) give an example in how European SPS measures can be particularly
burdensome.
33 The growing literature on regional public goods offers a general discussion of this. See: Sandler (1998; 2006);
Estevadeordal, Franz and Nguyen (2004); Cook and Sachs (1999); Ferroni (2002); Arce and Sandler (2002); Kaul
et al. (2003), and Kanbur et al. (1999). Stålgren (2000) offers a review of the literature. See also Rufin (2004) on
transport and communication infrastructure, and Holmes et al. (2006) on standards.


14




unit of the good does not diminish the quantity available for consumption to others, meaning


that once a public good is provided, all can enjoy it at no or very low cost.




A quick examination then tells us that most of the benefits provided by regional trade


facilitation are not pure public goods. They are indeed almost all characterized by near total


excludability. This is clearly the case for transit corridors, transport infrastructure, financial


and communication infrastructure, networks, authorized traders regimes, and collocation of


customs services. The only dimension of trade facilitation that seems to be a pure regional


public good relates to communicable diseases. For the other regional public good dimensions


of trade facilitation, the full exclusion characteristic has actually positive implications.


Excludability indeed means that fees can be charged to finance their supply. It seems also that


once provided, trade facilitation goods are mostly non-rival in nature: new and improved


procedures or systems can be enjoyed by all at little or no marginal cost (although in some


specific cases, discrimination might still have to be borne in mind). In essence regional trade


facilitation is a mostly a “club good”.




Secondly, depending on the type of public good, the capacity of countries, individually or as a


group, to affect the supply of the public good varies: what in the literature is called


aggregation technology (Hirschleifer, 1983). In the case of trade facilitation, the specific


difficulties for the delivery of regional trade facilitation goods are quite varied. In the first


instance, a regional good could in theory be provided by any country within a region, and thus


it is desirable for countries to coordinate over this, otherwise one risks to have too much of


one good. Airports and ports hubs, cost duplication elimination are two illustrations where


coordination is optimal.34 A second, different example is the integrity of a customs union,


which depends on the member with the weakest customs enforcement capacity (this is


discussed below).35 In this case, the failure is linked with lack of capacity. Incentives are big


for customs union members to provide the weakest link with the technology to enforce


customs disciplines at the higher standard. Third case in hand: networks, but also many other


aspects of regional trade facilitation, are affected by the sum of efforts of the countries


participating.36




In the all these cases, the contribution of each country to the supply of regional trade


facilitation is to some extent substitutable for the contribution of others and thus creates free


riding incentives. These have to be addressed if undersupply is to be avoided, and requires

34 “Best shot” and “better shot” categories in Kanbur et al. (1999) typology.
35 “Weakest link” and “weaker link” categories (Kanbur et al., 1999).
36 This is to build the network. Note on the other hand that the integrity of the network is affected by the
contribution of its weakest link.


15




some form of institution building (Arce and Sandler, 2002). However, the type of aggregation


technology matters as contributions to the total effort are not necessarily equally distributed,


which alters the free riding incentives of each country. An implication is that despite having


in common the need for regional intervention, various components of trade facilitation reform


cannot be delivered using similar approaches. An important remark in this respect is that the


role of individual countries belonging to a region will vary depending on what type of


regional public good that needs to be delivered.




The nature of regional initiatives


The regional nature of the various aspects of trade facilitation reform suggests that regional


initiatives are in a unique position to help tackle trade facilitation issues (World Bank, 2004,


2005). There are numerous institutional public and private arrangements that have the ability


to deliver these regional goods. The most common are regional trade integration agreements


and regional cooperation agreements. But other arrangements can also supply regional public


goods, such as public private partnerships (in several transit corridors), regional development


institutions, or NGOs (Sandler, 2006). The focus here is primarily on regional trade


agreements, which for reasons discussed below, but also more generally in the literature


(Devlin and Estevadeordal, 2004) appear to offer the greatest potential for efficient delivery.


Because trade facilitation involves a wide range of regulatory activities, it makes sense to


concentrate on institutions that are largely public, such as regional cooperation agreements,


when we discuss alternatives to regional trade integration.




A fact is that regional trade agreements (except for customs unions) have not included much


in the way of trade facilitation efforts (Moïsé, 2002), at least until recently; Bin and


Misovicova (2007) note that the number of agreements covering trade facilitation in Asia and


the Pacific has significantly augmented in the recent years and that 34 out of 102 signed


RTAs now include some trade facilitation provisions. The institutional setting of regional


agreements seems well suited to pursue a trade facilitation agenda. Trade Facilitation indeed


requires not only the elimination of distortionary and inefficient rules and practices, but


mostly to carry on an ambitious and positive agenda of reform by implementing


internationally compatible modern legislation, systems and skills. In essence trade facilitation


is about deep integration.




16




How RTAs can facilitate trade facilitation


The World Bank (2005) lists several areas of facilitation in which they view RTAs can lead to


improvement: alignment of customs codes with international standards; simplification and


harmonization of procedures (e-documents and single document); alignment of tariff


structures with the HS; transparency; effective implementation of the WTO valuation


agreement; joint work towards customs integrity; establishment of joint border posts; and


joint training centers. A regional approach to some of the items in this list (alignment with


international standards, transparency) does not obviously stem from any the economic


advantages discussed above, implying that there is not necessarily a direct correspondence


between the economic optimal level of intervention and the jurisdictional one: the subsidiarity


question. The interest of taking such reforms forward in regional agreements is thus not be


only because of pure economic reasons, but also because regional trade agreements offer


specific advantages over other forms of international agreements (multilateral or other


regional forms of cooperation) and unilateral initiatives.




