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National Trade Policy for Export Success

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This study presents a trade policy framework developed by ITC. It provides the trade policy instruments that governments can use to support the competitiveness of firms at each stage of the supply chain and outlines how trade policy options can influence national export competitiveness. The study also discusses in detail the trade policy instruments corresponding to each of the following objectives: creating competitive infrastructure services; promoting exports and foreign investment; moving goods across borders effectively; addressing export market issues and improving inputs and capital goods. It also considers how to tackle the overriding constraints faced by both public and private sectors, related to every stage of production and distribution of goods and services for export.

United Nations Sales No. E.12.III.T.3


USD 70
ISBN 978-92-9137-402-1


EXPORT IMPACT FOR GOOD


National Trade Policy
for Export Success




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NATIONAL TRADE POLICY
FOR EXPORT SUCCESS


Geneva 2011




ii


ABSTRACT FOR TRADE INFORMATION SERVICES


ID=42668 2011 F-07.01 NAT


International Trade Centre (ITC)
National Trade Policy for Export Success
Geneva: ITC, 2011. xi, 160 p.


Study presenting a trade policy framework developed by ITC, providing the trade policy instruments that
governments can use to support the competitiveness of fi rms at each stage of the supply chain – outlines
how trade policy options can infl uence national export competitiveness; discusses in detail the trade
policy instruments corresponding each of the following objectives: creating competitive infrastructure
services; promoting exports and foreign investment; moving goods across borders effectively; addressing
export market issues; and improving inputs and capital goods; considers how to tackle the overriding
constraints faced by both public and private sectors, related to every stage of production and distribution
of goods and services for export.


Descriptors: Trade Policy, Export Strategy, Competitiveness, Export Promotion.


English, French, Spanish (separate editions)


ITC, Palais des Nations, 1211 Geneva 10, Switzerland (www.intracen.org)


The designations employed and the presentation of material in this publication do not imply the
expression of any opinion whatsoever on the part of the International Trade Centre concerning the
legal status of any country, territory, city or area or of its authorities, or concerning the delimitation
of its frontiers or boundaries.


Digital image on the cover: © International Trade Centre, Kristina Golubic


© International Trade Centre 2011


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in
any form or by any means, electronic, electrostatic, magnetic tape, mechanical, photocopying or otherwise,
without prior permission in writing from the International Trade Centre.


P248.E/DCP/BTP/11-XI ISBN 978-92-9137-402-1
United Nations Sales No. E.12.III.T.3




iii


FOREWORD


In recent decades, global integration – together with openness to trade – has been a catalyst for strong
economic growth for many countries, generating employment and reducing poverty.


Countries that have reaped the most benefi ts from international trade have focused on national trade
policies and regulatory reforms that created a business-friendly environment so that fi rms could achieve
export success. However, because trade policy is a complicated process that demands balancing
competing and disparate interests, the process of reform is challenging for both the public and private
sectors. Meeting these challenges calls for action on two fronts.


First, governments must take a holistic view of the policies, laws and regulations needed. They must be
implemented in the right sequence to create a mutually reinforcing framework that fosters competitiveness
and a business-friendly environment. Policies, laws and regulations should work together in synergy
to achieve ‘export impact for good’. Ministries, departments and government agencies must work in
tandem to ensure policy coherence.


Second, for the reform process to strike the right balance among various interests, governments must
secure the buy-in of all stakeholders, especially from the private sector.


Reform may be diffi cult in the short term, which is why stakeholders must understand the issues and be
convinced that the benefi ts of export-led growth will only be realized in the medium and longer term.


This book brings together research, analysis and experience gathered on trade policy, legal and
regulatory changes from various countries around the world. It also presents successes and failures
through case studies and examples.


We hope entrepreneurs and private sector organizations will be able to use this book to assess the
impact of trade policy and regulations on the competitiveness of their businesses. The book attempts
to juxtapose the opportunities and the challenges arising out of the reform process to enable all
stakeholders to weigh the benefi ts and costs of different trade policy options. As such, it is a valuable
tool for business associations and other interested stakeholders engaging in advocacy campaigns on
trade policy issues.


I am confi dent it will also be of immense use to policymakers in developing and least developed countries
that are pursuing export-led economic development strategies.


Above all, we hope this book will promote a culture of informed public-private dialogue, which is an
essential component of the democratic process of policy formulation. Only by engaging all stakeholders
in an informed dialogue will we be able to achieve the goal of sustainable and inclusive economic
growth.


Patricia Francis
Executive Director
International Trade Centre




iv


ACKNOWLEDGEMENTS


A book of this scope required the hard work and dedication of a great many committed individuals. The
concept for the book is to create a framework that describes the linkages among export-led growth strategies,
development and competitiveness. The framework was designed by Rajesh Aggarwal, Chief, and Andrew
Huelin, Consultant, Business and Trade Policy, International Trade Centre (ITC). ITC wishes to thank everyone
who contributed to this effort.


Introduction – National trade policy for export success


Rajesh Aggarwal, Chief, Business and Trade Policy Section; and Andrew Huelin, Consultant, Business and
Trade Policy Section, ITC, wrote this introduction.


Chapter 1 – Create competitive infrastructure services


Robert Anderson, Counsellor, Intellectual Property Division, WTO; Frédéric Jenny, Judge, Supreme Court of
France (Judge in the Commercial Economic and Financial Chamber); and Anna Muller, Intellectual Property
Division, WTO wrote this chapter.


Chapter 2 – Promote exports and foreign investment


Zdenek Drabek, Former Adviser at WTO, Division of Research and Statistics; Rajesh Aggarwal, Chief,
Business and Trade Policy Section; and Andrew Huelin, Consultant, Business and Trade Policy Section, ITC,
wrote this chapter.


Chapter 3 – Move goods across borders effectively


Luc Dewulf, consultant to the International Monetary Fund, World Bank, Asian Development Bank and United
Kingdom Department for International Development and European Commission on trade facilitation issues;
Rajesh Aggarwal, Chief, Business and Trade Policy Section; and Andrew Huelin, Consultant, Business and
Trade Policy Section, ITC, wrote this chapter.


Chapter 4 – Address export market issues and Chapter 5 – Improve inputs and capital goods


Both of these chapters were written by Samuel Laird consultant to the World Trade Organization (WTO), the
United Nations Conference on Trade and Development (UNCTAD), and ITC, as well as Special Professor of
International Economics, University of Nottingham, and Visiting Professor, World Trade Institute, Bern; Rajesh
Aggarwal, Chief, Business and Trade Policy Section; and Andrew Huelin, Consultant, Business and Trade
Policy Section, ITC.


Special thanks


This book also benefi tted from the advice many experts. Special thanks to Friedrich Von Kirchbach, Director,
Division of Country Programmes, ITC; Pierre Sauvé, Deputy Managing Director and Director of Studies, World
Trade Institute, University of Bern; Richard Newfarmer, formerly the Special Representative of the World Bank
to the United Nations and WTO in Geneva; Ryan Patrick Garcia Evangelista, Executive Director, U-ACT and
Deputy Secretary-General, the Philippines Chamber of Commerce and Industry, Manila; and Agatha Nderitu,
Executive Director, East Africa Business Council, Arusha, United Republic of Tanzania.


Natalie Domeisen managed the publication. Dianna Rienstra, Phoenix Ink Communications, Brussels,
was editor and adviser for this publication. Danielle Carpenter Sprungli conducted proofreading. Desktop
publishing was carried out by Carmelita Endaya.




v


CONTENTS


Foreword iii


Acknowledgements iv


Abbreviations xi


INTRODUCTION 1


TRADE-LED GROWTH 2


DOMESTIC POLICY PRECONDITIONS 2


TRADE POLICY OPTIONS FOR NATIONAL EXPORT COMPETITIVENESS 3
Identifying drivers for export success 4


THE TRADE POLICY AND EXPORT COMPETITIVENESS INTERFACE 5
The production supply chain 6
Trade policy instruments 6


DESIGNING TRADE POLICY FOR EXPORT COMPETITIVENESS 8
Create competitive infrastructure services 8
Promote exports and foreign investment 8
Move goods across borders effectively 8
Address export market issues 8
Improve inputs and capital goods 8


CHAPTER 1


CREATE COMPETITIVE INFRASTRUCTURE SERVICES 11


INTRODUCTION 12
Development assistance for infrastructure 12
Focus on fi rms delivering infrastructure services 12
Privatizing is not enough 13


RESTRUCTURING STATE MONOPOLIES TO IMPROVE PERFORMANCE 15
Using competition law and policy 15
Issues in competitive restructuring 16
Policy options 16
Access to monopoly facilities 18
A continuing need for enforcement 19


THE ROLE OF BUSINESS ORGANIZATIONS AND ASSOCIATIONS 19


THE TRANSPORTATION SECTOR 20
Ports 20
Railways 23
Air transport 25
Road transport 27


THE ENERGY SECTOR 29


TELECOMMUNICATIONS 33


CONCLUSION 38




vi


CHAPTER 2


PROMOTE EXPORTS AND FOREIGN INVESTMENT 41


INTRODUCTION 42


FDI AS A DRIVER OF THE GLOBAL ECONOMY 42
FDI is growing faster than trade 43
Global trade and global FDI are strongly correlated 44
Why multinationals invest abroad 44
FDI fl ows 45


LINKAGES BETWEEN FDI AND EXPORT GROWTH 46
Access to effi cient infrastructure services 46
Services can be a bottleneck 47
FDI – an attractive solution 47
Investor partnerships 47
Why use foreign investment for infrastructure? 49


ACCESSING GLOBAL SUPPLY CHAINS 50
Fragmented, globalized production 51
Linking domestic fi rms with global supply chains 52
Transferring technology and know-how 53
Multinational fi rms boost domestic competition 54
Expanding domestic production capacities 54
Exports and outward FDI 55


POLICY IMPLICATIONS 56
Strategies to attract foreign capital 57
Targeting foreign investment 57
Good governance, key to investment promotion 57
Open trade policies 59
Implementing trade policy effectively 60
Stronger regional cooperation 62
Enhancing domestic competition 62
Policies to attract technology transfer through FDI 66
Attracting FDI: Public-private partnerships 66
FDI reduces vulnerability to capital outfl ows 68


PROMOTING INVESTMENT 69
Investment promotion agencies 69
Building national and regional image 70
Investor targeting 71
Providing investment services 71


CONCLUSION 73


CHAPTER 3


MOVE GOODS ACROSS BORDERS EFFECTIVELY 75


INTRODUCTION 76


WHY TRADE FACILITATION MATTERS FOR NATIONAL COMPETITIVENESS 77
Increasing trade fl ows 77
Attracting foreign direct investment 77
Increasing government revenues 78
Improving product and market diversifi cation 80




vii


WHY TRADE FACILITATION MATTERS FOR BUSINESS 80
High transaction costs damage competitiveness 80
Removing obstacles to just-in-time delivery 82


BENCHMARKING TRADE FACILITATION 82
Key success factors 82


A FOCUS OF WTO NEGOTIATIONS 84


THE PIVOTAL ROLE OF CUSTOMS 85
Challenges for customs authorities 86
Security of trade supply chains 87
Customs valuation – a diffi cult task 88
Rules of origin 90
Improving coordination among border agencies and service providers 90
Reforming electronic customs management systems 91


TOWARDS FLUID TRANSIT PROCEDURES 93
The case of landlocked countries 94
Key elements of a transit operation 94
Net benefi ts outweigh costs 95
Effi cient transit procedures and practices 95


TRADE LOGISTICS SERVICES AND COMPETITIVENESS 97
Policy responses 99
Express delivery needs effi cient logistics 101


PUBLIC-PRIVATE COLLABORATION 102
Consultation mechanisms and processes 102


CONCLUSION 104


CHAPTER 4


ADDRESS EXPORT MARKET ISSUES 107


INTRODUCTION 108


MARKET ACCESS 108
Identifying market opportunities 108
ITC information services 109


ASSESSING MARKET CONDITIONS 110
Tariffs 110
The Doha Round of trade negotiations 113
Regional trade agreements 114
Rules of origin 115
Non-tariff measures grow in importance 118
NTMs affecting goods 118
NTMs affecting services 120
Why are NTMs used? 123
What are the effects of NTMs? 124
Who uses NTMs and what is their effect? 124


TECHNICAL BARRIERS: WHY EXPORTERS WORRY 128
WTO principles for standard setting 128
What can exporters do about technical barriers? 130


EXPORTING IN THE PRESENCE OF DOMINANT FIRMS 134




viii


THE IMPORTANCE OF VALUE CHAINS 134


ITC BUILDS CAPACITY 135


COMPETITION FROM THIRD COUNTRIES 136


CONCLUSION 136
Strategies for market access 136


ANNEX: NON-TARIFF MEASURES – CLASSIFICATION FOR TRADE IN GOODS 138


CHAPTER 5


IMPROVE INPUTS AND CAPITAL GOODS 141


INTRODUCTION 142


MARKET OPENNESS CAN REDUCE COSTS 143


ELIMINATING ANTI-EXPORT BIAS 145


REDUCING INPUT COSTS 146


WTO RULES ON SUBSIDIES 146


SPECIAL TARIFF RELIEF SCHEMES 149
Relief from payment of duty 149
Temporary admission regimes 149
Duty drawback schemes 149


EXPORT RESTRICTIONS AND TAXES 152


SPECIAL ECONOMIC ZONES 152


REGIONAL SOURCING 157


SUPPORTS FOR INPUTS TO EXPORTS 157
Subsidies for inputs 157
Export credits and export fi nance 157


ATTRACTING FDI 158


CONCLUSION 160




ix


FIGURES


Figure 1: The trade policy/export competitiveness interface 7


Figure 2: Global GDP growth and merchandise trade volume, 1950-2009 43


Figure 3: Growth of global output, FDI stocks, merchandise exports and services, 1980-2008 44


Figure 4: FDI infl ows, global and by group of economies, 1980–2010 (billions of dollars) 45


Figure 5: Private investment in sub-Saharan infrastructure projects by sector, 1990-2008 48


Figure 6: Skoda/Volkswagen car sales 1991-2010 55


Figure 7: Skoda/Volkswagen after-tax profi ts 1997-2010 55


Figure 8: The Single Window 92


BOXES


Box 1: OECD recommendation on separating competitive and natural monopoly functions 18


Box 2: Argentina: monitoring competition in restructured ports 21


Box 3: Indonesia: using competition law for restructuring ports 22


Box 4: Jamaica: stopping abuse of dominance in port management 22


Box 5: Zambia: abuse of dominance in port management led to tariff increases 23


Box 6: Mexico: encouraging competition – the spatial separation model 25


Box 7: Sweden: encouraging competition – the vertical separation model 25


Box 8: United States: lessons from airline deregulation – the viability and benefi ts of competition 27


Box 9: Air cargo cartel fi ned by European Commission for price fi xing 28


Box 10: Examples of deregulation in freight transport 28


Box 11: Expected gains from the United States-Mexico bilateral trucking dispute 29


Box 12: Price fi xing in bus services from Singapore to Malaysia and southern Thailand 30


Box 13: Reform of the EU’s electricity sector 31


Box 14: China: reform of the energy sector 32


Box 15: Russian Federation: abuse of dominance in the power transmission market 33


Box 16: Pakistan: cartelization in liquefi ed petroleum gas market 34


Box 17: Forms of market entry – the United States Telecommunications Act of 1996 34


TABLES


Table 1: Non-competitive and competitive components of key infrastructure industries 16


Table 2: Sectoral and sub-sectoral breakdown of PPP projects, as of 2009 49


Table 3: Good governance in investment promotion 58


Table 4: Policy matrix for the promotion of foreign investment in infrastructure and effi ciency-seeking
manufacturing and services 63


Table 5: Major functions of an investment promotion agency 70


Table 6: Measuring national logistics performance 83


Table 7: Export distance, cost and time in landlocked countries 94


Table 8: Trade and transit procedures and practices 96


Table 9: Average tariffs on agricultural and industrial products, 2008 (%) 111


Table 10: Examples of products with high rates of duty 112


Table 11: GATS commitments by sector 123


Table 12: Anti-dumping measures initiated January 1995–June 2010, by reporting country and sector 126


Table 13: Common needs of exporters – TBT/SPS compliance requirements 131




x


Box 18: Peru: abuse and transfer of monopolistic power 35


Box 19: Chinese Taipei: abuse and transfer of monopolistic power 36


Box 20: Latvia: abuse of dominance 37


Box 21: Mexico: competition-related elements of the WTO Panel Report 38


Box 22: Global car production 52


Box 23: India: business service outsourcing creates value 53


Box 24: GATS – The relationship between trade and investment 56


Box 25: United Republic of Tanzania: private sector linkage programme 64


Box 26: Ireland: national linkage programmes 66


Box 27: Czech Republic: targeting the right technology investment 71


Box 28: Botswana: enabling investors to secure clearances and approvals 72


Box 29: Investment decision-making for Philips Electronics 78


Box 30: Ghana: customs reform and modernization 79


Box 31: Delays damage companies’ competitiveness 80


Box 32: Indonesia: pineapple producer faces inhibiting trade facilitation costs 81


Box 33: Yemen: poor trade facilitation hurts tuna exporters 82


Box 34: Infrastructure for trade facilitation 84


Box 35: Dealing with corruption 87


Box 36: Guidelines – pre-shipment inspections and destination inspections 89


Box 37: Tunisia: improved clearance time at the port of Radès 92


Box 38: Economic development in landlocked countries – ‘very, very tough’ 93


Box 39: A pragmatic solution – the West African Transit Agreement 97


Box 40: Rwanda: deregulating international transport 100


Box 41: Czech Republic, Hungary and Poland: privatization 101


Box 42: Malaysia: consultation mechanisms 103


Box 43: Circumvention through third-country assembly 116


Box 44: The Honda case 116


Box 45: Effects of EU and United States rules of origin on African exports of textiles and clothing 117


Box 46: Implications of the absence of multilateral rules 118


Box 47: Classifi cation of non-tariff measures (NTMs) 119


Box 48: Examples of the four modes of supply from the perspective of importing ‘country A’ 121


Box 49: Sample schedule of commitments – Arcadia 122


Box 50: Recent trends in NTMs 125


Box 51: Philippines: examples of NTMs affecting agriculture 129


Box 52: Defi ning technical barriers to trade and sanitary and phytosanitary measures 130


Box 53: Viet Nam: case study – private associations defend industry 131


Box 54: Sri Lanka: internationally recognized conformity infrastructure 133


Box 55: Thailand: global integration of the auto industry 135


Box 56: The SCM Agreement: options for a developing country 148


Box 57: xport competitiveness and duty drawback 151


Box 58: Common features of SEZs 154


Box 59: Costa Rica and Senegal: experiences 155


Box 60: Nepal: ensuring textile and apparel benefi t from SEZs 156


Box 61: Nepal creates a business-friendly investment climate 156


Box 62: Vanuatu promotes investments and exports 157


Box 63: Colombia encourages investment and export promotion 159




xi


ABBREVIATIONS


The following abbreviations are used:


ACP African, Caribbean and Pacifi c
ACV Agreement on Customs Valuation
AEO Authorized economic operator
AGOA African Growth and Opportunity Act
ASEAN Association of Southeast Asian Nations
CBU Completely built up
CKD Completely knocked down
CVD Countervailing duty
DI Destination inspection
DSL Digital Subscriber Line
ECOWAS Economic Community of West African States
EEA European Economic Area
EPZs Export processing zones
EU European Union
FDI Foreign direct investment
FTAs Free trade agreements
G20 Group of Twenty
GATS General Agreement on Trade in Services
GDP Gross domestic product
GSP Generalized System of Preferences
IATA International Air Transport Association
ICT Information and communications technology
IMF International Monetary Fund
IPA(s) Investment promotion agency(ies)
IPO Initial public offering
ISO International Organization for Standardization
IT Information technology
ITC International Trade Centre
LDCs Least developed countries
LMIC Low- and middle-income countries
LPG Liquefi ed petroleum gas
LPI Logistics Performance Index
MFN Most favoured nation
MNEs Multinational enterprises
MRL Maximum residue limit
NAFTA North American Free Trade Agreement
NTBs Non-tariff barriers
NTMs Non-tariff measures
OECD Organisation for Economic Co-operation and Development
PPP Public-private partnership
PSI Pre-shipment inspection
ROOs Rules of origin
RTAs Regional trade agreements
S&D Special and differential treatment
SCION Standard input-output norms
SEZs Special economic zones
SMEs Small and medium-sized enterprises
SPS Sanitary and phytosanitary
SW Single window
TBT Technical barriers to trade
TCMCS Coding System of Trade Control Measures
TRQs Tariff rate quotas
TTC Trade transaction cost
TTFA Trade and Transport Facilitation Audit
UNCTAD United Nations Conference on Trade and Development
VAT Value-added tax
WCO World Customs Organization
WTO World Trade Organization






INTRODUCTION 1


INTRODUCTION


TRADE-LED GROWTH ..................................................................................................................................... 2


DOMESTIC POLICY PRECONDITIONS ........................................................................................................ 2


TRADE POLICY OPTIONS FOR NATIONAL EXPORT COMPETITIVENESS ............................................. 3


THE TRADE POLICY AND EXPORT COMPETITIVENESS INTERFACE ...................................................... 6


DESIGNING TRADE POLICY FOR EXPORT COMPETITIVENESS ............................................................. 8




INTRODUCTION2


INTRODUCTION
Export performance has been critical for the economic development of many developing countries in recent
years. It has contributed to faster growth and poverty reduction. Exporting has produced economic benefi ts
deriving from effi ciency gains associated with exploiting comparative advantages and improved allocation of
scarce resources. There are also dynamic gains in the export sector driven by greater competition, greater
economies of scale, better use of capacity, dissemination of knowledge and know-how, and technological
progress.


TRADE-LED GROWTH
There are now many examples of developing countries that have been able to develop competitive export
industries and have been rewarded with remarkable economic growth: the Republic of Korea and Chinese
Taipei in the 1960s; Southeast Asian countries such as Thailand, Malaysia and Singapore in the 1970s; China
in the 1980s; and Central and South American countries in 1990s, such as Chile. These countries were also
able to tap into the phenomenal growth in international trade. Between 1950 and 2005 the volume of world
trade increased 27 times, from US$ 296 billion to over US$ 8 trillion.1 Despite international trade experiencing
a contraction of 12.2% in 20092 in the wake of the fi nancial crisis, trade is again on the upswing. This is
evidenced by a record-breaking 14.5% surge in the volume of exports in 2010.3


But what trade policies and regulations are needed to achieve export success? This book attempts to answer
this question by promoting a better understanding of trade policy, which can enable countries to achieve
export success. It is now widely recognized that to tackle the myriad constraints faced by exporters, trade
policy can no longer be limited to so-called ‘border measures’.4 Policymakers must address a wide range of
national issues, including creating an enabling business environment (competition, investment, institutions,
etc.); providing competitive access to infrastructure (energy, communications, transport, etc.); facilitating
reliable and effi cient movement of goods to destination markets; and ensuring product compliance with
quality and sanitary and phytosanitary standards.


Because of the success of forerunners of export-led economic growth, since the mid-1980s many other
developing and least developed countries (LDCs) have tried to emulate this model. There has been a
fundamental shift in development policy. The import substitution model encouraged countries to build up
their own domestic agricultural and manufacturing capacity and substitute domestically produced goods for
imports. This may have been important at an earlier stage of development in some countries, but also led to a
number of failures and slow growth, and a number of countries that had earlier followed an import-substitution
model have become more outward oriented. Today, the focus is on improving international competitiveness,
allowing the exploitation of dynamic export markets.


DOMESTIC POLICY PRECONDITIONS
To be export competitive among countries with similar resource endowments, a range of supporting domestic
policies is required. Many countries are unable to realize the full potential of export-led growth because


1 ‘The GATT/WTO at 60: WTO World Trade Report examines six decades of multilateralism in trade’, WTO Press Release 502,
4 December 2007. Available at: www.wto.org/english/news_e/pres07_e/pr502_e.htm
2 ‘Trade to expand by 9.5% in 2010 after a dismal 2009’, WTO reports, WTO Press Release 598, 26 March 2010.
Available at: www.wto.org/english/news_e/pres10_e/pr598_e.htm
3 ‘Trade growth to ease in 2011 but despite 2010 record surge, crisis hangover persists’, WTO Press Release 628, 7 April 2011.
Available at: www.wto.org/english/news_e/pres11_e/pr628_e.htm
4 Kaukab, R., ‘Inclusiveness of trade policy-making: Challenges and possible responses for better stakeholder participation’,
Commonwealth Trade Hot Topics, Issue 70, February 2010.




INTRODUCTION 3


domestic preconditions remain largely unfulfi lled. For example, LDCs still contribute just 1% to global trade.
Partial efforts have been made by many countries, but anything short of a comprehensive approach fails to
overcome the full range of constraints inhibiting export development.


A comprehensive and clearly articulated approach to trade policy and regulatory practices, with buy-in by all
stakeholders, is vital to the success of an export strategy. When different government departments handle
trade-related policies in isolation rather than in an integrated manner, it is diffi cult to develop and implement
a coherent policy framework to support an export strategy. A coherent trade policy framework bridges
government departments, public and private sector trade-related programmes, and private-sector actors.
The result is an overarching set of prioritized objectives prepared in a holistic fashion by bringing together all
relevant stakeholders and driven by the common goal of export impact for good.


This book aims to address these concerns by advancing a coherent trade policy framework. To address the
need to unleash the export potential of fi rms through trade policy ‘at the border’, ‘behind the border’ and
‘beyond the border’, this book advances prioritized objectives to tackle the overriding constraints faced by
both the public and private sectors.


This introduction explains how the International Trade Centre (ITC) prioritized the objectives discussed in
each chapter. It gives an overview of how trade policy options can infl uence national export competitiveness
and trade policy options. It goes on to presents a framework, created specifi cally for this book, to explain
the interface between trade policy and export competitiveness (see fi gure 1). The framework captures at a
glance the scope for trade policy to infl uence export competitiveness. It illustrates the need for specifi c trade
policy instruments to address constraints exporters face behind the border, at the border and beyond the
border, related to every stage of production and distribution of manufactured goods, agricultural products
and services for export. Some of these trade policy instruments that have multiple purposes in addressing
common, overlapping issues. Finally, this introduction provides a further explanation of how these objectives
are addressed in each chapter of the book.


TRADE POLICY OPTIONS FOR NATIONAL EXPORT
COMPETITIVENESS
Export competitiveness refers to ‘the capacity to produce, distribute and sell products and services as or
more effectively and effi ciently than is done by the relevant competitors’.5 In the current globalized trading
environment, the notion of competitiveness has taken on added importance and emerged as a key indicator
and determinant of ‘successful’ nations. Christian Ketels, an economist specialized in competitiveness
strategy, suggests: ‘Exports are an important diagnostic tool that can help signal whether more fundamental
conditions in the economy are right. The overall success on global export markets as well as the particular
pattern of industries that successfully export provides valuable ‘revealed’ information on underlying
competitiveness conditions.’6 He further adds that poor export performance is ‘an indication that there are
weaknesses that either limit the productivity of companies or negatively affect their ability to project their
capabilities on global markets. Exports in particular sectors give an indication that the location has a particular
set of strengths in its competitiveness fundamentals that are conducive to their success.’


National trade policy that promotes export competitiveness must fi nd ways to increase the ability to sell
domestically produced goods and services on global markets. Finding such ways requires the analysis
of factor endowments, institutional strengths and market opportunities. Strategies may then be shaped to
take account of overall national development and socio-economic ambitions, typically involving multiple
government departments, ministries and agencies, as well as the effective participation and collaboration of
the private sector. Often a strategy aimed solely at attaining export success may be politically unfeasible due
to incompatible competing interests that impact on the process of trade policy decision-making. Strategies


5 Ministry for Foreign Affairs of Finland. Available at: formin.fi nland.fi /public/default.aspx?nodeid=15265&contentlan=2&culture=en-
US
6 Ketels, C., ‘Export competitiveness: Reversing the logic’, paper prepared for World Bank’s Development Debate, ‘What do we mean
by Export Competitiveness and How do Countries Achieve it in an Uncertain World?’, Harvard Institute for Strategy and Competitiveness,
2010.




INTRODUCTION4


also need to be formulated within the international trading context to ensure compliance with commitments
under the World Trade Organization (WTO) and other regional and bilateral agreements. The main priority is
to ensure domestic policies and partners work in tandem to achieve export competitiveness.


IDENTIFYING DRIVERS FOR EXPORT SUCCESS


Consensus is emerging concerning the fundamental drivers of exports. Increasingly, it is understood that
broad reforms at the national level can have positive results for exporters. Global competitiveness frameworks
and fi rm-level value chain analyses that have emerged have been helpful in this respect.


Global competitiveness frameworks
The emergence of international competitiveness frameworks has been infl uential in pinpointing a wide range
of stumbling blocks to trade. Frameworks most relevant for trade policy include the following::


 The World Economic Forum’s Global Competitiveness Index outlines 12 pillars for global competitiveness:
– Institutions, infrastructure, the macro-economic environment and health and primary education are


basic requirements for competitiveness.


– Higher education and training, goods market effi ciency, labour market effi ciency, fi nancial market
development, technological readiness and market size are essential to enhance effi ciency.


– Business sophistication and innovation are indicators of innovation-driven economies.


 The World Economic Forum’s Enabling Trade Index is also relevant. The index measures how economies
have developed institutions, policies and services to facilitate trade, and groups its indices around:


– Market access


– Border administration


– Transport and communications infrastructure


– Business environment.


 The World Bank’s Doing Business Report has also emerged as a recognized framework to measure
progress related to trade policy and export competitiveness. Its 11 indices measure ease with:


– Starting a business


– Dealing with construction permits


– Getting electricity


– Registering property


– Getting credit


– Protecting investors


– Paying taxes


– Trading across borders


– Enforcing contracts


– Resolving insolvency.


These frameworks help trade policy reformers to assess the trading and business environment of their
country against international best practices. This enables them to focus on specifi c areas to reform that will
improve their country’s ranking on international indices and, at the same time, strengthen competitiveness
and increase exports.


However, while international frameworks are useful to assess competitiveness, their effectiveness is limited
for the following reasons:7


 They focus on broad economic competitiveness rather than export competitiveness. As such, they cover
some issues that may be less critical for the export environment (or too far upstream) and fail to go into
suffi cient detail on some issues that are particularly critical for exports.


7 Ibid.




INTRODUCTION 5


 Most analyses of export competitiveness uncover a series of issues that a country would need to address
to achieve more success in export markets. This is to be expected, as the factors that constrain exports
are generally multiple and simultaneous. But it is seldom fi nancially feasible, operationally practical, or
politically possible to address all these issues concurrently. In short, there is a need to turn an assessment
into practical and actionable policy.


The value chain approach
International frameworks generally assess and expose constraints rather than propose ‘remedies’ or policy
recommendations. Further analytical work is required at the country level to devise more targeted policy
responses. Value chain analysis can be used as a framework to complement global competitiveness
benchmarking.


The value chain approach analyses each link in the ‘chain of activity’ at the sector level. A value chain for any
product or service extends across research and development, raw materials supply and production, delivery
to international buyers, and ultimately to disposal and recycling.8


By ‘analysing the costs of doing business through a specifi c product or industry lens, value chain analysis
facilitates the identifi cation of binding constraints to growth and competitiveness and the effective targeting
of institutional and policy-related issues, at the sector and economy-wide levels alike’.9


How is value chain analysis for national reforms to trade policy? The fi ndings of a report from the World Bank
Group suggest that the reform agenda that typically emerges from the value chain analysis relates to three
broad core areas:10


 Product or services market issues – trade policy, competition policy, price distortions, subsidies, licensing,
standards for products and services, customs, logistics, property rights, and the regulatory framework.


 Factor market issues – wages, capital charges, utility market issues, labour market rigidities, land price
and zoning.


 Market-related issues – market diversifi cation, research and development, product or service diversifi cation
and supplier linkages.


Importantly, the fi ndings suggest that the obstacles to trading are typically not unique to one particular
sector, but affect exporters from diverse sectors. These common factors suggest that fi rm productivity greatly
depends upon public inputs to production and well-functioning markets in which fi rms operate. Government
policies either contribute to or constrain the creation of a business-friendly environment in which fi rms can
effi ciently obtain and sell their inputs.


The multifaceted nature of export competitiveness requires a clear understanding of the wide range of
contributing and constraining factors. Constraints are likely to be multiple and intertwined, tied to cross–
cutting issues such as good governance; infrastructure; product standards, certifi cation and corresponding
regulatory requirements for the provision of services; access to fi nance; and fi rm linkages.


THE TRADE POLICY AND EXPORT COMPETITIVENESS
INTERFACE
The list of constraints that prevent a country from expanding trade is very long. Most developing countries
are unable to make wholesale reform changes simultaneously. First, this is due to a failure to create the
necessary constituency for reform. Because policymaking requires buy-in from a diverse range of stakeholders
with competing views, they need to be convinced of the rationale for reform. Second, many countries are
constrained by a lack of fi nancial resources to carry out often-expensive reforms.


8 ‘Value Chain Analysis: A Strategy to Increase Export Earnings’, International Trade Forum – Issue 1, ITC, 2003.
9 Moving toward competitiveness: A value-chain approach’, World Bank, 2007.
Available at: www.ifc.org/ifcext/fi as.nsf/AttachmentsByTitle/MovingTowardCompetitiveness/$FILE/Value+Chain+Manual.pdf
10 Ibid.




INTRODUCTION6


As a result, it is critical to galvanize stakeholders around overarching constraints, which if addressed would
have the greatest impact on expanding trade and promoting economic growth. Because country situations
are so diverse, there is no singular trade policy framework that can be advocated globally. However, there are
some similar, fundamental components.


The ITC trade policy and export competitiveness framework developed for this book and detailed in fi gure
1 is intended to assist readers in identifying overriding objectives and suitable trade policy instruments to
address constraints. The framework is intended to enable policymakers, private sector organizations and
entrepreneurs to take a holistic approach to national trade policy reforms. Reforms should be implemented
with a wide range of instruments aligned to support enterprises in achieving export competitiveness and
success. The framework is the analytical basis for this book.


THE PRODUCTION SUPPLY CHAIN


The top half of fi gure 1 shows the most typical inputs fi rms require across the entire supply chain:


 It begins with the need for fi rms to access raw materials and intermediate goods for production. Here the
most cost competitive and reliable source of supplies is sought, either domestically or abroad.


 Next, inputs are transported to the fi rm via customs, distribution warehouses and overland (road, railway,
etc.). Some inputs may be ‘transported’ via telecommunication or other modes of cross-border trade
(outsourcing services).


 Inputs are then processed into agricultural or industrial products or services.


 Finally, the products or services are ‘transported’ to destination markets. To transport goods to the
border fi rms are increasingly reliant upon effi cient logistics functions, for which there is a need for good
communication systems (telecommunications and Internet). Good communications systems are also
necessary for the export of services typically characterized as ‘business process outsourcing’. All products,
whether agricultural or manufactured, must conform to technical barriers to trade (TBT) requirements.
Agricultural products must conform to sanitary and phytosanitary (SPS) requirements. Services may need
to meet regulatory requirements.


Firms must compete with both domestic and foreign fi rms as providers of goods or services to destination
markets. Cost, access and reliability of inputs is inevitably a main concern of fi rms endeavouring to be
competitively priced and reliable providers of goods. At the same time, non-competitiveness in any of the four
areas discussed earlier can make exporting an unrealistic option for fi rms.


TRADE POLICY INSTRUMENTS


The bottom half of fi gure 1 details typical trade policy instruments that governments can use to support
the competitiveness of fi rms at each stage of the supply chain. These instruments encompass a broader
understanding of trade policy responses ‘at the border’, ‘behind the border’ and ‘beyond the border’.
Governments can use some instruments to target specifi c areas of the supply chain that would boost fi rm
competitiveness. Other instruments are cross-cutting and affect multiple areas of the supply chain through
policies that shape the country’s trading and economic landscape.


An example of the former is the use of duty drawback schemes to ‘provide exporters of manufactured
goods with imported inputs at world prices and thus increasing their profi tability, while maintaining the
protection for domestic industries that compete with imports’.11 Such policies are specifi cally intended to
achieve access to inputs at competitive prices. Similarly, mutual recognition of academic qualifi cations is
an important determinant of export of professional services (under the broader area of trade in services).


11 Export Competitiveness and Duty Drawback, World Bank: web.worldbank.org/WBSITE/EXTERNAL/TOPICS/TRADE/0,,contentMDK:2
0540524~pagePK:148956~piPK:216618~theSitePK:239071,00.html




INTRODUCTION 7


Here governments – ideally working in close cooperation with professional bodies – can negotiate mutual
recognition agreements with their trading partners with foreign professional credentials so as to enable
greater exporting of these services.


In terms of cross-cutting policy instruments, overall improvements in transport, communications, port
services and distribution can have an impact at various stages of the supply chain. For example, transport
brings goods to the border or to the port, but also affects production costs.


By mapping the trade policy instruments that impact each stage of the supply chain it becomes clear that
the same trade policy instruments regularly affect different stages. Accordingly, trade policy instruments can
be classifi ed into a set of overarching objectives. These objectives are the subject of the fi ve chapters of this
book.


 Create competitive infrastructure services
 Promote exports and foreign investment
 Move goods across borders effectively
 Address export market issues
 Improve inputs and capital goods.


Figure 1: The trade policy/export competitiveness interface


Source: ITC.


Agriculture
Manufacturing


Services
Raw materials


Intermediate goods


Transport
Communication


Finance


Energy
Transport


Communication
Finance


Ports
SPS and other


technical
standards


Distribution
Ports


S
up


pl
y


ch
ai


n
Tr


ad
e


po
lic


y
in


st
ru


m
en


ts


At the border Behind the border At the border Beyond the border


‡Tariffs
‡Duty drawbacks
‡Trade facilitation
‡Rules of origin
‡Custom
valuation


COST OF INPUTS


‡Regulatory
systems
‡Efficiency of
services
providers
‡Market access
to foreign
services
suppliers
‡Competition
policy


INFRASTRUCTURE
SERVICES COSTS


‡FDI openness
‡Export /
investment links
‡Tariffs on capital
goods
‡Protection of
property rights
‡Good
governance
‡ Labour market


BUSINESS
ENVIRONMENT


‡Conformity
assessment
‡Mutual
recognition/
equivalence
agreements


COMPLIANCE


‡Efficiency of
port services
‡Trade
facilitation


EXPORT COSTS


‡ Market access
- Agriculture
- Manufactured
goods


- Services
‡ Export subsidies/


domestic support
in agriculture
‡ Non-tariff


measures
‡ Preferential trade


regimes/Regional
integration


MARKET ACCESSSTANDARDS


‡SPS/TBT
compliance




INTRODUCTION8


DESIGNING TRADE POLICY FOR EXPORT
COMPETITIVENESS


CREATE COMPETITIVE INFRASTRUCTURE SERVICES


Chapter 1 discusses the positive effects that competitive infrastructure services can provide for businesses.
It focuses on issues concerning the competitive structure and behaviour of fi rms involved in the delivery of
infrastructure services. It also reviews the role of public initiatives to enhance competition of infrastructure
services through restructuring and applying related rules.


Numerous examples illustrate the impact of state monopolies and abuses of a dominant position in raising the
input costs in developing countries, thereby making it more diffi cult for them to export. The chapter explains
how ineffi cient monopolies can be restructured and competition rules applied to revitalize the performance of
infrastructure sectors. Attention is also given to the role that business associations and individual businesses
can play in guiding policy innovation and implementation.


PROMOTE EXPORTS AND FOREIGN INVESTMENT


Chapter 2 explores how foreign direct investment drives the global economy and how it may enhance a
country’s export performance. A discussion follows on the policy implications of linkages between export
performance and foreign direct investment, as well as recommendations to promote export growth by
adopting the ‘right’ policies concerning foreign investment.


MOVE GOODS ACROSS BORDERS EFFECTIVELY


The importance of effective trade facilitation for promoting exports is stressed in chapter 3. Effective trade
facilitation increases exporter competitiveness by allowing exporters to trade goods and services on time and
with low transaction costs. Key components of a ‘broadened approach’ to trade facilitation are discussed,
including customs (clearance, risk management, coordination among border agencies, etc.), competency of
private and public logistics services providers, and logistics and competitiveness.


Also presented are best practices to achieve the main objectives of trade facilitation, which are to minimize
the transaction costs and complexity of international trade for businesses while maintaining effi cient and
effective levels of compliance with national and international requirements.


ADDRESS EXPORT MARKET ISSUES


Chapter 4 emphasizes that the roadmap to a successful export effort requires identifying market opportunities
and conditions of access, followed by developing a programme at the government and private-sector levels
to take advantage of the opportunities. The chapter focuses on what exporters need to know about overseas
markets, how to obtain that information, and how to exploit the opportunities that are identifi ed.


Advice is also provided on how exporters can develop a strategy to address these various, changing
situations to win markets. There is also a discussion on technical barriers to trade, which have been identifi ed
in recent surveys as a key concern of exporters.


IMPROVE INPUTS AND CAPITAL GOODS


Given equal terms of access, competitiveness in a foreign market depends on being able to deliver at a fi nal
price that is lower than that of competitors, taking into account conditions of sale, quality, delivery times and,
where appropriate, after-sales services.


This fi nal price of the good or service is itself a composite of production costs as well as delivery costs, which
in some instances may be even higher than the costs of production. Chapter 5 explores strategies and policy
options to ensure that fi rms are able to access inputs and capital goods at competitive prices.