We examine the following characteristics of RTAs: i) a forum to exchange concessions across


a broad array of sectors; ii) the access to mechanisms of cooperation, including in some


instances financial transfers and capacity building; iii) a mechanism for political commitment;


and iv) a more efficient approach to harmonisation and implementation.




RTAs as a forum of issues


First, deep RTAs offer the possibility of comprehensive trade facilitation, involving reform in


several sectors of the economy that can be incorporated in the new generations of RTAs.


Deep integration agreements present the opportunity to include sectors that are not well


covered multilaterally, while also providing efficient enforcement mechanisms (we treat this


below). The wider remit of RTAs compared to multilateral approaches (binding such as the


WTO, or other international organizations with less enforceability such as the WCO, which


focuses only on customs) is reflected in initiatives such as APEC, which uses of a broader


definition of trade facilitation reform compared to the relatively narrow approach taken in the


WTO (Wilson et al., 2002). By incorporating policies for which there is no actual or possible


prospect multilateral liberalization, some regional agreements offer increased scope for


meaningful trade facilitation reform. A good illustration of this is the adoption of flexible and


harmonized policies on visas and opening of services, dimensions usually out of reach of a


multilateral agreement, but which can be part of regional discussions; ECOWAS, for instance,


suppressed visas between member countries. The political economy of RTAs makes it easier


17




to deal with migration issues because countries can exchange commitments on natural


persons movements (whereas not possible in GATS).37




By tackling many dimensions of trade facilitation at the same time, regional trade agreements


also give the scope of exploiting natural complementarities between the different elements of


trade facilitation reform.38 A particular challenge of reform is to get all the agencies involved


in border control to work to a common objective of facilitating trade. This is often not


happening. By having the policy areas implemented by these agencies (such as SPS and


standards) covered in a same trade agreement offers scope for agreeing to common aims


linking these policies. In theory the WTO could offer similar advantages, but there the


multiplicity of diverging country interests behind each issue makes any attempt at defining a


coherent approach across them difficult and reduced to the common high level principles of


non discrimination, transparency or due process, but still a far cry from delivering coherent


implementation of these policies.




Conceivably all the facets of trade facilitation reform could equally be included in either


RTAs or specifically designed cooperation agreement. However, RTAs generally offer the


scope of a wide spectrum of policies across which trading-off concessions (Devlin and


Estevadeordal, 2004), including non-economic dimensions.39 Besides, because of this breadth


of scope, regional trade agreements can also guarantee better commitment. In theory any


attempt to deny any trade facilitation concession by the imposition of other trade barriers (e.g.


tariffs) should be more complicated as these are part of the agreement. By the same token,


enforcement of trade facilitation measures will be guaranteed by the possibility for partners to


withdraw any other concession. Obviously there many limits to this happening in practice,


starting with the fact that despite being broad in scope, many existing regional agreements are


more shallow than deep, thus offering still quite a lot of flexibility to members to escape


enforcement.




Redistribution


Regional trade agreements are not infrequently complemented by sharing of resources and


redistribution mechanisms among partner countries, including the supply of financial and



37 Although this is only likely when partner countries are have similar levels of development and patterns of
comparative advantage that make movement of natural persons relatively balanced. Bin and Misovicova (2007)
find that provisions on mobility of business persons are present in about one third of RTAs containing trade
facilitation provisions in Asia and the Pacific.
38 For instance regional guarantee systems help establish global standards for documentary credity (EBRD, 2003)
and thus generate information that can be used for other purposes.
39 At the same time this increases the complexity of negotiating across a wide range of issues.


18




technical assistance. Trade facilitation reforms can be demanding, both in expertise and


material.40 Regional efforts offer in addition the possibility of benchmarking (for example the


regional program for Trade and Transport Facilitation in South Eastern Europe, De Wulf and


Sokol, 2005: 137) the sharing of good practice. Several regional agreements have a program


of regional capacity building. This is the case of APEC and COMESA. APEC has developed


a program of technical assistance for which members have drawn a collective and individual


Country Assistance Plans covering 16 areas.41 The European Union devotes rather


considerable sums and efforts to assisting neighbor countries with which it signs association


agreements (OECD, 2005). In particular, as discussed earlier, when the provision of better


trade facilitation at the regional level is impaired by the lack of capacity of a few members,


with implications as a whole for a regional system, regional groupings will assist the delivery


of joint assistance (acting as a coordination mechanism and sharing the costs among


members).




Even in the absence of redistribution arrangements, RTAs potentially create beneficial access


to external financial resources as they may increase the credibility and ability of the regional


group to offer loan collateral for instance (Devlin and Estevadeordal, 2004). Regional


guarantee systems would benefit from this.




Trust and institutions


It is also well-known that regional trade agreements act as trust building mechanism, favoring


interactions between officials and exchange of information (Schiff and Winters, 1998). Trust


is a vital aspect of trade facilitation cooperation, as it helps mitigate risk – and thus reduce


physical constraints on the transport of goods such as inspections or requirements to abide to


certain requirements such as compulsory routes – through increased confidence in shared


information and systems. While regional trade agreements have a good track record as


enabling trust building across partner countries’ administrations, attempts to involve


businesses, for instance through public private partnerships have been much less successful:



40 This question is the subject of some debate: it is argued that developing countries are actually more advanced
than commonly thought and that a large share of essential trade facilitation measures would not be that costly and
that the main hurdle is political. This is for instance the conclusion reached by McLindern (2006), arguably in the
narrow context of WTO negotiations. On the other hand, there is also evidence that ambitious customs reform
(often as part of revenue reform) mobilises very significant donor support over several years as in the instance of
South Eastern Europe.
41 APEC Sub-Committee on Customs Procedures (2006). CAP Assessment/Evaluation Matrix. September 2006.
http://www.sccp.org/sccplibrary/Meas_Eval/capeval_0206.htm