CHAPTER (N°)


CHAPTER TITLE
SUBTITLE


TABLE OF CONTENTS FOR CHAPTER ......................................................................................................................p


TABLE OF CONTENTS FOR CHAPTER ................................................................................................................................................. P


TABLE OF CONTENTS FOR CHAPTER ......................................................................................................................p


TABLE OF CONTENTS FOR CHAPTER ......................................................................................................................p


TABLE OF CONTENTS FOR CHAPTER ......................................................................................................................p


1


REA COMPETITIVE
INFRASTRUCTURE SERVICES


INTRODUCTION............................................................................................................................................. 12


RESTRUCTURING STATE MONOPOLIES TO IMPROVE PERFORMANCE ............................................. 15


THE ROLE OF BUSINESS ORGANIZATIONS AND ASSOCIATIONS ...................................................... 19


THE TRANSPORTATION SECTOR ................................................................................................................ 20


THE ENERGY SECTOR ................................................................................................................................. 29


TELECOMMUNICATIONS ............................................................................................................................. 33


CONCLUSION ................................................................................................................................................ 38




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES12


CREATE COMPETITIVE
INFRASTRUCTURE SERVICES


INTRODUCTION
Infrastructure services – including transportation, energy and telecommunications – account for a large
proportion of the costs of export-oriented and other developing and transition economy businesses. The term
‘infrastructure’ typically refers to ‘the basic physical and organizational structures and facilities (e.g. buildings,
roads, power supplies) needed for the operation of a society or enterprise’.1 The effi cient organization and
delivery of infrastructure services is vital to the export competitiveness and success of businesses. For this
reason, infrastructure investment is seen as a key to enhance development prospects of low-income and
middle-income countries.


DEVELOPMENT ASSISTANCE FOR INFRASTRUCTURE


As a result, providing infrastructure services has emerged as a primary focus of development assistance.
Infrastructure now accounts for about 40% of the World Bank’s commitments.2 Sound infrastructure
investments can make a big difference to countries’ growth prospects. For example, in recent years, enhanced
public investment in infrastructure has been a key factor underpinning rapid growth and a decrease in trade
costs in the emerging economies of Asia.3


Several issues are critical to successful infrastructure.


 Finance. Because infrastructure is often provided through public investment and expenditure, the
adequacy of public fi nances and the effi ciency of their allocation is an important factor. Frequently, access
to private fi nancing – including foreign direct investment – as a supplement or alternative to public funds
is also a concern.


 Public procurement. A related factor is the effi ciency and competitiveness of public procurement methods
and institutions.4


 Technology. Access to the best available technology, whether sourced from home or abroad and whether
fi nanced by public or private capital, is another crucial factor.


FOCUS ON FIRMS DELIVERING INFRASTRUCTURE SERVICES


This chapter focuses on issues concerning the competitive structure and behaviour of fi rms involved in
the delivery of public and business infrastructure services. Also discussed is the role of public initiatives
to enhance competition in providing these services through restructuring and application of related rules.
Attention is given to the role that business associations and individual businesses can play in guiding policy
innovation and implementation in this area.


The structure and behaviour of fi rms involved in infrastructure supply, related rules and public policies and their
implications for developing country businesses is just one aspect of the discussion on public infrastructure
as a development tool. Historically, in both developed and developing economies, monopolies often


1 As defi ned by the Online Compact Oxford Dictionary. Available at: www.askoxford.com/concise_oed/infrastructure
2 For further information on the World Bank’s infrastructure-related activities: web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSD
NET/0,,contentMDK:22493665~menuPK:6395187~pagePK:64885161~piPK:64884432~theSitePK:5929282,00.html
3 Brooks, D.H. and D. Hummels. Infrastructure’s role in lowering Asia’s trade costs: Building for trade, Cheltenham, Edward Elgar, 2009.
4 Anderson, R.D., W.E. Kovacic and A.C. Müller, ‘Ensuring integrity and competition in public procurement markets: a dual challenge
for good governance’. In Arrowsmith, S., R.D. Anderson, The WTO Regime on Government Procurement: Challenge and Reform, Chapter
22, pp. 3-58, Cambridge University Press, 2011.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 13


provided key infrastructure services, whether in the fi elds of transportation, energy or telecommunications.
Occasionally these monopolies have emerged through monopolistic or predatory behaviour by the fi rms
themselves, but most often they have been established through legislation or by government grant.


Frequently, the combination of monopoly power and public ownership has resulted in less-than-satisfactory
performance, as manifested by:


 Higher-than-competitive rates;
 Lack of adequate service offerings;
 Lack of innovation or readiness to adapt to improvements in technology as they become available.


This has directly undermined the competitiveness of developing country business users. Consequently, there
has been a trend to ‘de-monopolize’ such industries and ensure fair competition to the benefi t of users, as
illustrated by the various examples in this chapter.5


PRIVATIZING IS NOT ENOUGH


In many cases, fi rst recourse of governments has been to privatize the relevant entities, seeking thereby
to invigorate and infuse them with the dynamism that is often associated with private ownership. This has
been particularly true in the transition economies of Central and Eastern Europe, as well as in developing
economies in Africa, Asia and Latin America. However, experience has shown that this can be a trap. Merely
privatizing state-owned monopolies typically will not yield improved performance if measures are not also
taken to expose such enterprises to competitive market forces.6


Experts increasingly believe that exposing infrastructure service providers to competition is at least as
important to improving performance as the injection of private capital fi nancing, and should, where possible,
precede rather than follow privatization. It may be easy to make such a recommendation, but it is harder
to follow it in practice. Even in developed economies, reforms have tended to proceed in an incremental
fashion, seeking practical solutions to particular problems that have presented themselves, and with much
‘learning by doing’, rather than following an overall ‘rational plan’.


Where privatization has already occurred, measures to introduce competition remain important and should
still be pursued. However, they may be more diffi cult to implement as the private monopoly will have a clear
interest in lobbying the government to delay or avoid measures that may jeopardize its market position.


An important element of the policy response to a lack of competition in public infrastructure sectors is either
adopting or maintaining a competition or antitrust statute. Such a statute is essential to prevent and remedy
common in anti-competitive practices, such as abuses of a dominant position or the establishment of price
fi xing cartels that raise costs for infrastructure customers. In a number of instances, competition laws,
typically through the application of their provisions regarding abuses of a dominant position, can be used as
a platform to impose necessary restructuring and establish competitive access regimes.7


However, in some cases the remedies available through competition law enforcement may be insuffi cient
and other measures may be needed to effectively address monopoly issues in infrastructure industries. An
example is repealing or reforming statutes or regulations that unnecessarily limit entry to particular markets.
Another is enacting new legislation to restructure – break up – established monopoly enterprises to enable


5 Beato, P. and J. Laffont. ‘Competition in public utilities in developing countries’, Inter-American Development Bank, Washington, D.C.,
Sustainable Development Department, Technical Papers Series, 2002. Available at: cdi.mecon.gov.ar/biblio/docelec/MU2007.pdf


Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank, Washington, D.C., 2004.


François, J. and M. Manchin, ‘Institutions, Infrastructure, and Trade,’ Policy Research Working Paper No. 4152, World Bank, Washington,
D.C., 2007.
6 Ibid. and Anderson, D. Robert, F. Jenny, ‘Competition Policy, Economic Development and the Role of a Possible Multilateral Framework
on Competition Policy: Insights from the WTO Working Group on Trade and Competition Policy’, in Medalla, E., ed., Competition Policy in
East Asia, Chapter 4, Routledge, 2005.
7 Kovacic, W.E., ‘Designing Antitrust Remedies for Dominant Firm Misconduct’, vol. 31, Connecticut Law Review, pp. 1285-1319, 1999.


Anderson, R.D. and A. Heimler, ‘Abuse of Dominant Position: Enforcement Issues and Approaches for Developing Countries’, in Dhall, V.
(ed.), Competition Law Today: Concepts, Issues and the Law in Practice, Chapter 2, pp. 59-92, New Delhi, Oxford University Press, 2007.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES14


competition, for example by establishing industry-specifi c competitive access regimes. Such measures may
be adopted either as an alternative to, in conjunction with, or as a follow-up to competition law enforcement
proceedings.


For example, the far-reaching reform of the United States telecommunication services was to a large extent
put in motion by the 1982 consent settlement in an antitrust case, United States versus AT&T. Nevertheless,
extensive legislative action was required to complete the process. This issue is discussed further in this
chapter, in the section on telecommunications. A complementary relationship between competition law
enforcement actions and legislative reforms in the reform of public infrastructure sectors has also been
evident in the European Union (EU).8


While measures to inject competition into moribund infrastructure monopolies have most often been
implemented at the national level, in many cases there is also an interface with international trade agreements
and cooperation. For example, in Africa, the creation of common regional markets may be a necessary
step to establish effective competition in some elements of the transportation sector, due in part to a lack
of adequate demand to support multiple service providers in some individual countries. Similarly, regional
cooperation can be a key factor in facilitating competition in energy markets. Trade commitments, including in
the 1997 World Trade Organization (WTO) negotiations on Basic Telecommunications Services, have played
an important role in reinforcing the effectiveness of pro-competitive reforms in the telecommunications sector.


Using this chapter
The specifi c sectors examined in this chapter include:


 Transportation, including port facilities, railways, air and road transport;
 Energy, including electricity and natural gas;
 Telecommunications.


This chapter explores infrastructure competitiveness issues from the vantage of developing and transition
economy infrastructure-user fi rms, with particular attention to the interests of export-oriented fi rms. It provides
numerous examples of the impact of state monopolies and abuses of a dominant position – whether by
private or publicly owned companies – in raising the input costs of developing country businesses, thereby
making it more diffi cult for them to participate in export markets. The chapter also explains and provides
examples of how ineffi cient monopolies can be restructured and competition rules applied to revitalize and
enhance the performance of infrastructure sectors.


The aim of the chapter is not to provide a textbook for legal, economic or judicial experts to develop particular
cases within competition authorities or adjudicatory bodies, but rather to show policymakers the importance
of policy for infrastructure issues related to the competitiveness of developing and transition economy
businesses. Another aim is to encourage businesses, their associations, and other relevant bodies, such
as consumer and public interest organizations, to provide appropriate input to the policy solutions adopted.


This chapter presents background for approaches to competitive restructuring and competitive access to
remaining monopolies that cut across the various sectors. A key related point concerns the need for input
from developing country businesses and their associations in the design and application of relevant policies
and initiatives.


Concerning the relationship between the infrastructure issues in this chapter and the domain of trade policy,
for the most part, the measures and initiatives are not legally mandated by trade agreements. Rather, they fall
into the category of measures that countries may take to ensure that their participation in trade-liberalizing
agreements and arrangements is not only legally compliant, but also successful in generating benefi ts for
citizens.


There are exceptions. As discussed in this chapter, maintaining ‘competitive safeguards’ in relation to basic
telecommunications services is a requirement of the Reference Paper on regulatory principles that has


8 Canada’s experience with these issues is discussed in: Anderson, R. D., A. Hollander and J. Monteiro, W.T. Stanbury, ‘Competition
Policy and Regulatory Reform in Canada, 1986-1997’, Review of Industrial Organization 13, pp. 177-204, 1998.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 15


been adopted by most WTO members. Sometimes the most effective tool to enhance competition, whether
in infrastructure or other sectors, is trade liberalization, which entails removing legal or other barriers to
participation in goods or services markets by ‘foreign’ fi rms.


In many cases, trade liberalization alone fails to generate sustained development and growth. This can be
traced to a failure to introduce complementary domestic policy reforms.9 Countries and their businesses are
best positioned to take advantage of the potential benefi ts of trade liberalization when steps are taken to:


 Reduce costs and enhance the effi ciency of infrastructure sectors such as telecommunications, energy
and transportation


 Promote fl exibility by eliminating artifi cial restrictions on entry, exit and pricing in manufacturing and other
industries


 Establish and strengthen incentives for investment and innovation
 Create effi cient management structures
 Improve productivity.


The views and suggestions set out in this chapter are offered in this spirit.


RESTRUCTURING STATE MONOPOLIES TO IMPROVE
PERFORMANCE
Addressing sub-optimal performance in infrastructure sectors due to lack of competition can require a variety
of remedial measures. The privatization of relevant entities can be part of the solution. But the mere privatization
of relevant entities will not yield improved performance if measures are not taken to expose former monopoly
enterprises to competitive market forces. The result could be to substitute private monopolies for public ones,
often with no improvement or even a worsening of performance from the standpoint of users.


USING COMPETITION LAW AND POLICY


In this context, competition law and policy have vital roles to play. A competition law is essential to prevent
common anti-competitive practices, such as abuses of a dominant position or establishing price-fi xing
cartels that raise costs to consumers and business users. This is no less important in public infrastructure
than in other sectors; arguably it is more so, because the effects of excessive prices or poor quality service
in infrastructure sectors will be felt across the national economy.


Beyond applying competition law to harmful practices such as cartels, it may be necessary to consider the
comprehensive restructuring of established monopoly enterprises/dominant fi rms. It may also be necessary
to enact competitive access regimes that, for example, authorize competing electrical energy suppliers to
connect to a power grid, enable trains operated by different enterprises to run on the same sets of rails,
or grant competing transportation service providers equal access to port or airport facilities. The repeal of
legislation limiting entry or granting legal monopoly status may also need to be considered.


Essential information is provided on the topic of competitive restructuring, particularly the forced separation
of monopoly and competitive business segments in a particular sector. Information is provided on the
closely related topic of access pricing. Also discussed is the continuing need for effective enforcement
of general provisions of competition law, even after appropriate restructuring has taken place. Finally, this
section explains the important role that businesses and other associations, such as consumer organizations
and public interest groups, can play in reinforcing the case for user-friendly reforms and in the ongoing
application of relevant rules in ways that benefi t export-oriented businesses.


9 This is discussed further by Osakwe, C., Poverty Reduction and Development: the interaction of trade, macroeconomic and regulatory
policies, Tenth Joseph Mubiru Memorial Lecture, organized by the Bank of Uganda, 14 December 2001.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES16


ISSUES IN COMPETITIVE RESTRUCTURING


Over the past two to three decades, governments in developed and developing countries have progressively
implemented extensive reforms aimed at improving the performance of public infrastructure sectors. A
common strategy for improvement has been the introduction of private sector participation in formerly state-
owned infrastructure markets, such as the transportation, energy, telecommunications and other sectors.
However, for private sector participation to result in improved performance, creating competition is an
essential complement to other reforms.


A necessary basis for reforms implemented in many countries to create new possibilities for competition
has been the realization that the majority of infrastructure sectors, even if they have some monopoly
elements, normally are not ‘monolithic natural monopolies’.10 Rather, such sectors typically comprise distinct
activities, some with natural monopoly characteristics, but others that may be perfectly capable of supporting
competition. A good example is the electricity sector, which in the past was widely assumed to be a natural
monopoly. It is now recognized that although building and operating power transmission facilities may be
most effi ciently done by a single fi rm, in general there is no technical barrier that prevents power for the grid
from being supplied by multiple electricity generating companies operating in competition with each other.
However, as discussed later in this chapter, introducing competition into previously monopolized electricity
sectors is a complex and challenging process.


Another example is that while decades ago it was believed that the then-telephone industry was best served
by a single, vertically integrated enterprise supplying most or all related services, today most segments of
the industry in most countries have to one degree or another been exposed to competition between multiple
service providers. At the same time, there are continuing issues regarding the terms of access to common
facilities, for example, the ‘local loop’ that may still have natural monopoly characteristics.


POLICY OPTIONS


Table 1 summarizes information on competition possibilities in fi ve infrastructure sectors. If implemented
successfully, these options can generate major savings for businesses and other users.


The challenge for policymakers is to decide, on the basis of the best available information, which of these
possibilities for competition can be realized most practically in the context of their national geographical,
institutional and practical constraints. This is a challenge that calls for substantial input from business users,
on the basis of their practical experience and knowledge, in addition to public interest organizations and
any advisory bodies with specialized knowledge of the sectors concerned. In some cases, authorities may
wish to draw upon the services of consulting fi rms having specialized knowledge of issues and technical
constraints in the relevant sectors.


Table 1: Non-competitive and competitive components of key infrastructure industries


Industry
Activities that are usually not


competitive
Activities that can be or are sometimes


are competitive


Electricity
High-voltage transmission and local
distribution


Generation and supply to fi nal customers


Gas
High-pressure transmission and local
distribution


Production, supply to fi nal customers and
storage


Telecommunications Local residential telephony or local loop
Long-distance, mobile and value-added
services


Railways Short-haul track and signalling infrastructure Train operations and maintenance facilities


Air transport services Airport facilities
Aircraft operations, maintenance facilities, and
commercial activities


Source: Table adapted from Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank,
Washington, D.C., 2004. Table 1.2. See also: Gönenç, R., M. Maher, G. Nicoletti, ‘The Implementation and the Effects of Regulatory
Reform: Past Experience and Current Issues’, OECD Economic Studies 32(11), Organisation for Economic Co-operation and
Development, 2001.


10 A natural monopoly is an industry that is most effi ciently served by a single fi rm (i.e. a monopoly) due to the cost structure of the
industry.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 17


In 2001, the Organisation for Economic Co-operation and Development (OECD) Council adopted a
recommendation concerning structural separation in regulated industries (see box 1 below).11 The
recommendation recognizes the potential usefulness of the following:


 Structural reforms, for example separation of potentially competitive segments of a particular sector (e.g.
train operation or power generation) from other segments that constitute genuine natural monopolies, like
railroad track facilities or power transmission lines.


 Behavioural measures, such as regulation, can be tools to stimulate competition for the purpose of
controlling costs, promoting innovation and enhancing the quality of the service, to the benefi t of users.


At the same time, the OECD recommends that neither structural reforms nor regulation are without attendant
costs. Rather than recommending a blanket approach to the implementation of such reforms across countries,
it recommends a careful case-by-case approach, involving the weighing of potential benefi ts and costs.
Different countries – both developed and developing – have employed a variety of approaches at different
times and across different sectors, for example energy as opposed to transportation or telecommunications.
This is an important factor highlighting the need for input from business and other advisory bodies to
implement solutions in particular cases.


In 2006, the OECD Recommendation on Structural Separation was extensively reviewed. The review found that
structural separation, as the stronger means of introducing competition, has important general advantages
over behavioural measures:


 ‘Separation limits the need for certain regulations that are diffi cult, costly and only partially effective
 Separation may stimulate innovation and effi ciency in the competitive services, and
 Separation helps to eliminate cross-subsidization.’


However, the review also found that these advantages must be balanced against possible disadvantages,
in particular:


 ‘Separation [sometimes] forces a loss of economies of scale from integrated operation
 Transaction costs for consumers [may] increase
 Direct costs of separation can be high
 System reliability may fall when investments are not made jointly, and
 Accountability for interface problems may be diffi cult to assign.’


Overall, the OECD study fi nds that ‘costs and benefi ts differ from sector to sector and from country to country,
so uniform recommendations are not possible’.


There is an important qualifi cation to the discussion on structural separation of competitive and non-competitive
business segments. In some cases it may not be necessary to undertake such a ‘vertical’ separation of
functions if all components of the industry are potentially subject to competition. For example, as discussed
in the context of the rail transport sector, rather than separating the ownership and management of track
facilities and trains, some countries have chosen the path of allowing separate integrated train networks to
compete with each other, known as ‘horizontal competition’.


In yet other cases, the relevant authorities may consider that the costs involved in either vertical or horizontal
restructuring of incumbent fi rms may be excessive in relation to the benefi ts to be achieved; they may decide
to continue to allow the dominance of key infrastructure sectors by vertically integrated monopolies. However,
this choice precludes the achievement of the signifi cant gains in effi ciency that experience has shown can be
achieved by introducing well-tailored pro-competition reforms.


Again, the context-specifi c nature of the choices to be made highlights the importance of specialized
knowledge of conditions prevailing in particular markets and direct input from end users (i.e. developing and
transition economy businesses) in the development and implementation of the solutions to be adopted in
particular cases.


11 Recommendation of the OECD Council concerning Structural Separation in Regulated Industries, 26 April 2001 – C(2001)78. Available
at: acts.oecd.org/Instruments/ShowInstrumentView.aspx?InstrumentID=194&InstrumentPID=190&Lang=en&Book=False




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES18


ACCESS TO MONOPOLY FACILITIES


An issue closely related to structural separation that complicates the implementation of this approach
concerns the pricing of access by the competitive segments of an industry to monopoly facilities that remain
even after appropriate restructuring has taken place. A ‘competitive access regime’ may be needed, for
example to authorize competing electrical energy suppliers to connect to a power grid, enable trains operated
by different enterprises to run on the same sets of rails, or grant competing transportation service providers
equal access to port or airport facilities. However, setting appropriate price levels for this purpose is by no
means an easy task.


A vexing task for regulators is to design terms and conditions of access to bottleneck infrastructure facilities
by competing service providers. These facilities are essential inputs in the production or delivery of fi nal
products, and cannot be economically duplicated.


Examples include the local loop (‘fi nal mile’) in telecommunications, the transmission grid in electricity,
the network of pipelines in natural gas, and the track in railroads. Access policy is the keystone of the
contemporary response to the problem of residual monopoly in infrastructure. Indeed, it is at the core of
discussions of ways to facilitate competitive entry into activities that have traditionally been run by franchised
monopolies.


The access issue is especially diffi cult in situations where several fi rms compete in the sale of a fi nal product,
but one is the monopoly owner of an input that is indispensable in the supply of that product.12


The pricing of access to essential monopoly facilities is a technical issue that will not be discussed in detail
here. In brief, economic literature and competition law enforcement and regulatory experience offer two main


12 Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank, Washington, D.C., 2004.


Box 1: OECD recommendation on separating competitive and natural monopoly
functions


In its recommendation, the OECD Council identifi ed two types of measures that may be taken to introduce or
enhance competition in regulated sectors: (i) structural measures and (ii) behavioural measures. While structural
measures ‘primarily address the incentives of the regulated fi rm (such as vertical ownership separation or club or
joint ownership)’, behavioural measures ‘primarily address the ability of the regulated fi rm to deny access (such
as access regulation)’.


The OECD recommends the careful consideration of the balance of benefi ts and of the different types of measures
in choosing which should be implemented. The main part of the recommendation reads as follows:


“When faced with a situation in which a regulated fi rm is or may in the future be operating simultaneously in a
non-competitive activity and a potentially competitive complementary activity, Member countries should carefully
balance the benefi ts and costs of structural measures against the benefi ts and costs of behavioural measures.


The benefi ts and costs to be balanced include the effects on competition, effects on the quality and cost of
regulation, the transition costs of structural modifi cations and the economic and public benefi ts of vertical
integration, based on the economic characteristics of the industry in the country under review.


The benefi ts and costs to be balanced should be those recognized by the relevant agency(ies) including the
competition authority, based on principles defi ned by the member country. This balancing should occur especially
in the context of privatization, liberalization or regulatory reform.”


Source: Recommendation of the OECD Council concerning Structural Separation in Regulated Industries, 26 April 2001 –
C(2001)78. Available at: acts.oecd.org/Instruments/ShowInstrumentView.aspx?InstrumentID=194&InstrumentPID=190&Lang=
en&Book=False




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 19


approaches to the effi cient pricing of such essential input facilities: (i) the ‘effi cient component pricing rule’;
and (ii) ‘Ramsey pricing’ – a form of price discrimination where different classes of users are charged different
prices according to their respective demand elasticity.


Each of these approaches seeks to specify prices for access that prevent monopolistic service providers
from appropriating excessive rents for themselves, while properly refl ecting the economic costs of access
and maintaining incentives for effi cient investments in common (monopoly) facilities. Variations on these two
main approaches have also been proposed, and issues concerning the use of ‘price caps’ – ceilings that are
placed on particular prices or charges – can also arise.13


Access pricing is a matter on which user businesses and their associations, in addition to public interest
organizations, should seek to involve themselves and provide appropriate input. Consulting fi rms specializing
in access issues may also be employed to help illuminate conditions in particular markets. Active monitoring
by users and participation in regulatory proceedings by a broad range of public interest bodies can help
broaden the perspective of sectoral regulators.


A CONTINUING NEED FOR ENFORCEMENT


Even following the implementation of any appropriate restructuring measures and, where appropriate, the
introduction of competitive access regimes, the need for continuing applicability of general competition laws
remains. Such laws are important to dealing with three main sets of business practices:


 Cartels – price fi xing or market sharing arrangements between fi rms that should be in competition with
each other;


 Mergers between competing fi rms;
 Abuses of a dominant position, sometimes referred to as monopolization.14


All of these practices have the potential to undermine or completely eliminate the potential gains from pro-
competitive reforms, including structural separation. For example, suppose train operating companies are
split off from the ownership of railroad tracks in the hope of enabling effective competition to take place, but
the train operators meet secretly to establish a rate-setting cartel. In this case, all of the potential gains for
consumers generally and export-oriented businesses in particular may be lost.


THE ROLE OF BUSINESS ORGANIZATIONS AND
ASSOCIATIONS
Individual developing and transition economy businesses and their associations can play an important role
in these issues. There are at least three types of input they can provide.


 Political support. First, at a broad level, they can play a crucial role in building political support for
necessary restructuring initiatives and reforms.


 Designing specifi c restructuring initiatives. Second, they can provide essential input to the design
of specifi c restructuring initiatives, most importantly because they are typically situation-specifi c. For


13 Readers seeking technical information concerning these issues are referred to: Access Pricing, Organisation for Economic Co-
operation and Development (OECD), Competition Committee, 2004. Available at: www.oecd.org/dataoecd/26/6/27767944.pdf


Armstrong, M., ‘The Theory of Access Pricing and Interconnection’, in M.E. Cave, S.K. Majumdar, I. Vogelsang, Handbook of
Telecommunications Economics: Volume 1, Chapter 8, pp. 297-381, 2002.


Laffont, J., I. Gremaq, Jean Tirole and Idei Geras, ‘Creating Competition through Interconnection: Theory and practice’ Journal of
Regulatory Economics, vol. 10, No. 3, pp. 227-256, 1996.
14 Formally speaking, the terms ‘abuse of dominant position’ and ‘monopolization’ are not identical. The former deals with abusive
conduct by a fi rm already enjoying a dominant position in a market. The latter concerns the process by which a dominant position or
monopoly is established. However, in practice the kinds of conduct covered by these two labels overlap substantially.


Anderson, R.D. and A. Heimler, ‘Abuse of Dominant Position: Enforcement Issues and Approaches for Developing Countries’, in Dhall, V.
(ed.), Competition Law Today: Concepts, Issues and the Law in Practice, Chapter 2, pp. 59-92, New Delhi, Oxford University Press, 2007.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES20


example, whether separating the ownership of railroad tracks and train operators is a useful step in
helping export-oriented businesses compete will depend on the size and geographic confi guration of
the particular country considering such measures and particularly on the extent of other options, such as
low-cost trucking services or air freight, that are available to individual users. This is information that user
businesses and their associations are best-suited to provide.


 Referring business complaints to authorities. Third, user businesses and their associations can play
a role in referring complaints to the appropriate authorities, for example national competition agencies,
looking at apparent competition law violations by infrastructure service providers and other input suppliers.


Businesses and their associations are not the only bodies that can potentially make valuable contributions to
issues concerning implementing competition-oriented structural reforms and related rules. It is very important
that consumer and other public interest-oriented bodies play their roles.


To facilitate providing input, the following examples illustrate the harm to international competitiveness that
can be caused by ineffi cient infrastructure monopolies as well as the benefi ts that can be achieved through
pro-competitive restructuring. They also illustrate the continuing need for the application of competition rules,
for example to enforce competitive access to genuine ‘natural monopolies’ and to guard against continuing
abuses of a dominant position.


THE TRANSPORTATION SECTOR
Transportation is a critical infrastructure sector. Its performance is of paramount importance for the
competitiveness and success of export-oriented businesses. For this reason, it has been an early and
continuing target of competition-oriented structural reforms in both developed and developing countries.
Following are examples of reforms implemented and related issues concerning the application of competition
rules in the specifi c sub-sectors of this important fi eld: ports, railways, airlines, and bus and road transport
services.


PORTS


Within the transportation sector, ports are one of the most important infrastructure elements for international
trade. Almost 85% of the world’s trade distribution relies on sea transportation.15 For a majority of goods,
other methods of transportation, such as land and air, are signifi cantly less viable alternatives. Therefore,
effi cient port services and infrastructure are essential to the competitiveness of export-oriented businesses
in developing countries.


Measures to introduce and safeguard competition in port services can play a vital role in creating effi ciency
in port-related services, thereby reducing costs for business users exporting and distributing goods via sea
transportation. This section provides an overview of competition issues related to ports, as well as examples
illustrating how competition law can contribute to preventing anti-competitive practices.


In general, port-related competition can be observed at two levels:


 Competition between ports. To the extent that several different ports can be reached by producers at a
comparable cost level, there will be competition among those ports. Inter-port competition can, in some
circumstances, be enhanced by improvements in inland freight transport, which means that customers
can switch more easily from using one port to using another.16


 Competition among port service providers can be created at the intra-port level. For example, this can
be achieved by breaking down relevant concessions and creating multiple terminal facilities with different
operators for different terminals within a single port.


15 Brooks, D.H., D. Hummels, Infrastructure’s Role in Lowering Asia’s Trade Costs, Cheltenham, Edward Elgar, 2009.
16 Pittman, R. and V. Yanhua Zhang, ‘Electricity Restructuring in China: The Elusive Quest for Competition’, Economic Analysis Group
Discussion Paper 08-5, April 2008, 2008. Available at: www.justice.gov/atr/public/eag/232668.pdf.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 21


While both forms of competition improve effi ciency and business competitiveness in a given country or region,
the specifi c geographical, economic and overall situation determine which measures can be implemented
and will yield the best results. An important task for business users is to actively refl ect on their needs and
where possible establish channels of communication with the relevant regulatory authorities.


Structural measures alone may not be suffi cient to fully address all competition-related concerns regarding
ports. An Economic Analysis Group Discussion Paper17 describes two trends that threaten competition.


The fi rst trend is the appearance of a few but large multinational terminal operating fi rms worldwide. As
this leads to a consolidation of terminal operating fi rms, there are fewer potential bidders for particular
concessions or privatizations in ports, thereby reducing competition. This development can be harmful to
local developing country businesses in two ways. First, large multinationals may replace individual, local
port operating fi rms. Second, prices for business port users may rise due to reduced competition, thereby
reducing local business competitiveness in export markets.


The second trend is that ocean shipping lines have been vertically integrating into the ownership and operation
of container terminals. At the same time, bulk producers of iron ore, coal and petroleum have been vertically
integrating into the ownership and operation of the specialized bulk terminals used for their products. This
trend affects competitors of vertically integrated fi rms in the primary markets served. Other ocean shipping
lines or producers may be excluded from using the terminals, thereby creating competition issues despite
the enhanced economic effi ciency of the operations of the vertically integrated fi rm.


Therefore, even where basic inter-port and/or intra-port competition exists, competition/anti-trust statutes,
effi cient monitoring and law enforcement by competition authorities are of crucial importance to ensure
competition in ports.


The boxes on port restructuring in Argentina and Indonesia illustrate cases of actual or potential abuse found
and countermeasures taken by different governments in different regions of the world.


The Argentine example highlights threats to competition caused by vertical integration of port operators with
shipping lines or export-oriented producers of goods.


The example of Argentina in box 2 shows that vertical integration does not necessarily lead to violations of
competition law, but that close monitoring can be an effective deterrent. Monitoring may be carried out by
public competition authorities. However, the business community must also take an active role. Competitors
as well as business users of port services can make important contributions to monitoring activities by
notifying authorities of any indications of anti-competitive behaviour. This is in their interest as they suffer the
negative consequences of anti-competitive behaviour, as seen in the Indonesian case in box 3.


17 Pittman, R., ‘Competition Issues in Restructuring Ports and Railways’, Economic Analysis Group Discussion Paper 09-6, November
2009. Available at: www.justice.gov/atr/public/eag/251856.htm.


Box 2: Argentina: monitoring competition in restructured ports


The Argentine Government, seeking to create intra-port competition in the port of Buenos Aires, its largest
and busiest port, created a six-terminal authority within the port, Puerto Nuevo, and limited awards to only one
terminal per company. One of the terminals was acquired by Maersk Sea Land, one of the world’s largest ocean
shipping companies. The company was closely monitored by the Argentine Comisión Nacional de Defensa de
la Competencia to avoid possible vertical foreclosure – in other words, to ensure that Maersk Sea Land did not
discriminate against its ocean shipping competitors by denying them access to its own terminals, or providing
access under inferior terms.


Source: Pittman, R., ‘Competition Issues in Restructuring Ports and Railways’, Economic Analysis Group Discussion Paper 09-6,
November 2009. Available at: www.justice.gov/atr/public/eag/251856.htm.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES22


When it comes to infrastructure services, businesses often fi nd themselves in the role of being a customer
of the relevant infrastructure business. Therefore, abuses of dominance, such as the imposition of exclusive
dealing requirements as described in box 3, can directly impact their ability to make economically benefi cial
business decisions and can negatively affect their competitiveness.


The Jamaican case in box 4 is a good example of the role of regulation and competition law where competitors
are forced to rely on open access to essential facilities controlled by a dominant player. While it may not be
necessary to impose full vertical separation by preventing port operators from also being active in ancillary
markets such as stevedoring, open access regimes must be actively monitored and enforced to counteract
the strong economic incentive for dominant players to exclude competitors from using essential facilities.


Box 3: Indonesia: using competition law for restructuring ports


In Indonesia, the Commission for the Supervision of Business Competition found the public company controlling
the ports of the provinces of Aceh, North Sumatra and Riau to be in violation of competition law. It had monopolized
the market for palm kernel and copra exports from the major North Sumatran port of Belawan, and had sought to
impose exclusive dealing requirements on seven major customers. (Decision, Case No. 01/KPPUL/2004)


Source: Ray, David, Indonesian Port Sector Reform and the 2008 Shipping Law, Jakarta: Indonesia Competitiveness Program,
Report prepared for USAID, August 2008.


Box 4: Jamaica: stopping abuse of dominance in port management


The facts


Port Kingston/Bustamante (hereafter referred to as Kingston Wharves) is a multi-purpose facility also used for
stevedoring. Kingston Wharves (KW) is one of only two public ports in Jamaica located at a distance of 170 km of
each other. Kingston Wharves Limited (KWL), a Jamaican company that owns KW and also operates a stevedoring
company, issued a notice on 11 December 2001 that effectively denied independent stevedoring companies
access to the port facilities they needed to carry out their commercial interest.


The law


Section 20(1) of the Jamaican Fair Competition Act (FCA) states, ‘an enterprise abuses a dominant position if
it impedes the maintenance or development of effective competition in a market’. Under Section 20(2)(a), ‘an
enterprise shall not be treated as abusing a dominant position if it is shown, [inter alia], that (i) its behaviour was
exclusively directed to improving the production or distribution of goods or to promoting technical or economic
progress; and (ii) consumers were allowed a fair share of the resulting benefi t’.


Analysis


Given that KW handled all the non-containerized cargo in the Port of Kingston/Bustamante, and thus had a
dominant position, KWL had the ability to engage in practices aimed at excluding competition in stevedoring and
other ancillary markets. This was not necessary to ensure the operability of the port facilities and therefore could
be identifi ed as an attempt by KWL to engage in anti-competitive practices. KWL was found to be in violation of
Jamaican competition laws.


Impact on local businesses and exporters


If not prevented from barring independent service providers from using its facilities by regulation, KWL could
have extended its dominant position from providing the port facilities as sole owner to all related services by
driving out its existing or potential competitors in ancillary markets, such as the stevedoring and towage markets.
Furthermore, KWL would have been in a position to charge port users, such as shipping operators, exporters and
importers, excessive prices for ancillary port-related services.


Source: OECD, DAF/COMP/GF/WD(2005)15 of 14 January 2005, Global Forum on Competition, Abuse of Dominance in
Regulated Sectors. Case submitted by Jamaica, Session III.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 23


The Zambian case described in box 5 provides an example of a more subtle, but equally detrimental, abuse
of dominance. In Zambia, other businesses were not formally excluded from using the port. However,
over the long term, preferential treatment of a particular port user can have serious consequences for the
competitiveness of other port users, resulting in bankruptcy and an eventual eradication of competitors.


RAILWAYS


Railways are another extremely important element in the infrastructure of most countries. Resource
commodities like grains and other agricultural products, minerals, fertilizers, coal, potash, sulphur, ores and
concentrates, chemicals, forest and petroleum products – commodities essential to developing country
producers and exporters as inputs for production – are typically transported in bulk and over long distances.
Where road transport is not a viable alternative, for example due to the size of shipments or the lack of
good roads, commodity shipments are often captive to the railroad industries.18 As a result, railway transport
effi ciency is important for the competitiveness of developing country fi rms using such commodities.


18 Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank, Washington, D.C., 2004.


Box 5: Zambia: abuse of dominance in port management led to tariff increases


The facts


Zambia is a landlocked country. The only signifi cant port is Mpulungu Port, located on Lake Tanganyika in northern
Zambia. Mpulungu Port is vital for the export of goods to neighbouring countries grouped around the lake. It was
formerly managed by the Zambian Government through a state-owned enterprise. To increase the productivity and
effi ciency of the harbour by privatization, Mpulungu Harbour Management Limited (MHML) received a concession
for the management of Mpulungu Harbour Estate, Harbour and Port Operations and Assets in 2000 after a
competitive bidding process.


However, MHML not only became the port’s operator, but also acted as the holding company of Agro-Fuel
Investments Limited (Agro-Fuel), a port user with a 50.1% market share. This led to MHML securing preferential
shipping space for Agro-Fuel by passing on information exclusively available to the port operator, favouring Agro-
Fuel to charter vessels and allocate profi table cargo. This practice created obstacles that made it impossible for
other port users to store cargo, and forced cargo owners to clear and transport their cargo exclusively through
Agro-Fuel. The fi nal result was a 46% tariff increase for other port users.


The law


The Concession Agreement provided the following terms: ‘The Concessionaire warrants and undertakes that it
shall procure that Harbour and Port Services are available to the public and other commercial users on Arms
Length Terms, provided however, that such use shall not unduly prejudice or interfere with the Concessionaire’s
operations hereunder, in doing so the Concessionaire shall procure that the public or other commercial users are
not prejudiced.’ (Article 62.1.)


Analysis


Despite privatization, effi ciency gains could not be reaped due to vertical integration. MHML was able to transfer
its position of dominance provided by the concession agreement to the market of its subsidiary, thereby abusing
its position. Adequate access-regulating clauses in the Concession Agreement proved vital. MHML was found to
be in violation of the Concession Agreement as Mpulungu Port had the potential and capacity to handle both the
port operator’s (i.e. MHML’s), services and the competitors’ services without affecting the port operators’ business.


Impact on local businesses and exporters


Denial of access to this facility meant that other port users were unable to compete effectively. As a consequence of
MHML’s abuse of dominance, competitor port users ran into liquidity problems and some subsequently collapsed.
This situation could only be remedied by virtue of the sound legal framework addressing potential competition
concerns provided by the Concession Agreement.


Source: OECD Global Forum on Competition, DAF/COMP/GF/WD(2005)21 of 14 January 2005, Abuse of Dominance in
Regulated Sectors. Case submitted by Zambia, Session III.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES24


Even countries with long-established railway networks have observed poor performance of state-owned,
monopolist railway companies. International institutions have identifi ed competition as necessary to enhance
railway services and infrastructure markets generally. At the end of the twentieth century, many countries
adopted sometimes radical reforms to achieve this.19


Investment in rail infrastructure is a high ‘sunk cost’,20 which poses signifi cant barriers to the market entry of
new competitors. Competition in the form of duplicating railway infrastructure cannot be expected to occur
even after the privatization of a formerly state-owned company.21 Therefore, measures to reform railways
must integrate novel strategies to avoid the ‘natural monopoly’ created by railway infrastructure owned and
operated by a single railway company.


Several ‘modes’ of creating competition have been implemented by countries in reforming the railway
sector. Researchers, having assessed evidence from the experiences or reform efforts across countries and
continents, conclude that ‘no one approach has proven to be the best across a wide variety of circumstances’.22


Private sector feedback is essential to any reform process. This is particularly relevant where complex systems
and structures, like in the railway sectors, are regulated to favour private sector participation and market entry.


Often, the status quo is a vertically integrated state-owned enterprise that owns and operates all railway
facilities and vehicles.23 While this structure may allow maximum economy of scale benefi ts and seamlessly
integrates different rail transport sub-sectors, it is not conducive to competition. The result is a lack of incentive
to operate effi ciently. As pointed out above, even privatization of a vertically integrated state-owned enterprise
may not lead to the desired benefi ts.


As a result, some countries have created railway systems where several private companies operate on
different sectors of their territory – spatial separation – based on concessions or franchises. At the same
time, vertical integration is maintained within each of the sectors; one company owns and operates all railway
facilities and vehicles within the relevant sector. The basic idea behind this approach is that the benefi ts of
vertical integration are preserved to some extent within each sector. At the same time, some competition
occurs when concessions and/or franchises are tendered and where alternative routes to destinations
through different sectors or common points are available to users.


Countries that have implemented this ‘spatial separation model’ include Argentina, Brazil, Mexico, Peru and
Bolivia (Plurinational State of). These countries have divided their formerly monopolistic railway systems into
separate railway enterprises, controlled by private companies under long-term franchise agreements. These
companies compete with each other mostly at common points, but occasionally over parallel routes as well.24


The Mexican case in box 6 explains conditions and regulatory choices conducive to effective competition
through the spatial separation model. Whether similar strategies can be deployed in other countries will
depend on country circumstances.