19




for instance the European Union has tried to build ambitious public-private partnerships in the


context of its European transport network policy, with mixed success.42




In the context of regional trade agreements, customs cooperation committees are often


established to discuss enforcement issues and also help diffusing disputes (World Bank, 2005:


89). More informal expert groups have also been established in regional integration context,


such as the EU Florence process on infrastructure, which has been influential for promoting


reform (Rufin, 2004). Also, through harmonization of instruments and increased


transparency, it becomes easier to understand what trade partners are up to. The establishment


of trust is central in achieving devolution of responsibilities to partner countries such as in


mutual recognition and regional guarantee schemes, but also in establishing shared facilities.


Trust not only matters at the technical level, but of course also at the political one. An


illustration of the link between trade facilitation and international trust, albeit not in the


context of an RTA is given by the recent decision by India and China to reopened to trade the


Himalayan pass of Nathu-La, after four decades of military tension.43 The trust dimension


takes an added importance with enhanced concerns about security after the terrorist attacks of


11 September on the United States. Better security involves better border control, which can


benefit from regional cooperation.




Regional trade integration implies the building of regional institutions that can take forward


some policies on behalf of its members. RTAs offer a cost-saving institutional architecture


(Devlin and Estevadeordal, 2004; Sandler, 2006) through which the demand for regional


public goods can be more easily aggregated. The redistribution mechanisms discussed above,


but also the cooperation mechanisms established through a RTA will help both achieving


better cooperation (limiting free riding in particular) and capacity, all central dimensions for


the delivery of public goods. It is also often thought that regional institutions are better placed


to carry forward international harmonization agendas (World Bank, 2005; Consilium Legis,


2003 also make this argument in the case of transit corridors). Regional representation can


also be a way to increase the bargaining power of its constituents in international negotiating


forums such as standard setting organizations (an example of this is for instance discussed in


EC, 2001 in relation to air and maritime transport standards). Finally, as discussed above,


pooling scarce resources can mean that regional institutions will become more efficient.





42 Another way to create ownership with businesses is by giving them access to dispute settlement under the RTA,
as NAFTA and CAFTA do for investment. Similar solutions could be envisaged in relation to trade facilitation,
offering the possibility for the private sector to challenge governments that unlegitimately restrict their business.
43 http://news.bbc.co.uk/1/hi/world/south_asia/5093712.stm
http://economictimes.indiatimes.com/articleshow/1661459.cms


20




Incentives for regional reform: are RTAs naturally complements of trade facilitation?


Interestingly, RTAs have contributed to create new impediments to trade which require more


sophisticated trade facilitation measures as administration of border formalities becomes more


complex because of the need to discriminate between preferential and non-preferential trade


(De Wulf and Sokol, 2005). It takes more time to process goods covered by regional


agreements than other (Roy and Bagai, 2005). Thus, while making trade more complex,


regional agreements have created new trade facilitation needs with the enforcement of


preferential rules of origin. All this probably explains why most RTAs, to the exception of a


few deep RTAs, when they include trade facilitation aspects focus on questions of origin


(Moïsé, 2002) and their enforcement. Too often, RTAs have focused on these elements alone


rather than explicitly making of trade facilitation an element of regional integration.




On the other hand, Europe views customs (and probably border processes in general) as an


important tool in favoring regional integration and promotion of preferential links (EC, 2003).


There are indeed incentives, triggered by the trade creation effects of regional agreements,


which raise the salience of other aspects of regional cooperation (World Bank, 2005: 92) such


as trade facilitation. One has however to add that trade diversion may as well diminish the


relative importance of trade with the excluded parties to the regional agreement. One can for


instance see that the trade facilitation related policies of Europe have been largely inward


looking until most recently. This is not so much an issue when the trade volume


complementarity operates with trade facilitation policies that are not discriminatory in essence


(such as international harmonization). However it could become one with policies of


cooperation and mutual recognition or adoption of any standards that exclude certain


categories of traders.




The focus on enforcement questions in existing RTAs limits the scope of these agreements on


trade facilitation to few dimensions, which essentially aim at simplifying the job of the


customs authorities when dealing with goods under preferential access. This includes


transparency requirements with frequent reference to GATT article X (Moïsé, 2002), the


adoption of documentation standards (such as the Single Administrative Document in the EU)


to facilitate the access to information and cooperation between customs authorities for fact


finding. Harmonization is not much on the agenda, except for better mutual understanding of


day-to-day operations.




Secondly, when RTAs involve more than two partners, the question of transit management is


raised. If three countries grant each other preferential access, goods exchanged between any


21




two members must be able to transit through the third one without added charges and


impediment to trade that undo the preferential treatment. Thus regional trade agreements


provide a strong incentive to push forward transit agreements, either within the RTA itself or


in parallel. As discussed in section 3, despite abundance of provisions on transit,


implementation remains an issue.




The third facilitation-related element historically prominent in RTAs deals with rules on


technical standards and phytosanitary requirements. In some occasions, such as within the


European Union and the Mercosur, an ambitious regulatory agenda has been pursued.