Another way to introduce competition in the railway sector is through competitive access, as discussed
earlier in the chapter. Competing railway companies have exclusive control over some track and exchange
access rights with other companies or ‘interline’ – handing off traffi c between companies. While this mode is
conducive to enhanced competition and preserves effi ciency gains resulting from vertical integration, close
monitoring may be necessary to ensure that access rights are provided on a non-discriminatory basis. This
is because different railway companies can be considered as having a ‘dominant position’ through control
of essential facilities for ‘their’ tracks.


19 Gómez-Ibáñez, J.A. and G. De Rus, Competition in the Railway Industry: An International Comparative Analysis, Cheltenham, Edgar
Elgar, 2006.
20 A ‘sunk cost’ is a cost that has been incurred and cannot be reversed.
21 Pittman, R., ‘Competition Issues in Restructuring Ports and Railways’, Economic Analysis Group Discussion Paper 09-6, November
2009. Available at: www.justice.gov/atr/public/eag/251856.htm.
22 Gómez-Ibáñez, J.A. and G. De Rus, Competition in the Railway Industry: An International Comparative Analysis, Cheltenham, Edgar
Elgar, 2006.
23 Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank, Washington, D.C., 2004.
24 Ibid. and


Pittman, R., ‘Competition Issues in Restructuring Ports and Railways’, Economic Analysis Group Discussion Paper 09-6, November 2009.
Available at: www.justice.gov/atr/public/eag/251856.htm




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 25


A third option consists of vertically separating different components of the railway sector; separating ownership
and maintenance of the railway tracks from ownership of vehicles and provision of transport services. While
this option may appear to create the most robust environment for high levels of competition, there is a price to
pay. Vertical separation requires coordination among a multitude of different actors, which may prove diffi cult
to achieve where economic interests are not aligned. Furthermore, effi ciency gains from competition may be
counteracted by a lack of economies of scale. Box 7 describes how Sweden successfully implemented a
‘vertical separation model’ and combined it with adequate oversight to ensure competition.


AIR TRANSPORT


Air transport, like other transport services, is a key input to international trade and the competitive success
of user businesses. This is separate from the role of air transport services in meeting consumer demand for
tourism-related services. Numerous studies have highlighted the importance of an effi cient, effective and
reliable air transport infrastructure, especially in developing countries, to ensure the materialization of the
gains from trade.25 These studies also highlight the role of international civil aviation in contributing to the
development process and its role in many people’s commercial decisions. The importance of air transport
has increased as a result of technological innovation, deregulation and enhanced market access for foreign
companies, which have made air transport more accessible to a wider set of customers in a broader range
of countries.


25 This section of the chapter draws on material from World Trade Organization. Source: ‘International Trade in Air Transport: Recent
Developments and Policy Issues’, World Trade Report 2005, World Trade Organization, 2005. Available at: www.wto.org/english/res_e/
publications_e/wtr05_e.htm


Box 6: Mexico: encouraging competition – the spatial separation model


Mexico was able to create a spatial separation model conducive to direct competition in freight transport services
among different privately-owned railways. Three different railways each serve a major port on the Pacifi c and
the Caribbean. Two railroads serve industrial hubs such as Monterrey and Guadalajara and connect to different
railways at the United States border. As a result, businesses have a choice between at least two competing railways
when serving their main markets.


Source: Gómez-Ibáñez, J. A., G. De Rus, Competition in the Railway Industry: An International Comparative Analysis, Cheltenham,
Edgar Elgar, 2006.


Box 7: Sweden: encouraging competition – the vertical separation model


Sweden decided to vertically separate infrastructure and operations while maintaining public ownership of the
infrastructure company and some operating companies. Rail operators are charged low short-run marginal costs
for using the infrastructure; the taxpayer bears the remaining burden. Publicly-owned operating companies are
subject to private-sector competition, especially in the freight sector, where there is open access. Other services
are subject to competitive tenders.


The example of Sweden shows that continued oversight and competition legislation are needed despite regulatory
measures to enhance competition. When a state-owned operator won back a contract over a private operator in
1993, it was found guilty of using predatory pricing methods: it used its dominant position to put in an unprofi table
bid and was thus able to eliminate competition.


Sources: Gómez-Ibáñez, J. A., De Rus, G., Competition in the Railway Industry: An International Comparative Analysis,
Cheltenham, Edgar Elgar, 2006. Alexandersson, G., S. Hultén, ‘The problem of predatory bidding in competitive tenders – a
Swedish case study,’ Thredbo papers, 8, 24, 2003. Available at: www.idei.fr/doc/conf/rai/papers_2003/alexandersson.pdf




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES26


 In the past few decades, far-reaching changes have occurred in government policy in the national and
international air transport sectors. Diverse policies have been introduced to facilitate entry, increase foreign
ownership and investment, liberalize access to markets and, importantly, alleviate restrictions on access
to and use of airports. The success of these policies has varied. No unique formula exists to satisfy the
sometimes confl icting goals of ensuring adequate delivery of international air transport services and airline
profi tability. Nonetheless, a number of jurisdictions have found the following approaches to be useful and
relevant. The removal of unnecessary restrictions on entry to and pricing of providing airline services –
‘deregulation’ – is one approach. It is important to note that the relaxation of regulation, which has received
broad support, relates to these economic variables of entry and pricing, not to safety or environmental issues.


 Another approach is relaxing or, in some cases, eliminating restrictions on foreign ownership and
investment.


 Some policymakers choose to promote competition in international routes through negotiating ‘Open
Skies’ and similar agreements.26


 Vigorous application of competition (antitrust) laws to instances of collusive and predatory conduct and
airline mergers that are likely to lessen competition is another approach.


The pursuit of such policies in the international air transport sector and the national air transport sectors of
many countries built initially upon the experience gained in one jurisdiction – the United States. Key fi ndings
are explained in box 8.


In continental Europe, deregulation started later than in the United States and moved at a slower pace.
The 1992 Single Market Initiative played a key role in implementing greater freedom of entry and pricing.
Subsequently, various regulations issued by the European Council, reinforced by relevant enforcement actions
and policy advocacy by the European Commission, further promoted freedom of pricing and operational
fl exibility across the EU. Since then, extensive competition from low-cost carriers has triggered signifi cant fare
reductions for consumers in many intra-EU city-pair markets for passenger air service. Most recently, intra-EU
deregulation has been complemented by major external market-opening initiatives.


The state of competition in the international air transport sector is a function of many variables, some of which
have already been described in previous sections of this chapter. These include changing technology and
demand conditions, the availability of necessary infrastructure and, importantly, the conditions governing
access to markets. As described above, for many years, the degree of competition in the international air
transport sector has been limited by constraints on entry and in some cases pricing that are embodied
in bilateral air service agreements. These, in turn, derive from the ‘piecemeal bilateralism’ approach to
international regulation of this sector that was adopted at the Chicago Convention in 1944.27


The state of competition in air transport also depends on fi rm strategies and behaviour, as well as on public
policies in relation to such strategies and behaviour, for example on the application of competition law and
policy. The following issues have been noted as meriting particular attention:28


 Mergers, joint ventures and strategic alliances (including code-sharing arrangements) in the airline sector,
their implications for competition and their treatment by competition authorities;


 The implications of antitrust immunity for the International Air Transport Association (IATA) and individual
code-sharing arrangements;


 Issues concerning the possibility of inter-airline collusion (cartelization or price fi xing), including through
electronic tariff publishing and related channels;


 The treatment of predatory conduct (i.e. practices through which fi rms may seek to exclude potential rivals
from markets) in the airline sector; and


 The contribution of competition advocacy – i.e. interventions by national competition authorities and other
parties with related interests in national and international policymaking processes in the sector.


26 Abeyratne, R., ‘Competition and Liberalization in Air Transport’, World Competition, vol. 24 Issue 2, pp. 607-637, 2001.
27 Convention on International Civil Aviation, signed in Chicago on 7 December 1944, Chicago Convention. Available at www.icao.int/
icaonet/dcs/7300.html
28 McDonald, J.B., ‘Competition in the Air’, Remarks to the IATA Legal Symposium 2007 on Competition, Compliance, Consequences:
The New Regulatory Environment, Istanbul, 12 February 2007. Available at www.justice.gov/atr/public/speeches/222159.htm




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 27


Box 9 provides an example of a recent price-fi xing cartel in the air cargo sector operating within Europe,
affecting airfreight prices on sales with third countries. This example shows the clear importance of
competition law enforcement to ensure that the gains from market liberalization in service sectors are passed
on to consumers, particularly business users.


ROAD TRANSPORT


Road transport services are equally important for developing business competitiveness. Road transport
represents more than 70% of the land freight service at origin and destination points, connecting businesses to
world markets.29 For example, where trucking is a viable alternative to rail, water or air transport, a competitive
road transport sector can lead to important welfare gains from inter-modal competition.


There is also a relationship of complementarity between road and other forms of transport. Road transport
plays an important role in providing connections to and between transport hubs, such as ports and airports,
potentially creating further intra-modal competition.


29 Londoño-Kent, P., Freight Transport for Development Toolkit: Road Freight, International Bank for Reconstruction and Development, World
Bank, 2009. Available at: siteresources.worldbank.org/INTTRANSPORT/Resources/336291-1239112757744/5997693-1266940498535/
road.pdf


Box 8: United States: lessons from airline deregulation – the viability and benefi ts of
competition


Some lessons to emerge from analyses of the effects of deregulation in the United States of America:


 A key benefi t of deregulation was to promote new entry into particular markets by existing and start-up carriers.
From 1978-2003, 129 new carriers entered the industry.


 Enhanced freedom of entry and competition resulted in substantial improvements in performance, including an
average 30%-33% reduction in fares for consumers in real (infl ation-adjusted) terms


 Signifi cant productivity gains were achieved, in part through new competitive strategies and operational
adjustments made possible by the enhanced freedom of operations that deregulation provided.


 Although many individual large and small carriers have come and gone, deregulation has not led to signifi cant
reductions in service for small towns and rural communities. On the contrary, the number of scheduled
departures available to such towns and communities has increased by 35%-40%.


 Deregulation has increased the need for the effective application of competition (antitrust) law in the airline
sector, particularly with respect to mergers and strategic alliances. In a deregulated environment, mergers and
alliances are a key means by which carriers can potentially preserve or enhance their market power. In cases
where airline mergers were allowed to proceed, concentration in city-pair markets increased and consumer
welfare was diminished.


 The mere elimination of regulatory barriers to entry has not generally proven suffi cient to prevent higher than
competitive pricing in the airline sector – actual competition in city-pair markets is required. This has called into
question the so-called ‘contestability hypothesis’, which implies that the mere threat of entry is often suffi cient.


 Contrary to fears expressed at the time, there is no evidence that deregulation has resulted in lower safety levels
for consumers. Today, air travel is demonstrably safer than in the pre-deregulation period. While this may be
due in part to extraneous developments such as improved technology, it clarifi es that deregulation did not result
in heightened risks for passengers. In making sense of this picture, it is important to note that deregulation in
the United States did not involve any relaxation of legislated safety controls administered by the Department of
Transportation and other authorities. Deregulation focused on the economic aspects of regulation – controls on
entry, exit and pricing.


Source: ‘International Trade in Air Transport: Recent Developments and Policy Issues’, World Trade Report 2005, World Trade
Organization, 2005 p. 225. Available at: www.wto.org/english/res_e/publications_e/wtr05_e.htm.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES28


While road infrastructure provided by the state is a basic requirement for well-functioning road transport
systems, the private sector has an important role to play. Unlike rail transport, there are no generally
recognized ‘natural monopolies’ in the trucking sector.


Box 9: Air cargo cartel fi ned by European Commission for price fi xing


The facts


Airlines providing airfreight services primarily offer the transport of cargo to freight forwarders, which act on behalf
of individual shippers. In November 2010, the European Commission fi ned 11 air cargo carriers approximately 800
million euros for operating a worldwide cartel, setting prices for surcharges for fuel and security.


The cartel members coordinated elements of air cargo prices for over six years, from December 1999 to 14 February
2006. The cartel established numerous bilateral and multilateral contacts between airlines, covering fl ights from, to
and within the European Economic Area (EEA).


The cartel members fi rst agreed on a fl at rate fuel surcharge per kilo for all airfreight shipments and then extended
their cooperation to a security surcharge. To ensure surcharge levels would be applied in full and without exception,
they eliminated any possibility to grant discounts to customers by refusing to pay a commission on surcharges to
their freight forwarders.


Impact on users


This cartel in an infrastructure sector of vital importance to many exporters of higher valued products directly raised
their costs and/or prevented them from negotiating possibly signifi cant discounts. Effective action by the European
Commission was essential to protect user interests.


Source: ‘Press Release No. IP/10/1487’, European Commission, Brussels, 9 November 2010. Available at: europa.eu/rapid/
pressReleasesAction.do?reference=IP/10/1487&format=HTML&aged=1&language=EN&guiLanguage=en.


Box 10: Examples of deregulation in freight transport


Mexico. Abolishing a government monopoly on freight allocation led to a 23% drop in prices within fi ve years, and
trucking services improved in frequency, access and speed of delivery.


Indonesia. Deregulating road transport prices led to a signifi cant increase in the number of truck operators,
creating a competitive market.


Czech Republic, Hungary and Poland. Market entry of new competitors led to competitive pricing and better
quality services. In particular, larger, internationally connected trucking companies developed innovative logistics
solutions conducive to faster delivery and better protection of cargo against breakage or spoilage.


Morocco: Abolishing a public monopoly in freight allocation and transport price de-regulation led to dramatically
decreased transport prices. However, this led to under-investment in new technology and training for drivers.


Rwanda. Deregulating international transport by abolishing a parastatal monopoly led to a decline in prices of
almost 75% in real terms when taking into account a continued increase in input prices. Furthermore, the Rwandan
fl eet grew quickly, recovering from a collapse at the height of the civil war in 1994.


Malawi. Trucking deregulation lead to increased competition, lower prices and better services.


Source: Teravaninthorn, S. and G. Raballand, Transport Prices and Costs in Africa: A review of the main international corridors,
Washington, D.C., World Bank, 2009.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 29


Prices charged for transport services and the quality of service depend to a large extent on the regulatory
regimes and competitiveness in the trucking industry.30 At the same time, international experience shows that
strong competition in this industry is benefi cial. In that regard, there are indications that where competition
in road transport is not kept artifi cially low due to restrictive regulations, a strong level of competition can be
expected. As a result, many countries have reformed trucking markets by deregulating the industry and were
successful in achieving signifi cant reductions in transport prices31 (see box 10).


Most examples in this chapter have dealt with situations where developing and transition economy
businesses can enhance marketing by proactive measures to restructure essential infrastructure sectors
and by applying competition rules. However, it is important to note that sometimes the most effective tool to
enhance competition – whether in infrastructure or other sectors – is trade liberalization. Trade liberalization
entails removing legal or other barriers that prevent ‘foreign fi rms’ from participating in goods or services
markets. A good example is the resolution of a United States-Mexico dispute regarding cross-border trucking
services, which is expected to lead to competition and effi ciency gains (see box 11).


As in all industries, in the road transportation sector cartels can erode potential gains from market liberalization.
Box 12 provides an example of cartelization in road coach services from which lessons can be drawn for road
transport services.


THE ENERGY SECTOR
Whether generated from traditional non-renewable sources like coal, petroleum, natural gas and uranium, or
renewable sources like biomass, hydro, wind, solar and geothermal power, energy is essential to producing
almost all goods and services. Energy is vital to the interest of the business community and the public.
An effi cient and effective electricity network provides energy for industrial purposes and improves living


30 Teravaninthorn, S. and G. Raballand, Transport Prices and Costs in Africa: A review of the main international corridors, Washington,
D.C., World Bank, 2009.
31 Ibid.


Box 11: Expected gains from the United States-Mexico bilateral trucking dispute


Under the North American Free Trade Agreement (NAFTA), the United States and Mexico had agreed to phase-
out restrictions on cross-border passenger and cargo services. However, in 1995, the United States announced it
would not lift restrictions on Mexican trucks, resulting in a ban on Mexican trucks in regard to most of its territory.
In 2001, a NAFTA dispute settlement panel found the United States restrictions to be in breach of its NAFTA
obligations and allowed Mexico to adopt retaliatory measures.


On 6 July 2011, the Governments of the United States and Mexico agreed to end the dispute. A formal agreement
on a pilot cross-border trucking programme between Mexico and the United States was signed, based partly on
fi ndings of a study by the United States Department of Transport that found Mexican carriers had met all required
safety mandates.


Effi ciency gains resulting in lower prices for customers can be expected as a result. The previous requirements for
cross-border transportation were costly and time consuming as goods had to be unloaded from Mexican trucks
and reloaded onto United States trucks at the border. The crossing added an extra day to the journey, requiring
three trucks and three drivers to transfer the cargo. According to estimates, this resulted in extra charges of US$
150 per passage for about 4.5 million annual truck crossings, creating an additional US$ 675 million in annual fees
to transport cargo across the United States-Mexico border.


Sources: United States Department of Commerce, International Trade Administration, Information on Foreign Retaliation.
Available at: www.trade.gov/mas/ian/tradedisputes-enforcement/retaliations/tg_ian_002094.asp.


‘US, Mexico Agree to Settle Truck Feud’, Wall Street Journal, 4 March 2011. Available at: online.wsj.com/article/SB10001424052
748703300904576178511087875924.html.


Centre for Strategic & International Studies, Washington, D.C., Simon Chair’s Blog, 10 March 2011. Available at: csis.org/blog/
united-states-Mexico-trucking-dispute.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES30


standards for the general public. For these reasons, energy is vital to development. Fast-industrializing
developing countries must cope with extremely rapid growth in power demand, which can be twice as high
as gross domestic product (GDP) growth.32


Despite the need for effi cient and competitively priced energy supply, in the past, public authorities have
not focused on reforming the energy sector to maximize benefi ts from enhanced competition. At least until
the early 1980s, most electricity industries were vertically integrated monopolies controlled by state-owned
companies at the national or regional levels.33


A large number of countries have initiated some reforms to restructure and privatize the electricity and energy
sectors. However, these reform processes have not proven easy. As reliability and security of energy supply
are crucial, mistakes can be costly and lessons need to be learned as quickly as possible. Especially over
the past decade and as a result of fi rst experiences with reform in different countries, views have changed
considerably on how the electricity and energy sectors should be structured.34


Developing countries face particularly diffi cult challenges. Building and operating national electricity networks
requires upfront fi nancing. Complex operating conditions and cost recovery situations may prove diffi cult for


32 How to Utilize FDI to Improve Infrastructure – Electricity, Lessons from Chile and New Zealand, Investment Advisory Series, Series B,
No. 1, Best Practices in Investment for Development, 1995-6088, United Nations Conference on Trade and Development, 2009.
33 Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank, Washington, D.C., 2004.
34. Ibid.


Box 12: Price fi xing in bus services from Singapore to Malaysia and southern
Thailand


The facts


Investigations of the Competition Commission of Singapore (CSS) revealed that between 2006 and 2008, 16 coach
operators together with the Express Bus Agencies Association (EBAA) had fi xed prices by imposing:


 A minimum selling price for one-way express coach tickets between Singapore and six destinations in Malaysia,
which created a price fl oor on ticket prices; and


 A fuel and insurance charge levied on all tickets sold and used to mark up ticket prices.
The CCS imposed considerable fi nancial penalties on the companies involved. Of the 16 coach operators and
the EBAA that engaged in price fi xing, six parties fi led appeals. In its decisions of 24 March 2011, the Competition
Appeal Board of Singapore (CAB) upheld CCS fi ndings on liability on all counts. The total amount of fi nancial
penalties imposed on all 17 infringing parties is US$ 1,135,170.


The law


Section 34 of the Competition Act of Singapore prohibits agreements between competing organizations, decisions
of associations of organizations, and concerted practices, which have as their object or effect the appreciable
prevention, restriction or distortion of competition within Singapore, unless they are excluded or exempted.


Analysis


Price fi xing is considered as a serious violation of competition rules. It has a direct impact on the users of the
service and related business activity. In this case, the cartel targeted international bus transport services. This
cross-border case shows that to effectively address competition concerns, the international dimension must be
taken into account.


Impact on local businesses and exporters


There are two ways in which local businesses could have been affected by the bus cartel. First, businesses may
have used the bus transport services in their commercial activities and paid overly high prices. Second, the fact
that the price fi xing cartel remained stable over a long period of time could indicate that ‘outsiders’, potential
competitors, were prevented from entering the market and gaining customers by offering lower prices.


Source: ‘Press Release of 24 March 2011’, Competition Commission of Singapore. Available at: app.casebank.ccs.gov.sg.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 31


many countries.35 At the same time, rapidly growing demand is matched by an equally growing need for
further investment in generating, transmitting and distributing power. New technologies with the potential to
dramatically alter the cost structure of generating electricity are now available, but must be implemented for
effi ciency gains.


The traditional governance structure in the sector can be ill-suited to react fl exibly to today’s dynamic
developments and fast-changing investment and other needs. The crucial question is how to best introduce
competition into generation and supply markets. Past experience in various countries has shown that while
no one model is a perfect solution, three ways of restructuring monolithic monopolies, refl ecting varying
competition and customer choices, have been identifi ed:


 Competition can be introduced at the generation level only. A single privately or state-owned distribution
enterprise buys electricity from different generators but maintains a monopoly over transmission and
consumer supply. This is known as a ‘single buyer’ model.


 Competition at the wholesale level can be introduced by spatially separating different services areas.
Different distribution enterprises purchase electricity from generators and use the transmission network on
open access arrangements to transmit power to their services area where they maintain a monopoly on
resale to the consumer. This is known as a ‘wholesale competition’ model.


 Full competition can be achieved by introducing competition at the generation, wholesale and retail
levels. In this ‘retail competition’ model, the full transmission grid is subject to open access and consumers
have a choice among different suppliers.


35 How to Utilize FDI to Improve Infrastructure – Electricity, Lessons from Chile and New Zealand, Investment Advisory Series, Series B,
No. 1, Best Practices in Investment for Development, 1995-6088, United Nations Conference on Trade and Development, 2009.


Box 13: Reform of the EU’s electricity sector


The issue


Despite a longstanding reform process of the electricity market in the European Union, the European Commission’s
enquiries revealed that the EU’s internal market in electricity was still defi cient, due to inadequate framing of existing
rules and measures. The Commission deemed it important to amend the current rules to ensure fair competition
and supply electricity at the lowest possible price to complete the internal market in energy.


The reformed law


Directive 2009/72/EC of the European Parliament and the Council of 13 July 2009 was adopted. The Directive
concerns common rules for the internal market in electricity and repealed Directive 2003/54/EC. The Directive
introduces common rules for the generation, transmission, distribution and supply of electricity to develop a
competitive, secure and environmentally sustainable market in electricity. The main benefi ts the Directive seeks to
establish are:


 Ensuring that customers have the right to choose their electricity supplier and to change supplier easily;
 Ensuring that non-household customers may contract simultaneously with several suppliers;
 Ensuring that Member States implement an independent mechanism (energy ombudsman or consumer body)


to manage complaints or disputes effi ciently;


 Ensuring monitoring of security of supply by Member States;
 Unbundling transmission systems and transmission system operators (from March 2012) while ensuring stability


and reliability of supply and services;


 Establishing a transparent system of third-party access to transmission and distribution systems; and
 Unbundling and transparency of accounts – electricity undertakings are required to keep separate accounts for


their transmission and distribution activities, which can be accessed by the competent authorities.


Analysis


The variety of measures adopted shows that unbundling, regulatory activities, monitoring and strengthening of
end-user rights are complementary measures to enhance competition. These measures must be adapted to
specifi c situations and their effect must be monitored to achieve the desired results.


Source: Anderson, R. D., A. Heimler, ‘What has Competition Done for Europe? An Inter-Disciplinary Answer’, in Aussenwirtschaft
(the Swiss Review of International Economic Relations), 62, Heft IV, pp. 419-454, Jahrgang, 2007.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES32


Notwithstanding these options, there is wide agreement on the basic architecture for electricity restructuring.
Generally, generation is separated from other operations and competition is introduced at the wholesale
and/or retail levels.36 The role of the regulator is to set tariffs and regulate access to the transmission and
distribution networks.


Box 13 describes the latest reform efforts within the EU. This is an example of an ambitious attempt to
maximize competition at all levels of the distribution chain.


The example of China, described in box 14, highlights the growing electricity demands of a fast-growing
country as well as reform measures introduced to meet demand.


As in other sectors, structural reforms must be complemented by competition and anti-trust disciplines to
provide checks and balances to possible abuses of remaining market power. Where some bottlenecks or
monolithic/monopolistic structures are upheld, a sound legal framework is needed to regulate the behaviour
of dominant players and allow competition in downstream markets. The Russian case in box 15 illustrates
this point.


While liberalization of markets at the national level is a desirable fi rst step, opening up supply to international
competition can further reduce prices for businesses as consumers. The case of Pakistan in box 16 shows
that competition authorities can play a vital role in ensuring that international competition is not stifl ed by
cartelization in the energy sector.


36 Kessides, I., Reforming Infrastructure; Privatization, Regulation, and Competition, World Bank, Washington, D.C., 2004.


Box 14: China: reform of the energy sector


The issue


China’s rapidly growing economy puts pressure on its energy sector. To attract private investment and ensure the
effi cient use of investments, the Chinese Government has undertaken a fundamental restructuring of the electricity
sector, including strategic measures such as separating the assets and operations of generation from those of
transmission and distribution.


Impact on local businesses and exporters


Lack of competition can be expected to slow economic growth for private businesses that depend on energy to
produce goods and deliver services. However, the same effect can occur if free market competition leads to price
volatility and unstable supply. As a result, key factors of reform to introduce competition include price stability and
steady supply.


Measures taken


The incumbent monopoly generator, transmitter and distributor of electricity, the State Power Corporation (SPC),
was broken up in late 2002. SPC’s generation assets were divided into fi ve generation companies: Huaneng
Group, Huadian Power, Guodian Power, Datang Power Group and China Power Investment Company. Each of
the generation companies was to control no more than 20% of the national generation capacity. The transmission
grid was separated from generation operations and then further separated into two power grid operators, the State
Power Grid Company and the South China Power Grid Company. Transmission and distribution continue to be
regulated monopolies, with power supplied from a competitive generation sector.


Source: Pittman, R. and V. Yanhua Zhang, ‘Electricity Restructuring in China: The Elusive Quest for Competition’, Economic
Analysis Group 08-5 April 2008, 2008. Available at: www.justice.gov/atr/public/eag/232668.pdf




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 33


TELECOMMUNICATIONS
Information and communication technologies (ICTs) and services are vital to participation in the knowledge-
based activities that are increasingly important in today’s global economy.37 ICTs and services are essential
for development and for the competitiveness of developing economy businesses. Recent decades have
seen an unprecedented growth in the availability of telecommunication services. This is directly linked to
reforms introduced in the telecommunications sector. At the same time, technological changes, such as the
expansion of mobile telecommunication services, have changed the landscape of telecommunications.


Both developments have competition at their heart. Beginning in developed countries, reforms to break up
monopolistic structures in the telecommunications sector and create competition have now been introduced
in many countries. Former state-owned companies have been privatized and made subject to competition
from other private telecommunications providers. The signifi cance of competition policy for this process is
illustrated by a ground-breaking competition law case – the United States versus AT&T, which was resolved
by a negotiated consent decree in 1982. This is an example of competitive restructuring that inspired related
reforms around the world.38


37 Khalil, M., P. Dongier and C. Zhen-Wei Qiang, ‘Chapter 1: Overview’, in Information and Communications for Development 2009:
Extending Reach and Increasing Impact, Washington, D.C., World Bank, 2009. Available at: siteresources.worldbank.org/EXTIC4D/
Resources/5870635-1242066347456/IC4D_2009_Overview.pdf
38 For a discussion of the long-run signifi cance of the settlement see: Yoo, C. S., ‘The Enduring Lessons of the Breakup of AT&T: A
Twenty-Five Year Retrospective,’ Scholarship at Penn Law, Paper 280, 2008. Available at: lsr.nellco.org/upenn_wps/280


Box 15: Russian Federation: abuse of dominance in the power transmission market


The facts


In 2001, RAO UES Russia, a company with more than 65% market share in the electric power generation and high
voltage transmission markets, refused to sign an electric power transmission service contract with Rosenergoatom,
an electric power producer. The latter had concluded electric power delivery contracts with companies serving the
Georgian and Ukrainian markets and depended on RAO UES Russia to fulfi l the contracts. RAO UES Russia’s
refusal to provide the necessary power transmission services was based on the company’s assumption that
Rosenergoatom needed to seek prior approval of electric power export contracts with third parties by RAO UES
Russia. Therefore, RAO UES Russia required Rosenergoatom to fully disclose their power export contracts with
third parties.


The law


RAO UES Russia is a natural monopoly according to Article 4 of the Federal Law on Natural Monopolies and is
inscribed in the Register of Natural Monopolies. Due to its monopoly position, signing contracts on electric power
transmission with power providers is obligatory for RAO UES Russia according to Article 10 of the Civil Code and
Article 5 of the Federal Law On Competition and Restriction of Monopolistic Activity at Commodity Markets (further,
Competition Law) and Article 8 of the Federal Law On Natural Monopolies.


Analysis


Nuclear plants belonging to Rosenergoatom produce electric power to deliver it to the market. But a power line is
necessary to deliver from producer to consumer. RAO UES Russia is a monopolist that owns these power lines. By
refusing to provide power transmission services to competitors in the power production market, RAO UES Russia
attempted to establish additional control over the power production market.


Impact on local businesses and exporters


Due to the fact that RAO UES Russia refused to render electric power transmission services to producers, in this
particular case to Rosenergoatom, the generating company had no access to electric power export markets. The
refusal to open the power transmission network to competitors resulted in the competitor’s inability to fulfi l such
contracts, thus preventing them from successfully operating in the export market.


Source: OECD Global Forum on Competition, DAF/COMP/GF/WD(2005)20 of 14 January 2005, Abuse of Dominance in
Regulated Sectors. Case submitted by the Russian Federation, Session III.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES34


Box 16: Pakistan: cartelization in liquefi ed petroleum gas market


The facts


National producers of liquefi ed petroleum gas (LPG) formed a cartel to keep producer prices for LPG low and
prevent foreign importers from entering the market. Instead of charging a higher producer price when selling LPG
on to marketing companies, they used their control over marketing companies to extract commission payments
and other premiums.


This resulted in a high consumer price. Nevertheless, the offi cial price that importers were bound to apply (due to
government regulations) was kept low, as authorities determined the offi cial price in relation to the local producer
prices. Because importers were not able to sell to consumers directly and benefi t from the high consumer price,
importing LPG became unprofi table for them despite high consumer demand for additional quantities.


The law


Section 4 of the Competition Act of Pakistan prohibits price fi xing agreements as well as agreements fi xing or
setting the quantity of production, distribution or sale of goods.


Analysis


LPG producers, by engaging in anti-competitive practices, were able to prevent competition from LPG importers
that would have resulted in a lower consumer price. By circumventing the offi cial consumer price regulations and
control over the marketing companies, local LPG producers reaped high benefi t margins despite artifi cially low
producer prices.


Impact on local businesses and importers


Importers were prevented from engaging in business and local end users of LPG suffered from the artifi cially high
consumer price.


Source: Inquiry Report ‘Suo Moto Inquiry against JJVL and LPGAP’, Competition Commission of Pakistan, March 2009. Available
at: www.cc.gov.pk.


Box 17: Forms of market entry – the United States Telecommunications Act of 1996


The Telecommunications Act envisions three forms of market entry by competitors: facilities-based entry, resale
and unbundling.


Facilities-based entry


This form of entry occurs where network infrastructure is duplicated so that direct competition among independent
network operators occurs. While potentially high entry costs and a loss of economies of scale benefi ts may deter
market entry, this form of competition requires the least regulatory intervention and provides for secure access to
networks. Interconnectivity among networks, number portability and similar issues still require some oversight to
ensure maximum competition.


Resale entry


Resale entry occurs where competitors are given the right to buy access to the incumbent’s telecommunications
infrastructure at wholesale prices (that is, at a discount when compared to the retail price). Unnecessary duplication
of networks can therefore be avoided and/or entrants can use resale on a temporary basis until the installation of
new infrastructure is completed. A main challenge regarding resale is access pricing.


Unbundling


Unbundling means that different telecommunications-related market segments are separated and sold to
competing telecommunication service providers, i.e. access to local loops, switching, databases and signalling
systems. Again, pricing is an important issue. Furthermore, transaction and interface compatibility costs may rise
due to disaggregation.


Source: Laffont, J. and J. Tirole, Competition in Telecommunications, Cambridge, Massachusetts; London, England; MIT Press,
2000.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 35


Another building block for reforms in this sector was establishing separate regulators for the telecom sector.
Today, more than 80% of countries have taken this step.39 Typically, one of these regulators’ primary roles
is to create conditions for competition by regulating access to telecommunications infrastructure and
interconnectivity. Box 17 provides an overview of ‘traditional’ reform measures by summarizing the patterns
of market entry in local telephony40 services envisioned by the United States Telecommunications Act of 1996.


In addition to regulatory reform, technological changes have led to competition within and among different
forms of telecommunication.41 A report to the United States Chamber of Commerce notes that mobile phone
services were fi rst considered as a ‘natural monopoly’ by regulators, but the mobile phone industry is well
able to establish parallel network infrastructure in different countries. In addition, mobile telephony has
become a competitive telecommunications market. At the same time, mobile telephone users continue to
rapidly increase in developing countries, where fi xed-line services may not be available, for example in rural
areas. This indicates that mobile telephony services, to some extent, act as a substitute for fi xed-line services
and therefore create competition in the sector.


An increasing focus on broadband Internet services through Digital Subscriber Line (DSL), cable or other
fi xed line networks shows that access is not an issue of the past. Even where duplication or multiplication of


39 Trends in Telecommunications Reform 2010-11: Enabling Tomorrow’s Digital World – Summary, International Telecommunication
Union, 2011. Available at: www.itu.int/pub/D-REG-TTR.12-2010
40 In telecommunications, telephony encompasses the general use of equipment to provide voice communication over distances,
specifi cally by connecting telephones to each other.
41 Hazlett, T.W., C. Bazelon, J. Rutledge and D.A. Hewitt, A Report to the U.S. Chamber of Commerce – Sending the Right Signals:
Promoting Competition through Telecommunications Reform, 2004. Available at: www.rutledgecapital.com/pdf_fi les/20041006_telecom_
dereg_complete_study.pdf


Box 18: Peru: abuse and transfer of monopolistic power


The facts


When mobile telephony arrived, the Peruvian Government gave concessions, distinguishing between mobile
telecommunications services in Lima and outside Lima. While Tele 2000 (A band) and CPT (B band) competed in
Lima, only Entel (A band) obtained a concession for mobile telecommunications outside Lima. In 1993, Telefónica
bought CPT and Entel, and in 1994 these two undertakings merged. In this scenario, Telefónica began to develop
automatic national roaming services, allowing its customers to freely use their handsets both in and outside Lima.


To offer its clients the same service, Tele 2000 requested that Telefónica open the Entel network outside Lima for
automatic roaming to Tele 2000 customers as well, but Telefonica refused.


The law


The Peruvian telecommunications law stipulated: ‘Because of the neutrality principle the operator of a
telecommunications service that is in support of others’ telecommunications services, or who has a dominant
position cannot use these situations to provide simultaneously other telecommunications services with major
advantages and with detriment to his competitors, using practices restrictive of free and fair competition, such as
limiting interconnection or damaging services’ quality.’


Analysis


Telefónica used its dominant position in the market outside Lima to generate advantages in the Lima mobile
telecommunications market. Therefore, Telefonica transferred market power. Tele 2000’s clients were only provided
access to manual roaming.


Impact on local businesses and exporters


Tele 2000 could not compete with Telefónica’s Automatic National Roaming services, because Tele 2000 exerted
monopoly power in the market outside Lima. This signifi cant disadvantage provided obstacles for Tele 2000 to
compete in Lima’s mobile telecommunications market.


Source: OECD Global Forum on Competition, DAF/COMP/GF/WD(2005)16 of 14 January 2005, Abuse of Dominance in
Regulated Sectors. Case submitted by Peru, Session III.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES36


networks occurs, for example through the parallel use of cable, DSL and other networks for similar services,
interconnectivity must be ensured and some bottlenecks continue to exist, even though their location may
change due to changes in technology.42


Furthermore, reform processes may not automatically have resulted in market entry and the desired levels
of competition. The examples from Peru, Chinese Taipei and Latvia show that even after taking steps to
introduce competition, oversight from regulators and/or competition authorities is needed.


The Peruvian case provides an example of market concentration through a merger that resulted in anti-
competitive behaviour. The cases of Latvia and Chinese Taipei illustrate how market power in one
telecommunication sector can be transferred to another. It should be emphasized that only under particular
market conditions can a fi rm with a monopoly in one market extend its monopoly in another market through
cross-subsidization. Most competition policy experts would agree that cross-subsidization should not be
presumed to be harmful to competition in all cases. Rather, harmful effects, if any, need to be investigated
and established on a case-by-case or ‘rule of reason’ basis.


An important example of the links between competition policy, economic regulation and international trade
liberalization is provided by the Reference Paper on regulatory principles. This Reference Paper forms
part of the commitments made by most WTO Members in the context of the WTO Negotiations on Basic
Telecommunications Services, conducted under the General Agreement on Trade in Services (GATS) that
concluded in February 1997. The Reference Paper is intended to address, among other things, situations
where the services provided by public telecommunications networks constitute essential facilities that are
exclusively or predominantly provided by a single or limited number of suppliers and for which there are no
feasible substitutes – a situation that potentially constitutes an impediment to both competition and market
access for service suppliers.


42 Laffont, J. and J. Tirole, Competition in Telecommunications, Cambridge, Massachusetts; London, England; MIT Press, 2000.


Box 19: Chinese Taipei: abuse and transfer of monopolistic power


The facts


Based on a 1996 Telecommunications Act, Chinese Taipei has gradually liberalized its telecommunications
services sector in sequence: from paging, mobile phones, satellite phones and mobile data communications in
1997, to the fi xed communications networks in 2001. In 1999, Chunghwa was still the only telecommunications
company operating in the fi xed line telecommunications market, but faced competition in the already liberalized
mobile telecommunications sector. The prevailing rate for mobile phone users was at NT$ 1.7 for fi ve minutes for
local calls to fi xed lines and the rate of local calls to mobile phones was at NT$ 6 per minute. Then, Chunghwa
introduced the so-called ‘099’ service at a uniform rate of NT$ 3.6 per minute, by which calls to the 099 service
could be transferred to mobile phones.


The law


The Telecommunications Act provided the Ministry of Transportation and Communications with the authority to
prevent the setting of tariffs by facility-based carriers engaging in cross-subsidization, thereby preventing them
from hindering fair competition.


Analysis


By using its market power due to its monopoly position in the fi xed line telecommunications sector and the related
infrastructure, Chunghwa cross-subsidized mobile phone communications by its users. At the same time, it
controlled access by competitors to the fi xed line infrastructure and could set prices in that regard.


Impact on local businesses and exporters


Because no competitor could benefi t from a similar possibility to cross subsidize mobile phone communications
due to a lack of access to an alternative fi xed line infrastructure, they could not offer lower rates to their customers.
Eventually, all competitors in the mobile telecommunications sector could have been driven out of business and
the monopoly of Chunghwa would have been reinstated.


Source: OECD Global Forum on Competition, DAF/COMP/GF/WD(2005)19 of 14 January 2005, Abuse of Dominance in
Regulated Sectors, Case submitted by Chinese Taipei, Session III.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 37


To address this concern, the Reference Paper sets out detailed rules relating to interconnection of downstream
service providers with major suppliers on non-discriminatory terms, the prevention of anti-competitive acts,
including anti-competitive cross-subsidization, and the making available of information needed for effi cient
interconnection. These rules draw on concepts of anti-trust and regulatory policy such as exclusionary
practices and the essential facilities doctrine.43


In regards to the relationship between domestic reform and the Reference Paper, a recent World Bank report
states:


Incorporation of the Reference Paper as an additional commitment in the GATS Schedule of Specifi c
Commitments is a good example of using multilateral obligations to support domestic reform.


The fact that the Reference Paper obligations are binding help propel the domestic reform agenda
needed to fully implement the opening to competition.


The Reference Paper is a good example of how international commitments can be used to carry forward
national priorities in regards to maintaining and reinforcing competition in appropriate settings.


Key elements of the Reference Paper and related provisions of Mexico’s GATS commitments were considered
in the 2007 WTO Panel Decision in the Mexico telecoms case. In this case, which was brought against
Mexico by the United States, the panel found that several features of Mexico’s framework for regulation of


43 Anderson, R.D. and P. Holmes, ‘Competition Policy And The Future Of The Multilateral Trading System’. Journal of International
Economic Law, vol. 5, No. 2, pp. 531- 563, 2002.


Box 20: Latvia: abuse of dominance


The facts


In November 2002, Lattelekom, historically the monopolistic provider of fi xed telecommunications in Latvia, started
to provide a combined service, Komforta ISDN (K-ISDN), which was based on the lease of ISDN telephone lines
and the rental of a digital bureau telephone exchange (BTC). A discount was applied to the subscription price
for K-ISDN. The amount of this discount depended on the quantity of conversations over the public fi xed-line
telecommunications network. In the framework of the above-mentioned combined service, the lease payment for
connection to an ISDN line was fi xed at half the level of the lease payment for connection to a separate ISDN line,
without any BTC rental.


The law


Article 13 of Latvian Competition Law prohibits the abuse of a dominant position.


Analysis


Until 1 January 2003, Lattelekom had legal monopoly rights to provide voice telephony services over the public
fi xed-line telecommunications network, lease of lines and taxophone services. During 2003, Lattelekom lost only
approximately 3% of its market share in providing voice telephony services and preserved its monopoly position
in the market of leased lines. Thus, Lattelekom had a dominant position in two regulated markets – in the market
for voice telephony over the public fi xed-line electronic communications network and the market for leased line
service. By using its monopoly position in these two markets to provide discounted services in a third, separate
market (BTC), it sought to extend its monopoly to that market.


Impact on local businesses and exporters


Other companies that wanted to enter the BTC rental services market, but that were neither providers of voice
telephony services over public fi xed-line telecommunications network nor providers of leased ISDN telephone
lines, did not have the possibility to offer discounts to their clients and were unable to compete successfully with
Lattelekom.


Thus, unequal competition conditions would have been created. By combining three services in one package, two
of them provided by Lattelekom as the dominant undertaking, and by applying discounts that could not be offered
by other market participants, Lattelekom practically closed the BTC rental services market, not allowing new market
participants to enter.


Source: OECD Global Forum on Competition, DAF/COMP/GF/WD(2005)17 of 14 January 2005, Abuse of Dominance in
Regulated Sectors. Case submitted by Latvia, Session III.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES38


international telecommunications services were in violation of Mexico’s commitments under the Reference
Paper. See box 21 for a summary of points relating to the competition dimension of this matter.44 Rather
than appealing the case to the WTO Appellate Body, Mexico chose to accept the panel’s ruling. In the view
of some observers, it did so precisely because this was in the best interest of Mexico’s consumers and the
long-term development of Mexico’s telecommunications sector.45


CONCLUSION
The restructuring of public infrastructure sectors such as transportation, telecommunications and energy,
and the application of appropriate competition rules in these sectors, offers a signifi cant tool to enhance
competitiveness and commercial success of developing and transition economy businesses.


Such measures merit active consideration by all countries as a complement or counterpart to participating
in trade liberalizing agreements and arrangements, to better ensure the success of such participation.
Implementing these measures involves practical and conceptual challenges. Informed input by export-
oriented businesses and their associations and other relevant bodies can facilitate wise choices in this area.


The competitive structure and behaviour of fi rms involved in the delivery of public and business infrastructure
services are signifi cant for developing economy businesses. There are several possible approaches
to enhancing competition in providing public and business infrastructure services through appropriate
restructuring, and the application of related rules.


Reforms are ongoing and competition law will continue to play a role before and after structural reforms.
Developing country businesses, their associations, and public interest organizations should provide
appropriate input to policy design and implementation to ensure that the measures taken refl ect their long-
run competitive interests.


44 A more complete summary covering other aspects of the case is available at: www.wto.org/english/tratop_e/dispu_e/cases_e/
ds204_e.htm
45 Hufbauer, G. and S. Stephenson, ‘Services Trade: Past Liberalization and Future Challenges,’ Journal of International Economic Law
10(3), 605–630, doi:10.1093/jiel/jgm028, Advance Access publication, 10 August 2007. E. Fox, ‘The WTO’s First Antitrust Case – Mexican
Telecom: A Sleeping Victory for Trade and Competition’, Journal of International Economic Law 9(2), 271–292, doi:10.1093/jiel/jgl012,
Advance Access Publication, 8 May 2006.


Box 21: Mexico: competition-related elements of the WTO Panel Report


Complainant: United States


Respondent: Mexico


Establishment of Panel 17 April 2002; Adoption of Panel Report 1 June 2004


Background


For many years, Telmex was the dominant supplier of telecommunications services in Mexico. According to the
WTO Panel Report, the applicable regulations in Mexico conferred on Telmex, as the long-distance service licensee
having the greatest percentage of outgoing long-distance market share for the relevant country in the previous six
months, the power to negotiate the rate to be paid by foreign carriers – including United States carriers such as
AT&T and MCI – for the interconnection of calls terminating in Mexico. In addition, Mexican law required all other
licensed Mexican concessionaires to charge no less than the fee negotiated by Telmex for similar services.


Summary of competition-related fi ndings of the Panel


The Panel ruled that Mexico violated its commitments under the Reference Paper and the GATS.


 Mexico failed to ensure interconnection at cost-oriented rates for the cross-border supply of facilities-based
basic telecom services, contrary to Article 2.2(b) of its Reference Paper.


 Mexico failed to maintain appropriate measures to prevent anti-competitive practices by fi rms that are major
telecom suppliers, contrary to Article 1.1 of its Reference Paper.


 Mexico failed to ensure reasonable and non-discriminatory access to and use of telecommunications networks,
contrary to Article 5(a) and (b) of the GATS Annex on Telecommunications.


Source: Ibid. and WTO Dispute Settlement: One-Page Case Summaries, World Trade Organization, Geneva, 2006. Available at
www.wto.org/english/res_e/booksp_e/dispu_summary06_e.pdf.




CHAPTER 1 – CREATE COMPETITIVE INFRASTRUCTURE SERVICES 39


For the most part, the measures and initiatives in this chapter are not legally mandated by trade agreements.
Without them, however, export competitiveness will be at risk. Failures of trade liberalization to generate
sustained development and growth often can be traced to a failure to introduce complementary domestic
policy reforms. Countries, and their businesses, will not be well-poised to take advantage of the benefi ts of
trade liberalization unless steps are also taken to: reduce costs and enhance the effi ciency of infrastructure
sectors; promote fl exibility by eliminating artifi cial restrictions on entry, exit and pricing in manufacturing and
other industries; and establish and strengthen incentives for investment, innovation, the creation of effi cient
management structures and productivity improvement.


In this spirit, a number of insights emerge from the overview of issues concerning restructuring of public
infrastructure sectors and application of related rules:


 Competition measures strengthen reform. First, at the broadest level, measures to strengthen competition
are an important complement to other reforms, such as privatization, aimed at improving performance in
providing public infrastructure services in the transportation, energy and telecommunications sectors.
Successfully implemented, such measures offer substantial potential benefi ts to users, especially export-
oriented businesses. The gains for export-oriented businesses are equally applicable to importing
businesses.


 Technology is an asset. Second, technological change and improved understanding of issues concerning
industrial structure have enabled enhanced competition in providing infrastructure services. This can be
achieved through measures such as separation of potentially competitive segments of a particular sector
(e.g. train operation or power generation) from other segments that constitute genuine ‘natural monopolies’
(e.g. railroad track facilities or power transmission lines), the introduction of competitive access regimes,
and related measures.


 Use competition laws. Third, competition laws, typically through application of their provisions regarding
abuses of a dominant position, can sometimes be used as a platform to impose necessary restructuring
and establish competitive access regimes. In other cases, the remedies available by enforcing competition
law may not be suffi cient and other measures may be needed to effectively address monopoly issues
in infrastructure industries. Other measures may include: (i) repeal or reform of statutes or regulations
that unnecessarily limit entry to particular markets; and (ii) enactment of new legislation to restructure
(i.e. break up) established monopoly enterprises and permit competition to take place, for example by
establishing industry-specifi c competitive access regimes.


Continuing applicability of general competition laws is, in any case, important to deal with harmful practices
in public infrastructure as in other sectors, such as: (i) cartels – price fi xing or market sharing arrangements
among fi rms that should be in competition with each other; (ii) mergers that are likely to lessen competition
or create a situation of market dominance; and (iii) abuses of a dominant position.


 Apply a case-by-case approach. Fourth, a uniform approach to implementing competition-oriented structural
reforms across all sectors and countries generally cannot be recommended. Experts tend to counsel a
case-by-case approach involving careful weighing of potential benefi ts and costs of particular reforms and
restructuring measures. In this context, user businesses and their associations, in addition to public interest
and other advisory bodies, have an important role to play in providing input to policy formulation.
At least three types of input can usefully be provided by such organizations. First, on a broad level, they
can play a crucial role in building political support for necessary restructuring initiatives and reforms.
Second, they can provide essential input to the design of specifi c restructuring initiatives. Third, businesses
and their associations can play a role in referring to the appropriate authorities, for example, national
competition agencies, complaints regarding apparent competition law violations by infrastructure service
providers and other input suppliers.


 Connect competition to international agreements where appropriate. Fifth, measures to inject competition
into moribund infrastructure monopolies have most often been implemented at the national level. However,
in many cases there is also an interface with international trade agreements and cooperation. In particular,
and as has been discussed with reference to the WTO Reference Paper on regulatory principles in relation
to basic telecommunications services and other instruments, international commitments can be used
to carry forward national priorities in regards to maintaining and reinforcing competition in appropriate
settings. More generally, in many cases, the most effective tool to enhance competition, whether in
infrastructure or other sectors, can be trade liberalization, which entails removing legal or other barriers to
participation in goods or services markets by foreign fi rms.






CHAPTER 2


PROMOTE EXPORTS AND
FOREIGN INVESTMENT


INTRODUCTION............................................................................................................................................. 42


FDI AS A DRIVER OF THE GLOBAL ECONOMY ........................................................................................ 42


EXPLORING THE LINKAGES BETWEEN FOREIGN INVESTMENT AND EXPORT GROWTH ................ 46


ACCESSING GLOBAL SUPPLY CHAINS ..................................................................................................... 50


POLICY IMPLICATIONS ................................................................................................................................ 56


PROMOTING INVESTMENT ......................................................................................................................... 69


CONCLUSION ................................................................................................................................................ 73




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT42


PROMOTE EXPORTS AND FOREIGN
INVESTMENT


INTRODUCTION
Much of the debate about export strategy is related to better trade policies and institutions, more effi cient
physical infrastructure and the availability of skilled manpower. However, the debate goes beyond domestic
issues. The export sector is dependent on the performance of product and factor markets1 both at home and
abroad. The links between export and foreign investments are strong. Foreign investment has an important
role to play in the development of a country’s exports. This chapter explains linkages between foreign
investment and exports and makes recommendations as to how countries can promote export growth by
adopting the ‘right’ policies towards foreign investment.


There are fi ve areas in which exports and foreign investments are related. The fi rst four relate to inward foreign
investment. The last one relates to outward foreign investment.


 Exports and access to effi cient service providers;
 The role of foreign investors in the access of exporters to credit and other forms of fi nancing;
 Access to global supply chains;
 Export competitiveness and access to technology and know-how;
 Exports and outward FDI as alternative sources of supply. This is related to the choice of fi rms to export or


to supply foreign markets by their subsidiaries established in those markets.


To better understand the links between exports and foreign investment, the following questions are explored:


 What are the linkages between exports and foreign investment?
 What are the channels through which foreign investment can improve export performance?
 Are all contributions of foreign investment to exports positive or are there also risks associated with foreign


investment fl ows?
 Do different kinds of foreign investment have different impacts on a host country?
 What policies are needed to encourage foreign investment?
 In situations in which foreign investment involves heavy costs for host countries, should governments in


those countries adopt more defensive positions? If so, what are the options open to them?


Foreign investment has for the most part played a positive role in development, economic growth and
exports. Critics of foreign investment have identifi ed situations in which foreign investment had negative
effects on host countries, which incurred social costs from the foreign investors’ activities. Outfl ows of foreign
investment have sometimes been seen as detrimental to home countries.


The majority of observers and policymakers now acknowledge that the benefi ts from foreign investment
far exceed their costs, and that foreign investment plays a positive role in a country’s economic and social
development.


FDI AS A DRIVER OF THE GLOBAL ECONOMY
A positive correlation exists between exports and foreign investment – typically, export growth is accompanied
by foreign investment growth in world markets.


Global merchandise trade grew faster than global output from 1950 to 2009, demonstrating that global trade
in goods has become an important driver of global output growth (see fi gures 2 and 3).


1 Product markets are markets for goods and services. Factor markets refer to markets for productive resources, such as land, labour
and capital.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 43


Figure 2 also shows that global trade in services has been growing on average even faster than merchandise
exports. Moreover, due to serious methodological problems of data collection, the offi cial statistics on trade
in services are underestimated.2 This suggests that globalization is no longer a matter of international trade
in commodities and industrial goods, but refl ects a deepening of global markets and a growing importance
of trade in services, which also acts to facilitate greater goods trade.


Figure 2: Global GDP growth and merchandise trade volume, 1950-2009




0


50


100


150


200


250


300


350


400


450


19
50


19
53


19
56


19
59


19
62


19
65


19
68


19
71


19
74


19
77


19
80


19
83


19
86


19
89


19
92


19
95


19
98


20
01


20
04


20
07


GDP Merchandise trade
20


09


Source: WTO Secretariat.


FDI IS GROWING FASTER THAN TRADE


The second important feature of global trends has been the rapid growth of global FDI.3 As global markets
have deepened, there has been parallel growth in global FDI, particularly in recent years. As the data reveals in
fi gure 3, between 1980 and 2008, the annual average percentage growth in the global stock of FDI exceeded
the growth of global merchandise exports and services.


The impressive growth in global trade in goods and services can be largely explained by the heightened
outsourcing and the emergence of supply chains as well as growth in trade in services. Research has
commonly indicated that supply chain growth together with FDI growth into service sectors have led to
rapid growth of global FDI. The list of service industries that are attracting foreign investors has dramatically
increased over time.4


The growth of FDI in services can be partly explained by the fact that many services are at best – or can only
be – transferred through FDI. (In World Trade Organization’s (WTO) General Agreement on Trade in Services
(GATS) terminology, that is Mode 3 – delivery of services through an established commercial presence
abroad.) Globalization of production and enhanced technical know-how also has led to a considerable
increase in intra-fi rm trade in services.


Growth in services entails signifi cant fl ow-on effects: (i) services such as energy, communications and
transport support exports of goods; (ii) the investment costs of service infrastructure projects are typically
very high; as a result, FDI in those sectors is an attractive option for many developing countries with severe
budgetary constraints; (iii) service sectors themselves have become dynamic exporters (as demonstrated in
fi gure 3).


2 Maurer, A. and P. Chauvet, ‘The Magnitude of Flows of Global Trade in Services’, in Hoekman, B., A. Mattoo, P. English, Development,
Trade and the WTO, p. 243, Washington, D.C., World Bank, 2002.
3 For more discussion: Organisation for Economic Co-operation and Development (OECD), International Investment Perspectives,
pp. 54-55, Paris, OECD, 2005.
4 For more discussion: World Investment Report, United Nations Conference on Trade and Development (UNCTAD), Geneva, 2004.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT44


Figure 3: Growth of global output, FDI stocks, merchandise exports and services, 1980-2008


Sources: International Monetary Fund for GDP, United Nations Conference on Trade and Development
for FDI, and WTO for merchandise and commercial services trade.


Note: Average annual percentage increase.


GLOBAL TRADE AND GLOBAL FDI ARE STRONGLY CORRELATED


The third global trend is the high correlation between the trade growth of trade in goods and services and
FDI growth. Trade can be either a substitute for FDI or a complement to FDI, as noted above. Multinational
enterprises (MNEs) may decide to service a foreign market either through exports or through a subsidiary by
establishing a foreign presence. While establishing a subsidiary would lead to a substitution of exports by
FDI, subsidiaries of MNEs often create new trade fl ows with their parent companies or foreign suppliers, and
they can also export to third countries or back to the home country.


Trade can also complement FDI. Establishing foreign affi liates leads to new trade from the parent company
to its subsidiary, or from other home or third country suppliers to the subsidiary. Under both situations –
substitute and complementary trade to FDI – greater trade correlates with greater investment fl ows.5


WHY MULTINATIONALS INVEST ABROAD


In addition to factors such as the overall policy framework and business facilitation environment, the three
main motivating economic reasons for fi rms to invest in foreign markets are to seek markets, seek resources
and seek effi ciency.


Market-seeking FDI
FDI that is carried out to augment sales in the existing market or to seek out opportunities for new markets
is called ‘market-seeking FDI’. Investing locally can be motivated by favourable regulations or to save on
operational costs such as transportation. For example, General Motors’s investment in China may best be
seen as market seeking because the cars assembled in China are sold in China.


A market-seeking MNE invests to serve the host country’s demand for goods, resulting in horizontal FDI.
This occurs when a multinational company carries out a similar business operation in different countries; that


5 OECD, op.cit, Figure 2.1, p. 53.






6.4


11.7


7.7


8.8


0.0


2.0


4.0


6.0


8.0


10.0


12.0


14.0


World GDP World FDI stocks World
merchandise


exports


World
commercial


services exports




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 45


is, when the same production activities are replicated in several locations to satisfy local market demand.
Inevitably, the market demand on FDI infl ows is infl uenced by the market size or absolute value of gross
domestic product (GDP), and market quality, or GDP per capita.


Resource-seeking FDI
Resource-seeking FDI is investment undertaken to gain access to natural resources, such as minerals,
oil, natural gas and agricultural products, in particular countries. This type of investment seeks to acquire
factors of production that are more obtainable in the host country. The investment seeks access to existing
resources, such as Exxon Mobil investing in oil production in the North Sea.


Effi ciency-seeking FDI
FDI activities may also be undertaken to guarantee optimization of accessible opportunities and economies
of scale. Typically, fi rms partake in this type of investment in the hope that they will increase their effi ciency by
exploiting the benefi ts of economies of scale and scope. In addition, effi ciency-seeking FDI typically involves
investing in foreign markets to take advantage of a lower cost structure.


While market-seeking FDI results in horizontal investment, effi ciency-seeking FDI implies vertical investment.
The vertical investment strategy of MNEs connotes that it divides different stages of the production process
among geographical locations to minimize production costs. For example, a production stage that is labour
intensive is located where appropriately skilled labour is available at low cost. An example of effi ciency-
seeking FDI is that of a credit card company opening a call centre in India to serve United States customers.


FDI FLOWS


Most FDI originates in developed countries. Historically around two-thirds of this FDI has gone to developed
countries, meaning FDI fl ows are heavily tilted towards developed country markets.6 For the fi rst time
developing countries levels surpassed the 50% mark of global FDI fl ows in 2010, as fi gure 4 indicates.


Figure 4: FDI infl ows, global and by group of economies, 1980–2010 (billions of dollars)


Source: World Investment Report 2011, UNCTAD. Available at: www.unctad-docs.org/fi les/UNCTAD-WIR2011-Full-en.pdf


6 The actual numbers are even more dramatic. Industrial countries represented 90% of the origin of FDI outfl ows in 2000 and received
almost 70% of all FDI infl ows.


Maurer, A. and P. Chauvet, ‘The Magnitude of Flows of Global Trade in Services’, in Hoekman, B., A. Mattoo and P. English, Development,
Trade and the WTO, p. 243, Washington, D.C., World Bank, p. 243, 2002.


Developing economies


Developed economies


Transition economies


0


500


1 000


1 500


2 000


2 500
World total


52%


1980 1985 1990 1995 2000 2005 2010




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT46


According to the United Nations Conference on Trade and Development’s (UNCTAD) 2010 World Investment
Report, the 10 leading developing countries for FDI infl ows,7 account for approximately three-quarters of total
developing country FDI infl ows.8 However, the share of developing economy FDI has been tilted towards
certain favoured investment destinations such as China, India, Mexico, Brazil and Turkey, rather than being
more evenly spread across all countries.


Of further interest is the huge rise of FDI infl ows in these and other most favoured economies. For example,
China recorded FDI infl ows of US$ 578,818 million in 20109 compared to US$ 20,691 million in 1990; India
recorded US$ 197,939 million in 2010 compared with US$ 1,657 million in 1990; Mexico recorded US$
327,249 million in 2010 compared with US$ 22,424 million in 1990; Brazil recorded US$ 472,579 in 2010
compared with US$ 37,143 million in 1990; Turkey recorded US$ 181,901 in 2010 compared with US$ 11,150
million in 1990.10


Clearly, because of the link between FDI and increased exports, developing countries endeavouring to
participate more in international trade must pay more attention to creating an enabling environment for
investors. Developing countries must also learn from the experiences of those similarly placed countries that
have undergone reform to attract investment.


LINKAGES BETWEEN FDI AND EXPORT GROWTH
The linkages between foreign investment and exports operate through different channels. There are basically
four kinds of linkages between exports and foreign investment. All of these linkages relate to inward foreign
investment. The fourth one also links to outward foreign investment.


 Access to effi cient infrastructure services;
 Access to global supply chains;
 Access to technology and know-how;
 Exports or outward FDI by fi rms that seek to supply foreign markets by establishing foreign presence.


ACCESS TO EFFICIENT INFRASTRUCTURE SERVICES


Those countries that have successfully engaged in exporting provide a national environment in which access
to services, particularly infrastructure services, are competitive. Moreover, ensuring competitive access in
terms of increased effi ciency, access and affordability of services can: contribute to a country’s economic
diversifi cation, effi ciency and export competitiveness; increase domestic supply capacity; contribute to
development goals; and enhance a country’s integration into the regional and global economy.


For example, landlocked countries are extremely dependent on effi cient haulage companies, rail systems and/
or road systems that effectively connect them with ports and foreign clients. Similarly, effi cient sea transport
has historically been the key to linking overseas markets across continents. Moreover, the competitiveness
of fi rms depends critically on their access to services such as the provision of electricity, Internet, various
business services and so on.


7 The countries are China, India, Brazil, Turkey, Chile, South Africa, Mexico, British Virgin Islands, Cayman Islands and Saudi Arabia. For
further information on the FDI infl ows and outfl ows see: World Investment Report 2011: Non-Equity Modes of International Production and
Development, UNCTAD, pp. 191-193. Available at: www.unctad.org/Templates/webfl yer.asp?docid=15189&intItemID=2068&lang=1&m
ode=toc
8 Ibid.
9 These fi gures are only for Mainland China, and do not include Hong Kong, which was re-united with China in 1997.
10 UNCTAD, World Investment Report 2011: Non-Equity Modes of International Production and Development.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 47


SERVICES CAN BE A BOTTLENECK


Effi cient service delivery does not come about cheaply in most cases. Service delivery depends in many
instances on physical infrastructure, which often requires major policy reforms and institutional changes to
increase the competitiveness of service providers. For example, many service providers operate in highly
distorted markets as monopolies (for example electricity generation and transmission, rail transport or water
companies), and could be more competitive if appropriate policy reforms were enacted.


While reforms are one part of the equation, it is also the case that there is a lack of public and private fi nancial
resources to improve upon the performance of services. In particular, infrastructural investment requirements
are substantial and call for investments, often with long time periods. Power stations, road networks,
undersea cables, rail rolling stock and aircraft are all examples of capital goods in service infrastructure that
require massive investment that can typically only be amortized11 over long periods. They are also subject to
considerable risks.


Developing countries face a particularly serious problem in fi nancing these infrastructural requirements.
There are basically fi ve different sources of fi nancing investment in infrastructure. They include two public
sources – government budgets and foreign donors. In addition, there are three private sources – loans from
commercial banks, bond issues and equity investment. For a variety of reasons, which will be discussed
in the following section, all these sources – with the exception of foreign equity investment – have major
economic and fi nancial disadvantages.


FDI – AN ATTRACTIVE SOLUTION


Foreign equity investment that is FDI-based fi nancing of physical infrastructure has several advantages:


 Resources needed for fi nancing infrastructural projects can be entirely mobilized by foreign investors;
 Government resources used to fund such projects can be made available for other useful projects, such


as health and education;
 The risk of investment would fall on or be shared with foreign investors, depending on the structure of the


actual deal;
 In countries with foreign currency shortages, foreign project fi nancing can strengthen the home country’s


international reserves;
 Foreign-funded and owned projects typically involve the transfer of technology and know-how, which is of


critical importance to most developing countries;
 There are also ways of ensuring that foreign investors use services or other inputs provided by local


suppliers as much as possible, thereby creating backward linkages.


INVESTOR PARTNERSHIPS


There are three main channels for foreign investor participation in infrastructure: public-private partnerships,
privatization and green fi eld investment.


Private sector participation in the design, fi nancing and execution of infrastructure projects reduces the large
gap between infrastructure needs and the limited investment resources governments have at their disposal
to meet them. Public-private partnerships (PPPs) bring the best features of the public and private sectors
together. The private sector can leverage its advantages in creative fi nancing, greater operational effi ciency,
lower costs of distribution, more complex delivery systems, faster decision-making, management fl exibility
and innovation. The public sector can provide strategic direction, including the choice, location and pricing
of infrastructure; ensure value for money and transparency in procurement; and above all, through capital or
user fee subsidies, or commitments to purchasing agreements, enable private fi rms to enter large markets
with guaranteed consumers.


11 In accounting the cost of a long-term asset is accounted for by deducting a portion of that cost against income in each period.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT48


In relation to trade, infrastructure comprises not only roads, railways, ports, energy, water and
telecommunications, but also laboratories for quality, sanitary and phytosanitary controls and verifi cation of
compliance standards with border posts and associated computer and customs software. The use of PPPs
in infrastructure is often seen as a more economically effi cient and sustainable option for governments,
particularly those trying to address infrastructure shortages or improve the effi ciency of their organizations.
There are a number of different models, such as build, operate and transfer (BOT); build, own, operate and
transfer (BOOT); or build, own and operate (BOO).


In recent decades there has been an upsurge in the use of PPPs. In sub-Saharan Africa, between 1990
and 2008 there was an immense rise in the investment commitments to infrastructure projects with private
participation (see fi gure 5). In 2008, nearly US$ 15 billion was invested, compared to minor investments
recorded in 1990. For projects with high capital and maintenance costs, PPPs have proven to be particularly
attractive for countries with tight fi scal constraints and the inability of public entities to fi nance projects.
Benefi ts of PPPs include:


 Encouraging a strong customer service orientation;
 Enabling the public sector to focus on the outcome-based public value they are trying to create;
 Providing benefi ts by allocating the responsibilities to the party – either public or private – that is best


positioned to control the activity that will produce the desired result;
 Expediting completion compared to conventional delivery methods;
 Improving quality and system performance from the use of innovative materials and management


techniques;
 Substituting private resources and personnel for constrained public resources;
 Accessing new sources of private capital.


At the same time, implementing PPPs has been complicated in practice, often requiring additional government
support. Therefore, it is important to ensure good practices for implementation.


The other two important channels for foreign investors to participate in costly infrastructure projects are
privatization and greenfi eld investment. An example of a service sector in which greenfi eld investments
have taken place is telecommunications. An example in which PPP and privatization channels have been
used is the power sector, where the construction of power stations is particularly costly and the commercial
risks are particularly high. The attractiveness of deals involving PPPs and privatization in project fi nancing
in developing countries can be also seen from the data on global PPP investment projects based from the
World Bank. The data shows a considerable expansion of those projects around world over the last 25 years
or so, with a particularly high share of those projects in the energy and water sectors.


Figure 5: Private investment in sub-Saharan infrastructure projects by sector, 1990-2008


15


12


9


6


3


0


2008 US$ billions


Energy Telecoms Transport Water and sewerage


1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008


Source: World Bank. Private Participation in Infrastructure Database. http://ppi.worldbank.org/.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 49


Table 2 shows the sectoral and sub-sectoral breakdown of current PPP projects in the World Bank’s
Private Participation in Infrastructure Database (PPI database).12 The energy sector comprises the bulk of
PPP projects. Transport projects, mostly seaports, airports, highways and bridges, account for the second
largest share, followed by telecommunications, then water and sewage. This sectoral breakdown refl ects two
key investment patterns in PPPs: sectors with cross-border applications and impact, such as energy and
transport, attract the biggest investments, while sectors with more local applications, such as telecoms and
water and sewage, see the least investment.


Table 2: Sectoral and sub-sectoral breakdown of PPP projects, as of 2009


Primary sector Number of projects
Proportion of world


total


Energy 1 524 38.32%


Telecom 818 20.57%


Transport 1 020 25.65%


Selected sub-sectors Number of projects
Proportion of world


total


Energy
Power generation 992 24.9%


Power distribution 561 14.1%


Telecom
Fixed telecom 343 8.6%


Mobile 542 13.6%


Transport


Airports 121 3.0%


Seaports 303 7.6%


Railroads 104 2.6%


Roads 490 12.3%


Water
Water sewerage and treatment 305 7.7%


Water utility 336 8.4%


Source: Resides, R. Global Determinants of Stress and Risk in Public-Private Partnerships (PPPs) in Infrastructure, ADB Institute
Working Paper, No. 133, Asian Development Bank Institute, based on data from the World Bank PPI database. Totals of sub-
sectors may not necessarily add up to sector totals because some projects may involve more than one sub-sector (e.g. in the
energy sector, a project may involve both power generation and power distribution, so a single project can be classifi ed under
both sub-sectors).


WHY USE FOREIGN INVESTMENT FOR INFRASTRUCTURE?


The following section details why there is a need to use FDI in developing countries, often in favour of other
possible alternatives.


 Limited availability of domestic public funds. Most developing countries struggle with government
budgetary constraints in mobilizing suffi cient resources. Governments in developing countries face
powerful demands on their budgetary resources from social sectors, such as education and health. This
creates serious dilemmas for policymakers endeavouring to support infrastructure projects. While valuable
support has been provided by foreign public institutions, such as the World Bank and other regional
banks, to carry out infrastructure projects, it is not nearly enough to satisfy demand.


 Domestic private sources of funding are often inadequate. While domestic private funding sources from
the banking sector and capital markets could provide an alternative to the inadequacies of public support,
they are also inhibited. For example, stock markets are one of the most vital areas of a developed country


12 The Private Participation in Infrastructure (PPI) project database tracks infrastructure projects newly owned or managed by
private companies that achieved fi nancial closure in 1990-1999 in energy (electricity and natural gas transmission and distribution),
telecommunications, transport and water.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT50


because they provide companies with access to capital through individual investment. However, stock
markets are at best in a nascent state in most developing countries, with very few actually having fully
functional capital markets.13


Local domestic bank infrastructure fi nancing is also limited. Access to credit is constrained by high interest
rates, low creditworthiness of borrowers, and a highly limited ability of these banks to supply credit,
typically with a short-end of credit maturities. While the reasons for high interest rates and for the bias
towards short-term credit are complex, there is widespread agreement that low effi ciency in the fi nancial
sector is one of the principal reasons.


 Access to private foreign credit is poor and very risky. Access to foreign borrowing is extremely limited
for most developing countries due to the absence of well-functioning local capital markets, currency
restrictions that limit access to loans in foreign currency in foreign credit markets, high levels of external
debt, and an almost complete absence of companies able to provide adequate security to foreign lenders.
Foreign borrowing by governments is limited to a few developing countries, which are primarily middle
income. However, these governments typically must borrow at rates refl ecting higher sovereign risks.
Some local companies have the capacity to borrow abroad.
Some middle-income developing countries with fully liberalized foreign currency markets may be in the
position to borrow abroad at interest rates lower than domestic rates and on-lend the funds at more
attractive rates locally. This ‘carry-trade’ in recent years has spread through many markets due to the large
differences in interest rates among countries, and in the pace of liberalization of capital accounts. Although
an attractive option, especially for fi nancial intermediaries, carry-trade is also very risky. Banks that borrow
abroad contract their debt in foreign currency while the proceeds from their on-lending activities are usually
in local currency. This currency mismatch has often resulted in serious problems. It has also led to local
banks borrowing and lending the foreign currency, in which case the foreign currency risk is borne by the
fi nal borrowers. Either option entails signifi cant risks to both borrowers and lenders.


 Introducing new fi nancing instruments is very complicated. Bond fi nancing, a type of long-term
borrowing that government and public utilities use to raise money, primarily for infrastructure projects,
has been proposed as the preferred option for developing countries.14 Finance is obtained by selling
bonds to investors based upon the promise to repay this money, with interest, according to specifi ed
schedules. The interest government has to pay investors on the bonds is exempt from taxes, making it a
more attractive proposition than it might otherwise be. Bond fi nancing also has the advantage of being
long term and at fi xed interest rates – something that local banks in such countries are unlikely to be able
to provide.
However, the problems of using bond fi nancing on a large scale are immense. One major constraint is the
poorly developed pension and insurance industries in most developing countries, which limits the range
of long-term investors into bonds. Even in countries in which both industries are established, the liquidity
of pension and insurance companies tends to be very limited.


The main advantage of FDI is its role in fully absorbing, or at least sharing, the commercial risk of the project,
avoiding further increases in external debt, transferring technology and know-how, and providing external
fi nancing for the project. This also limits overcrowding and other adverse impacts on local credit markets.
Furthermore, foreign investors normally have better access to credit markets than governments or private
investors from developing countries and as a result are able to obtain better credit conditions.


ACCESSING GLOBAL SUPPLY CHAINS
One of the most remarkable changes in global trade has been the strong interdependence of trade and
foreign investment. The growth of global trade in goods and services has been highly correlated with global
FDI growth. Modern global trade trends refl ect the importance of FDI as an important driver of trade. Moreover,
increasing intra-fi rm trade, between developed and developing countries, highlights the trend towards more
trade-intensive foreign investment.15


13 A capital market is a market for securities (debt or equity), where companies and governments can raise long-term funds (over a one-
year period). The capital market includes the stock market (equity securities) and the bond market (debt).
14 Making Finance Work for Uganda, Washington, D.C., World Bank, December 2009.
15 OECD, op.cit, p. 54.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 51


A common scenario is when the developing country affi liate of a US multinational has been able to increase its
exports to other affi liates rather than to the parent company. This is confi rmed by empirical evidence showing
that intra-fi rm exports as a percentage of total US MNE exports to both developed and developing countries
have been growing. For example, from 1982 to 1994, the share of US parent companies that shipped to their
foreign affi liates increased from 31% to 42%; the share of US parent company imports shipped from their
foreign affi liates increased from 36% to 50%.16


These trends refl ect the recent strategy of MNEs to engage in outsourcing and globalized production with
a network of subsidiaries in various countries, thereby creating a global value chain. These trends also
refl ect a change in weight of importance given to the main determinants of FDI. Although market-seeking
or resource-seeking investments still account for the majority of FDI between developed and developing
countries, effi ciency-seeking motives have increased over the past decade.


FRAGMENTED, GLOBALIZED PRODUCTION


As the world has become more globalized, it has become easier for production processes to be fragmented
into separate stages. The simplest form is the subcontracting process, where the delivery of services or
intermediate inputs is subcontracted to a service provider or a producer of inputs. In more complex supply
chains, many stages of the production process may be located in different parts of the world and linked
together by the fi nal producer. The fi nal producer typically uses modern management techniques, such
as just-in-time deliveries and other methods of stock management, as well as highly advanced transport
systems and communication technologies.


MNEs may use their subsidiaries for the delivery of important inputs, which leads to intra-fi rm trade.
Alternatively, MNEs may contract other companies. Intra-fi rm trade is characterized by several important
features:17


 Trade relates to goods and services that feed into many different stages in the production process;
 Because intra-fi rm trade involves different subsidiaries of MNEs, it also implies a strong link to foreign


investment. This link comes from the fact that each subsidiary is created by foreign investment of the
parent company. FDI is critical to the creation of the value chain;


 MNEs with intra-fi rm trade tend to be different from those with no intra-fi rm trade. They tend to be more
dynamic technologically;


 Parents and subsidiaries of MNEs tend to be more deeply integrated and less sensitive to the economic
environment, such as changes in tariffs and exchange rate movements;


 MNEs with intra-fi rm trade have more R&D operations.


Creating and maintaining supply chains is a complex process, and their origins may vary from case to case.
Backward linkages to local fi rms represent a particularly tenuous relationship, involving the need for an MNE
to carefully choose their suppliers from those local fi rms that meet stringent requirements set down by the
MNE. Alternatively, the awarding of a contract or allowance for technical assistance by an MNE may be
instrumental for local fi rms to become competitive suppliers. Local suppliers become competitive while doing
business with MNEs due to more stringent requirements or technology transfer.


Multinationals choose their supply chain approach based on local conditions and favoured business
approaches. Developing country governments are keen to design appropriate policies strengthening the
linkages.


16 Zeile, W.J., ‘US Intra-Firm Trade in Goods’, Bureau of Economic Analysis, Survey of Current Business, Washington, D.C., July 1997. For
more recent data see: Dunning, J., Lundan, S.N., Multinational Enterprises and the Global Economy, Second Edition, Cheltenham, Edward
Elgar, 2008.
17 Feinberg, S.E. and M.P. Kean, ‘Intra-Firm Trade of US Multinational Corporations: Findings and Implications for Models and Policies
towards Trade and Investment’, in Moran, T. H., E.M. Graham, M. Blomstrom, Does Foreign Direct Investment Promote Development?
pp. 247-248, Washington, D.C., Peterson Institute for International Economics, May 2005.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT52


LINKING DOMESTIC FIRMS WITH GLOBAL SUPPLY CHAINS


Criteria for selection
A World Bank survey18 of activities of MNEs in the Czech Republic and Romania revealed that the decision of
an MNE to choose one type of supplier over another is driven by several factors. The survey found that the
top reasons reported for cooperating with Czech suppliers included: low prices (71%); geographic proximity
(64%); savings in transport costs (56%); savings on import duties (44%).


Sourcing from foreign fi rms located in the Czech Republic was primarily driven by the fact that these fi rms
were global suppliers of the MNE (45%) and offered more competitive prices (45%) and offered higher
quality products (29%) not available from Czech fi rms; transport costs mattered (30%) as well, and benefi ts
of proximity were also important.


Importing inputs from abroad was primarily driven by using a parent company’s global suppliers (46%),
implementing the decision of parent company (37%), unavailability of particular products from Czech fi rms
(36%), or desire to purchase higher quality inputs (30%).


One of the benefi ts of participating in supplier fi rms is the potential for technology transfer by more advanced
MNEs. While technology transfer is not the main reason for local fi rms to participate in supply chains, it can
be an extremely important external benefi t for them.


What do these trends and features of supply chains mean for developing countries?


First, the benefi ts of supply chains are not distributed equally around the world. Some countries participate
in the process extensively, while other countries do so less or are left completely behind. Countries in South-
East Asia and East Asia have been particularly active in various supply chains and strong involvement also
takes place in Eastern Europe and parts of Latin America.


Second, an important message is that greater involvement of developing countries in supply chains is
imperative if they want to benefi t from the rapid growth of global markets. Developing countries will directly
benefi t from these global trends to the extent that MNEs locate their foreign activities in their markets. This
also enables developing countries to diversify their economies away from primary commodities.


Developing countries benefi t indirectly from the FDI activities of MNEs if their fi rms can be linked to their
supply chains as direct or indirect suppliers in the manufacturing process of foreign affi liates of MNEs, or
by providing services in the supply chain. It is clearly in the interest of developing countries to facilitate the
development of backward linkages, creating new employment and income opportunities for local fi rms and
workers. The value of backward linkages will be even greater if accompanied by transfers of technology and
management skills. In some situations, this may call for direct interventions from governments to encourage
backward linkages if they are impeded by market imperfections, as has been done in some countries.
Governments also need to create a sound investment environment.


18 Javorcik, B.S. and M. Spatareanu., ‘Disentangling FDI Effects: What do Firms Perceptions Tell us?’ in Moran, T. H., E.M. Graham,
M. Blomstrom, Does Foreign Direct Investment Promote Development? pp. 45-71, Washington, D.C., Peterson Institute for International
Economics, May 2005.


Box 22: Global car production


In the United States, a manufactured car is a good example of production fragmentation in global trade where
various value chains are created. United States car manufacturers have been adept at sourcing inputs and
deliveries from various suppliers from all over the world, which has resulted in creating high value, particularly
compared to other countries. A typical United States car built in the 1990s was created by suppliers from eight
countries, including the Republic of Korea, Chinese Taipei and Singapore. Most of the value was created by foreign
suppliers; the contribution of United States labour and capital and other inputs was only 37%.


Source: Grossman, G. and E. Rossi-Hansberg, The Rise of Offshoring: It’s Not Wine for Cloth Anymore, Princeton University, 2006.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 53


TRANSFERRING TECHNOLOGY AND KNOW-HOW


Export growth can be constrained by the use of old technology, a fi rms' poor knowledge of markets, poor
management and weak marketing channels. These challenges can be overcome through increased FDI,
which brings transfer of technology and know-how to local fi rms.


Foreign fi rms can bring the knowledge of markets, marketing channels and technological or managerial
know-how. This transfer of technology and know-how can improve a local fi rm’s profi tability by stimulating
productivity growth through modern technology or better management and/or reduction of unit costs due to
economies of scale by expanding marketing channels and introducing new markets.


There are two main technology transfer channels that can assist local fi rms in linking up with foreign investors.


 Horizontal technology transfer. This occurs when MNEs enter the domestic market and provide
technological support to local fi rms through the following:
– Local fi rms can learn by doing from the MNE as they strive to meet the MNE’s stringent quality standards;
– Local fi rms can employ skilled labour from the MNE;
– Local fi rms can benefi t from the presence of various quality professional service providers that often


accompany an MNE when it enters a country, including accountants, lawyers and brokers. Typically,
these service providers can also be used by local fi rms, thus raising the competitiveness of many
service providers. This expertise is also benefi cial to local fi rms endeavouring to export.


 Vertical technology transfer. This can take the form of forward linkages from supplier to buyer and
backward linkages from buyer to supplier. Vertical technology transfer can occur when foreign fi rms offer
suggestions to improve technological processes after inspection of facilities, assistance in testing quality,
leasing or lending machinery, training, supply of inputs, organization of production lines, maintenance of
machinery and inventory management.