However, in most cases standards provisions have been much more modest, including in


RTAs among advanced economies. In the case of the European Union, beyond the upward


harmonization for the internal market, the most ambitious attempts at facilitation of trade on


standards have been through standalone mutual recognition agreements (such as the one with


the USA) and are limited to conformity assessment. One lesson that seems to emerge from


regional cooperation on standards is that the nature of regional cooperation on standards


depends on the specific capacity of the trade partners such as preparedness to perform


conformity assessments, and the institutional setting of the agreement, where depending on


how strong institutions are, more or less active harmonization or recognition routes can be


followed (World Bank, 2005: 88).




The recent generation of regional trade agreements seems however to increasingly incorporate


additional trade facilitation content. Evidence of this is reported for regional agreements in


Asia that include provisions covering transparency of laws and rulings, use of ICT and e-


commerce, freedom of transit, mobility of business people, facilitation of transport and


logistics, and facilitation of payment and trade finance (Bin and Misovicova, 2007).




Thus the complementarity between RTAs and what is often their first main objective, the


reduction of tariffs and quotas, and some aspects of trade facilitation reform create an


incentive to bring trade facilitation cooperation under the umbrella of an RTA rather than in a


standalone agreement. As noted by Devlin and Estevadeordal (2004), this complementarity is


likely to increase with commercial integration, thus expanding the scope of trade facilitation


intervention in the context of RTAs. This aspect is highlighted by the case of Customs


Unions.




22




The special case of customs unions


Arndt et al. (2007) suggest that a benefit of opting for a customs union model over a simple


free trade agreement could be to register more progress on “deep integration” issues such as


trade facilitation or liberalization of services. We find that this is most likely to be indeed the


case for trade facilitation.




The preservation of tax revenues is very much at the forefront of customs and other trade


facilitation related concerns in regional trade agreements. This is in this respect a notable


difference between cooperation agreements (which are not necessarily signed in the context


of tariff reductions) and RTAs. For developing countries and even more least developed ones


trade taxes are a big share of all government revenue (Keen and Simone, 2004). This is why


emphasis has most often only been on the few aspects of customs that would enable to secure


trade tax revenues while allowing preferential trade.




The incentives related to optimizing revenue collection are modified in a customs union,


which we first define broadly as a regional trade agreement with a common external tariff and


no tariffs among its members. 44 In a “true” customs union, revenues will be collected at the


initial port of entry in the customs union. That is revenue is collected by each member on


behalf of the union and subsequently either redistributed or spent by common institutions.


This substantive difference between customs union and other regional trade agreements bears


important consequences on the scope for trade facilitation reform at the regional level.




First, customs unions do not require the implementation of rules of origin among members.45


They also either eliminate or diminish the need for transit bond regimes for goods destined to


markets within the union. Both are significant facilitations of trade. Further, forming a


customs union implies further incentives for trade facilitation reform in member countries to


harmonize their regime, starting with adopting common customs legislations, classification,


and tariff rates.




Like in any other preferential trade arrangements there are incentives for trade deflection in


customs union, to take advantage of borders in the region where protection is the lowest.


Because tariffs are uniform, the cause of trade deflection is solely due to non-tariff barriers,


therefore putting a specific emphasis on them. Among them, lack of trade facilitation in one



44 The World Customs Organization (1995) defines a customs union as the union of two or more customs
territories sharing a common tariff, where customs duties and restrictive regulations of commerce have been
abolished within the customs union.
45 At least for “true” customs unions that collect revenue at entry.


23




partner provides incentives for private operators to concentrate their trading operations in the


most efficient member of the union: “port shopping” is what happened in Europe (EC, 2003).


Another characteristic of customs unions is that there is no possibility to change unilaterally


the external tariff applied to third countries, and eventually compensate tariff revenue losses


caused by trade diversion. Such revenue losses are one of the chief motives for governments


to take action.46 Additionally when revenue is collected by individual members on behalf of


the Union, and then shared under some revenue sharing agreement - as it is in SACU -


implies that there is mutual confidence in the enforcement capacity of other union members:


trade facilitation measures and upgrading of union members border management is an


element of confidence building.




Therefore in order to preserve the integrity of a union, members have a strong incentive to


take a joint approach to issues and build capacity at the weakest points of entry of the customs


territory.47 These “race to the top” incentives can promote facilitation reform in some


members. This also means that the prognosis for the provision of weakest link type public


goods is increased in customs unions, which is confirmed by their generally more ambitious


trade facilitation undertakings.48 Members of the COMESA have for example adopted several


regional trade facilitation initiatives, including a single document for customs and are in the


process of establishing a regional bond system (see box 2 for further examples in COMESA).




Deeper integration within the Customs Union adds to incentives for trade facilitation. In the


context of a more integrated markets such as the EU single market, the removal of internal


borders has meant not only a transfer of sovereignty for tariff revenue collection to the Union,


but also of all other border controls, and thus a transfer of authority at the European


Commission level, as well as further incentives to build the capacity of the weakest members


in the absence of national border controls for goods transiting through other members of the


Single European Market (EC, 1989).




Note however, that the incentive is rather one of harmonization and enforcement than


facilitation of trade in the strict sense. In this context there is a clear distinction between trade


among members and trade with third countries. While intra-union trade is most likely to see


more benefits from the removal of controls, the harmonization of regulatory requirements,

46 Ineffective protection of the domestic industry is the other reason why regional agreement members want to
avoid trade deflection. One can however assume that governments will be looking after their direct interests (tax
collection) very closely in any case.
47 See Keen (2003).
48 According to Arce and Sandler, regional institutions are already well placed to provide weakest link type public
goods compared to global institutions because being closer to the problem they can identify more easily the
“laggards”. As the weakest link problem is one of capacity, the idea seems here that for implementation purposes,
regional institutions will be more efficient.