The examples above refer to technology transfer through supply chains. Another form of technology transfer
can take place through direct linkages between an MNE (foreign investor) and a local fi rm. They can
create joint ventures or local fi rms can offer their companies directly for sale. Alternatively, the links can be
established through initial public offerings (IPOs), or mergers and acquisition (M&A) activities. Both IPOs and
M&As would typically require deals to be consummated through well-functioning stock markets, a condition
that is usually diffi cult to meet in most developing countries where stock markets are poorly capitalized and
there is little liquidity. Until stock markets in developing countries are either developed or strengthened, local
fi rms will need to seek direct links with foreign investors.


Box 23: India: business service outsourcing creates value


India’s US$ 1.5 billion outsourcing business illustrates how foreign investment and trade have benefi ted the
country. Together with information technology (IT) and software, business process outsourcing is perhaps the
country’s most open sector. In 2002, it attracted 15% of total FDI and accounted for 10% of all exports. By 2008, it
was expected to attract one-third of all FDI and to generate US$ 60 billion a year in exports, creating nearly 1 million
new jobs in the process. Being a liberalized sector combined with some investments by a few key MNEs, the
outsourcing industry took off. Pioneers such as British Airways, General Electric and Citigroup were among the fi rst
to move IT and other back offi ce operations to India, entering in 1996, 1997 and 1998 respectively. The success of
these companies demonstrated that the country was a credible outsourcing destination.


The MNEs trained thousands of local workers, many of whom transferred their skills to new Indian companies.
For instance, India’s Tata Consultancy Services recently went public valuing the company at US$ 8.8 billion with
US$ 1.2 billion in total revenues, growing at 30% per year since 1997, and of which more than 90% is exports.
The number of Tata’s employees grows by 17% per year. Today, Indian outsourcing fi rms control over half of the
intensely competitive global IT and back offi ce outsourcing market. Many of the leading companies started as joint
ventures or subsidiaries of MNEs, or were founded by managers who had worked for them. Liberalized sectors
have grown faster and business process outsourcing has taken off.


Source: Organisation for Economic Co-operation and Development (OECD), International Investment Perspectives, pp. 69,
Paris, OECD, 2005.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT54


MULTINATIONAL FIRMS BOOST DOMESTIC COMPETITION


Both trade and investment infl uence domestic competition as imports compete with domestically produced
commodities and foreign subsidiaries compete with local fi rms. The effects of both imports and foreign
investment are similar. By increasing competition, imports and competition create pressure on local fi rms to
reduce costs and to become more competitive. In many countries, government policies overly restrict foreign
participation in the domestic market. This approach needs to be carefully considered as it may impede the
potential export competitiveness of domestic fi rms.


However, it must be noted that the entry of MNEs may also hurt local fi rms. Multinationals have been known
to hire talented staff away from local fi rms (brain drain). The entry of MNEs may also distort the local labour
market by forcing local wages up to the point where local fi rms cease to be competitive.


EXPANDING DOMESTIC PRODUCTION CAPACITIES


FDI can contribute to expanding the production capacities of the local export sector. FDI can also encourage
local fi rms to introduce new products and services. In all parts of the world, FDI projects have led to relocating
manufacturing capacities from developed countries to transition and developing countries. Some of the
many examples include the expansion by United States car manufacturers into Mexico, foreign investments
by Intel in Costa Rica, Dell and other United States investors in Ireland, Volkswagen in the Czech Republic
and the emergence of China as the major supplier of manufactured goods.


There is an abundance of research that positively links FDI’s contribution to the competitiveness of local
fi rms in developing countries. For example, researchers have identifi ed and reviewed various FDI success
stories ranging across different industries and countries and analyzed the contribution of foreign investment
to the size of plants and their effi ciency, productivity, technology transfer and other factors of successful
performance.19 Overall, the research suggests an overwhelming link to FDI and its contribution to economic
growth and to economic development in general. Other evidence comes from studies of the Spanish
economy, which show not only that exports and FDI infl ows were complementary, but also that the fl ow of
causality was from FDI to exports.20


A powerful example of a success story is the acquisition of the Skoda Car Manufacturing Company by
Volkswagen in 1991. The success can be assessed in terms of output and profi tability as shown in fi gures 6
and 7, as well as in terms of backward linkages that have created enormous job opportunities and led to a
dramatic increase in productivity.


China represents an interesting case because of the important role of FDI in domestic resource mobilization
and exports, as well as the country’s strong competitiveness in world markets. For example, a study reveals
that technological innovation and FDI have had positive effects on the export competitiveness of China’s
manufacturing industry. In addition, changes in the export competitiveness of China’s manufacturing industry
over time have been related to the path of FDI infl ows.21 A great deal of empirical evidence is provided in
numerous sectoral studies and studies considering the contribution of technology transfer to economic growth.


19 Blalock, G. and P.J. Gertler, ‘Foreign Direct Investment and Externalities: The Case for Public Intervention’, in Moran, T. H., E.M.
Graham and M. Blomstrom, Does Foreign Direct Investment Promote Development? pp. 73-106, Washington, D.C., Peterson Institute for
International Economics, May 2005.
20 Alguacil, M.T. and V. Orts, ‘A multivariate co-integrated model testing for temporal causality between exports and outward FDI: The
Spanish case‘, Studies on the Spanish Economy, FEDEA, 1999. Available at: www.fedea.es/pub/eee/1999/eee50.pdf
21 Yang Yonghua, ‘Technological Innovation, FDI and China’s Manufacturing Export Competitiveness: An Empirical Analysis based
on China’s 26 Industries Panel Data’, International Conference on Information Management, Innovation Management and Industrial
Engineering, vol. 4, pp. 579-582, 3rd International Conference on Information Management, Innovation Management and Industrial
Engineering, 2010.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 55


Figure 6: Skoda/Volkswagen car sales 1991-2010


900


800


700


600


500


400


300


200


100


0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2008 20092007200620052003 200420022001


In thousands


Source: Compiled by ITC based upon the yearly reported fi gures of the Czech Car Association.


Figure 7: Skoda/Volkswagen after-tax profi ts 1997-2010


20


15


10


5


0
1997 1998 1999 2000 2008 2009 20102007200620052003 200420022001


In billions of
Czech crowns


Source: Compiled by ITC based upon the yearly reported fi gures of the Czech Car Association.


EXPORTS AND OUTWARD FDI


Multinational fi rms have two options in servicing foreign markets. They can either export directly to foreign
markets or they can supply foreign markets using their own subsidiaries established in those markets.
Establishing subsidiaries requires outward FDI.


Why would exporters face the dilemma of exporting or investing abroad? There are several answers to this
question. One answer is the costs of transport, insurance, energy and the complex logistics of organizing
delivery across borders, all of which may create strong disincentives to export to foreign markets. As the costs
of exporting and other logistical arrangements increase, the total costs of exports relative to the alternative –
the costs of establishing a foreign presence and servicing foreign markets by the company’s own subsidiary




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT56


– also increase. It may be more profi table for fi rms to set up their affi liates abroad to service their markets.
Services can be delivered in different forms, or ‘modes of delivery’ as defi ned by the WTO in the GATS. These
modes are described in box 24.


However, some fi rms have no other option to access foreign markets except by establishing a foreign
presence. Examples include hotel and restaurant services that require a foreign presence to satisfy foreign
demand in foreign markets.


Another reason for fi rms to choose a foreign commercial presence as the form of service delivery may be
market protection by foreign countries against imports of goods or services. Tariffs as an instrument of
protection in the host countries against merchandise imports may induce foreign fi rms to abandon attempts
to enter the foreign market via exports and supply that market using their affi liates. This practice of fi rms
bypassing tariff protection is known as ‘tariff jumping’. Foreign governments may introduce or deliberately
maintain protective measures to encourage foreign investors to set up businesses in their market to stimulate
employment, incomes and tax revenues.


POLICY IMPLICATIONS
Foreign investment help developing countries gain access to more competitive infrastructure services, as
well ensuring greater participation in global supply chains. Governments should pursue strategies that attract
foreign capital and are conducive to conducting business.


Box 24: GATS – The relationship between trade and investment


The General Agreement on Trade in Services (GATS) is the WTO Agreement that defi nes the relationship between
investment and trade in services using four modes through which services can be traded.


Mode 1 – Cross-border supply: the supply of a service ‘from the territory of one member into the territory of any
other member’. The service crosses the border, but both the provider and the consumer stay home.


Mode 2 – Consumption abroad: the supply of a service, ‘in the territory of one member to the service consumer
of any other member’. The consumer physically travels to another country to obtain the service.


Mode 3 – Commercial presence: the supply of a service ‘by a service supplier of one member, through
commercial presence in the territory of any other member’, i.e. investment through the establishment of a branch,
agency or wholly owned subsidiary.


Mode 4 – Presence of natural persons: the supply of a service ‘by a service supplier of one member, through
presence of natural persons of a member in the territory of any other member’. Private persons temporarily enter
another country to provide services.


Mode 3 encompasses FDI as a mode of supplying services. Although Mode 3 does not necessarily imply the
presence of foreigners working in affi liated companies, Mode 4 often accompanies Mode 3 as the foreign fi rm
may need to employ non-nationals in the host country, for example, persons from the parent company entering as
‘intra-corporate transferees’.


Modes 1 and 2 can also be complementary to Mode 3 when subsidiaries of foreign companies in developing
countries are exporters of services to the parent company. An example is business process outsourcing, whereby a
fi rm creates a subsidiary in a developing country to undertake database services and outsources the management
of its databases to the affi liate, an illustration of developed country Mode 3 exports leading to developing country
exports under Modes 1 and 2. Any effort to liberalize foreign investment in services (Mode 3) may need to consider
barriers to trade in services through Modes 1, 2 and 4.


Source: ‘A Policy Framework for Investment: Trade Policy’, a paper prepared for an OECD conference on Investment for
Development: Making it Happen, Rio de Janeiro, Brazil, 25-27 October 2005.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 57


STRATEGIES TO ATTRACT FOREIGN CAPITAL


Foreign investors are attracted to investing abroad by three main factors:


 Opportunities for profi ts;
 Macroeconomic stability determined by a mix of monetary, fi scal and exchange rate polices;
 A business-friendly environment, including protection of investors, attractive tax rates, ease of trading


across borders, contract enforcement, rule of law, etc.


While profi tability is clearly the necessary condition to invest, both macroeconomic stability and a business-
friendly environment play important roles in investors’ decisions to the extent that they affect the costs of
investing and the need for insurance coverage.


TARGETING FOREIGN INVESTMENT


This is arguably the most controversial area of policymaking with regards to foreign investment. Given that FDI
contributes to a country’s competitiveness, it may be tempting for governments to pursue policies targeting
FDI for specifi c local industries. However, the experience of countries has been quite negative except in very
special circumstances. The conditions for the success of these policies are so stringent and country specifi c
that it would be extremely risky and expensive to imitate them elsewhere. There are many examples of
countries that have succeeded in attracting FDI without special foreign incentives or other ‘targeting’ policies.


Financial incentives should not discriminate against domestic investors. The discrimination would encourage
domestic consumption rather than savings and possibly encourage capital fl ight, none of which is in the
interest of developing countries. Moreover, government investment policies should not be seen as ‘picking
winners’ by making investment decisions on the basis of the government’s judgement of the relative profi tability
of individual projects. These judgements are best made by private investors who have the experience and
skills in the given areas and risk their money and businesses to succeed.


There are few areas in which developing countries can consider government interventions. Where there
are serious market failures or distortions, it is unadvisable to target foreign investment. At the same time,
trade and investment barriers in developing countries are relatively high. Targeted incentives might be used
temporarily to overcome anti-export bias in such circumstances (see chapter 5).


Developing countries are often unable to attract foreign investment due to shortages of technical or other
labour skills, for example, in the fi nancial services sector. Governments should consider more proactive
support to develop these skills under labour policies.


In many countries, setting up foreign businesses can be excessively costly due to a range of issues, including
complying with business start-up procedures and regulations, minimum capital requirements, labour
shortages and other factors. Under such circumstances, governments are justifi ed in providing fi nancial
support as an incentive to foreign investors to compensate for such costs.


GOOD GOVERNANCE, KEY TO INVESTMENT PROMOTION


Transparency results in improvements in overall governance standards. For simplicity, good governance for
investment promotion can be reduced to four main principles: predictability, accountability, transparency and
participation. Table 3 outlines these principles together with examples of how to improve governance and the
necessary mechanisms to achieve good governance.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT58


Table 3: Good governance in investment promotion


Requisites for good governance Examples of how to improve
governance


Mechanisms/instruments/
practices


Predictability Clear policies and a legal framework for
investment


Streamlined and simple rules and
regulations governing investments


Effective investment facilitation services


Strong advocacy role of investment
promotion agencies (IPAs)


Online road maps for investors


IPA investment implementation support
services


Accountability Introduction of ethical standards for civil
servants


Anti-corruption instruments and
measures


Dispute resolution mechanisms for
investors


Code of conduct


Client charters


Anti-corruption legislation and
enforcement (anti-corruption board)


Investment ombudsman


Transparency Easy availability of information for
investors


Timely disclosure of information on
changes in the investment regime


Information collection and sharing
of national data on FDI and impact
of international investment on the
economy


Investment regime data on website


Investment guides


Online application and tracking system
for permits and licences


Client charters


Analysis of FDI data by IPA and frequent
publication of FDI trends and impact


Participation Regular public-private sector dialogue
on efforts to improve the investment
environment


Consultations with civil society on
legislative and regulatory changes that
will infl uence businesses


National business council and local
chamber of commerce and industry


Involvement of NGOs and labour
organizations in consultations on policy
decisions


Source: Notes on Good governance in Investment Promotion, Strengthening the Investment climate: a blue book on best
practices, UNCTAD, 2004. Available at: http://www.unescap.org/tid/publication/indpub2402_chap5.pdf


Transparency is key
Transparency is key to overcoming foreigners’ disadvantages when investing in a host country. Transparent
information on how governments implement and change rules and regulations concerning investment is a
decisive factor in the investment decision.22 Transparent policy environments compensate for what foreign
investors may consider as disadvantages when investing in a host country with very different regulatory
systems, cultures and administrative frameworks. Policies implemented in a transparent manner help to
avoid hidden costs that may increase the perception of risk by foreign investors.


A transparent and predictable policy and regulatory framework assists businesses in the evaluation of
potential investment opportunities on a more informed and timely basis, reducing the period before the
investment becomes productive. Transparency conditions have also been endorsed in almost all recent
international investment agreements, including regional agreements and most bilateral investment treaties
and various WTO agreements. Countries can provide a clear indication of their commitment to transparency
by signing international, regional and bilateral agreements.


Transparency is also related to higher fl ows and quality of investment. A 2007 OECD study shows that there
is a strong relationship between international investment fl ows and the quality of governance against FDI
infl ows.23


22 ‘Investment policy’, in The Policy Framework for Investment: A Review of Good Practices, OECD, 2007.
23 Ibid.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 59


Barriers to transparency reform
A fundamental challenge in seeking to improve transparency is similar in all countries; it is the desire to
protect ‘concentrated benefi ts at the expense of broader wellbeing’.24 A lack of transparency also protects
government offi cials from accountability. The OECD describes some obstacles to reform:


Many actors – both inside and outside the public sector – can have a stake in non-transparent practices.
It is for this reason that, despite the broad apparent agreement in principle about their benefi ts, actual
implementation of transparency-enhancing reforms is likely to involve painful shifts in the way policies are
made and implemented, especially in countries with highly opaque policy environments. The diffi culty will
be to develop the political momentum for pro-transparency reform and to prevent backsliding.


A further obstacle to reform is that it entails technological, fi nancial and human resources and requires
administrative costs. The main transparency actions entail the creation of registers, websites, the
development of ‘plain language texts’, and other mechanisms for making legal and regulatory codes, and
any changes or new regulations being made accessible to interested parties.25


Implementing such measures can be particularly burdensome, particularly for developing countries often
lacking fi nancial and technical resources. Even when legislation has been introduced to reform the investment
climate, implementation diffi culties often remain, commonly due to resource constraints. In other examples,
corruption has impacted adversely on the rule of law and integrity of the host country.26


OPEN TRADE POLICIES


What trade policy would be conducive to FDI infl ows? The answer can be split into two parts. The fi rst part
relates to trade policy as an instrument of incentives to attract FDI – the ‘pre-establishment stage’. The
second part refers to trade policy after the establishment by foreign investors in the host country – the ‘post-
establishment’ stage.


In the pre-establishment stage, governments have two options with regards to trade policy as an instrument
of attracting FDI:


 Lower trade barriers as an incentive to effi ciency seeking foreign investors;
 Maintain a relatively high level of border protection of commodity and services markets with the hope of


replacing imports by foreign producers establishing their presence in the host country.


Which of these two strategies should be pursued? The latter strategy, based on a high level of protection,
presupposes a large domestic market in the host country that would make a foreign presence attractive. Small
markets hardly create conditions for effi cient plant size to make local production effi cient and competitive. Yet
even in large markets, the preferred option is a relatively open trade regime that creates better conditions for
production effi ciency in the post-establishment phase. As noted earlier in this chapter, those countries with
more open trade regimes, typically developed countries, record higher levels of FDI.


In the post-establishment stage an open trade regime – with low tariffs, no quotas and no non-tariff barriers
(NTBs) to trade – is also the preferred option as part of the strategy to enhance a fi rms’ export competitiveness
for several reasons. Tariffs and NTBs on imports constitute a tax on inputs used in producing exports and
goods and services for the domestic market. They create an anti-export bias. Barriers to imports of capital
and intermediate goods will be particularly costly.


Trade policy is not considered to be the best policy option to address government economic priorities.
Other instruments should be used. A high level of harmonization of rules such as sanitary and phytosanitary
standards (SPS) and technical norms with those agreed under the existing SPS and technical barriers to


24 Nixon, R., ‘Transparency Obligations in International Investment’, 2004. Available at www.treasury.gov.au/documents/876/PDF/
International_investment_agreements.pdf
25 ‘Investment policy’, in The Policy Framework for Investment: A Review of Good Practices, OECD, 2007.
26 ‘Investment policy’, in The Policy Framework for Investment: A Review of Good Practices, OECD, 2007.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT60


trade (TBT) agreements in the WTO are also very important. Export controls and restrictions are also not
recommended because they impede access to external markets, which would violate one of the foreign
investors’ main objectives in developing countries (for further analysis see chapters 4 and 5).


IMPLEMENTING TRADE POLICY EFFECTIVELY


Well-designed trade policies are critical, but just as essential is the need for effective implementation.
Also critical are a well-functioning legal system supporting property rights and contract enforcement, well-
functioning government legislative departments; effi cient customs and tax administration, modern trade
infrastructure, such as metronomic systems, testing centres, information gathering and dissemination
systems; and the absence of informal export and import barriers.


The non-discrimination obligation
Non-discrimination in the form of ‘national treatment’ obliges a government to treat enterprises controlled by
the nationals or residents of another country no less favourably than domestic enterprises in like situations. It
also holds that an investor or investment from one country be treated by the host country no less favourably
than an investor or investment from any third country, referred to as most favoured nation (MFN) in international
agreements. Reciprocally, non-discriminatory treatment does not grant advantages to foreign investors.


The practical use of these principles towards investment differs greatly across countries, because a state’s
right to regulate frequently entails discriminating against foreign investors. Subject to specifi c commitments
agreed to in international agreements, governments determine which industries will, or will not, be subject to
national treatment. This decision is motivated by concern about factors including development and equity,
and national interest, such as security. Exceptions to national treatment include more onerous licensing
requirements for foreign investors than for domestic investors, special screening procedures for FDI entry
of foreign fi rms, and limits on foreign equity ownership ceilings. Exceptions to national treatment are most
typical for the fi nancial services, land and international transport sectors.


Although valid in many instances, government policies that detract from national treatment or MFN frequently
involve costs that must be carefully balanced in relation to anticipated benefi ts. For example, they may
cause less competition, distort resource allocation, hinder linkages between MNEs and local suppliers,
and slow the diffusion of technological innovations. Such consequences may put off investors and give a
negative perception concerning a country’s openness towards investment. Consequently, exceptions to non-
discrimination ought to be periodically re-evaluated to decide whether the original conditions that warranted
such practices still exist.


Protect property and contractual rights
The protection of investment, including physical and intellectual property rights, is widely accepted as an
essential component in creating the conditions for a strong investment environment and economic growth.
Effective government policies play an important role in ensuring both the promotion and protection of property
rights and contract enforcement measures are in place.


Secure, transferable rights to land are a vital precondition for creating a strong investment environment and
an important inducement for investors and entrepreneurs to shift into the formal economy. Owing to these
rights, the investor is able to participate in the eventual profi ts that are derived from an investment and
diminish the risk of fraud in transactions. These rights provide an economic value and investors must be
assured that their claim to these rights is properly established and protected.27 Insecurity of property rights
may arise due mainly to inappropriate or unclear legislation, non-existent or ambiguous land records and the
inability to enforce existing land rights.28


Contract enforcement is critical. The value of property is only realized when it is involved in a transaction. This
transaction could involve using the property as collateral to obtain a loan or it could involve the sale of the
property. It is ultimately the possibility of using an asset in a given market transaction that gives the asset its


27 ‘Investment policy’, in The Policy Framework for Investment: A Review of Good Practices, OECD, 2007.
28 Blue Books on Best Practice in Investment Promotion and Facilitation, UNCTAD. Available at: www.unctad.org/TEMPLATES/Page.
asp?intItemID=4158&lang=1




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 61


value. Therefore, investors must have trust in the channels through which transactions involving these assets
take place. Bureaucratic and cumbersome procedures for dealing with commercial transactions undermine
the benefi ts to the investment environment of any established property rights.


Intellectual property rights as investment assets
A World Intellectual Property Organization report29 notes that ‘property rights enable the exercise of ownership
over the intellectual output of R&D activities. This is done by creating, using, and leveraging IP (intellectual
property) rights that enable the owner of IP rights to enter into negotiations with others in order to take a
new product to market through various kinds of partnerships.’ Frequently, these partnerships are based
on special contractual arrangements known as licensing contracts that permit third party use of one or
more types of IP rights in exchange for a valid consideration in cash or kind. In addition, a secure access
to IP rights, through ownership or licensing of IP rights, can be essential to acquiring funds from fi nancial
institutions and investors.


A growing number of developing countries are seeking to attract FDI, including industries where proprietary
technologies are important. But foreign fi rms are reluctant to transfer their most advanced technology or to
invest in production facilities until they are confi dent their rights will be protected. Strengthening IP rights
can be an effective incentive for inward FDI; however, it is only a component of a broader set of factors. For
example, China had no IP rights protection before 1985, but has subsequently undergone a gradual reform
of its patent system and introduced protection measures. Recent research suggests that the strengthening
of IP rights protection in China has a positive and signifi cant effect on attracting FDI.30


Small- and medium-sized enterprises (SMEs) are often constrained in more ways than larger enterprises
in making an effective and effi cient use of the IP rights system. This means that their potential to invest in
innovation activities is not always used. SMEs may profi t from various features of the IP system depending
on their individual needs and technological capacity. In today’s knowledge-based economy, it is their skill
in using the IP system successfully that will chiefl y infl uence their ability to make the most of their innovative
capacity and regain their investments in innovation. For governments, it is important to ascertain the extent
to which SMEs are currently aware of, have access to, and are making effective use of, the IP system and to
determine the barriers that are preventing them from doing so.


An attractive taxation system
A host country’s tax policies can stimulate or discourage FDI infl ows and affect foreign investment decisions.
A high tax burden relative to benefi ts from the stream of income from the project and relative to tax burdens
levied in other competing locations is likely to discourage foreign investment. Location-specifi c projects and
hence profi t opportunities may offer tax authorities somewhat greater room for manoeuvre, but the number of
such projects is limited. In addition, it is well known that the host country tax burden is a function of statutory
tax provisions and compliance costs. Compliance costs can become prohibitive. A poorly designed tax
system and ineffective tax administration may discourage capital investment if the tax laws and regulations
are not transparent, if they are too complex and if they are unpredictable. Under these circumstances, project
costs would increase, and so would the uncertainty over net profi tability of the project.


Countries with a low tax burden will attract more foreign investors than those with a high tax burden. Similarly,
transparent tax regimes based on relatively simple tax rules and effective tax enforcement mechanisms will
be highly desirable. Together with tax treaties signed with major partner countries, this will create a highly
effective way of ensuring the predictability of tax burdens, both current and in the future.


Tax systems should be neutral with respect to location, size of fi rms, origin of ownership and sectors to avoid
discriminating against the most effi cient suppliers. However, exceptions to this rule could be envisaged and
are even condoned under WTO rules. For example, lower tax burdens are often offered to investors, both
foreign and domestic, for investments in poorly developed regions. Similarly, lower taxation privileges have


29 Intellectual Property Rights and Innovation in Small and Medium Enterprises, World Intellectual Property Organization (WIPO). Available
at: www.wipo.int/export/sites/www/sme/en/documents/pdf/iprs_innovation.pdf
30 Using data for 38 diverse countries from 1992-2005, the empirical evidence suggests that the strengthening of intellectual property
rights protection in China has had a positive and signifi cant effect on attracting FDI. For further information see, Awokuse, T., ‘Intellectual
property rights protection and the surge in FDI in China’, Journal of Comparative Economics, vol. 38, Issue 2, June 2010.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT62


been offered to fi rms in favoured sectors to boost labour skills or help develop the small enterprise sector.
The use of tax incentives always raises the question of their effectiveness, which is why it is prudent to carry
out a cost-benefi t analysis before they are introduced.


Subsidies usually do not affect project fundamentals, but investors happily receive them as an added bonus.
Subsidies also tend to shorten the investment horizon and may make foreign investment decisions highly
speculative. Much of what applies to tax policies also holds true for the use of subsidies by governments.


STRONGER REGIONAL COOPERATION


Stronger regional cooperation increases the attractiveness of domestic markets. At the same time, the
markets in many developing countries are too small to make the case to foreign investors for economically
and fi nancially viable projects. Under these circumstances, there are two main solutions:


 Enable foreign investors to seek external markets outside the domestic markets of the host countries.
Foreign investors would invest abroad with the view of using the host country as the production hub
for exports to other countries and markets. In many parts of the world, this is becoming an increasingly
realistic option, facilitated by regional integration and the accompanying lowering of trade barriers, which
makes intra-regional trade a more viable option than in the past.


 Governments can greatly contribute to developing supply chains by expanding and integrating their
external markets through, for example, regional trade agreements and deeper regional integration.


ENHANCING DOMESTIC COMPETITION


Contestable markets and domestic competition
For a contestable market to exist there must be low barriers to entry and exit so that there is always the
potential for new suppliers to provide fresh competition to existing suppliers. For a perfectly contestable
market, entry into and exit out of the market must be costless. However, contestability of markets and the
benefi ts of FDI to the economy in general and to export sectors in particular can be adversely affected by
high costs of imperfect competition. Competition in product and services markets can be impeded by the
following barriers:


 Competition may be impeded by specifi c economic conditions that often originate in the small size of
markets or in the nature of technology, typically leading to natural monopolies;


 Competition can be adversely affected by anti-competitive practices of fi rms, such as predatory
pricing, price discrimination, price fi xing, exclusive purchase agreements, or other measures preventing
contestability of markets and collusion.


The desirable level of competition will differ in each of these cases. The anti-competitive practices of fi rms
are in most cases considered to be detrimental to a country’s competitiveness and social welfare. The origin
usually lies in the market power of fi rms, which then becomes the target of efforts to enhance competition.
This is of particular relevance to efforts to make the linkages between exports and foreign investment as
effective as possible by generating additional effi ciencies and reducing confl icts. There are two main policy
instruments to be used by governments to enhance domestic competition – trade and investment policies
and competition policies.


Open trade and investment regimes enhance domestic competition
Import penetration is a powerful channel to increase domestic competition. Therefore, trade liberalization
leading to lower import restrictions can be used to that effect. But governments must also consider the other
roles of trade policy. One role is the impact of trade policy on fi scal revenues by the collection of customs
duties and other trade taxes, which constitute a large share of government revenues in many developing
countries. The other important role is to protect domestic fi rms. The pro-competitive effect of trade policies
may directly contradict the other two roles, and is usually taken into account in reaching the fi nal decision.
The general rule is for governments to meet their objectives with ‘fi rst-best policies’ rather than relying on
trade policy, which is often not even the second-best choice.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 63


Open investment policies can have the same effect because they can lead to increased domestic competition
as foreign MNEs establish their presence in the host country. However, when foreign fi rms establish themselves
in the host countries, it could lead to maintaining the status quo or an even lower degree of competition as
foreign fi rms acquire domestic fi rms to eliminate competition. Under these circumstances, an open investment
regime should be accompanied by appropriate competition policy tools to achieve the objective.


Competition policies to target anti-competitive behaviour
Open trade and investment regimes are powerful instruments of competition policies, but they may not
be suffi ciently effective in reducing anti-competitive practices and production ineffi ciencies. Other tools of
competition policy should be used to ensure that foreign investment leads to effi ciency gains and increased
competitiveness.


Competition policies should target the anti-competitive behaviour of fi rms, including MNEs, because in the
long run they negatively affect the trade performance and competitiveness of fi rms in developing countries.
For example, some foreign investment projects have included exclusivity clauses and non-competition
provisions. While such provisions could be benefi cial in the short term, they should be eliminated over time
to ensure the competitiveness of incumbents.


Table 4: Policy matrix for the promotion of foreign investment in infrastructure and effi ciency-seeking
manufacturing and services


Policy conditions Infrastructure
Effi ciency-seeking manufacturing


and services


Non-discrimination of foreign investors
vis-à-vis domestic investors and among
foreign investors


Membership in the WTO, which ensures conformity to the principles of national
and most favoured nation treatment in domestic economic policies


Bilateral and regional investment treaties


Predictability, transparency and
enforcement of domestic policies


Multilateral and bilateral investment agreements


Globally competitive policy conditions
for entry of foreign investors


Provisions for a satisfactory sharing of
risks in public-private partnership (PPP)
deals


Effective trade facilitation


Open trade policies


Elimination of foreign currency
restrictions – a liberal currency regime


Attractive tax policies


Macroeconomic stability


Attractive and predictable business
environment – ‘friendly’ bureaucracy,
rule of law, etc.


Market access for foreign investors Wide range of commitments on Mode
3 [commercial presence abroad] in the
WTO General Agreement on Trade in
Services


Privatization of state-owned utilities


Framework for PPPs


Wide range of commitments on Mode
3 (commercial presence abroad) in the
WTO General Agreement on Trade in
Services


Wide range of commitments in bilateral
investment treaties


Competition policies


Size of the market Regional agreements to enlarge the
size of the domestic market


Regional agreements to enlarge the
size of the domestic market


Resource endowments Availability of natural resources (e.g.
coal, water)


Availability of skilled labour Availability
of natural resources


Sectoral policies/conditions Pro-competitive regulations Policies to
encourage technology transfer


Government promotion of backward
and forward linkages Policies to
encourage technology transfer


Neutral fi nancial incentives to avoid
the potential for bias and non-market
orientated ‘picking of winners’ approach


Source: ITC.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT64


The existence of dominant positions of foreign fi rms should also be closely monitored and, if necessary,
addressed. The list of known examples of anti-competitive behaviour is long and the types of non-competitive
behaviour of fi rms may vary from case to case. Not all of these practices need to be remedied by government
intervention, but they should all be a matter of concern when designing export strategies.31


At the same time, foreign companies and MNEs should not be excluded from competition policies. Those
companies are prone to seeking dominant and highly concentrated positions in the market. The need
for competition policies becomes even more important in the aftermath of major privatization deals and
deregulation. (For further analysis on competition policy, see chapter 1.)


Linkages with the domestic economy
The term ‘business linkages’ refers to any upstream or downstream, formal or informal relationship that takes
place between MNEs and their local business partners in a country where the MNE does business. Such
linkages fall into two categories: backward linkages with suppliers where MNEs source parts, components,
indirect materials and services from local SMEs; and forward linkages developed between MNEs and their
customers.32 The ability of foreign affi liates’ linkages to contribute to domestic supplier development depends
primarily on the domestic markets and local fi rm capabilities.


An effective business linkages programme is one of the fastest and most effective ways of upgrading
domestic enterprises; facilitating the transfer of technology, knowledge and skills; improving business and
management practices; and facilitating access to fi nance and markets.


31 For more information about these practices and the need for government intervention, see: Graham, E.M. and J.D. Richardson,
Competition Policies for the Global Economy, Institute for International Economics, Washington, D.C., vol. 51, p. 41, 1997.
32 ‘TNC-SME linkages for development: issues – experiences – best practices’, Proceedings of the Special Round Table on TNCs, SMEs
and Development, the Special Round Table on TNCs, SMEs and Development, UNCTAD, Bangkok, 15 February 2000.


Box 25: United Republic of Tanzania: private sector linkage programme


The Private Sector Initiative Tanzania (PSI Tanzania) began when BP Tanzania approached SBP, a research
and private-sector development organization based in South Africa, to help create an enterprise development
programme. PSI Tanzania was formally launched in April 2002 with eight corporate members, and has grown the
number of private sector participants to 17.


The business linkages programme brings together major corporations – including Kahama Mining Corporation,
Kilombero Sugar Company, National Microfi nance Bank and Tanzania Breweries – in the United Republic of
Tanzania in a forum where they share experiences of working with SMEs and actively seek out ways to better
integrate local SMEs into their supply chains.


The project is an example of how overlapping interests of large corporations and host countries can be managed
to achieve development goals. The successful implementation of a corporate social responsibility initiative has led
to enhanced incomes and employment arising from the inclusion of local SMEs into the supply chains of BP and
other major corporations operating in the United Republic of Tanzania.


The fi rst stage of the programme focused on a supply chain diagnostic within each corporate partner, followed
by sharing experiences and creating supplier development strategies. The corporations identifi ed opportunities
for local SME outsourcing and ways of working more closely with suppliers to develop their capacity. An SME
database of 506 Tanzanian suppliers was designed by SBP and shared among PSI corporate partners. These
suppliers are now shared between the procurement departments of the corporations, resulting in an expanded
market and increased opportunities for the SMEs.


During 2005, each PSI member company agreed to select three of their SME suppliers for special attention,
increasing support and mentorship. For example, BP Tanzania selected three SME suppliers, involved in printing,
catering and plastic packaging, that are new to their vendor list. An initiative is underway to develop a proposal to
private sector donors to fund SME supplier training and capacity building.


Source: Adapted from the United Kingdom Department of International Development’s (DFID) review of the
project: PSI, United Republic of Tanzania, 2006.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 65


A more active participation of developing countries in global supply chains dominated by MNEs will depend on
the supply and demand conditions in supply chains. The condition for an effective participation of fi rms from
developing countries is to have a product or a service to offer to fi rms. Nevertheless, the state of readiness
to participate in supply chains can vary from fi rm to fi rm and from country to country. Some fi rms may be
competitive and fully ready, others may need to strengthen some aspects of their business performance,
such as management, quality control, technology and labour skills. In addition, fi rms can be prevented from
becoming parts of multinational supply chains by infrastructure impediments well beyond their control, such
as an unstable power supply, poor communications and poor road infrastructure. As detailed in box 25,
governments can facilitate the process of greater involvement in global supply chains by putting in place
favourable policies to encourage FDI.


MNEs typically seek ways to reduce costs across their supply chains. As a result, MNEs have incentives
to cooperate – and transfer technology – with suitable suppliers in developing countries if more advanced
technology will lead to lower prices, better quality of products or services and higher profi ts. Many developing
countries need to take proactive steps to make their fi rms more attractive to MNEs.


Governments in countries with poor infrastructure services should ensure that local fi rms have access to
competitively priced and reliable enabling infrastructure services, all of which are critical to the operation of
supply chains. Financial policies should support an effective delivery of fi nancial services to ensure greater
access to credit for fi rms, and to effective international payment transaction systems.


The technological gap of fi rms in emerging markets may not necessarily be the fundamental constraint to
their participation in supply chains. Various studies have shown that MNEs are often keen to assist local fi rms
to ensure that they have the required know-how, technology and fi nance to deliver top quality products and
services – provided that those products and services are price competitive.33


A study by the World Bank34 provides interesting fi ndings from a wide range of case studies gathered to
understand what large companies are doing to tackle constraints they face in doing business, as well as
assisting their participation in global supply chain. The study’s key fi ndings are:


 Foreign companies investing in developing countries frequently confront situations where the conditions
of existing infrastructure, technology and the general business environment signifi cantly raise operating
costs. A number of the case studies discuss transfers of technology, know-how and knowledge, and
efforts to improve the business environment. Examples include the development of hard infrastructure
such as facilities (Alstom, Barrick and Nespresso), the dissemination of technologies (Qualcom) and
knowledge (Dow and the Karachi Chamber of Commerce), and providing access to fi nance for suppliers
(Nespresso).


 Companies are also supporting participation links to supply chains, ranging from design to production,
assembly, packaging, marketing, distribution and consumption, as well as participation in the agribusiness
industry (Walmart, Transfarm Africa, Coca-Cola, Kraft, Cargill). Examples also include assistance in
meeting quality and safety standards, which are important when helping to incorporate local producers
into global value chains (Consumer Goods Forum and Danone).


No technology transfer will take place or be effective if it cannot be assimilated by the labour force in
developing countries. Investment in human capital through education and skills upgrade training should be a
government priority. All countries that have benefi tted from technology transfer have simultaneously invested
in education, particularly higher learning and targeted technical skills training.35


33 For more discussion see: Smarzynska, J. and M. Spatareanu, op. cit., pp. 62-69.
34 The Role of International Business in Aid for Trade, World Bank, July 2011.
35 For a brief review of the literature on technology transfer, see: Saggi, K., ‘International Technology Transfer and Economic Development’,
in Hoekman et al., op.cit., pp. 351-358.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT66


POLICIES TO ATTRACT TECHNOLOGY TRANSFER THROUGH FDI


Most countries prefer to access foreign technology through licensing agreements or joint ventures. However,
in practice the most frequently used channel of technology transfer has been FDI.36 At the same time, MNEs
rely heavily on research and development expenditures to maintain their global competitive advantages.
Policies should focus on attracting FDI as a channel of technology transfer. Policies to enhance technology
transfer technology from MNEs in developed countries to developing countries rest on three pillars:


 Participation of exporters in supply chains;
 Strict and effective enforcement of intellectual property rights;
 Education and training for labour skills.


Open trade policies are a prerequisite for attracting FDI and seeking access to foreign technology and
know-how. The experience of developing countries with technology transfer pursuing import substitution
strategies has not been positive. The experience of the formerly centrally planned economies has been a
failure. However, technology transfer has been relatively successful in countries with open trade regimes or, at
least, with emphasis on growth of exports, for example in the Republic of Korea, Japan and China. All these
countries have demonstrated considerable skill in acquiring and absorbing foreign technology and, over
time, generating their own.37


ATTRACTING FDI: PUBLIC-PRIVATE PARTNERSHIPS


Securing sustainable partnerships requires sophisticated skills to assess competing interests and negotiate
pragmatic agreements. Despite the benefi ts, many countries remain unconvinced and cautious about
implementing PPPs for a number of reasons. Private investors – both domestic and foreign – typically operate
within a time horizon that could make pure economic pricing for fi nal services or output diffi cult to implement.
The private sector may also be fearful of what it perceives to be the risk associated with ever-changing
government regulation. At the same time, both sides are often sceptical about the intentions of the other. For
example, in a typical build-operate-transfer (BOT) project, the most common risks can be summarized as
follows:


36 Ibid., p. 358.
37 Ibid., pp. 357-358.


Box 26: Ireland: national linkage programmes


Since the mid 1980s, Enterprise Ireland (EI) has been operating various linkage programmes to integrate foreign
enterprises into the Irish economy. It pursues two objectives: (i) to support Irish enterprises in building capacity,
innovating and creating new partnerships; and (ii) to assist international investors in sourcing key suppliers in
Ireland. EI collaborates closely with foreign affi liates, their parent MNEs, and the various government agencies
involved with local suppliers.


Between 1985 and 1987, an estimated 250 foreign affi liates were actively involved in the linkage programme.
During that period, affi liates operating in Ireland increased their local purchases of raw materials fourfold, from Irish
£ 438 million to Irish £ 1,831 million, and more than doubled their purchases of services from Irish £ 980 million to
over Irish £ 2 billion. In the electronics industry alone, the value of inputs sourced locally rose from 12% to 20%. On
average, suppliers saw their sales increase by 83%, productivity by 36% and employment by 33%.


EI worked closely with foreign affi liates to ensure suppliers were capable of meeting the demand and quality
requirements. One of EI’s key criteria for selecting local suppliers was their management team’s attitude and
potential to grow. Also noteworthy is that EI’s matchmaking is no longer seen as so critical. The need diminished
over time as the composition of affi liates, their motivations for locating in Ireland, and their local knowledge
changed. Ireland’s competitive advantages in the global value chain are generally recognized.


Source: World Investment Report 2001 – Promoting Linkages, UNCTAD, 2001.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 67


 Risks in BOT projects
– Completion risk that the project may not be completed on time at the required price
– Performance and operating risk due to technical failures, interruptions, poor management and labour


performance
– Cash fl ow risks
– Infl ation and foreign exchange risks
– Insurable risks
– Political risks
– Regulatory risks


Under these circumstances, additional government support is needed. In brief, various risk-mitigating
instruments have been used to aid the implementation of BOT deals, including the following:


 Mitigating risks in BOT projects
– Political and bureaucratic support
– Assured supplies
– Assured revenues
– Loans and equity contributions
– Earning assets – permission to use public assets to cover capital costs, debt service and operating


expense
– Regulatory, fi scal and other budget support
– Project risk support
– Infl ation and foreign exchange cover
– Sovereign guarantees
– Temporary protection against competition38


Overall, the challenge for PPP projects lies in creating awareness about their benefi ts, gaining the confi dence
of all stakeholders including civil society, building an appropriate regulatory framework and establishing a
bankable business model. Prior in-depth dialogue that goes beyond the purely legal aspects is needed
between the government and private operators. The underlying economic, social and regulatory issues must
be thoroughly discussed, particularly how such collaboration fi ts into overall national strategies for growth,
infrastructure and poverty eradication.


For the private sector to stay engaged in a PPP initiative, it is essential that tangible results be delivered within
a reasonable timeframe. Because the time horizons of the private sector are often short and the focus is more
results-oriented, programmes and projects need to be designed and delivered in a business-friendly manner.


Additionally, long-term projects face particularly complex issues of commercial, regulatory and sovereign
risk.39 PPP projects need to be carefully planned and managed when operated, which requires government
support.


The successful completion of a PPP requires the presence of a strong banking sector that can act as a
fi nancier of PPPs. The presence of a deeper fi nancial sector covering equity markets and their supporting
services can be conducive to PPP deals. As a result, PPPs are more likely to be implemented in countries with
relatively stronger and deeper fi nancial sectors. Governments in countries with relatively weak and shallow
sectors should consider the appropriate fi nancial sector reform.


38 For more details, see: Llanto, G. M., Build-Operate-Transfer for Infrastructural Development: Lessons from the Philippine Experience,
pp. 338 ff., 2008.
39 Ibid., pp. 336-338.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT68


FDI REDUCES VULNERABILITY TO CAPITAL OUTFLOWS


Developing countries have been historically vulnerable to capital outfl ows in view of low levels of their
international reserves. More recently, some developing countries have experienced a major twist in this
pattern, and they have generated large current account surpluses, which in turn have been reinvested in
developed country markets. These issues are particularly important in the current debates about the linkages
between export competitiveness and foreign investment.


Capital fl ows are extremely mobile and have been historically linked to a series of fi nancial crises. What is
also a matter of broad agreement is that fi nancial crises have been typically associated with movement of
portfolio capital that is highly mobile and is often invested short term. However, there is less of an agreement
about the origins of fi nancial crises, which may vary from case to case. Any loss of confi dence of investors
in the assets held in their portfolio will result in an instantaneous sale and repatriation of the proceeds from
sales of those assets.


These features are in direct contrast to FDI fl ows. By their nature, FDIs represent a mid- or long-term commitment
to the project and the host country, and this makes FDI far more stable than portfolio investments.40


Sequencing liberalization of capital accounts
The distinctly different features of portfolio and foreign direct investment suggest two different answers to
these questions and two different sets of policies. Governments should be concerned about which segments
of foreign currency transactions should be encouraged fi rst and which may have to come later.


Given the more stable nature of FDI, governments need not be as preoccupied about macroeconomic risks
of FDI movements as they have to be in the case of portfolio investment. In fact, FDI has been seen to act as
‘insurance’ against market imperfections that limit credit availability in a fi nancial crisis.41


For portfolio investments, monetary authorities have to be concerned about the speed of portfolio capital
movement, which can be much faster that the ability of governments to respond. They must also be concerned
about the size of cross-border portfolio capital, which dwarfs the size of a country’s international reserves and
hence its ability to defend itself against speculative attacks on their currency.


In the past, some countries like Chile adopted a ‘prudent’ approach by restricting parts of short-term capital
movements. The pressures from creditors, with the cautious support of the International Monetary Fund,
have led to policy reforms towards a complete elimination of those restrictions; even Chile eventually had to
remove them.


Nevertheless, there is a great deal of support among many leading academic experts for the view that the
complete elimination of all restrictions on short-term capital movement should only be adopted after careful
consideration of all fundamental conditions needed for such a step, such as having a reasonable level
of international reserves, a strong banking sector, a reasonably deep fi nancial sector and macroeconomic
stability.42


Regulations concerning foreign currency transactions involving FDI are a different matter. Given the
importance of FDI for development and its more stable properties, there are no reasons for any foreign
currency restrictions. To reduce the incentives for fi rms to relocate abroad governments should ensure that
exporters’ operations are not constrained by domestic barriers to export, such as high costs of transport,
insurance, Internet or energy.


40 Some economists have tried to argue that FDI can actually be as unstable as portfolio investment; however, this view represents a
minority.
41 Blalock, G. and P.J. Gertler, ‘Foreign Direct Investment and Externalities: The Case for Public Intervention’, in Moran, T. H., E. M.
Graham and M. Blomstrom, Does Foreign Direct Investment Promote Development? p. 73 and pp. 75-77, Washington, D.C., Peterson
Institute for International Economics, May 2005.
42 Magud, N. and K.S. Rogoff, ‘Capital Controls: Myth and Reality – A Portfolio Balance Approach’, Boston, NBER Working Papers
16805, February 2011.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 69


If domestic barriers exist, efforts should be made to lower them through competition policies, regulatory
measures or a public investment programme, among other measures. Exporters constrained by high external
tariffs or other external restrictions to market access should become a matter of priority for country trade
negotiators.


PROMOTING INVESTMENT
There are many factors determining location choices for multinationals, which explain what compels foreign
investors to choose a particular country. These location-specifi c determinants are mainly political and
economic fundamentals, including market size, overall political and economic stability creating a prospective
business environment, the level of labour skills, availability of infrastructure and investment incentives.
Investment promotion and facilitation, while no substitute for the basics being in place, also forms one of the
important pull factors. The following clarifi es the factors that have an impact on investment promotion, and
outlines the additional value investment promotion agencies (IPAs) can provide.


Investment promotion is likely to have the greatest impact in countries where other factors that attract FDI are
most comparable. The characteristics that are able to attract FDI are often found in the developed industrial
countries that dedicate great effort to getting their fundamentals right and then implement investment
promotion initiatives, which belongs to the fi nal stage attracting FDI. This has been confi rmed by recent
research, which shows that investment promotion makes more sense in countries that improved their
fundamentals because even outstanding investment promotion cannot compensate for a pro-investment
environment.43


INVESTMENT PROMOTION AGENCIES


Some IPA functions have been more helpful than others, depending on the stage of development of the host
country and the existing levels of FDI. There are no quick fi x solutions for attracting FDI; however, investment
promotion and facilitation measures can make a difference provided the above-mentioned factors are also
prioritized. The following sections outline the functions and suggest best practices for IPAs.


A foremost way of organizing and implementing a government’s strategic investment promotion policies
has been to decentralize many of the functions of government relating to foreign investment promotion and
facilitation to a single agency providing ‘one-stop-shop’ services. An IPA’s investment promotion role typically
encompasses four main types of activities: image building, investment generation, investment servicing and
policy advocacy (see table 5 below.) The degree of importance that IPAs give to the various sorts of activities
can differ signifi cantly. Strong IPAs commonly possess the following characteristics:44


 Well-developed facilitation and aftercare services identifi ed and prioritized explicitly in their investment
promotion strategy;


 A clear target of working for second-generation investment;
 Post-location problem-solving services for the investor clients; and
 Facilitation and aftercare services geared to ‘anchoring’ the investment to the location.


43 Morriset, J. and K. Andrews-Johnson, The Effectiveness of Promotion Agencies at Attracting Investment, Washington, D.C., World
Bank, 2004.


Well, L. and A. Wint, Marketing a Country: Promotion as a tool for Attracting Foreign Investment, Revised Edition, Washington, D.C.,
International Finance Cooperation, 2000.
44 Blue Book on Best Practice in Investment Promotion and Facilitation – Cambodia, UNCTAD, 2004. Available at www.unctad.org/
sections/dite_dir/docs/dite_pcbb_iprs0001_en.pdf




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT70


Table 5: Major functions of an investment promotion agency


Function Objective Activities


Image building Create the perception of a country
as an attractive site for international
investment


Advertising


PR events


Mass media campaigns abroad


Investor forums


Maintaining relationships with journalists
and business partners


Developing the agency’s website


Investment targeting/generation Create investment leads that target
investment into specifi c sectors,
development areas, or companies


Identifying potential investors


Matchmaking


Direct mailings, telephone campaigns


Seminars for targeted investors


Pre-investment services Facilitate a foreign investor’s entry into
the economy and to assist in analysing
investment decisions


Providing information


Setting up a one-stop-shop registration/
approval service.


Sectoral analyses


Offering assistance in obtaining sites,
suppliers, etc


Post-investment or aftercare services Assist foreign investors in maintaining
their businesses in good standing,
facilitating reinvestment decisions in
the future


Legal or other advisory support to
ongoing foreign investment projects.


Dealing with bureaucracy, etc.


Policy advocacy Improve an investment climate by
establishing an effective feedback
between a foreign investor and
government


Surveys of the private sector


Participating in task forces


Making policy and legal proposals to
authorities


Lobbying


Source: Well, L., A. Wint, Marketing a Country: Promotion as a tool for Attracting Foreign Investment, Revised Edition, Washington,
D.C., International Finance Cooperation, 2000.


BUILDING NATIONAL AND REGIONAL IMAGE


One of the main tasks of an IPA is to generate a positive international image for a country or specifi c area within
the investor community. Image building activities form an important part of agency operations, particularly
in the early phases of investment promotion.45 Its function is mainly that of ‘focusing investor interest on the
location and overcoming negative perceptions rather than directly persuading a multinational company to
invest’.46 The agency needs to generate an image of the host country from the standpoint of investors. This
is of considerable importance for a country with a poor investment climate and low levels of FDI that wants
to generate investment interest.


Regional promotion can give support to country-level promotion as many potential investors think in regional
terms due to such factors as the potential offered by larger markets. Regional promotion can be diffi cult as
neighbouring countries often see themselves as competitors for FDI. However, the fl ow-on effects are more
likely to be experienced by all, particularly in those regions that are less well known by investors.


45 Piontkivska, I. and E. Segura, Survey on International Foreign Investment Promotion Practices, The Bleyzer Foundation, 2003. Available
at www.sigmableyzer.com/fi les/International_agencies_review_eng.pdf
46 Ogutcu, M., ‘Investing in Turkey’s future: Competing for, “seducing”, “winning” and “enduring” the benefi ts of foreign direct investment’,
Stredigma.com, e-journal of strategy and analysis.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 71


Common image building activities include various kinds of advertising in fi nancial and industry- or sector-
specifi c international media, generation of favourable news stories about the progress in reforms and other
positive changes occurring in the country. It also includes other public relations events, like participation in
investment exhibitions and fairs, conferences and organization of investment opportunity seminars’.47


Image building can also require tackling more basic quality of life issues, for instance the quality of services
provided by immigration authorities and agencies in charge of granting visas.


INVESTOR TARGETING


Often governments are unable to serve everyone in the FDI markets because there are too many MNEs and
they are diverse in their investing requirements. Effective IPAs seek out segments that they are better able
to serve, refl ecting the specifi c locational advantages, and matching the requirements of foreign investors
with their countries’ unique development objective. Investor targeting is a cost saving method used by IPAs
to attract FDI by narrowing the range of their promotional efforts. Most commonly it occurs on multiple levels
involving selection of countries, regions, sectors, industries or particular companies.


IPAs recognize investor targeting as a way to use often-scarce resources effi ciently by focusing their
promotional efforts on the most receptive sectors or on those that have been recognized as being potentially
most valuable to the economy. Box 27 details the successful use of investment targeting of technology in the
Czech Republic.


PROVIDING INVESTMENT SERVICES


The majority of IPAs place great importance on investment servicing and facilitation, which is an essential
component of investment promotion. Investment servicing involves a broad range of services to help investors
analyse investment decisions, found a business and keep it operating effectively and effi ciently. Investors'
services that IPAs typically offer can be divided into two groups: pre-investment and post-investment, or
aftercare, services.


All IPAs provide services in the pre-investment decision-making stage. IPA services typically include ‘giving
interested investors information about the country, its macroeconomic situation, major industries, legislation
and procedures required of investors, investment incentives, costs of doing business and other information
that can facilitate an investor's decision to launch a business or set up a joint venture in the country’.48 IPAs
generally assist investors with the process of beginning their investment projects.


47 Piontkivska, I. and E. Segura, Survey on International Foreign Investment Promotion Practices, The Bleyzer Foundation, 2003. Available
at www.sigmableyzer.com/fi les/International_agencies_review_eng.pdf
48 Ibid.


Box 27: Czech Republic: targeting the right technology investment


CzechInvest has opted for industry targeting that refl ects the characteristics of the Czech Republic’s economy.
The logic behind this can be explained by IPAs efforts to deliver the maximum technology transfer to their home
economies. It was assessed that the industrial capabilities of the country were not too underdeveloped. However,
by promoting too great an infl ux of foreign technology, local fi rms would not be able to benefi t as the ‘knowledge
gap’ would be too great. Thus, CzechInvest targeted FDI from industries that embodied more technology than the
domestic national average, but not so much more that domestic companies would have diffi culty learning from
them.


CzechInvest built on the presence of the country’s existing industrial roots, trying to capitalize on its strengths, and
thus send a message to investors about their potential.


Source: Trnik, M., The Role of Investment Promotion Agencies at Attracting FDI and their Impact on Economic Development in
Central Europe, 2007.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT72


IPAs can act as a one-stop-shop to accelerate the registration or approval process, attaining sites, utilities,
identifying suppliers, etc. The speed of service matters. ‘Long delays and costly procedures to establish
a new business entity is one of the obstacles to new investment and entrepreneurial activity’.49 One-stop-
shops enable investors to access information on the required steps to set up or expand a business and
provide services to accelerate the granting of needed permits and licenses. Box 2850 outlines Botswana’s
experiences in enabling investors to secure clearances and approvals quickly.


Reinvestments by the foreign business community comprise a large part of FDI infl ow into the country.
Therefore, providing post-investment services is founded on the belief that content investors will eventually
increase their business and assist in attracting other foreign investors to a country.51 This belief has been
supported in an extensive survey of investment promotion in sub-Saharan Africa, where the United Nations
Industrial Development Organization found that investors indicated they were far more likely to be attracted
to a location based on the recommendation of an existing investor.52


Post-investment services include ‘assistance to foreign investors in overcome problems that occur while they
are operating, such as advice and consultation in dealing with bureaucracy’. These types of services also
help identify administrative and other barriers to foreign investments, and thus facilitate implementation of the
other important function of an IPA – policy advocacy.53


The important contribution that high-quality post-investment services can make is also shown by the
experience of some European countries, especially Ireland and Scotland, where incremental investment
by existing investors accounts for 60% of the annual fl ow of FDI. The Industrial Development Agency of
Ireland has specifi c responsibilities both for securing new investment from foreign investors in manufacturing
and international service sectors, and for supporting foreign enterprises already in Ireland to expand their
business.


As a result of the day-to-day contacts with private sector representatives, an IPA could be considered a link
between the private sector and the government. IPAs are typically engaged in a wide range of activities, from
amendments to legislation to minor improvements in administrative procedures that can facilitate investor
operation in the country. ‘While being either part of the government or having close connections with high-
level government offi cials, an IPA has the ability to advocate changes in investment policies, and to play a key
role in the preparation of new investment legislation and regulations.’54


49 OECD, ‘Investment promotion and facilitation’, op.cit.
50 Blue Book on Best Practice in Investment Promotion and Facilitation – Nigeria, UNCTAD, 2009.
51 Piontkivska, I. and E. Segura, Survey on International Foreign Investment Promotion Practices, The Bleyzer Foundation, 2003. Available
at www.sigmableyzer.com/fi les/International_agencies_review_eng.pdf
52 Africa Foreign Investment Survey: Motivations, Operations, Perceptions and Future Plans – Implications for Investment Promotion,
United Nations Industrial Development Organization, 2003. Available at: www.unido.org/fi leadmin/import/20146_survey_2003.pdf
53 Piontkivska, I. and E. Segura, Survey on International Foreign Investment Promotion Practices, The Bleyzer Foundation, 2003. Available
at www.sigmableyzer.com/fi les/International_agencies_review_eng.pdf
54 Piontkivska, I. and E. Segura, Survey on International Foreign Investment Promotion Practices, The Bleyzer Foundation, 2003. Available
at www.sigmableyzer.com/fi les/International_agencies_review_eng.pdf


Box 28: Botswana: enabling investors to secure clearances and approvals


The Botswana Export Development and Investment Authority (BEDIA), established in 1997, enables investors to
secure clearances and approvals, including licenses, work and resident permits, visas and utility connections,
as well as infrastructural facilities such as land and factory space. It does this through its One-Stop Service
Centre, which operates with liaison offi cers from various government and parastatal institutions, whose roles and
responsibilities are clearly defi ned through memoranda of understanding. Importantly, BEDIA has been given the
right to approve applications for work and resident permits for the chief executive offi cers and six management
positions without having to go through normal ministry channels.


Source: BEDIA.




CHAPTER 2 – PROMOTE EXPORTS AND FOREIGN INVESTMENT 73


CONCLUSION
FDI can have powerful export-development effects. It can create an improved domestic environment that will
enable fi rms to better compete in global markets, including:


 Access to effi cient service providers. Successful exporting countries provide a national environment in
which access to services, particularly infrastructure services, is competitive. Owing to severe constraints
in fi nancing infrastructure in many of these countries, FDI can bridge this gap, and also provide benefi ts
such as transfer of technology and know-how and risk-sharing through public-private partnership models.


 Access to credit and other fi nancing for local exporters. Developing country fi rms face diffi culties in
attaining favourable access to fi nance. Thus, foreign investors, who are well-fi nanced with better access
to credit markets than governments or private investors from developing countries, fulfi l this gap.


 Access to global supply chains. MNEs should engage in outsourcing and globalized production with a
network of subsidiaries in various countries, thereby creating a global value chain. There has already been
a signifi cant rise in intra-fi rm trade between developed and developing countries. Governments can play
an important role in assisting in the creation of these linkages – both backward and forwards.


 Access to technology and know-how. Outdated technology, poor knowledge of markets, poor
management and weak marketing channels constrain export fi rms from developing countries. Local fi rms
would thus benefi t from the transfer of technology and know-how from foreign fi rms directly to them.


 Outward FDI as alternative sources of supply. Firms can choose to export or to supply foreign markets
by their subsidiaries established in those markets.


Reforms that remove barriers to trade protect foreign investors, promote competition and attract FDI. There
is a need for stable, predictable and reliable investment frameworks, effi cient infrastructure and efforts to
develop appropriate skills, and specifi c policy approaches and strategies to promote FDI in export conducive
areas. An example is participating in global supply chains.


Many countries have not been successful in attracting signifi cant FDI fl ows and have not reaped the potential
benefi ts of exporting through such linkages. These countries remain inhibited by the combined effects of
political and macroeconomic instability, weak infrastructure, poor governance, inhospitable regulatory
environments, intensifi cation of competition for FDI fl ows due to globalization, and poor promotion strategies
in particular. This runs counter to the experience of those countries that have been most successful in
leveraging FDI for export competitiveness, which shows that an appropriate policy and institutional setting is
needed to complement market forces.






CHAPTER 3


MOVE GOODS ACROSS
BORDERS EFFECTIVELY


INTRODUCTION............................................................................................................................................. 76


THE BENEFITS OF EFFECTIVE TRADE FACILITATION ............................................................................. 77


WHY TRADE FACILITATION MATTERS FOR BUSINESS ........................................................................... 80


IMPROVING BUSINESS COMPETITIVENESS ............................................................................................ 82


THE PIVOTAL ROLE OF CUSTOMS ADMINISTRATIONS ......................................................................... 85


FLUID TRANSIT PROCEDURES BOOST COMPETITIVENESS ................................................................. 93


PUBLIC-PRIVATE COLLABORATION ......................................................................................................... 102


CONCLUSION .............................................................................................................................................. 103




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY76


MOVE GOODS ACROSS BORDERS
EFFECTIVELY


INTRODUCTION
Global trade has burgeoned in recent years largely because of the progressive reduction of
tariffs and quotas from trade liberalization. More goods are crossing borders and must comply
with customs procedures and other border administration measures. Customs and other border
regulation policies, as well as procedures and practices for international trade, are created and
generated by the need for governments to control and monitor the movement of goods, transfer
of services and associated fi nancial fl ows. This is done to conform to each country’s particular
requirements, to collect appropriate tariff and tax revenues, to prevent, detect and deter the cross-
border movement of illegal drugs, arms, protected species, hazardous waste, and other controlled
products, as well as to collect relevant information for operational and statistical purposes.


International trade has some direct costs:


 Compliance costs, such as processes, procedures and requirements of customs and other
border control and clearance agencies;


 Costs of trade-related services, such as trade insurance, port services, cargo handling, local
and international transportation, and cross-border banking services.


The processes involved with executing these direct cost-related activities are loaded with ineffi ciencies due
to factors such as ineffi cient import and export procedures, other border management procedures, lack of
competitive transport services and an unfriendly business environment. These ineffi ciencies then give rise
to indirect costs, such as the increased cost of transportation, capital demurrage and port charges, loss of
perishable goods, increased cost of holding inventories, and other costs associated with unpredictability
created by these ineffi ciencies. Various trade facilitation measures can be deployed to effectively reduce the
level of these direct and indirect trade transaction costs.


If trade policies, procedures and practices are cumbersome or applied ineffi ciently, they can create major
barriers to the fl uid movement of goods from export departure to import arrival. The primary aim of trade
facilitation is to minimize the transaction costs and complexity of international trade for businesses, while
maintaining effi cient and effective levels of government control.1 Businesses have increasingly expressed
concern about overbearing or unnecessary trade transaction costs and have called for greater transparency,
effi ciency and procedural uniformity of cross-border transportation of goods.


Trade facilitation can have important implications for trouble-free exporting. Effi cient customs clearance
infl uences imports and exports. Competitive exporting requires effi cient access to imported raw materials,
intermediate goods and capital goods. For landlocked countries, the need for effective trade facilitation is
even greater because inputs are dependent on the effi ciency of the customs in neighbouring countries.
Reduced trade costs and lead times make local fi rms more competitive in international markets, thereby
increasing the likelihood that existing exporting fi rms will carry on and new fi rms will begin exporting.


There is a need to complement more traditional trade facilitation areas, such as border processing and
clearance systems and procedures, with competitive trade logistics services. Many of these services are
performed ‘behind the border’ as compared with ‘at the border’. These services include domestic transport,
warehousing, port services, information management and the ability to track and trace consignments.


1 ‘Trade Facilitation: An Introduction to the Basic Concepts and Benefi ts’, ECE/TRADE/289, United Nations Economic Commission for
Europe, 2002.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 77


The benefi ts of trade logistics as a strategic source of competitive advantage are even more critical in
today’s environment of increased global production sharing, the shortening of product lifecycles and the
intensifi cation of global competition. Global production chains need a robust logistics sector to complement
more traditional trade facilitation areas, such as border processing and clearance systems and procedures.
Coordinating the various stages of product development, component production and fi nal assembly is
dependent upon the ability to move goods across borders rapidly, reliably and cost effectively.


Improvements in a country’s ability to connect to the global logistics network can bring access to vast new
markets for its businesses. This chapter assists readers in understanding and tackling trade facilitation and
trade logistics issues. As a trade supply chain is only as strong as its weakest link, there is a need for
countries to understand what those weak links are and devise appropriate policy responses.


WHY TRADE FACILITATION MATTERS FOR NATIONAL
COMPETITIVENESS


INCREASING TRADE FLOWS


There is an abundance of research linking the benefi ts of trade facilitation to increased trade. The
research often fi nds that even modest reductions in trade transaction costs signifi cantly increase
trade fl ows. Some of the main studies are described below.


 The World Bank’s study, Trading on Time, explores the effects of additional transportation time using
World Bank data on the number of days it takes to move standard cargo from the factory gate to the ship
in 126 countries. The study fi nds: ‘On average, each additional day that a product is delayed prior to
being shipped reduces trade by at least 1%.’ The report shows that delays have an even greater impact
on exports of time-sensitive goods, such as perishable agricultural products: ‘A day’s delay reduces a
country’s relative exports of time-sensitive agricultural goods by 6% percent.’2


 The World Bank’s 2008 studies by Bernard Hoekman and Alessandro Nicita conclude that increasing
the Logistics Performance Index of low-income countries to the level of the average for middle-income
countries would boost trade for these low-income countries by about 15%. Similarly, reducing low-income
country trade costs, as measured by the Ease of Doing Business Index, to the average for middle-income
countries would boost exports by about 7% for these low-income countries.3


ATTRACTING FOREIGN DIRECT INVESTMENT


Trade facilitation reforms also improve the fl ow of ‘effi ciency-seeking’ foreign direct investment (FDI),
commonly described as off-shoring or investing in foreign markets to take advantage of a lower cost
structure. Lower trade costs and entry barriers attract foreign direct investors. These trade transaction costs
are usually factored into the cost-benefi t analysis of corporations as they evaluate alternative locations for
foreign investment. The case study of Philips Electronics is a good illustration of effi ciency-seeking FDI (see
box 29).


Effi ciency-seeking FDI is when investors set up production facilities where goods are mainly exported.
Production fragmentation opens up new opportunities for export-led industrialization in developing countries.
One of the most important export development strategies is to become a part of a global value chain.
Globalization and international competition encourage international corporations to use a variety of locations
for the manufacture and sourcing of components and fi nal products. Increasingly, products are assembled
in one country from components manufactured in several others.


2 Djankov, S., C. Freund and C.S. Pham, ‘Trading on Time’, World Bank Policy Research Working Paper No. 3909, World Bank, 2006.
Available at: www.doingbusiness.org/documents/trading_on_time_full_report.pdf
3 Hoekman, B. and A. Nicita, ‘Trade Policy, Trade Costs, and Developing Country Trade’, Policy Research Working Paper No. 4797,
World Bank, 2008.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY78


Firms are outsourcing and offshoring to places where costs are lower, acquire higher quality inputs and
improve their competitiveness. The simultaneous liberalization of investment and trade policies attracts
international corporations, which set up manufacturing facilities in low-cost destinations. However, this has
been highly dependent on good trade facilitation. As complexity in the supply chain increases, effi cient speed
and movement of goods and services becomes critical.


There is an abundance of research linking improvements in trade facilitation with increased FDI:


 Key factors in FDI fl ows include low direct and indirect trade transaction costs, including costs and risk
associated with a country’s border procedures.4


 If the number of days required to clear customs were halved in Ethiopia, average fi rm-level productivity
would increase by 18%, thereby raising the likelihood of FDI.5


 Effective trade facilitation can attract FDI and better integrate countries into international production supply
chains. For example, the manufacturing sector relies heavily on cheap, quick, transparent and predictable
customs services. Countries could increase the fl ow of FDI by adopting modern and effi cient border
procedures.6


INCREASING GOVERNMENT REVENUES


Enhancing the effi ciency of border procedures can substantially increase customs revenue. One International
Monetary Fund study 7 shows a very high reliance on trade taxes as a percentage of total tax revenues across


4 Radelet, S. and J.D. Sachs, Shipping Costs, Manufactured Exports and Economic Growth, Harvard International Institute for
Development, Harvard University, Cambridge, Massachusetts,1998.
5 Eiffert, B. and V. Ramachandran, ‘Competitiveness and Private Sector Development in Africa: Cross Country Evidence from the World
Bank’s Investment Climate Data’, Asia-Africa Trade and Investment Conference (AATIC), Tokyo, 1-2 November 2004.
6 ‘The Economic Impact of Trade Facilitation’, Trade Policy Working Paper No. 21, OECD, 2005.
7 Changing Customs Challenges and Strategies for the Reform of Customs Administration, International Monetary Fund, 2003.


Box 29: Investment decision-making for Philips Electronics


Philips Electronics is Europe’s largest electronics company. The company operates a fairly decentralized
organization and is dependent on a large number of production units located around the world. These units are
united in a complex global supply chain. Philips has established a specialized service unit of approximately 150
professionals whose purpose is to serve and assist the movement of goods across borders. For example, this unit
handles issues related to border and customs procedures such as customs declarations and customs invoices.
About 40 of the professionals in this unit work solely with the Chinese market, which represents about 25% of
production and 20% of sales.


Customs issues are high on the agenda when production is outsourced, where short lead times are critical
and documentation requirements complex. Customs procedures are normally taken into consideration at
the end of the investment evaluation process. Potential locations are fi rst identifi ed using a broad set of
criteria, and it is in the fi nal stages of the evaluation process that the company investigates the effi ciency of
the customs procedures of candidate countries.


Customs procedures are less important to investment decisions in major markets. In China, Philips enjoys
an early mover advantage where its dedicated service unit for border issues has long-established relations
and agreements with local authorities concerning customs clearance. The company’s relative market size
and importance as a large foreign investor also play an important role in its ability to affect border barriers.
For example, in the beginning of the 1990s, Philips invested in production facilities in Hungary. One of the
company’s preconditions was that the local authorities agree to cut clearance time – a major hurdle at the
time. The company managed to negotiate a cut in customs clearance time from an average of 4-5 days to
1-2 days.


Source: ‘The Economic Impact of Trade Facilitation’, Trade Policy Working Paper No. 21, OECD, 2005.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 79


all regions of the world, except for OECD countries. The study concludes: ‘For many developing countries,
and especially the poorest of them, tariff revenue will continue to be a core component of government
fi nances for many years to come.’ In Africa, more than one-third of total government revenue still comes from
trade taxes, about one-fi fth in Asia and the Pacifi c, and just over one-fourth in the Middle East. Ghana, as the
case study in box 30 explains, is one of the leading examples of how government-led measures to modernize
customs have reaped substantial trade and government revenue collection benefi ts.


Box 30: Ghana: customs reform and modernization


The Ghanaian Government decided to use a public-private partnership to modernize its customs operations. This
meant the government did not have to solely support the project on its own, which included the total cost of US$
12 million for physical infrastructure work, establishing communication networks, upgrading customs facilities, and
placing electric generators in remote border stations. The partnership is based on a private share of 65% (60%
contributed by SGS, a Swiss inspection company, 5% by Ecobank Ghana and a public share of 35% (20% from
Ghana Customs, 10% from Ghana Shippers’ Council and 10% from Ghana Commercial Bank). The partnership
relies on a custom’s management software that has been successfully used in other countries, such as Singapore.
Some of the main outcomes are:


 Simplifi ed customs procedures. For example, clients shuttling from one agency to the other to procure certain
permits, licences or exemptions required as part of the clearance process has been largely eliminated. The
tedious process of getting cargo manifests to Ghana Customs and other relevant agencies was eliminated as
cargo manifests are submitted electronically in advance.


 Faster clearance times. For example, previously at the main port of Tema, clearance times averaged 14 days,
compared to 2-3 today. At airports, clearance time now averages 2-4 hours, compared to 2-3 days in the past.


 Quicker exists of transit consignments. Due to satellite tracking of goods, transit consignments are exiting the
country quicker than when escorts were being used.


 Increased revenue collection. The annual average growth in revenue is 33% for the port of Tema and 32% for
Koltoka Airport. The total revenue collected by Ghana Customs grew by nearly 170% between 2003 and 2008.


According to the World Bank’s Trading Across Borders dataset of the Doing Business project, in 2005, Ghana
ranked 108th, with an index of 6 against a regional index of 8.5. By 2007, Ghana’s ranking had further improved to
61. The main reasons cited for this success include: new technology links with commercial banks so that customs
offi cers can confi rm the payment of duties without additional work; and changes in the operations sped up imports,
while new civil procedural rules and mandatory arbitration and mediation reduced the time needed to enforce
contracts.


Success factors


 Government support and belief in the project;
 Credible partners;
 Development of its own infrastructure to overcome core infrastructure issues;
 Phased project implementation that controlled costs and delivered consistently high-quality service;
 Tangible manifestation of the transformation and improvements of processes;
 Training, sensitization and extensive capacity building;
 Responsiveness to emerging trends and demands;
 A sustainable self-fi nancing arrangement.


These results highlight the importance of private sector participation in creating an enabling business environment
for economic growth. The strategic partnership of one multinational company was a major contributing factor to
the project’s success. As a result, the competitiveness of Ghana’s exports was signifi cantly improved, above all for
small- and medium-sized enterprises.


Source: ‘Public-Private Partnership on Integrated Customs Services in Ghana’, paper prepared by ITC based on presentations
made by Nortey Omaboe, Executive Chairman, GCNet, Ghana, at an ITC seminar, and the case study prepared by Emmanuel
Darko, Deputy General Manager, GCNet, Ghana, 2009.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY80


IMPROVING PRODUCT AND MARKET DIVERSIFICATION


‘A 10% improvement in trade facilitation – as measured by the [World Bank’s] Doing Business dataset’s
cost of exporting – is associated with product diversity gains of the order of 3%-4%.’8 Furthermore: ‘There
is evidence that differentiated goods (such as manufactures) have stronger diversifi cation responses to
trade facilitation than do homogeneous goods (such as agricultural products). Successful export promotion
programmes have been found to increase trade fl ows largely through the product diversifi cation channel.’9


The fi ndings were similar for the geographical dimension of diversifi cation: ‘A 10% improvement in trade
facilitation is associated with a 5%-6% increase in the number of foreign markets served. In other words,
geographical export diversifi cation appears to respond considerably more strongly to trade facilitation than
does product diversifi cation.’10


WHY TRADE FACILITATION MATTERS FOR BUSINESS
In 2010 the Economic Commission for Africa reported:


 Increased competition and the changing business environment require effi cient trade facilitation techniques
because products need to be delivered quickly. In the current business environment, a manufacturer
expects uninterrupted delivery and cannot afford to have goods tied up at the border because of
unnecessary or over-complicated customs procedures.


 Businesses located in countries with poor trade facilitation especially are seriously inhibited from attaining
such opportunities in the era of heightened globalization and intensifi cation of trade.11


Trade facilitation is critically important to SMEs, which have lower turnovers than large multinational fi rms, and
thus a lower capacity to absorb trade transaction costs. Moreover, SMEs frequently have less fi nancial means
to deal with administrative burdens, which often means they forego opportunities to enter new markets or
raise trade volumes in existing markets.


HIGH TRANSACTION COSTS DAMAGE COMPETITIVENESS


Often businesses need to bear not only the direct costs associated with moving goods, such as freight
costs, port and handling charges, procedural fees (such as bonds), agent fees, and side payments, but also
the indirect costs caused by ‘procedural delays, lost business opportunities and lack of predictability and
reliability in the supply chain’.12


8 Shepherd, B., ‘Enhancing Export Diversifi cation through Trade Facilitation’, ARTNet Policy Brief, Brief No. 19, May 2009.
9 Ibid.
10 Ibid.
11 ‘Trade Facilitation and Intra-African Trade’, Assessing Regional Integration in Africa IV: Enhancing Intra-African Trade, Economic
Commission for Africa, 2010.
12 Arvis, J., M. Mustra, J. Panzer, L. Ojala and T. Naula, Connecting to Compete: Trade Logistics in the Global Economy, World Bank,
2007. Available at: siteresources.worldbank.org/INTTLF/Resources/lpireport.pdf


Box 31: Delays damage companies’ competitiveness


Bedi Limited, a garment producer in Nakuru, Kenya, spent 18 months pursuing a trial order for school items from
Tesco, one of the United Kingdom’s largest retail chains. Bedi landed the order and the delivery date was set for
early July 2009, in time for the August back-to-school promotions. Bedi’s goods arrived in Kenya’s port city of
Mombasa at the end of June, ready for shipment. But they were delayed at the port due to congestion and did not
arrive in the United Kingdom until August. Bedi missed Tesco’s school promotions – and lost out on the chance to
become part of its global supply chain.


Source: Doing Business 2011: Making a Difference for Entrepreneurs, World Bank, 2011. Available at: www.doingbusiness.org/~/media/
FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB11-FullReport.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 81


International trade involves unavoidable transaction costs as goods cross borders, which cannot be
completely eliminated. However, businesses often incur additional avoidable costs, which raise the cost of
goods and services to end users and consumers. These unavoidable and avoidable costs constitute what
is generally referred to as trade transaction costs (TTCs). In terms of trade facilitation, TTCs are particularly
hard felt in the following areas:


 Border crossing time. Ineffi cient border crossings procedures impose several costs to the trader: (i)
delays at the border are costly in terms of immobilized equipment and staff, (ii) compliance costs that
come in addition to the taxes and fees levied, and (iii) costs that result from uncertainties, such as variance
in time to cross the border. The government also loses out by poorly functioning border-crossing services
because of ineffi ciencies in use of staff time and lost revenue. Spending excessive time at the border
represents one major complaint by traders, as it requires the immobilization of trucks and staff and results
in higher levels of inventory and associated fi nancial costs. With fi xed costs and driver salaries costing
about US$ 140 daily, traders highly appreciated reform that created a one-stop-border post and sped up
border crossings at Chirundu, the border between Zambia and Zimbabwe.13


 Trader compliance costs. Limited research has been done on trader compliance costs, but it is
increasingly recognized that they are signifi cant and often excessive due to the complexity, unpredictability
and ineffi ciency of the customs procedures. The World Bank’s Doing Business 2011: Making a Difference
for Entrepreneurs report quotes a Turkish trader who said that customs reform in his country reduced his
compliance cost by about 10%-15%.14 A 2003 Organisation for Economic Co-operation and Development
(OECD) study confi rms these observations based on survey data from the EU and Japan, suggesting that
compliance costs could range from 3.5%-5% of the value of import cargo. These costs also include bribes
paid to speed up customs clearance.15 Freight forwarders note that the introduction of the Single Window
in Singapore reduced compliance costs by 20%-35%.


 The unpredictability of the logistics chain. Traders are required to hold on to larger inventories and incur
the associated fi nancing charges.16


13 Doing Business 2011: Making a Difference for Entrepreneurs, World Bank, 2011. Available at: www.doingbusiness.org/~/media/
FPDKM/Doing%20Business/Documents/Annual-Reports/English/DB11-FullReport.pdf
14 Ibid.
15 Bribes are also used to lower assessed duties and taxes. More transparent and effi cient customs procedures have been shown to
reduce the amount of bribes solicited as well as the incidence of this practice.
16 Arvis, J., G. Raballand and J. Marteau, ‘The Cost of Being Landlocked: Logistics Costs and Supply Chain Reliability’, Policy Research
Working Paper No. 4258, World Bank, June 2007. Available at: ssrn.com/abstract=995079


Box 32: Indonesia: pineapple producer faces inhibiting trade facilitation costs


Bambang, a local Indonesian pineapple producer, would like to can pineapples in Lampung, Sumatra, and export
them to Europe. Sumatra Island is competitive in pineapples because of its environment, but port and logistics
bottlenecks within Indonesia raise transport costs for Bambang and other pineapple producers. Transport costs
are substantially above those of Thailand – the principal exporter of canned pineapples in the world – and shipping
charges out of Lampung are about 4% higher per carton. Higher costs are partly due to back hauling of empty
containers and the need to tranship imported tin for cans through Jakarta rather than directly to Sumatra. Lowering
transport costs and improving logistics infrastructure and services would not only allow producers like Bambang
to sell more, but also boost other key exports from Indonesia.


Source: Connecting to Compete in Indonesia, World Bank, 2010. Available at: siteresources.worldbank.org/INTINDONESIA/
Resources/Publication/2800161264668827141/LPI.indo.en.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY82


REMOVING OBSTACLES TO JUST-IN-TIME DELIVERY


In many countries, time for administrative procedures related to exports and imports prevents local
manufacturers from exporting time-sensitive products. ‘In an environment of “just-in-time” production,
where car manufacturers, for example, rely on the uninterrupted reception of the necessary components,
business cannot afford to have imported or exported goods tied up for long periods at the border because
of unnecessary or over-complicated trade procedures and requirements.’17


In addition, businesses may also need to carry higher inventories of supplies or fi nished products, or change
to more expensive means of transportation to be certain of meeting delivery schedules. Some recent studies
fi nd the following:


 Inventory holdings in manufacturing are two to fi ve times higher in developing countries than in the United
States. Halving inventories could reduce unit production costs by 20%.18


 Suppliers to the same automobile manufacturer will carry seven days of inventory in Italy, but 35 days in
Morocco.


 On average, Bangladesh has to ship 10% of its garment production by air to be certain to meet the
schedules of European buyers.19


BENCHMARKING TRADE FACILITATION
The periodic surveys in the World Bank’s Doing Business and Connecting to Compete: Trade Logistics in
the Global Economy reports detail where countries stand with regards to trade facilitation. Both reports show
that trade facilitation indicators vary widely across countries. While the ranking is generally correlated with
income levels, countries with similar income levels often fare quite differently in the measured indicators.
This is good news as it suggests that with vision, political will and leadership countries can enhance national
competitiveness.


KEY SUCCESS FACTORS


Countries that obtained successful results from trade facilitation typically follow a comprehensive approach
to reforms covering all key logistics: trade-related infrastructure, quality and supply of logistics services, core
customs modernization, border management integration, regional facilitation, and transit. Reform in these
key logistics is done in parallel. This type of an approach addresses ‘at the border’ and ‘behind the border’
constraints. Typically, the benefi ts of progress in one area may not be realized until impediments to trade in
other areas are also removed.


17 ‘The Costs and Benefi ts of Trade Facilitation’, Policy Brief, OECD, October 2005. www.oecd.org/dataoecd/58/25/35459690.pdf
18 Guasch, J.L. and J. Kogan, ‘Inventories in Developing Countries: Levels and Determinants – A Red Flag for Competitiveness and
Growth’, Policy Research Working Paper No. 2552, World Bank, 2001.
19 Connecting to Compete 2011: Trade Logistics in the Global Economy, World Bank, 2011.