24




and mutual cooperation, effects are likely to be much more ambiguous with countries outside


the Union. Border reform under customs union is only synonymous of genuine trade


facilitation to the extent that it makes trade easier among customs union partners and with


external partners. It is true that the adoption of a unique rule within the union creates


immediate benefits to third countries such as: an automatic reduction of duplication costs for


transiters and trading partners dealing with more than one customs union member and access


to a broader market once the fixed costs associated to border control (such as accessing


information about customs procedures) are paid. On the other hand, there is a distinct risk that


process of cooperation among union members in the implementation of their procedures such


as MRAs will give union economic agents an added competitive hedge against traders outside


the union that will not have access to these facilitation tools. Another risk of discrimination is


the adoption of higher standards and stricter procedures by union members on trade from


third parties leading for instance to standards harmonization and added controls at the border


to guarantee integrity of borders on behalf of other union members.




Box 2. COMESA’s regional initiatives on trade facilitation

The Common Eastern Market for Eastern and Southern African States (COMESA)
was formed in 1981 and the COMESA free trade area launched in October 2000. The
20 member countries of COMESA now plan to launch the COMESA Customs Union
in December 2008.

Trade facilitation has been an important aspect of regional integration in COMESA.
The following trade facilitation measures have been developed (not necessarily to all
member states):


• Common tariff nomenclature
• Common valuation system
• Protocol on rules of origin
• COMESA single customs declaration document (COMESA-CD)
• Protocol on transit and trade facilitation introducing licensing of transit


carriers and harmonization of axle load controls
• Regional customs bonds guarantee scheme was launched in 2006 enabling the


payment of a single bond for the region
• Licensing of clearing agents and formation of a regional Freight Forwarder


Association
• Protocol of third party motor vehicle insurance scheme (Yellow Card scheme,


to which 13 countries participate)
• Joint border controls (Chirundu port for Zambia-Zimbabwe; Malada border


for Uganda-Kenya)
• Implementation of common standards
• Capacity building with development of customs training modules



Source: COMESA (2005)




One should also note that most customs unions do not follow the model of collection of


revenues at the port of entry, but rather according to the final point of consumption. Arndt et


al. (2007) survey 9 customs unions and find that only the EU and SACU collect revenue at


25




entry. This means for the other customs unions the use of complex bond procedures to ensure


that goods entering the customs union are indeed taxed at their point of destination, as well as


possibly rules of origin.49 Trust and more developed institutions are also much less a feature


of such arrangements, as are incentives to cooperate to upward harmonization.




TRADE FACILITATION REFORM THROUGH RTAS: A SUITABLE OPTION?


Bergsten (1997), referring to APEC, lists trade facilitation as one of the five possible


definitions of “open regionalism”. Trade facilitation measures are indeed rarely preferential in


nature, except when they providing lower customs fees, simplified origin marking


requirements and mutual recognition agreements of conformity (Moïsé, 2002). Other reforms


undertaken in the name of trade facilitation in RTAs are de jure non-discriminatory and thus


their benefit should also extend to non-RTA trade partners (Schiff and Winters, 2003; Maur,


2005). The possibility however remains that through the adoption of specific standards, an


artificial advantage is granted to parties better acquainted than others with such standards (a


hidden motive behind upward harmonization claims promoted by developed countries). This


is an issue for technical barriers and phytosanitary standards. This probably less the case for


harmonization of customs procedures, essentially modeled on internationally agreed standards


(Moïsé, 2002). Implementation issues and necessary cooperation, including mutual


recognition of practices however raise the spectrum of discrimination against countries


outside the regional trade agreements.




What channel for regional trade facilitation? RTAs and cooperation agreements


As noted by Arvis et al. (2007) the lack of reform is not because of lack of legal instruments.


Regional dimensions of trade facilitation can be addressed through sector-specific bilateral or


plurilateral cooperation agreements rather than cross sectoral RTAs (thus confirming the view


that RTAs are not a technical necessity per se, cf. Hoekman and Kostecki, 2000). Regional


transit agreements are an example of such cooperation agreements.50 Transit arrangements


between countries are numerous. Taking the case of Africa, N’Guessan (2003) points out that


transit systems are particularly deficient. Only 30% of the regional transit in WAEMU is


conducted under the regional transit agreements, the remaining 70% being subject to bilateral


rules. Regional corridor agreements in Sub-Saharan African are largely not operational for


most of the transit traffic, and are superseded by national, non-harmonized, overlapping and



49 I thank Matthew Stern for drawing my attention to this fact. For instance in the EAC, a transitory regime will
ensure that collection of taxes is first made at the final port of destination, as opposed to the port of arrival
(Uganda DTIS, 2006).
50 There are several other examples of (generally bilateral) sector specific agreements to facilitate trade: customs
cooperation agreements and mutual recognition agreements for instance.


26




discriminatory provisions such as: compulsory customs escort, non-harmonized transit


charges, or specific country documentation for transit. Administrative burden adds to the


regulatory burden, with lack of coordination between different agencies in charge of


controlling transit goods (customs, police, sanitary controls). Inefficiency of these agencies


multiplies the costs. The conclusion thus seems that neither bilateral sectoral agreements nor


regional agreements in the context of regional integration have delivered trade facilitation


benefits in Africa.




One reason why bilateral transit cooperation agreements have not delivered could be the


absence of incentives by countries to internalize regional externalities: the asymmetry of


incentives for landlocked and border countries noted by Schiff and Winters (2002). However,


and more importantly, the lack of political commitment of individual countries behind


market-based reforms probably remains the biggest impediment. An example is absence of


liberalization in the transport sector denying the benefits of better transport links and


corridors. Poor procedures in individual countries of transit, linked to weak political


incentives to reform, remain often the main obstacle to efficient regional transit regime. An


interesting case in hand is Djibouti, which has made important port infrastructure investments


to increase its capacity to serve neighboring countries from its hinterland. To date, the


capacity of the port terminals remains in some instances largely underutilized. The reason is


not lack of demand: the Djiboutian port authority has had to increase its dry port capacity to


store increasing amounts of cargo laying in waiting. Slow border clearance from neighboring


Ethiopian authorities is the explanation. Cargo ships have to stay longer than necessary,


preventing full utilization of the terminals. Slow clearance from Ethiopian authorities creates


a negative externality on port activities in Djibouti, probably an important source of revenue


for a small economy like Djibouti. This demonstrates incidentally that the policies of


landlocked countries can also negatively impact on coastal neighbors.




The political commitment problem can be better addressed in the broader setting of RTAs,


than in other regional institutional settings. The anchoring of reform can be stronger, and the


cost of non-implementation of one obligation can jeopardize the agreement as a whole, and


thus is much higher. Dispute settlement measures tend to be stronger in regional trade


agreement than in sectoral agreements (World Bank, 2005: 86 provides the example of


standards). This could explain why the alternative to incorporating transit processes into or in


parallel regional agreement seems to have gained credence in the past decade, when several


27




agreements have been signed with provisions on regional transit.51 Indeed, many regional


agreements have incorporated rules and developed instruments to facilitate transit such as the


EAC, COMESA or SADC. However, actual transit facilitation has been disappointing mainly


because of poor implementation (Arvis, 2005 quoting UNCTAD, 2001). With the exception


of the European TRIE agreement (Transit Routier Inter Etats) most fail to address


implementation problems and have confined themselves to broad policy recommendations.




The poor record on transit illustrates the more general failure of most regional institutions to


deliver tangible trade facilitation reform. The EU, and to a lesser extent the APEC being


among the exceptions. In Africa, Mc Tiernan (2006) reports that only COMESA and the


trans-Kalahari corridor (an ad hoc transit cooperation agreement) have provoked changes in


customs practice.52 Interestingly, COMESA, the EU and APEC are three non traditional cases


compared to other RTAs. The poor performance of RTAs may seem unexpected. : since


RTAs have clearly not tried to take a rule setting role - left to international organizations53 -


they could have been expected to take a more active role in implementation. Moreover, that


RTAs have kept clear of the trade facilitation standard setting agenda is a good thing as it


guarantees MFN treatment: the modern standards adopted are accessible to all. Because they


are defined internationally, and thus one can presume that domestic interests are not


influencing their design, international standards should also guarantee National treatment.




The fact that RTAs have not delivered reform in practice needs therefore be questioned


further. A first remark is that the role of binding rules for implementation is perhaps


overstated. Finger (2006) reminds us that there is not necessary a need for legal obligation to


spark trade facilitation reform as many countries have already shown willingness to do so.


One should however wonder whether the willingness to undertake regional initiatives is the


same. APEC has no enforcement mechanism and commitments are entirely voluntary. APEC


has emphasized its focus on policy integration and common principles of reform, while


organizing the delivery of technical assistance.




A second observation relates, as discussed earlier, to the revenue preservation incentives in


regional integration. Policies in the transit country are likely to be motivated by tax revenue


preservation and since revenue collection is often not perceived as complementary to trade


facilitation, a plethora of controls will be the preferred option. Weak regional institutions also

51 Most regional trade agreements incorporate Transport and Trade Facilitation Agreements types (World Bank,
2005).
52 Although the trans-Kalahari corridor progress have been hampered by a unilateral decision by Botswana to
increase road user fees, which resulted in a decrease of traffic (World Bank, 2005).
53 The World Customs Organisation Kyoto Convention for customs, the International Civil Aviation Authority
(ICAO), the International Road Transport Union (IRU), the International Maritime Organisation (IMO), etc.


28




mean that implementation does not necessarily follow transit agreement that have been


negotiated. On the contrary, in a true customs union because revenues are collected on behalf


of the union, transiting countries have some incentives this time to facilitate transit trade for


countries that collect part of their revenue.




Another difference with customs union is often the strength of their institutions which allows


them to carry more ambitious reforms. Looking at the examples of the EU and COMESA it


looks certainly the case that bold regional facilitation initiatives have been tabled like the


regional bond scheme in COMESA, implemented in 2006, and numerous policies in Europe


such as trans-national information and transport networks, or standards harmonization.


Whether such policies have resulted in effective facilitation of trade is a question that is


difficult to answer. While many of these initiatives seem desirable, their implementation


remains largely unstudied and so is their impact. Besides there is also some evidence that


these policies have been more complex to implement that initially thought, short of


expectations in some cases (transit in COMESA), and that in the instance of the European


Union, many of the higher international standards remain to be implemented.




A last remark is the presence of large advanced countries as a driving force (both political and


material) behind reform. APEC (Japan, Australia), COMESA (South Africa), and of course,


European countries. As Schiff and Winters (2003) argue, trade facilitation as a dimension of


policy integration requires much more than non-discrimination. It needs the rapprochement of


policies and enforcement; it also needs effective implementation. Making policies more


compatible undoubtedly involves strong political will to fight against the vested interests in


border agencies.54 It also requires a different institutional setting that classical exchange of


trade concessions. In short, stronger and more permanent institutions than those of


multilateral trade negotiations are needed because implementation of trade facilitation


reforms will require at least coordination, and more likely, as discussed, harmonization and


mutual recognition of rulings. Regional cooperation agreements and RTAs seem more likely


to deliver institutions that will foster integration, mostly because transaction costs are smaller


among a few countries than multilaterally (and in general for the delivery of public goods,


Devlin and Estevadeordal, 2004; Sandler, 2006); in particular regional agreements seem to


offer the flexibility needed for the design of such institutions and for informal cooperation.