Box 33: Yemen: poor trade facilitation hurts tuna exporters


A case study from Yemen documents that fresh tuna to Germany fetched a price of US$ 4 per kilo, while frozen tuna
exported to Asia fetched a price of US$ 1 per kilo. About one-fi fth of total exports was frozen and sold in the Asian
market, although it could have been exported to Germany for four times the price were it not for delays caused by
a combination of poor infrastructure and poor transport services. The foregone net income amounted to US$ 480
per ton of exports compared to total sales revenue in Germany of US$ 4,000 per ton. The total cost of logistics for
this exporting fi rm was 55% of landed product price.


Source: Nordas H., E. Pinali, M. Geloso Grosso, ‘Logistics and Time as a Trade Barrier’, Trade Policy Working Paper No. 35,
OECD, 2006.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 83


Table 6: Measuring national logistics performance


Logistics
performance


factors


Logistics-
unfriendly


Partial
performers


Consistent
performers


Logistics-
friendly


Trade-related
infrastructure


Serious constraint Major constraint
Capacity bottlenecks
to support trade
expansion


Few bottlenecks,
except rail


Quality and supply of
logistics services


Low development Weak market
Emergence of a
diversifi ed supply of
logistics services


Industry leaders


Core customs
modernization


Often still a major
constraint


Potentially a major
constraint


No longer a constraint Best practice


Integration of border
management


Comparatively a lesser
problem


Major constraint
Typically the fi nal
binding constraint


Lesser problem


Regional facilitation
and transit


Main issue for
landlocked least
developed countries


Problematic Depends on the region Streamlined


Defi nition of terms


1. Logistics unfriendly (bottom quintile) – severely logistically constrained (LDCs)


2. Partial performers (third and fourth quintile) – typically low- or middle-income countries that have not yet consistently
addressed all the factors of non performance


3. Consistent performers (second quintile) – typically emerging economies with a strong logistics constituency


4. Logistics friendly (top quintile) – high performers, for the most part high-income countries


Source: Logistics performance survey data, Connecting to Compete, World Bank, 2010.


Trade facilitation measures can be undertaken along two dimensions: (i) a ‘hard’ dimension related to
tangible infrastructure such as roads, ports, highways and telecommunications; (ii) a ‘soft’ dimension related
to transparency, customs management, the business environment, contestability of services markets, and
other institutional aspects that are intangible.20


In practice, this might mean that large investments in hard infrastructure projects to improve infrastructure
quality alone do not necessarily lead to lower transport prices, unless complementary steps in soft regulatory
reform are also undertaken. ITC’s 2010 survey21 of companies and business associations in Uganda revealed
that while the largest share of aid for trade disbursements in 2008 (38%) was absorbed by transport and
storage, less than 50% of business associations and companies’ perceived improvement in these services.
The lack of competition along different segments in the trade logistics chain, for example, can result in high
mark-ups favouring cartels among logistic service fi rms.


In addition, interest group lobbying and corruption can make regulations work as barriers. Inappropriate
regulation in transport services can protect ineffi cient logistics operators and discourage the entry of more
effi cient logistics operators with lower operational costs. Complementary reform to dismantle cartels and
enhance competition along different segments of the logistics chain is crucial to lowering trade costs. In a
more competitive environment, measures to improve physical infrastructure are likely to yield more signifi cant
results.


20 Portugal-Perez, A. and J. Wilson, ‘Export Performance and Trade Facilitation Reform: Hard and Soft Infrastructure’, Policy Research
Working Paper No. 5261, World Bank 2010.
21 ‘Aid for Trade and Export Performance: A business perspective from Uganda’, Working Paper, ITC, 2010.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY84


Improvements to the trading environment are critical. This includes the full range of transaction costs
affecting trade. As made clear by John Wilson and others, trade facilitation, ‘can be seen as the set of policy
instruments aimed at improving a country’s trading environment by reducing unnecessarily high transaction
costs across all of these hard and soft infrastructure fronts’.22


A FOCUS OF WTO NEGOTIATIONS
Traditionally, trade facilitation measures have focused primarily on simplifying and rationalizing customs
procedures and eliminating red tape to move goods across borders. The current Doha Round of negotiations
on trade facilitation has focused on getting these core customs procedures right. Negotiations have focused
on clarifying and improving rules pertaining to: (i) the transit of goods, (ii) the fees involved in importing
and exporting, (iii) the publication and administration of trade regulations, and (iv) promoting effective
communication and cooperation between customs authorities.


Often the trade facilitation agenda has limited itself to discussion of what processes and procedures a trader
needs to comply with to import or export. The Doha Round of trade negotiations, initiated in 2001, added
trade facilitation in mid-2004 to the issues that had dominated the agenda, including tariffs for agricultural
and non-agricultural imports, non-tariff barriers, services and confl ict resolution. This decision was the result
of the recognition that traders face many obstacles that inhibit the smooth transfer of goods from production
sites to external markets.


The WTO chose not to tackle the whole trade logistics chain, but focused on the actions that governments
take to control and administer the way in which goods move across their national borders, through the
various documentary and physical inspection stages to clearing customs and receiving approval from border
agencies, such as health and safety or revenue authorities. The objectives of the trade facilitation negotiations
are straightforward:23


 Clarify and improve General Agreement on Tariffs and Trade (GATT) rules on the movement, release
and clearance of goods, including goods in transit, with the aim of reducing the transaction costs of


22 Wilson, J. et al., 2005, ‘Assessing the Benefi ts of Trade Facilitation: A Global Perspective’, The World Economy, 28(6), pp. 841-871,
2005.
23 Elgin R., ‘The Doha Round Negotiations on Trade Facilitation’, The Global Enabling Trade Report, 2008. Available at https://members.
weforum.org/pdf/GETR08/Chap%201.2_The%20Doha%20Round%20Negotiations%20on%20Trade%20Facilitation.pdf


Box 34: Infrastructure for trade facilitation


Hard infrastructure


 Physical infrastructure measures the level of development and quality of ports, airports, roads and rail
infrastructure.


 Information and communications technology (ICT) is interpreted as the extent to which an economy uses
ICT to improve effi ciency and productivity as well as to reduce transaction costs. It is built on indicators of the
availability, use, absorption and government prioritization of ICT.


Soft infrastructure


 Border and transport effi ciency aims at quantifying the level of effi ciency of customs and domestic transport
refl ected in the time, cost and number of documents necessary for export and import procedures.


 Business and regulatory environment measures the level of development of regulations and transparency. It is
built on indicators of contestability of service markets and government transparency.


Source: Portugal-Perez, A., J. Wilson, ‘Export Performance and Trade Facilitation Reform: Hard and Soft Infrastructure’, Policy
Research Working Paper No. 5261, World Bank 2010.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 85


trade. Three GATT Articles are at the centre of the trade facilitation negotiations: Article V on facilitating
transit trade, Article VIII on limiting border fees and formalities, and Article X on making trade regulations
transparent so that foreign traders can understand them and work with them more easily.


 Develop special provisions for developing countries and least developed countries (LDCs) and provide
them with technical assistance and capacity building support to help them to implement better trade
facilitation policies and practices.


 Improve communication and cooperation between the customs authorities of WTO member countries,
which have proposed a set of resolutions to articulate these commitments. As of the writing of this chapter,
much progress has been achieved and a consensus has emerged as to which proposals could be
retained. However, fi nalization of the trade facilitation discussions is being delayed by lack of progress on
the highly controversial issue of agricultural tariffs.


The GATT Articles to be clarifi ed during the Doha Round of trade negotiations pertain to all border control
agencies. To the extent that they pertain to customs clearance, they are largely a subset of the Articles spelled
out in detail by the World Customs Organization (WCO) and agreed to by most countries in the 1974 Kyoto
Convention. This Convention has been updated and the Revised Kyoto Convention came into force in 2006.
The WCO has no enforcement mechanism to ensure that members adhere to their commitments. However,
WTO trade facilitation is intended to be legally binding and enforceable and provides technical support to
members that request it to implement their commitments. The WTO grants ‘special and differential treatment’
for developing countries and LDCs that need time to fully implement the agreed upon measures.


A 2006 review of trade facilitation measures included in the proposals submitted by WTO members found
that customs organizations, which still had to tackle a serious reform agenda, had made substantially more
progress to ease border crossings. In addition, customs organizations were better aware of the challenges
ahead and more prepared to tackle them than other border agencies. Overall, trade facilitation would greatly
benefi t if the agencies responsible for the inspection of industrial standards, security, and phytosanitary and
animal health standards would similarly improve their performance. Delegating some of their functions to
customs, cooperating in establishing a risk-based inspection programme and undertaking joint inspections
would mark progress.


THE PIVOTAL ROLE OF CUSTOMS
The role of customs is to control the movement of goods and thus secure the state’s interests and protect
revenue collection. For traders, delays in customs clearance raise trade costs. This involves opportunity
costs for fi rms that are slower to market and may lose contracts with importers, as well as higher storage
fees at the port of entry. It is critical to keep procedures as simple and transparent as possible to reduce the
time needed to clear customs.


Customs operations consist of a complex set of interlocking processes. At each stage, complications and
ineffi ciencies can and often do emerge. Customs processes fall under four categories, each with sub-
procedures:


 Taking control over the goods that cross the border;
 Processing of customs declaration to establish the dutiable value;
 Collecting the duties assessed;
 Undertaking the post-release control and audit.


Trade facilitation is mainly concerned with the fi rst two categories. Customs authorities are typically faced with
many challenges as they struggle to meet the diverse demands of government, business and society. These
challenges are typically exacerbated in developing countries:24


 Complex trade regimes include multiple rules of origin, diffi cult to implement tariff regimes and ambiguous
customs valuation rules.


24 De Wulf, L. and J. Sokol, editors, Customs Modernization Handbook, World Bank, 2005. Available at: siteresources.worldbank.org/
EXTEXPCOMNET/Resources/2463593-1213985777369/01_The_Customs_Modernization_Handbook.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY86


 Government-wide personnel policies often make it diffi cult to attract, retain and motivate staff with the skill
mix required by increasingly complex trade transactions.


 Complexity of rules and procedures coupled with lack of transparency create a fertile ground for corruption.
 International trade techniques are increasingly complex and rely on ICT support. Customs need up-to-


date ICT capability.
 Clearance times are often very long, imposing substantial costs on the trader in terms of ‘facilitation


money’, higher inventory levels and fi nancing costs.


CHALLENGES FOR CUSTOMS AUTHORITIES


The following section details some of the main challenges for customs. An extensive discussion of the various
customs modernization issues can be found in the World Bank’s Customs Modernization Handbook. 25


Are customs laws and regulations transparent, standardized and harmonized?
Customs plays a very important part in trade operations and revenue collection. Customs is also expected
to play an active role in protecting society and reinforcing national security by preventing cross-border
movements of prohibited or restricted goods, such as counterfeit goods, illicit drugs, endangered species,
human traffi cking and illegal arms.


Customs operations need a solid legal framework within which responsibilities can be performed. Without
an effective legal framework that assures transparent, predictable and rapid customs clearance, the private
sector fi nds it very diffi cult to conduct business with or to invest in a country. This is particularly critical in
today’s competitive international business environment.


In reaction to immense increases in trade volume and heightened requirements for security, particularly post
9/11, many customs administrations are evaluating their operations from the perspective of international
standards and best practices to assess the need to introduce legal reforms. For many countries the Customs
Code needs to be modernized, particularly to eliminate non-essential customs aspects and comply with
international commitments.


Because traders are often not informed and are thus unprepared for newly introduced regulations, it is
important to guarantee transparency and predictability by providing basic information on issues such as
customs laws, certifi cation requirements, decisions, consultation mechanisms, and appeals processes.


Improvements in transparency and predictability are valued by the private sector as one of the most important
gains from trade facilitation.


To do so, authorities can refer to the WCO’s Revised Kyoto Convention, which aims to simplify and harmonize
existing international customs procedures around the world. The Convention provides a legal framework
and a range of agreed upon standards to improve customs operations. The Convention is commonly
recognized as the international standard and is used as a benchmark for the global customs community. The
Convention’s provisions can be adopted in a fl exible manner in the customs legislation of many countries.


Is there suffi cient human resource capability to carry out all of the increasingly
complex customs responsibilities?
Because of the ongoing demands of customs modernization, capable human resources are needed to cope
with the full range of operations. Customs administrations need to constantly stay abreast of developments
in international trade – particularly in the areas of ICT, legal provisions and economic conditions. Customs
services should endeavour to develop a competent and effi cient administration, determine the optimum
management of staff and available technical resources, and create a culture of good governance and integrity.


Managing risk
There is a trade-off between control and trade facilitation – too much of one makes it diffi cult to achieve the
other. Risk management seeks to strike an appropriate balance between trade facilitation and control. It aims


25 Ibid.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 87


to adjust operational practices to minimize the number of transactions that require detailed inspection. This
is achieved by applying a set of management procedures that include identifying, analysing, evaluating and
mitigating the risks that might have an impact on achieving regulatory and revenue goals.


Customs also needs to keep pace with today’s constantly changing international environment, driven by huge
increases in international trade, transnational organized crime, and terrorism. Customs administrations are
increasingly aware that national and international cooperation is vital, which requires increased information
sharing among customs services. The value of sharing information with other law enforcement agencies
and the business sector has also been recognized as vital. All of this information forms the basis for risk
management.


SECURITY OF TRADE SUPPLY CHAINS


Increasing international concern about the security of trade supply chains has increased the need to secure
the movement of goods and protect means of transport. This concern for security needs to be balanced
with the recognition that legitimate cargo should continue to receive the full benefi ts of trade facilitation. To
this end, the WCO Framework of Standards to Secure and Facilitate Global Trade has been developed and
endorsed by WCO members to address this issue in a balanced manner. A core element of the Framework
is the initiative to use a consistent risk management approach to tackle threats to the trade supply chain.


The SAFE Framework of Standards – the Two Pillars
As detailed by WCO: ‘At the June 2005 annual Council Sessions in Brussels, Directors General of Customs
representing the Members of the WCO adopted the SAFE Framework of Standards by unanimous
acclamation. Not only did the adoption of this unique international instrument usher in a safer world trade
regime, it also heralded the beginning of a new approach to working methods and partnership for both
Customs and business.’26


Importantly, the framework is to act as a deterrent to international terrorism, secure revenue collections and
promote trade facilitation worldwide. The majority of the WCO’s 171 members have signed a letter of intent
to implement the SAFE Framework. However, progress has been slow. Inhibiting factors include the level of
awareness and preparedness, which is very uneven from one country to another.


Private sector representatives have strongly advocated for such an approach, but many have been frustrated
by the lack of progress. The WCO’s Columbus Programme is building capacity through training and technical
assistance for implementation in developing countries. The SAFE Framework is based on two pillars:
customs-to-business partnerships and customs-to-customs cooperation:


26 WCO Framework of Standards to Secure and Facilitate Global Trade. Available at: www.wcoomd.org/fi les/1.%20Public%20fi les/
PDFandDocuments/Procedures%20and%20Facilitation/safe_package/safe_package_I.pdf. 2007


Box 35: Dealing with corruption


Customs is susceptible to corruption. Offi cials are vested with considerable authority and responsibility to make
decisions that infl uence the duty and tax liability of traders and the admissibility of goods. Complex regulations and
high tariffs increase incentives and opportunities for corruption. The use of procedures that offer little discretion to
customs staff and that have built-in accountability methods limits the incentive for corruption.


Reform efforts should include automating clearance systems, which limits opportunities for customs offi cials
and traders to meet. Automation, coupled with measures such as providing suffi cient staff compensation and
increasing the risk of detection, helps stem corruption. The WCO’s Revised Arusha Declaration, which is a central
global effort to increase the level of integrity in customs, provides a series of self-assessment, action planning,
implementation and evaluation processes using WCO ‘integrity tools’.


For more information:
www.wcoomd.org/home_cboverviewboxes_valelearningoncustomsvaluation_cbintegritytooloverview.htm




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY88


 Customs-to-business partnerships. Customs should enter into strategic pacts with trusted economic
operators. Customs needs to understand the concerns of business and business needs to know the
requirements of customs. Most importantly, this relationship must become a partnership that results in
mutually benefi cial outcomes.
This goal is promoted through the concept of the authorized economic operator (AEO), which allows
for imported shipments from trusted operators to be rapidly moved from the controlled area of customs
ports to the public area. The objective is for scarce customs resources to be focused on monitoring risky
transactions. Low-risk AEO transactions should be subjected to simplifi ed customs clearance procedures
with the least interference to supply chains. The AEO system requires that the customs authority be
confi dent in its procedures and that the use of simplifi ed customs clearance procedures be coordinated
by an agreement between the customs authority and the AEO.


 Customs-to-customs cooperation. The new challenges of the 21st century demand a new concept of
customs-to-customs cooperation. Closer real-time collaboration is needed among customs administrations
and between customs and business in facilitating legitimate trade and undertaking customs controls. The
objective is to create a global customs network to support the international trading system, in partnership
with the various public and private sector stakeholders. To establish this network, an international
‘e-Customs’ network to ensure seamless, real-time and paperless fl ows of information and connectivity is
needed.


Guided by the principles of cooperation, the Framework strengthens the links between customs administrations
and their business stakeholders (customs-to-business partnerships) as well as cooperation among customs
(customs-to-customs cooperation).


CUSTOMS VALUATION – A DIFFICULT TASK


Because of the asymmetry of information, valuation is one of the most diffi cult tasks for customs offi cials.
Traders have a deep and intricate knowledge of the value of the inspected cargo and all of the factors
that impact on that value. Customs offi cials must deal with many commodities and do not have the same
expertise. Where traders take advantage of this asymmetry of information, they can declare a price that is
lower than the true value. If this goes undetected, the trader benefi ts from lower duties. It is up to customs
offi cials to acquire the expertise to counter this tendency.


In 1994, WTO members adopted the Agreement on Customs Valuation (ACV), which established that
customs value should to the greatest extent possible be based on the transaction value – the price actually
paid or payable for the goods, subject to certain adjustments.27 Where the transaction value cannot be used
because there is no transaction value or the price has been infl uenced by certain conditions or restrictions,
the ACV provides fi ve alternative methods to be applied in a prescribed order.28


Applying the ACV has presented serious problems for many customs administrations, particularly in
developing countries. Efforts are ongoing in many administrations to enhance trader compliance and train
staff to apply the ACV. Two approaches to assist customs offi cials to correctly implement the ACV are:


 Price lists. When customs offi cials can consult up-to-date price lists of the most frequently imported
goods, they are in a better position to claim ‘reasonable doubt’ and request further documentation from
the trader as to the prices actually paid or to resort to the alternative valuation methods specifi ed in the
ACV. Examples are the price lists maintained for the valuation of second-hand cars, an imported item that
is often grossly undervalued and for which reliable invoices do not exist. These lists consist of the prices of
the new car according to model and year of construction plus a set rate of depreciation.


 Pre-shipment inspection (PSI) and destination inspection (DI). Under a PSI programme, a country’s
Ministry of Finance or Customs Department contracts with a private fi rm to inspect cargo destined for its
country at the point of export. A DI contract specifi es that the contractor inspects the cargo at the point
of import, and relies on its corporate expertise and contacts abroad to undertake this task. PSI and DI
contracts detail the specifi c data that need to be covered in the inspection reports as well as the service


27 For a full treatment of this subject see: Goorman, A. and L. De Wulf, ‘Customs Valuation in Developing Countries and the World Trade
Organization Valuation Rules’, Customs Modernization Handbook, World Bank, 2005.
28 Details can be found at: www.wto.org/english/docs_e/legal_e/20-val.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 89


fee to be paid. The inspection report is provided to the importer and to the contracting authorities and
can be used as additional information to assess the acceptability of the declared value for the purpose of
calculating the duties and taxes due.


As of June 2010 12 countries have a PSI contract in place and 16 countries have a selective PSI contract or
a DI contract in place.29 The practice of customs authorities to contract PSI/DI services has frequently been
criticized, including by the WCO and the WTO. However, having recourse to these services was authorized in
the WTO Uruguay Round of trade negotiations. Some proposals submitted by WTO members in the ongoing
Doha trade negotiations would prohibit the use of PSI/DI.30 The matter is discussed in detail in the World


29 Countries that report PSI or DI contracts that are subject to the WTO Agreement on PSI. See: www.ifi a-federation.org/content/wp-
content/uploads/2010/04/IFIA_PSI_list_06_10.pdf
30 Agreement on Pre-shipment Inspection, WTO. Available at: www.wto.org/english/docs_e/legal_e/21-psi.pdf


Box 36: Guidelines – pre-shipment inspections and destination inspections


 Contract only PSI/DI companies that have a good reputation and operate under the Code of Conduct of the
International Federation of Inspection Agencies.


 Select PSI/DI service providers and renew their contracts through transparent and competitive bidding
procedures.


 Contract a single PSI/DI company for a period of a few years and renew the contract under competitive
conditions.


 Avoid split contracts. Companies are more complex to supervise, contracting costs tend to be more expensive,
and individual companies are less carefully supervised by their respective headquarters for which they represent
lesser profi t opportunities. Also, split contracts may lead importers to adjust their import patterns so as to benefi t
from the most helpful inspection service providers.


 Have PSI/DI contracts fully endorsed by customs, not imposed on customs by the Ministry of Finance or the
Central Bank.


 Link the PSI/DI contracts with a customs modernization project that clearly delineates the respective
responsibilities of customs and the PSI/DI company.


 Make the PSI/DI contract explicit:
– Determine services to be rendered (price, classifi cation, duties paid, special import regimes);


– Establish time limits without automatic extensions;


– Create a list of goods to be inspected with exceptions detailed;


– Customs should be assisted in setting up databases;


– Establish clear performance criteria that will allow the government to verify performance, with penalties for
failing to adhere to the criteria retained;


– Secure commitments to train customs staff and to transfer technology;


– Specify reporting requirements, including the number of inspections, irregularities addressed, adjustments
to value made and resulting additional assessments;


– Implement a process to handle complaints.


 Record the PSI/DI inspection reports in the customs declaration and in the automated customs management
system. Reconcile the fi ndings of PSI/DI inspection reports with customs declarations and values retained for
the calculation of duties and taxes; explain the reasons for deviations detected.


 To enhance importers’ compliance, apply the legal penalties for offenses of undervaluation.
 Specify an arbitration or appeals procedure to provide importers with an avenue to contest PSI/DI assessments.
 Create a steering committee (located outside customs, but with the participation of customs) to oversee PSI/DI


activities and report periodically to the private sector.


 Articulate an exit strategy to ensure a smooth transition of the functions that were performed by the PSI/DI
service to customs. PSI/DI companies could be retained to assist in dealing with fraud-sensitive goods, or other
cases where valuation poses particular problems.


 Introduce a publicity campaign to inform traders and the public about PSI/DI systems.
Source: De Wulf, L., Sokol, J., editors, Customs Modernization Handbook, World Bank, 2005. Available at: siteresources.
worldbank.org/EXTEXPCOMNET/Resources/2463593-1213985777369/01_The_Customs_Modernization_Handbook.pdf.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY90


Bank’s Customs Modernization Handbook.31 Many customs authorities believe that having recourse to PSI
and DI services has enabled them to collect more revenue. This is despite the fact that many of them have
inadequately supervised the performance of the companies rendering these services and/or failed to make
full use of the information provided.


Countries that have opted to use these services could do so as a temporary solution, while strengthening
their in-house customs valuation capacities by carefully using the inspection data provided and setting up
a mechanism to supervise the quality of the services rendered. Countries should also follow the guidelines
listed in box 36 to ensure that PSI/DI services interfere as little as possible with legitimate trade.


RULES OF ORIGIN


Customs offi cers need to ascertain the origin of goods in order to apply basic trade policy measures such
as quantitative restrictions, anti-dumping and countervailing duties, safeguard measures, origin marking,
and public procurement, and for statistical purposes. These rules of origin (ROOs) are non-preferential in
that they are intended to apply to all goods. However, preferential tariffs often apply as a result of preferential
trade agreements between the importing country and the country of origin. These ROOs are often strict for
the following reasons:


 They avoid trade defl ection, which results from claims that a good comes from a particular country that
benefi ts from preferential tariffs, whereas that may not be the case; or


 The good may not comply with the specifi cations spelled out in the trade agreement.
The proliferation of trade agreements, each with their specifi c regulations, has caused problems for customs
administrations and traders. Compliance with ROOs is often costly to the trader and verifi cation by customs
offi cials is complex. Traders that are the most adept at complying with product-specifi c ROOs, and/or
adjusting their product strategies to meet the ROOs, are most able to counter negative effects that arise.


ROOs have a legitimate purpose in preventing trade defl ection. However, critics point to an over abundance
of ROOs and lack of harmonization between different national and regional rules. They also point to concerns
that ROOs are used in a protectionist manner. For example, research carried out in 2007,32 showed the system
of trade preferences granted by developed countries to African countries is often undermined by restrictive
ROO measures. The research showed that protectionist interest groups act to restrict the integration of
preference-receiving developing countries into the global economy. For more information on ROOs and their
application in the global trading system, see chapter 4.


IMPROVING COORDINATION AMONG BORDER AGENCIES AND
SERVICE PROVIDERS


Improving coordination among border agencies and service providers is essential, particularly for developing
countries and LDCs. Trade depends on a large number of agencies and service providers, all of which
participate in the trade logistics chain at the border. Goods are fi nally cleared by customs, but only after
clearances from other border agencies have been obtained. Agencies responsible for quality standards
make separate inspections and may take samples to ensure imports conform to local quality standards. This
process often delays release and can add considerable costs to imports due to delays, de-stuffi ng fees and
demurrage, among other issues.


The fi nal clearance of goods is determined by the least effi cient border control agency. As a result, reforms
limited solely to customs will be substantially less effective if other agencies and service providers are unable
to enhance their performance.


There should be no duplication of effort among border agencies. For example, it makes little sense for
customs to have a modernized risk management system if it is compromised by another government
department’s mandatory reporting or examination approach. Better integrated border management requires
coordination among border control agencies, including standards, sanitary, phytosanitary and veterinary


31 For a full treatment of this subject see: Goorman, A. and L. De Wulf, ‘Customs Valuation in Developing Countries and the World Trade
Organization Valuation Rules’, Customs Modernization Handbook, World Bank, 2005.
32 Cadot, O., J. De Melo and A. Portugal-Perez, ‘Rules of Origin for Preferential Trading Arrangements: Implications for the ASEAN Free
Trade Area of EU and US Experience’, Journal of Economic Integration 22(2), pp. 288-319, 2007.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 91


agencies. In most instances, it is recommended that customs, as the dominant agency, take the lead in
coordinating various smaller agencies so as to ensure smoother functioning among the agencies. The WCO
is currently considering the addition of a third pillar to its Safe Framework of Standards relating to cooperation
between customs and other government border agencies – the customs-to-government pillar – in recognition
of the importance and need for inter-agency collaboration to encourage better, more secure and effi ciently
coordinated border management.


REFORMING ELECTRONIC CUSTOMS MANAGEMENT SYSTEMS


In recent years, customs clearance has greatly benefi ted from an electronic customs management system
(ECMS). Applying an ECMS is the single most important reform measure of the last few decades and has
greatly benefi ted trade facilitation. This trend is well documented in the World Bank’s Doing Business 2010
project. When correctly introduced, it leads to the replacement of old-fashioned and redundant customs
procedures by modern and effi cient processes that provide transparency and speed. However, introducing
an ECMS must be complemented by other modernization processes, policies and personnel management,
including adequate compensation, training and career planning.33 In addition to a number of administrative
customs processes, an ECMS promotes trade facilitation by:


 Permitting traders to deposit their declarations electronically from their offi ces ahead of the arrival of the
cargo at the border using electronic data interchange;


 Assisting customs in establishing whether these declarations are fi lled in correctly and notifying the traders
if they are unacceptable;


 Applying a risk module to select those goods that will be subject to either document or physical inspection;
 Selecting customs staff to handle declarations;
 Registering the fi ndings of the inspections;
 Assisting customs staff to establish the acceptability of declared values;
 Calculating the duties and taxes due;
 Issuing customs invoices;
 Providing a payment platform;
 Issuing the release documents.


Traders can follow the entire process electronically and prepare themselves and their transport to take the
goods across the border as soon as the release documents are transferred electronically.


Single Window – using ICT to facilitate trade
The Single Window (SW) demonstrates how advanced ICT can facilitate trade. First introduced as Tradenet
in Singapore in 1989, it has attracted signifi cant interest by the trading community worldwide and has been
implemented in several countries. Early adopters include Mauritius, Ghana, Senegal and Tunisia.


As shown in fi gure 8, the SW enables traders to submit regulatory documents at a single location and/
or single entity, thereby avoiding duplication and increasing effi ciency through time and cost savings for
traders. For example, in Pakistan one electronic declaration has replaced 26 clearance steps, 34 signatures
and 62 verifi cations. As a result, more than 70% of consignments are cleared within one hour and the overall
average clearance time has come down from several days to less than eight hours. Only 4% of import and
2% of export consignments are now examined, down from 100% previously. Rebate payments are made
automatically without having to fi le a claim. Refunds take less than 48 hours, compared to 90 days. Because
there is no contact between the taxpayer and the tax collector, chances of malpractice or corruption are very
remote.34


33 Doyle, T., ‘Information and communications technology and modern border management’, in Mclinden, G. et al., editors, Border
Management Modernization, pp. 37-38, World Bank, 2011.
34 For more information: www.utradepoint.com/eMagazine/04-2010/inner-pages/Reforming-Trade-Facilitation-The-Experience-of-
Pakistan.aspx




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY92


Figure 8: The Single Window


Source: ITC.


Box 37: Tunisia: improved clearance time at the port of Radès


The border management project at the port of Radès, Tunisia, demonstrates the gains in clearance times that have
been achieved. The project focused on integrating the clearance procedures of different agencies. Clearance
operations (the middle band in the fi gure) accounted for one-third of the dwell time, which is the amount of time a
ton of cargo remains in the port. Lengthy dwell time is typically an indication of an ineffi cient port operation. Further
gains are expected to come upstream (the bottom band) from automated transmission of the manifest by the port
operators and investment in handling to customs. Further gains are also expected downstream (the top band) by
making e-payment possible and by reforming the port rate structure to ensure rates are predictable.


Structure of clearance time for containers at the port of Radès, 2006-2008


Source: World Economic Forum, Global Enabling Trade Report, 2009.


12


10


8


6


4


2


0


D
ay


s


2007 S12006 S22006 S1 2008 S1 2008 S22007 S2


Post-clearance Clearance operations Pre-clearance


cargo clearance


Plant Quarantine


Animal QuaranƟne


Bank


Customs


Chambers of Commerce


Tobacco Board


Insurance Company


Selects, sorts, filters
information, routes it to
targeted recipients
(agencies, bank, etc.)
in the proper sequence
or flow and returns
responses to Trader


Responses from the
various authorities and
financial institutions are
returned to the Trader or
Agent. An all-positive
final response denotes
cargo clearance


Trader or Agent submits
all information required
for shipment once to the
Single Window service
provider


SINGLE WINDOW
















CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 93


Several key factors contribute to the successful launch of a SW:


 There must be a commitment from the highest level of government to stimulate the various national
institutions that deal with trade to adhere to SW procedures. Governments must be willing to drastically
simplify operating procedures that are engrained in the habits of operators and bureaucrats, many of
whom may resist change.


 All trade procedures must be catalogued and streamlined to permit the single fi le submission to the SW.
This is an arduous and time-consuming task that often encounters resistance.


 An agency must be identifi ed and vested with the power to implement decisions. This could be customs,
but other agencies could also undertake this task.


 The SW operations can be undertaken by a government agency or subcontracted to a corporation
operating under a public-private partnership, as is the case in Singapore and Ghana.


 The SW must have suffi cient fi nancial resources to operate effi ciently. Financing can be obtained either by
budget transfers or from the revenues of transaction fees.


 The various border agencies involved must improve their clearing performance as the release of the import
or export cargo will depend on the worst performer in the logistics chain.


TOWARDS FLUID TRANSIT PROCEDURES
Transit procedures permit the movement of goods through countries from one customs offi ce to the other
without paying import duties, domestic consumption taxes or any other charges normally due on imports.
These procedures are intended to protect the revenue of the transit country – for example to prevent goods
intended for transit to be ‘leaked’ to the domestic market. A poor transit system is a major obstacle to trade.
Only in exceptional cases should goods be subject to other import regulations applicable in the transit country,
such as health and safety requirements. These procedures cannot nullify the costs related to distance, but
should aim at introducing effi cient border-related procedures.


Border-crossing procedures can be complex when the transit country wants assurances that the transit
goods that have entered its territory without paying duties leave the country. In the process, some transit
countries introduce strict controls that slow down the transit trade. Smugglers have been known to exploit
the weaknesses of transit procedures to discharge some of their ‘transit’ cargo domestically, thus avoiding
paying the import taxes and fees. Dysfunctional transit procedures are a major issue for landlocked countries
and hamper economic development (see box 38).


Box 38: Economic development in landlocked countries – ‘very, very tough’


In a speech at the International Development Research Centre in Ottawa, Ontario, Canada, world-renowned
economist Jeffrey Sachs described the special challenges faced by landlocked countries:


‘It’s a very peculiar thing. If you look at the landlocked countries in the world, like Bolivia (Plurinational State
of), you will fi nd no success stories, except if you happen to be landlocked surrounded by rich countries. So
there are a couple of rich landlocked countries, Switzerland and Luxembourg. And then there is a world of poor
landlocked countries: in South America, Bolivia (Plurinational State of) and Paraguay; 14 utterly impoverished
landlocked countries in tropical sub-Saharan Africa – Chad, Mali, Niger, Central African Republic, Rwanda,
Burundi, Zambia, Malawi, and so forth – not big success stories economically; the landlocked countries in
Central Asia – the ‘stans’ (Turkmenistan, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan) where there’s nothing
going on economically except pumping oil, because that’s the one commodity that you can fruitfully transport
over 1,000 miles across borders. And you have to pity Uzbekistan in this regard: it’s the world’s only double
landlocked country, meaning it’s the only country all of whose neighbours are landlocked, so you have to cross
two international borders to get to a coast. It’s the only place like that in the world. And Lao People’s Democratic
Republic and other landlocked countries – there’s not a success story among them in the world.


It’s tough being landlocked: overland transport costs are extraordinarily high still. You don’t ship most goods
by air, except at a very late stage of economic development. And if you want to get started in economic
development, if you don’t have access to a seaport, it’s very, very tough.’


Source: New Approaches to International Donor Assistance’, speech by Jeffrey Sachs, International Development Research
Centre, Ottawa, Ontario, Canada, 19 June 2001. Available at: www.idrc.ca/en/ev-25642-201-1-DO_TOPIC.html




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY94


THE CASE OF LANDLOCKED COUNTRIES


Exporters in landlocked developing and developed countries operate under great constraints. Table 7, based
on fi ndings from the World Bank’s 2009 Logistics Performance Survey, clearly shows that costs in both Africa
and Europe are much higher for landlocked countries than for their coastal counterparts.35 Not only are the
distances to the export market larger than for countries that share a border with these markets, but they must
also deal with the procedures related to crossing one or even two additional borders to acquire imported
inputs and to get their fi nal products to market.


Table 7: Export distance, cost and time in landlocked countries36


Africa Europe


Coastal
countries


Landlocked
countries


Coastal
countries


Landlocked
countries


Logistics performance index 2.46 2.39 3.68 3.58


Port or airport Export time (days) 4.82 18.10 2.3 2.4


Import time (days) 7.21 6.99 2.2 3.6


Export cost (US$) 1 810.00 2 867.00 696.00 1 227.00


Import cost (US$) 2 701.00 3 059.00 823.00 1 496.00


Land Export time (days) 4.13 4.67 2.3 6.0


Import time (days) 6.93 8.41 2.9 2.9


Export cost (US$) 2 125.00 4 000.00 593.00 1 704.00


Import cost (US$) 2 581.00 3 221.00 670.00 1 489.00


Source: Logistics Performance Survey data, 2009.


KEY ELEMENTS OF A TRANSIT OPERATION


Seals. There should be a physically secure mechanism to ensure that goods present at the start of the transit
operation leave the transit country in the same quantity, form and status. The simplest way to guarantee this is
for customs to seal the truck37 to ensure that goods cannot be removed from or added to the loading space of
the truck without breaking this seal or leaving visible marks on the loading space of the truck. Trucks and seals
approved for use in the transit operation must conform to well-specifi ed criteria that guarantee their effective
operation and security. New transport seals are under study and prototypes are already in use. These seals
include a microchip that, when broken, transmits a signal, picked up via a satellite network that sends information
to the organization or principal of the sealed container, including information on its location. Although the prices
of such automated seals are relatively high, the cost will likely decrease in the coming years.


Sealing containers is relatively easy. However, sealing non-containerized conveyances presents some problems
because the trucks often are not of as high quality as those that carry containers, and often participate in
informal trade. Various sealing procedures have been proposed and are in operation. Good sealing systems
conform to the WCO Kyoto Convention. They should be (i) strong and durable; (ii) capable of being affi xed
easily and quickly; (iii) capable of being readily checked and identifi ed; (iv) cannot be broken, tampered with or
removed without leaving traces; (v) cannot be used more than once, except for those seals intended for multiple
use (e.g. electronic seals); and (vi) be made as diffi cult as possible to copy or counterfeit.


Guarantees. Customs must be given a guarantee to cover the payments of import duties, taxes and other
charges due on importation in the transit country in case goods do not leave the country via the transit
procedure. Guarantees should correspond to the duties and taxes ‘at risk’, but are sometimes calculated


35 Connecting to Compete: Trade Logistics in the Global Economy, p. 20, World Bank, 2010.
36 Note: African coastal countries: Benin, Cameroon, Côte d’Ivoire, Ghana, Kenya, Mozambique, Namibia, Nigeria, Senegal, South
Africa, Togo and United Republic of Tanzania. African landlocked countries: Burkina Faso, Central African Republic, Chad, Ethiopia,
Malawi, Mali, Rwanda, Uganda, and Zambia. European coastal countries: Belgium, Croatia, Germany, Italy, Netherlands, and Poland.
European landlocked countries: Austria, Czech Republic, Hungary, Luxembourg and Slovakia.
37 Trucks are used as an example. However, seals could be used for other modes of transport, such as wagons, barges, trains, etc.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 95


in terms of the value of the cargo, which is easier to establish than the ‘at risk’ duties. Banks and insurance
companies can issue guarantees and in some instances obtain reinsurance from international insurance
companies.


Non-guarantee forms of security such as deposits or the value of the trucks exist in some transit countries.
These guarantees tend to be more expensive and diffi cult to mobilize and are not recommended. Guarantees
can cover a single transit operation affected by the principal concerned or several transit operations up to
given limits and specifi cations. Customs procedures specify the modalities of recovering the guarantee.


Authorized operators. Operators providing guarantees that they will abide by the transit rules and operating
with acceptable vehicles are permitted to engage in the transit trade. National transit organizations are largely
responsible for identifying authorized transit operators.


Documentation fl ow. To control the beginning and completion of a transit procedure, customs should have
a reliable monitoring system. This system could be based on paper documentation issued by the customs
post that controls the origin of the transit shipment and the documentation issued or verifi ed by the customs
post at the exit of the country.


Increasingly, documents are transmitted electronically, relying on the transit module of the customs
management system. This system permits the timely lifting of the bond upon the completion of the transit
transaction. When the copies of the documents – or the electronically generated data match – have been
returned to the point of origin of the transit and matched with the documents issued at the start of the journey,
the transit operation is considered completed and the guarantee released. When they do not match, payment
of the import duties, taxes and other charges – including a fi ne – are due. These charges are covered by a
guarantee.


Human error and lax recording of the exit formalities can lead to redundant claims on the transit guarantee.
These claims are costly and lengthy to settle and undermine the trade facilitation aspects of the overall transit
procedures.


NET BENEFITS OUTWEIGH COSTS


Many bilateral, international and regional transit agreements are in place. The WCO and the WTO have
agreements among their members. Yet, many of these agreements and treaties exist only on paper or are in
a prolonged state of ineffective preparation or implementation. Inadequacy of or lack of legal instruments and
frameworks are not the problems. Implementation is hampered by a perceived lack of capacity, scepticism that
transit procedures can be implemented to adequately protect fi scal revenue, or from the lack of political will to
overcome vested interests that benefi t from poorly operating transit mechanisms. In addition, the erroneous
perception that fl uid transit procedures largely benefi t landlocked countries has undermined progress.


The World Bank estimates indicate that the benefi ts from transit can be signifi cant. For Kazakhstan they
were estimated at 0.5%-0.6% of GDP; about two-thirds accrued to the railway sector and one-third to road
transport. In the case of the United Republic of Tanzania vis-à-vis Rwanda, Burundi and Uganda, the main
benefi t is the additional traffi c handled profi tably by the transit country’s ports and trucking fi rms, the volume
of transit traffi c being large relative to domestic traffi c. The same type of benefi t accrues to Thailand from
transit traffi c with Lao People’s Democratic Republic, though in this case the volume is small. In the case
of Chile vis-à-vis Bolivia (Plurinational State of), the largest benefi t arises from a free trade zone from where
imported vehicles and consumer goods are sold on to inland countries.


The general perception is that the net benefi ts accruing to transit countries substantially outweigh the costs.


EFFICIENT TRANSIT PROCEDURES AND PRACTICES


Effi cient transit operations involve customs as well as transport operators, and require transport procedures
that allow trucks and drivers to cross borders without transhipment of the cargo or switching of drivers.
Mutual recognition of truck certifi cation insurance and driving licenses, as well as traffi c rights in the transit
country for national trucks, are issues that need to be considered.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY96


Transport regulations that specify which trucks are allowed to transport the transit goods also undermine
competitiveness. For example, ‘tour de role’ rules imposed by transporters associations allocate transportation
services. Table 8 provides an overview of how various trade and transport procedures and practices hamper
transit trade and undermine competitiveness.