RTAs further offer compared to sector-specific trade facilitation agreements the benefit of


stronger political commitment and linkages with several policies facilitating trade. Finally,


RTAs offer enforceability and resources for implementation. Enforceability of reform



54 This is for instance a clear finding from a recent study on the needs, priorities and costs for the implementation
of a future WTO Trade Facilitation Agreement (McLinden, 2006).


29




commitment does not seem to be such an issue in the case of trade facilitation as the example


of voluntary commitments with APEC show.55 Implementation of reform on the other hand


seems a major challenge for most countries, including richer ones. Availability of funds, time


and expertise is required for the most ambitious reforms. Again, RTAs including advanced


countries seem well suited to fulfill capacity building needs, provided that they offer the right


mix of financial assistance and expertise.




The complementarity of regional solutions with multilateral and national ones


Regional solutions to trade facilitation should not always be thought as substitutes to


multilateral, national or other regional interventions but also as complement. Transit corridors


should probably gain from the involvement of regional trade agreements on top of corridor


specific institutions such as regional management committees, and more national


arrangements (Consilium Legis, 2003).




It is also in several instances a fact, that in order to become operational, regional cooperation


has to rest on international rules and institutions. This is because the need for guarantees


extending beyond the regional level: we gave earlier the example of accreditation, which


needs to be guaranteed internationally by one of two global organizations: the International


Accreditation Forum and the International Laboratory Accreditation Organization (Holmes et


al., 2006). Likewise the integrity of TIR system is guaranteed by the UN Economic


Commission for Europe and the International Road Transport Union (Arvis et al., 2007).




Another dimension of complementarity of regional integration agreements and donor


organizations is likewise illustrated by the Trade and Transport Facilitation in South East


Europe program, a joint venture between the EU and the World Bank and bilateral donor


countries.56 Of course, the private sector, already mentioned, which may operate nationally,


regionally or globally, is another desirable stakeholder.




Which RTA? How the size of partner countries matters


Many aspects discussed so far are country specific. Country or country grouping


characteristics have therefore significant implications for regional trade facilitation. Least


Developed countries face a set of constraints that require particular attention. First, economic


size, meaning that economies of scale are less likely to be internalized at the national level,



55 Another enforcement issue is between government and private operators, and the need to have fair and
consistent enforcement of rules, and the right to appeal procedures for traders.
56 http://www.seerecon.org/ttfse/


30




thus suggesting that small countries should team up together to deliver regional trade


facilitation instruments (witness the regional enquiry point proposed by Barbados). Size also


implies that the bargaining position of small countries with more powerful neighbors leads to


suboptimal outcomes for them. The obvious example is transit. LDCs are over-represented


among landlocked countries. A solution to this size asymmetry would perhaps be for the


small country to trade-off concessions in an RTA context by offering market access (in


services sector for instance) against facilitated transit and better enforcement of rules so that


transit is not discriminated against (this includes competition in transport). Over-dependence


on tax revenues is another characteristic of LDCs compared to more advanced developing and


developed countries. This dependence creates strong incentives against trade facilitation, and


in particular against sharing any border responsibility with neighboring countries. In this


respect, an asymmetric regional cooperation may be an advantage, as partnering with a large


country that is less dependent on trade tax revenue will mean more political support for trade


facilitation reform.




This raises the question of whether there are specific partners with whom to preferably


implement trade facilitation reform? There is the complementarity between some aspects of


trade facilitation and the volume of goods trade: transport infrastructure springs to mind.


Modernization of trade procedures involves one off fixed costs that will be recouped more


easily over larger volumes of trade. This obviously applies to the case of transit for


landlocked countries where often a few transit routes will represent a very large proportion of


all external trade.




The volume of trade criterion however may fail to address the geographical-determined


dimensions of trade facilitation as for many countries trade with neighbors is actually too low,


thus shifting the focus of regional trade where transaction costs are already low, and possibly


reinforcing existing distortions (Schiff, 2001).57 A trade potential criterion makes more sense


and thus incorporates the geography determinants of trade facilitation discussed.




A different question is whether regional cooperation would not be better with partners


representing a large proportion of world trade? This complementarity can arise for some


norm-based dimensions of trade facilitation reform: it makes more sense to harmonize


standards with big world traders as this also means harmonization with this partner’s trade


partners. In the context of the positive externalities described earlier, it may make sense to



57 See for instance Al-Atrash and Yousef (2000) on Arab trade. Another example is the share of trade between
India and its neighbours.


31




integrate with hubs at the centre of large trade networks.58 In a world where production


processes become more fragmented, this seems the path to follow.59 The share of world trade


criteria points out for developing countries towards seeking trade facilitation reform in the


context of agreements with Northern economies. This presents the added benefit of access to


higher modern standards, technical assistance and capacity building: an important


consideration for weak link type public goods. Actually, evidence suggests that RTAs


involving developed economies contain more detailed and sophisticated trade facilitation


provisions (Bin and Misovicova, 2007).




The above arguments need however to be qualified with the possible negative effects of


RTAs mentioned earlier, in particular if trade facilitation measures boost trade diversion


effects. This seems to reinforce in our view the importance of promoting regional trade


facilitation measures in the context of regional trade agreements that are not trade diverting to


start with: an additional argument for choosing partners with a large share of the world’s


trade.




Finally, there is also the risk that countries with low capacity may not be able to share much


with countries with sophisticated policies in place, or be invited to implement measures


beyond what is strictly necessary for them.




Disentangling these dimensions is difficult as there is no automatic prescription as to where


the most benefits are concentrated and whether any piecemeal approach to trade facilitation is


advisable. Regarding the latter, I think better not. This thus suggests that a better framework


for addressing trade facilitation issues might need to rely on either a multilateral approach


with regional extensions or a hub-an-spoke approach such as the one envisaged in the


European Partnership Agreements.




CONCLUSIONS AND DIRECTIONS FOR FURTHER RESEARCH


Regional interventions matter. Regionalism, specifically regional trade agreements, has


undoubtedly a role to play to help trade facilitation reform. We find several reasons why this


should be the case:



58 As pointed out by one reviewer, does it make sense for Mercosur to have an agreement on multi-modal transport
(signed in 1994) among its countries but none with the EU and the US, its main trade partners?
59 This echoes a point made by Devlin and Estevadeordal (2004) who suggest that such “hub and spoke”
arrangements allow getting a greater geographical reach and realising economies of scope in the delivery of similar
multiple public goods to different regions.


32




- The existence of regional public goods, because of the presence of economies of scale


and externalities at the regional level, for instance in the exchange of electronic


information, or the mutualization of guarantee systems and transit.


- The “local” nature of several elements of the trade logistics chain and the inherent


efficiency of reforming them at the regional level.


- The adequacy of regional trade agreements, if appropriately designed, for


implementation of regional tools facilitating trade: this is because they are well


designed to address both coordination and capacity constraints facing the provision of


regional trade facilitation public goods. This means that regional trade agreements


can deliver several, different, and complementary trade facilitation public goods.


- Another advantage of regional trade agreements is when they incorporate deep


integration dimensions. They are better suited for addressing complex regulatory


liberalization. In addition, because they can be broad in scope across many policies,


trade-offs between the many components of the trade logistics chain can be made,


and offer better safeguards against violations of commitments.




Regionalism can deliver more. This said, there is yet scant evidence of success of regional


agreements promoting effective trade facilitation. The reasons why this is the case are still not


well identified and would warrant further research. Political economy consideration certainly


play a very important role here; one of the reasons behind low political will could well be the


reliance on trade tax revenue, a very sensitive issue for poor country especially. There might


thus be strong resistance to facilitate trade with regional partners. Incentives for better transit


arrangements are quite difficult to address in this respect.




What scope for regional cooperation? RTAs need to shift their focus from reciprocity to


policy integration and from a narrow vision of border enforcement to one of policy of


integration into world markets. This entails a broader coverage of trade facilitation issues as


whole (recent trade agreements seem to move in that direction).




In particular, trade facilitation objectives should be integrated in RTAs with a clear objective


to make them also more open to third country trade. As we know too well, trade diversion


means that regional trade agreements are not necessarily guaranteeing welfare gains for


participants in the agreement, and likely to generate welfare losses for countries excluded.


Regionalism is also not necessarily a stepping stone towards multilateral trade liberalization.


Trade facilitation reform can be a force for good in this context if it reduces trade transaction


costs on trade from all origins. While we offer no clear conclusion as to whether facilitation is


itself a stepping stone, it indeed looks like a useful and relatively straightforward policy


33




(probably easier to implement from a political point of view than tariff reform) to moderate


the trade diversion effects of preferential tariff reduction.60




We also saw that the diagnostic about the need regional trade facilitation reform is going to


differ depending on the absolute and relative size of countries under consideration. While


some criteria helping to discern how regional trade facilitation could be delivered were


identified, further work is needed to understand when the political economy incentives (in a


way the demand for regional public goods) can be catered for so as to result in optimal supply


of regional public goods.61




There is also little evidence on the impact of the most successful regional integration


agreements to guide policy makers on which regional trade facilitation policies may be


desirable. In particular, the study of existing regional agreements could bear some lessons on


whether there is a case for gradual approach, for prioritizing specific trade facilitation


regional public goods, leaving others for later and building upon that basis as seems to have


been the case in Europe.




Strong institutions are required. The crucial role played by institutions governing regional


trade liberalization efforts must be emphasized. Their role seems to matter as much – if not


more – in the implementation of the soft law aspects of reform than of hard rules. We


highlighted the importance of cooperation and joint regulatory design to deliver regional trade


facilitation solutions. This also highlights an area of comparative advantage of regional


approaches over multilateral ones. Weak institutions also are not well equipped to manage


heavy implementation challenges.




Regional institutions also need to be strong enough to push what are difficult reforms:


customs unions seem relatively more efficient. Emphasis should be shifted from rules to


implementation, with flexibility in mind, and possibly complementarity with other national or


multilateral approaches. This may mean strengthening regional specialist organization,


eventually in partnership with the private sector, which have tended to be more successful in


cooperation agreement or maintaining working groups of experts. Finally, Customs unions


have fared better than other forms of regional cooperation in many respects. Admittedly,


customs unions are few, and forming a customs union requires a serious amount of political


will on all sides: these are naturally good conditions for regional trade facilitation reforms too.

60 Helping the RTA to maintain the level of trade with third parties to its pre integration level, otherwise known as
the Kemp-Wan (1976) proposition.
61 For instance how exactly is coordination delivered? What makes countries that would compete with each other
for the supply of trade facilitation infrastructure change their mind?


34




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