Table 8: Trade and transit procedures and practices


Procedure/practice Documentation Charges, cost Comment


Unloading in port Bill of lading Port charges The effi ciency of port operations is not always
up to standard


Inspection and
clearance by customs


Invoice to determine
value, classifi cation
and weight that
permit the calculation
of the duties to be
guaranteed


Transit declaration


Guarantee


(deposit)


Often transit shipments are subjected to the
same time-consuming procedure applied
to imports for home consumption. Transit
guarantee is purchased. Often the guarantees
are calculated not on the ‘revenues at risk’ but
on the value of the transit cargo, which may
overstate the ‘duties at risk’.


Loading of vehicle Seals of containers and other conveyances.
Poor sealing practices leads customs to operate
convoys.


Formation of a convoy Convoy charges Convoys depart only when all trucks are present,
cause delays en route (mechanical problems
with older vehicles), and can pass border control
only when all trucks have reassembled at the
border. Corruption issues.


Road transport in the
transit country


Road transport
charges


Fixed transit routes


These charges are often contrary to GATT
Agreements.


Fixed routes are not always those trucks would
chose. This limits the freedom of transporter.


Controls en route Transit and other transport are often impeded by
numerous road checks by police and customs
and involve payments of gratuities.


Customs inspection
upon exit from fi rst
country


Copy of transit
document


In the absence of
an ICT system, this
presents problems


Seals are checked.


Transit document checked and slowly remitted
to issuing offi ce to discharge the guarantee.


Border inspections
(vehicle)


New insurance
charges


Driving license and insurance of vehicle check. If
invalid, change of operator is needed. Possible
axle load control, with axle loads that differ
across countries.


Transfer to other truck Transfer charges When trucks cannot operate on the other side
of the border, cargo can be damaged, lost or
stolen.


Customs inspection
entry in the destination
country


Transit declaration –
beginning of a national
transit link


New guarantee must
be purchased


Delays when customs do not recognize/accept/
doubt the transit seals/documents and insist on
inspections.


Other inspections upon
entry of second country


All documents Security, health checks; could lead seals to be
broken.


Arrival at destination All documents Costs of damage, loss The seals are broken, duties paid and guarantee
discharged.


Source: Arvis, J.F., Transit and the Special Case of Landlocked Countries, World Bank, 2005. Available at: www.gfptt.org/
uploadedFiles/4afdcdb3-f851-4641-a38b-98bd481f10c7.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 97


TRADE LOGISTICS SERVICES AND COMPETITIVENESS
The ability of businesses to connect successfully to international markets relies on the performance of the
entire supply chain. Six areas best capture the most important aspects of the current logistics environment:


 Effi ciency of the customs clearance process;
 Quality of trade and transport-related infrastructure;
 Ease of arranging competitively priced shipments;
 Competence and quality of logistics services;
 Ability to track and trace consignments;
 Frequency with which shipments reach the consignee within the scheduled or expected time.38


The broadened approach to trade facilitation ranges from traditional issues, such as customs procedures
and infrastructure quality, to new concerns, such as tracking and tracing shipments, timeliness in reaching a
destination and the competence of the domestic logistics industry. Weaknesses in any one of these areas are
critical to whether businesses can trade goods and services on time and at a competitive cost.


Trade logistics refers to the management of international fl ows of goods and related documentation and
payments. Many of these services are performed ‘behind the border’ as compared with ‘at the border’. These


38 Arvis, J., M. Mustra, J. Panzer, L. Ojala and T. Naula, Connecting to Compete 2008: Trade Logistics in the Global Economy, World Bank.
Available at: siteresources.worldbank.org/INTTLF/Resources/lpireport.pdf


Box 39: A pragmatic solution – the West African Transit Agreement


Economic Community of West African States (ECOWAS) member countries signed off on a transit agreement in
1982 that clearly identifi es the various elements that permit smooth transit among its 16 member countries. The
agreement has been largely ignored and today most transit cargo is regulated by bilateral agreements. However,
some progress is being made that could result in the fi nal adoption of the Agreement.


Ghana’s pragmatic solution for transit shipments to Burkina Faso, Niger and Mali is an example of best practice:


Guarantees. In 2006, ECOWAS countries adopted a proposal to create a chain of guarantors and agreed on a fee-
sharing arrangement covering all transit through West Africa. In March 2009, an agreement was reached among
Ghana, Burkina Faso and Mali to start a pilot and guarantors were identifi ed to launch the programme.


Seals. Ghana initiated a sealing system for transit trucks in agreement with the transport associations of the
destination countries – Niger, Burkina Faso and Mali. The system consists of a one-piece or approved multi-piece
tarp that is secured on the truck using tight ropes that are affi xed on hooks at the base of the truck platform cover.
A sealed nylon tape is placed through the hooks, upon which a numbered seal is affi xed. The number is noted on
the transit documents.


Documentation fl ows. Ghana’s exit border is equipped with the transit module of its customs management system,
which registers the completion of the transit journey and transmits this information to headquarters in real time.
This permits the prompt release of the transit bond. Burkina Faso and Mali are in the process of doing the same
and are implementing a special module to permit the seamless transfer of the transit information across customs
administrations. This procedure is required because the customs management systems in Niger, Burkina Faso
and Mali differ from Ghana’s system.


Transit truck tracking system. Ghana customs operates a tracking system that allows customs offi cials as well
as owners to follow the trucks over its territory. Burkina Faso and Mali are studying the possibility of extending this
system to their territories. However, there is little agreement among transit experts that the benefi ts to customs of
using such a system warrant their cost.


Sources: De Wulf, L., ‘Ghana Leads West Africa in Transit Reform’, Investment Climate in Practice, Nr. 10, World Bank, 2010.
Arvis, J. F., ‘Transit Regimes’, Mclinden, G., et al., editors, Border Management Modernization, World Bank, pp. 292-293, 2011.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY98


services include domestic transport, warehousing, port services, information management, infrastructure
that allows exporters to comply with standards imposed by the importing country, and capacity to track
goods to comply with increasingly stringent security requirements. The availability of high-quality and price-
competitive trade logistics services is strongly correlated with country competitiveness.


Companies must bear the direct costs associated with moving goods, including port and handling charges,
freight costs, agent fees, procedural fees and side payments. Furthermore, they often must incur further
costs associated with hedging for the lack of predictability and reliability of the supply chain.39 Companies
often need to carry higher inventories of supplies or fi nished products or change to more expensive forms
of transportation to be certain to meet delivery schedules.40 These costs are related to predictability and are
inclined to climb sharply in relation to declining logistics performance.


Effi cient logistics are one of the preconditions for developing countries to successfully conduct trade – both
exports and imports – and to integrate more fully with world markets. The lack of an effi cient logistics sector
can discourage or needlessly tax export activity. The cost of logistics relative to export value is a major
market access barrier for developing country exporters of goods. Relative to total export value, average
logistics costs are estimated to account for 3% in developed countries and 8% in developing countries.
Among developing countries, the share has been estimated at 15% in Africa and to almost 30% in landlocked
developing countries.


Supply chain performance relies on the quality of services provided by the private sector: customs brokers,
road transport operators, shipping agents and haulers. An effi cient supply chain relies on the competence
and diligence of public agencies that oversee border procedures. In many developing countries and LDCs,
there is dissatisfaction with the quality of trade logistics services provided by both the private and public
sectors. This is in stark contrast to developed countries, where there is more satisfaction with private providers
than with public providers. The negative view of private providers in developing countries and LDCs can have
signifi cant consequences. Frequently in these countries, inadequate regulations and a lack of competition
are the causes for dissatisfaction with private providers.


An example is the profession of customs brokers, which typically has a low barrier of entry without adequate
regulations to ensure the quality of services. As a result, there is an over presence of ‘suitcase’ operators
whose practices obstruct trade facilitation. Often these operators upset the clearance process and prevent
the emergence of capable local logistics operators that are better able to work with international operators.


Another example provided by the World Bank shows that increased competition and successfully liberalizing
trucking services is critical:


‘Rent-seeking behaviour and governance of the trucking industry are at the core of the issues faced
by many low-income African countries. Without increased competition and successfully liberalizing
trucking services where regulation remains strong, transport prices will remain high, service quality
will not improve and road users will not reap all the benefi ts of costly investments in infrastructure
rehabilitation.’41


The World Bank’s Connecting to Compete: Trade Logistics in the Global Economy42 report sheds some
light on the impact that infrastructure and infrastructure services have on country rankings according to the
Logistics Performance Index (LPI). When countries are ranked from high to low LPI, a positive relationship is
apparent between this ranking and the satisfaction of operators with the infrastructure services. For instance,
33% of operators in countries that belong to the top quintile of the overall LPI ranking indicated that road
infrastructure was of high or very high quality, compared to 4% of operators in the bottom quintile that were of
this opinion. Improvements would assist the competitiveness of all operators, but much more so for operators
in countries that belong to the lower quintiles. A similar relationship is found with respect to infrastructure
services


39 Arvis, J., et al. Connecting to Compete, World Bank, 2008.
40 Guasch, J. and J. Kogan, ‘Just in Case Inventories: A Cross Country Analysis’, Policy Research Working Paper 3012, World Bank,
2003. Available at: www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2003/04/23/000094946_03040404262960/
Rendered/PDF/multi0page.pdf
41 Freund, C. and N. Rocha, ‘What Constrains Africa’s Exports?’, Policy Research Working Paper 5184, World Bank 2010. Available at:
www.relooney.info/0_NS4053_347.pdf
42 Arvis, J.F. et al., Connecting to Compete: Trade Logistics in the Global Economy, World Bank, 2010. Available at: siteresources.
worldbank.org/INTTLF/Resources/LPI2010_for_web.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 99


POLICY RESPONSES


In getting products to market more quickly, safely and cost-effectively, developing countries have the choice
of relying on foreign logistics services suppliers or enhancing their own national supply capacity – or a
combination of both. Developing countries can clearly derive benefi ts from engaging in trade and investment
liberalization in logistics services. However, experience shows that certain preconditions must be met,
including infrastructure and its quality, access to and effi cient use of technology, providing security, and the
availability of skilled human resources. An important precondition is proper pro-competitive regulation with
the means to enforce domestic regulatory requirements while meeting international standards. A sound and
balanced regulatory framework, buttressed by policies to ensure a competitive environment for the sector,
is imperative. It is also fully consistent with the right to regulate that is enshrined in the WTO’s General
Agreement on Trade in Services (GATS) and in the growing number of preferential trade agreements (PTAs)
covering trade in services.43


A domestic trade and transport logistics audit
Policies to improve trade logistics and trade procedures should start with a domestic trade logistics audit that
identifi es the potential shortcomings that must be addressed in an action plan. The action plan should be
prepared with the full participation and support of the various actors in the domestic logistics supply chain.
This is further discussed in the 2010 World Bank study, Transport Facilitation Assessment: A Practical Toolkit
for Country Implementation. 44


‘The objective of [a] Trade and Transport Facilitation Audit (TTFA) is to establish a diagnostic, as
comprehensive as possible, on the situation in a country in terms transport costs and effi ciency related
to external trade and international transportation services providing an integrated approach.


A logistics audit will invariably start with gathering quantitative and qualitative data from key
stakeholders and with analysing and interpreting this information. The main departments collaborating
in data collection and interviews will typically be Logistics and Transportation as well as Warehousing,
Purchasing, Production, Trade Compliance, Customer service and IT departments.


All these departments are involved directly or indirectly in the supply chain and can provide a valuable
insight into the situation as well as benefi t from the outcomes of the audit.’


The information gathered and analysed will be transferred to an ‘as-is’ process, with documentary and physical
fl ow maps to provide a clear understanding and help evaluate the entire process to identify any ineffi ciencies,
bottlenecks and waste. The audit team then provides suggestions for improvements and modifi cations
summarized on ‘to-be’ maps. The team also ensures the suggestions are adequately prioritized. Specifi c
recommendations, action items and risk assessments are presented together with solutions to help with their
implementation. The data gathered is used to back-up fi ndings, quantify logistics costs and identify potential
savings through data analysis and benchmarking.


The main purpose of a TTFA is to enable policymakers to understand how supply chains for international
trade operate and identify opportunities to improve their performance. Governments play an essential role
in improving trade and freight logistics. Governments are also responsible for creating a pro-competitive
environment to enable trade and freight logistics providers to better operate. According to an UNCTAD report:


‘Regulation of logistics services and trade procedures infl uences the performance of international
supply chains, as does the quality and capacity of public infrastructure. Countries aspiring to progress
trade logistics may need to reform and modernize border management institutions, change transport
regulation policy, and, in some cases, invest signifi cantly in trade-related infrastructure.’45


43 Trade and Development Aspects of Logistics Services, UNCTAD, 2006. Available at: www.unctad.org/en/docs/c1ahm1d2_en.pdf
44 Readers are advised to refer to this study for an in-depth understanding of the issues. Trade and Transport Facilitation Assessment:
A Practical Toolkit for Country Implementation, World Bank, 2010. Available at: siteresources.worldbank.org/EXTTLF/Resources/
Trade&Transport_Facilitation_Assessment_Practical_Toolkit.pdf
45 Trade and Development Aspects of Logistics Services, UNCTAD, 2006. Available at: www.unctad.org/en/docs/c1ahm1d2_en.pdf




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY100


An audit can assist governments in gaining a comprehensive understanding of trade facilitation and logistics
as well as supply chain constraints in a country irrespective of their cause. Some key areas include the
following:


 Organization and quality of transport and logistics services as well as infrastructure offered to exporters
and importers;


 Procedural and documentary requirements necessary to move goods through borders or in transit
operations;


 Foreign trade patterns;


Box 40: Rwanda: deregulating international transport


In 1994, Rwanda’s initiative to deregulate the international transport sector had a huge impact on transport prices.
The dramatic decline in prices confi rmed the effect that cartels had on the country. Prices declined by more
than 30% in nominal terms and by almost 75% in real terms when taking into account the continued increase in
input prices. The impact in Rwanda was probably stronger than in most other African countries because before
deregulation a parastatal trucking company held a monopoly and was able to set high prices without any restraints.
At the same time, 1994 was the most violent period of the Rwandan civil war, when a road freight fl eet ceased to
operate.


Deregulation resulted in lower prices and led to growth in the Rwandan fl eet. This is in contrast to common fears
that deregulation, which liberalizes market entry, helps to eradicate the fl eet owned by truckers from landlocked
countries. In the case of Rwanda, this fear was even stronger given the disappearance of its trucking fl eet in 1994.


On the contrary, deregulation boosted the rapid recovery of the domestically owned fl eet. A distinctive feature
of Rwandan truckers’ business strategy has been to specialize in specifi c goods – such as petroleum products
– to capture niche and profi table markets. This largely explains why the current fl eet is equal to the level prior to
deregulation.


Average transport prices from Mombasa to Kigali (US$, constant and current)


Source: Teravaninthorn, S. and G. Raballand, ‘Transport Prices and Costs in Africa: A Review of the Main International Corridors’,
Africa Infrastructure Diagnostic, Working paper 14. Available at: infrastructureafrica.afdb.org/system/fi les/WP14_Transportprices.
pdf


Current transport tariffs (left) Real transport tariffs – GDP deflator (right)


350


300


250


200


150


100


50


0


19
89


19
90


19
91


19
92


19
93


19
94


19
95


19
96


19
97


19
98


19
99


20
00


20
01


20
02


20
03


20
04


20
05


20
06


Before liberalization After liberalization
900


800


700


600


500


400


300


200


100


0


U
S


$/
to


n


U
S


$/
to


n


(US$, constant and current)




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 101


 Constraints in regulatory, documentary and procedural requirements concerning international trade
transactions and equivalent transport operations;


 Availability and the organization of transport services and obstacles to their modernization and development;
 Regulation, quality and reliability of transport and logistics services and business practices.


Using the Logistics Performance Index
Policies that have an impact on trade and logistics regulations and procedures should be developed based
on an understanding of their impact on trade competitiveness. The World Bank’s Logistics Performance
Index (LPI)46 is detailed in the Connecting to Compete: Trade Logistics in the Global Economy report as well
as in numerous country specifi c studies. The LPI provides policymakers and private sector stakeholders
with benchmarking data along the entire supply chain. This information, available since 2007, enables
stakeholders to identify trade constraints, highlight poorly performing areas along the entire trade supply
chain, and target areas for reform. The World Bank’s Trade and Transport Facilitation Assessment: A Practical
Toolkit for Country Implementation reports:


By providing comprehensive data on country performance and a broad indication of where problems are,
the 2007 LPI helped raise awareness and intensifi ed the dialogue between policymakers and the private
sector in several countries about logistics bottlenecks and priorities for reform in facilitating international
trade and transportation at the country or sub-regional level.47


EXPRESS DELIVERY NEEDS EFFICIENT LOGISTICS


Express delivery is a good example of the need for reliable and effi cient logistics to promote business
competitiveness in coordination with government regulations.48 Express operators offer guaranteed, fast,
reliable, on-demand, global, integrated, door to-door movement of shipments that are tracked and controlled
throughout the trip. The express industry simplifi es and speeds up the process of transporting goods. It
organizes collection, generally at the end of the business day, allows the sender access to information on the
progress of shipments from pick-up to delivery, and provides proof of delivery.


Where shipments cross international borders, the express industry takes care of customs clearance and the
payment of duties and taxes as required. Many companies depend on express services when their products
are perishable and/or time sensitive. However, express delivery services are typically expensive and may not
be a viable option for many companies.


46 The World Bank’s Logistics Performance Index is available at: info.worldbank.org/etools/tradesurvey/mode1b.asp
47 Trade and Transport Facilitation Assessment: A Practical Toolkit for Country Implementation, World Bank, 2010. Available at:
siteresources.worldbank.org/EXTTLF/Resources/Trade&Transport_Facilitation_Assessment_Practical_Toolkit.pdf
48 ‘The Impact of the Express Delivery Industry on the Global Economy’, Oxford Economic Forecasting, 2005. Available at: www.global-
express.org/doc/Global_Express_Impact_Study.pdf


Box 41: Czech Republic, Hungary and Poland: privatization


Road freight transport was one of the fi rst sectors to be privatized and liberalized in most Central and East
European countries. Hungary, followed by Poland and then the Czech Republic, was the earliest to adopt pro-
competition reforms. Hungary and Poland passed laws granting free entry to the trucking market in 1988, as did
the Czech Republic after 1990. Market forces freely determine transport prices. The combination of privatization
and liberalization, which included deregulation reforms, such as eliminating rate and route controls, led to the entry
of many new trucking operators with competitive prices and better quality services.


A consequence of the new competitive environment includes several innovative logistics services initiated by the
trucking companies. This has resulted in faster delivery times and less breakage or spoilage of cargo. In most
cases, the more signifi cant service innovations were initiated by the larger, internationally connected trucking
companies.


Source: Source: Teravaninthorn, S. and G. Raballand, Transport Prices and Costs in Africa: A review of the main international
corridors, Washington, D.C., World Bank, 2009.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY102


The express delivery industry enables SMEs to use high-quality and rapid delivery services that they would
unlikely be able to provide by themselves. One area where express delivery services are likely to be particularly
critical to economic success is knowledge-based industries, such as pharmaceuticals, biotechnology,
fi nancial and business services, as well as research and development activities. These sectors have above-
average levels of dependency on express delivery services, refl ecting the time-sensitive, high-value products
and services they provide.


International express services are hypersensitive to government polices and restrictions that weaken
their capability to function effi ciently. This limits their potential to facilitate increased trade, investment
and productivity across the broader economy. The restrictions faced by service providers include: anti-
competitive practices of government-owned or authorized monopolies, complex licensing requirements and
ineffi cient customs procedures, and restrictions on foreign investment. Eliminating restrictions on the express
industry could promote increased trade, investment and productivity. This in turn could increase GDP, provide
employment and boost government fi nances.49


PUBLIC-PRIVATE COLLABORATION
The success of trade facilitation initiatives is frequently attributed to collaboration between the government
and the business community. Public-private collaboration enables both parties to strive cooperatively for their
mutual benefi ts and carry out trade facilitation projects, as well as address procedural concerns. Consultation
with private sector stakeholders is one of the main methods for governments to identify operational issues,
approve remedies and undertake reform. Public-private collaboration is feasible for all aspects of the logistics
and trade supply chain. However, such cooperation is most common in the area of border management,
where the role of the private sector is critical to the reform process. Private sector involvement in border
management can benefi t border agencies through the following activities:


 Consultation. Border management agencies can develop tools and mechanisms to consult with private
sector stakeholders about reform needs and initiatives.


 Collaboration. Border management agencies can partner with the private sector to encourage compliance
with trade controls and procedures through collaborative arrangements that motivate traders to internalize
and take responsibility for meeting border control objectives.


 Contracting. Border management agencies can and increasingly do rely on private sector services to
complement or augment government resources and capabilities. An example of effective collaboration is
the successful public-private partnership for customs services in Ghana50 (see box 30).


CONSULTATION MECHANISMS AND PROCESSES


A common approach is for private and public sector representatives to share their concerns in national,
departmental and local collaborative forums where they can then jointly explore border reform options and
approaches.51 In Malaysia, for example, the Prime Minister set up a special steering committee comprising
various government representatives and the President of the Federation of Malaysian Manufacturers to
address trade facilitation problems and take measures to solve them (see box 42).


Further mechanisms include ‘arm’s length approaches’, such as open consultation letters inviting interested
parties to express views on a given issue, and approaches driven by assessment and research, such as the
investigation of private sector trade facilitation reform requirements using surveys, toolkits and commissioned
studies’.52


Both government and the private sector can benefi t from such consultation processes. The contribution of the
private sector enables enterprises to keep abreast of the latest regulatory changes and to take appropriate


49 Ibid.
50 Granger, A., ‘The Role of the Private Sector in Border Management Reform’, in Border Management and Modernization, World Bank,
2010.
51 Ibid.
52 Ibid.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY 103


action. Through dissemination of information to the business community, businesses discover what incentives
and assistance programmes are available. Governments are able to learn about the problems faced by
businesses in their economic and trading activities. Consultation also presents an opportunity to identify the
issues and devise plans to overcome them.


CONCLUSION
A diverse range of measures are needed to ensure goods are moved across borders rapidly, reliably and cost
effectively. International studies show how traditional, ‘narrow’, approaches to trade facilitation have been
inadequate because they focus primarily on border processing, clearance systems and procedures at the
border. Today, trade facilitation must also take into consideration logistics services and quality infrastructure.


This ‘broadened approach’ to trade facilitation is supported by an abundance of high-level research showing
how specifi c trade facilitation measures can have major impacts on improving the business environment and
the expansion of competitive exports to global markets. The result of improvements could be substantial for
exporters in many developing countries and LDCs.


Box 42: Malaysia: consultation mechanisms


In Malaysia, public-private sector collaboration and partnerships have become standard operating procedure.
All ministries and agencies have adopted an open policy and encourage feedback from the private sector with
regards to problems faced in carrying out their economic and trading activities. All ministries and agencies involved
in trade-related issues are required to undertake industry consultations on a regular basis to further enhance the
business environment to promote trade and investment facilitation.


At the national level, annual consultations are held to discuss trade-related issues. For example, the Annual Ministry
of International Trade and Industry (MITI) Dialogue, chaired by the minister, provides the opportunity for corporate
leaders and industry associations to improve the trade and business environment. Discussions on trade facilitation
issues are a common and important component in almost all of these dialogue sessions.


Malaysian customs has established the Customs-Private Sector Consultative Panel (CCP) that meets twice a year
at the national level. Consultative panels have also been established at the state level, and hold meetings on a
regular basis, in addition to a monthly Meet the Clients Day.


Embedding reforms in the public delivery system


All issues, including observations and proposals from the consultations, are then discussed and evaluated by the
relevant ministries and agencies and discussed in forums such as PEMUDAH, a Special Taskforce to Facilitate
Business established in 2007. PEMUDAH brings together ministries with decision-making authority to address
the issues raised during the consultations related to the specifi c ministries. When changes to policy, regulations
and laws are required, they are submitted to the cabinet for consideration and approval. Ministries and agencies
continuously monitor policy reforms and improvements to procedures and approaches. PEMUDAH also has
monitoring responsibility, in order to ensure that the reforms implemented are sustained and are embedded in the
public delivery system.


The Malaysian Administrative Modernisation and Management Planning Unit (MAMPU), a central agency under
the Prime Minister’s department, monitors and oversees overall reforms. MAMPU plans and issues guidelines and
standards for public sector transformation. It provides consultancy services in areas such as strategic planning
and management business process re-engineering and the use of ICT. MAMPU also monitors the implementation
of transformation programmes and evaluates the effectiveness of implementation through rating mechanisms. In
addition, MAMPU coordinates public awareness programmes through various media to inform and encourage the
public to take advantage of the various improvements created by the government.


Source: Public-Private Sector Partnership on Trade Facilitation – the Malaysian Experience, ITC, 2010.




CHAPTER 3 – MOVE GOODS ACROSS BORDERS EFFECTIVELY104


But the benefi ts of progress in one area may not be realized until progress is made in all other areas. For
example, poor integration among the agencies involved in border processes may offset the benefi t of a
customs modernization programme.


Because of this broadened scope of issues, policy responses from national governments must adjust
accordingly. For example, in the area of trade logistics services, governments must foster a pro-competitive,
corruption-free environment to enable the best logistics services providers to fl ourish, thus reducing costs for
users. A trade and transport logistics audit as well as fi ndings from major international studies, such as the
World Bank’s Logistics Performance Index and the World Economic Forum’s Global Enabling Trade Report
2010,53 can assist in identifying problems across the entire supply chain. This information can be used to
identify priority areas for improving trade competitiveness.


Effective public-private collaboration can enable both private and public sector players to implement trade
facilitation projects, address procedural concerns and identify policy shortfalls. Ghana’s experience has
demonstrated that public-private partnerships are an effective means of obtaining fi nancing and technical
expertise for customs modernization, while maintaining government control in sensitive areas.


Similarly, in Malaysia, the effective use of collaboration and partnerships has become a standard operating
procedure for government entities and has encouraged feedback from the private sector regarding problems
it faces and solutions in carrying out economic and trading activities. The private sector, acting through
associations, can use this information to better consult with governments concerning the specifi c areas of
trade facilitation reform with the most potential to result in export growth.


Thus a broad range of trade facilitation issues, both at the border and behind the border, need to be addressed
in order to enhance export competitiveness. The range of issues cannot be handled by governments alone.
Governments need to work in collaboration with the private sector to identify stumbling blocks, propose
solutions, fi nance trade facilitation infrastructure and provide a competitive domestic environment for trade
logistics services providers.


53 Available at: www3.weforum.org/docs/WEF_GlobalEnablingTrade_Report_2010.pdf.








CHAPTER 4


ADDRESS EXPORT MARKET
ISSUES


INTRODUCTION........................................................................................................................................... 108


MARKET ACCESS ........................................................................................................................................ 108


ASSESSING MARKET CONDITIONS ........................................................................................................ 110


TECHNICAL BARRIERS: WHY EXPORTERS WORRY .............................................................................. 128


EXPORTING IN THE PRESENCE OF DOMINANT FIRMS ........................................................................ 134


THE IMPORTANCE OF VALUE CHAINS .................................................................................................... 134


ITC BUILDS CAPACITY ............................................................................................................................... 135


COMPETITION FROM THIRD COUNTRIES .............................................................................................. 136


CONCLUSION .............................................................................................................................................. 136


ANNEX: NON-TARIFF MEASURES (NTM) CLASSIFICATION FOR TRADE IN GOODS ....................... 138




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES108


ADDRESS EXPORT MARKET ISSUES


INTRODUCTION
The roadmap to a successful export effort requires identifying market opportunities and the conditions
of access, and developing a programme at government and business levels to take advantage of the
opportunities. This chapter focuses on the information about export markets exporting businesses need,
how to obtain that information and how to exploit the opportunities. Four points should be kept in mind.


First, export opportunities vary widely across markets and across products. Conditions change over time
because of policy changes, economic developments, changes in fashion and tastes, and the development
of new products and services.


Second, conditions of access may change under national programmes on trade and related policies, as well
as from regional and multilateral negotiations. The treatment of different trading partners may vary across
markets and in individual markets, with some exporters receiving better terms of access than others.


Third, in some sectors and in some exporting and importing countries, trade may be largely controlled by
a limited number of fi rms whose domination is based on size (monopolies or oligopolies on the selling
or purchasing side or both); economies of scale or other barriers to entry; on proprietary technologies in
products, services or in production; and delivery of goods or services.


Fourth, competing exporters – countries and fi rms – may be using strategies and instruments to give them an
advantage in foreign markets. These may simply be a sound export strategy, such as that being developed
in this chapter, or it may be the use of measures such as subsidies or even competitive undervaluation of
national currencies.


This chapter shows how exporters can develop a strategy to address various changing conditions to win
markets. However, the principal focus of the chapter is on market access conditions and on important
technical barriers to trade.


MARKET ACCESS


IDENTIFYING MARKET OPPORTUNITIES


Most countries and businesses have a good idea of their traditional markets and trends and conditions of
access to those markets. However, when they seek to expand and diversify their exports, including in new
markets, they need access to a much wider range of information to identify market opportunities and trends.


Today, a wide range of information and various tools are available for goods. For example:


 Trade intelligence can be obtained from the International Trade Centre (ITC). ITC was founded as a
joint agency of the United Nations Conference on Trade and Development (UNCTAD) and the General
Agreement on Tariffs and Trade (GATT) [now the World Trade Organization (WTO)] to be the leading
international agency in the provision of such information.


 Extensive information and analysis on many countries and topics, including services, are available from
the World Bank and UNCTAD. WTO Trade Policy Reviews provide broad-based surveys of individual
countries, as well as specifi c information on goods and services.


 Offi cial notifi cations of all trade rules and actions by WTO Members are on the WTO website (www.wto.org).
 World Bank and International Monetary Fund (IMF) reports provide useful general background on the


economies of many countries and specifi c information on certain sectors.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 109


ITC INFORMATION SERVICES


Since its founding in 1964, ITC has provided trade development information to trade support institutions and
the private sector in developing countries. It provides capacity building to use this information for market
development and negotiations, helping to level the playing fi eld for developing countries that lack easy
access to information about market conditions, trade trends, product developments and trade negotiations.


Over the last decade, ITC’s websites (see www.intracen.org) have delivered a growing amount of trade
intelligence to policymakers, trade support institutions and businesses. ITC books, its magazine and market
analysis tools have been made available free online for users in developing countries. In addition to the
quarterly Trade Forum magazine, ITC’s oldest publication, ITC produces an extensive range of publications
on various topics, including books, technical papers, directories and periodic bulletins. In the last 10 years,
ITC has published some 50 and over 100 technical papers. They include trade promotion handbooks, market
surveys, commodity handbooks and a range of technical materials..


The market surveys cover specifi c product markets, including coffee, cocoa, cotton, cut fl owers, dried herbs
and spices, food and beverages, fruit juices, oil cakes and meals, nuts, textiles, silk, and tropical timber.
There are also many books covering market opportunities and issues in trade in services. Trade promotion
topics include many publications that simplify WTO issues for the business community, and provide them
with hands-on advice to improve their export competitiveness.


There are also many publications that help national trade promotion institutions and national economic
policymakers shape their strategies and formulate policies for export success. The materials cover topics
such as: anti-dumping, countervailing duties and safeguards in various markets; business management for
international competitiveness; model joint venture model agreements; e-commerce; environment issues;
export modules for individual products; foreign exchange derivatives and risk management; geographic
indicators; Islamic banking; packaging information (general and product specifi c); product design for the
fashion, textiles and clothing industry;; quality management; and trade fi nance.


ITC’s directories and bibliographies cover importers’ associations, online market research, standards,
and trade support institutions. ITC also issues periodic trade information bulletins through its Market News
Service, packaging bulletins, business and trade policy updates and many other topics.


ITC’s suite of market analysis tools are used in over 200 countries by more than 100,000 individual users.
These sophisticated electronic products include inquiry systems that enable users to make their own requests
for specifi c information.


ITC’s Trade Map provides users with indicators on export performance, international demand, attractive
markets and the role of competitors. It covers more than 200 countries and territories and 5,300 products
of the Harmonized Commodity Description and Coding System. Trade data is also available at the tariff-line
level for 144 countries and on a quarterly and monthly basis for 86 countries. Trade Map assists fi rms and
trade support institutions in understanding the structure and evolution of international markets, helping them
to answer questions such as:


 What is the structure of the world market for a product?
 With what countries does my country currently trade?
 Where are opportunities for export market diversifi cation?
 Which countries are competing in a specifi c market and globally?


Strategic market research with detailed statistical information on international trade fl ows helps countries
answer questions on priority markets, by analyzing national trade performance, potential to increase bilateral
trade, analysis of trade fl ows with other countries and other topics.


ITC’s Country Map provides links to national trade support institutions and country-specifi c business
information. It presents trade and market profi les based on trade statistics that benchmark national trade
performance and provide indicators on export supply and import demand. Among the key indicators
provided is the Trade Performance Index (TPI) which assesses and monitors various export performance and
competitiveness dimensions by sector and by country.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES110


ITC’s newest database, Standards Map, provides information from most of the well-known standards
organizations, including Fairtrade (FLO), Rainforest Alliance, Global GAP, UTZ Certifi ed, Marine Stewardship
Council, International Federation of Organic Agriculture Movements. It covers 20 voluntary standards and 40
product and service groups.


There are no databases for services comparable to those for goods. Data on national production of services
are limited to a few broad sectors, while data on international trade in services do not cover bilateral fl ows.
However, as discussed later in this chapter, WTO schedules of national commitments under the General
Agreement on Trade in Services (GATS) show which WTO members have undertaken commitments in
various service sectors.


ASSESSING MARKET CONDITIONS
It is not enough to identify country or product markets of potential export interest. It is also important to
understand the conditions of access, including tariffs and a range of non-tariff measures (NTMs). These
conditions of access vary across countries and products, and they can be complex. What applies to one
exporter for one product may not apply to another exporter or product.


While tariff rates have declined over the years as a result of various negotiations and unilateral reforms,
they remain relatively high in a number of key areas for developing countries.1 Today, NTMs are attracting
increased attention. This is partly because they have become more obvious as tariffs have declined, and
partly because the incidence of certain measures seems to have increased. The Uruguay Round of trade
negotiations eliminated certain NTMs and clarifi ed the rules on the use of other measures. However, anti-
dumping actions, health and safety measures, and measures to protect the environment seem to be used
more frequently. In some countries, administrative procedures, such as customs formalities, also seem to
have a negative effect on trade.


An exporter hoping to exploit a potentially interesting market should fi rst obtain advice from the exporting
country’s commercial counsellor on the general market conditions and specifi c problems. The commercial
counsellor should also be able to give advice on import channels and specifi c commercial contacts for
marketing. If the advice is positive, it will likely be necessary to engage a customs agent, as well as to make
other arrangements for fi nance and insurance. ITC’s various directories are useful in this regard.


ITC’s online tool, MacMap, contains information on customs, tariffs and other market access measures
affecting trade in goods applied by 187 importing countries to exports from more than 200 countries and
territories. It allows users to analyse market access measures by any geographic or sectoral aggregation,
and also to simulate tariff reductions using various negotiation formulae.


TARIFFS


Overall, the customs duty rates for goods are now quite moderate. This has led many to dismiss the signifi cance
of tariffs, which are now low or even zero in most countries for many products. But recent research shows that
on average, tariffs remain more important than NTMs, and more important for some products.2 For example,
textile and clothing items have rates of over 40% in the United States market, while tariffs on agricultural
products – including the ad valorem3 or percentage equivalent of specifi c and compound rates – can rise to
several hundred percent.


At the same time, in some markets NTMs on specifi c products are now more important, as discussed below.
In brief, there is considerable variation across regions and across products. Careful product and market
specifi c analysis is essential for individual exporters. There are a number of complications in the types of
tariffs that may be applied, such as: ad valorem or percentage specifi c, compound, alternative, or seasonal;


1 This is the case for both agricultural and industrial products. For more information see, ITC, Market Access for Industrial Products,
Technical paper written by Sam Laird; ITC, Fostering Trade through Public-Private Dialogue: WTO Negotiations on Agriculture, Commercial
and Economic Implications. Report written following an ITC Roundtable on Agriculture held in Geneva, 29 May 2006.
2 Kee, Hiau Looi, A. Nicita and M. Olarreaga, ‘Estimating Trade Restrictiveness Indices’, Economic Journal, January 2009.
3 The term ad valorem is derived from the Latin ad valentiam, meaning ‘to the value’. An article of commerce may be subjected to an
ad valorem tax in proportion to its value, which is determined by assessment or appraisal. Duties, taxes on goods imported or brought
into a country from a foreign country, are either ad valorem or specifi c. An ad valorem duty is one in the form of a percentage on the value
of the property, unlike a specifi c duty that is a fi xed sum imposed on each article of a class, such as all Swiss wristwatches, regardless of
their individual values.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 111


bound or applied most favoured nation (MFN) rates; preferences; rules of origin; the basis for valuation; and
supplementary charges. Inexperienced exporters would likely benefi t from the advice of a customs agent in
the importing country.


In developed countries, the average bound MFN tariff rate – the rate set in GATT/WTO negotiations and listed
in WTO member schedules of commitments – was 8.67% for agricultural products and 3.25% for industrial
products (‘non-agricultural products’ in WTO terminology) in 2008 (see table 9). In developing countries the
comparable rates were 40.38% and 17.87%, respectively.


Table 9: Average tariffs on agricultural and industrial products, 2008 (%)


Agricultural products Industrial products


MFN bound MFN applied Effectively applied MFN bound MFN applied Effectively applied


Developed countries Developed countries


8.67 5.27 3.27 3.25 2.33 1.38


Developing countries Developing countries


40.38 14.77 8.18 17.87 6.14 4.56


Source: World Integrated Trade Solution, ITC, World Bank, WTO, UNCTAD.


Note: Averages are import weighted.


In practice, average applied MFN rates are much lower. This can arise where rates were not bound in the
past so that there is no comparable bound rate – as is the case for a number of non-agricultural products
– or where countries have chosen to reduce their MFN rates, notably in the developing countries under
World Bank/International Monetary Fund (IMF) reform programmes. Thus, in 2008 the MFN applied rates of
the developed countries were 5.27% for agricultural products and 2.33% for industrial products, while the
comparable rates for developing countries were 14.77% and 6.14%, respectively.


Rates may be still lower under various preferential arrangements, such as the Generalized System of
Preferences (GSP), special preferences for least developed countries (LDCs), European Union (EU)
programmes in favour of the African, Caribbean and Pacifi c (ACP) countries, or United States programmes
such as those under the African Growth and Opportunity Act (AGOA).


Similarly, reciprocal preferences for participants in regional trade agreements, such as the North American
Free Trade Agreement (NAFTA), the European Free Trade Association (EFTA) and the Association of Southeast
Asian Nations (ASEAN), can also reduce the effectively applied rates. In 2008, the average effectively applied
rates of developed countries were 3.27% for agricultural products and 1.38% for industrial products, while the
comparable rates for developing countries were 8.18% and 4.56%, respectively (see table 9).


There are two types of tariffs that tend on average to be higher. First, agricultural tariffs are typically higher
on average than industrial tariffs because this sector has benefi tted from special arrangements that
effectively exclude agricultural tariffs from multilateral trade negotiations prior to the Uruguay Round of
trade negotiations. Second, average rates in developing countries are typically higher than in developed
countries.4 This is mainly because in early rounds of trade negotiations under GATT, few demands were
made on developing countries to reduce tariffs, partly because their markets were small and of minor interest
and partly because of provisions for ‘less than full reciprocity’ allowing developing countries to use tariffs for
development purposes.


Average tariffs can be misleading as there is a wide spread of rates from the very high to as low as zero
that may be applicable to certain products and exporters. Table 10 provides examples of products in the
agricultural and industrial sector that have high rates in the major developed countries. Agricultural rates
are particularly high, infl uenced by the fact that the rates include estimates of the percentage (or ad valorem
equivalent) of rates expressed in specifi c rates (e.g. US$ 10 per kilo) or compound rates (e.g. US$ 10 per kilo
and 25%). These estimates are made using techniques agreed by WTO members, based on information on
unit values derived from international trade statistics that do not include direct price information.


4 There are exceptions, such as Singapore, Hong Kong and China, whose average rates are zero.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES112


Table 10: Examples of products with high rates of duty


Source: Consolidated Tariff Schedules, WTO.


Note: Agricultural rates include estimates of the percentage equivalent of specifi c and compound rates using methodology
agreed by WTO members in 2005


Eliminating these high tariffs, known as tariff peaks, is a priority on the multilateral trade agenda. It is now
widely accepted among trade negotiators that a tariff peak is an individual tariff rate at least three times higher
than the national average. Tariff peaks are less common in developing countries as a result of reforms under
World Bank/IMF programmes, which tend to favour fl atter tariff structures.


Goods affected by high rates are typically exported by developing countries. This bias in protection against
developing country exports is compounded by tariff escalation, which is the increase in the level of tariff
rates with the stage of processing. Tariff escalation makes it harder for exporters to develop export-oriented
processing industries, for example, by increasing domestic value added to their base commodity production.


Agricultural products with high rates
MFN bound


rate (%)


European Union


Bovine meats (fresh or frozen meat cuts) 76-146


Hams (fresh or frozen) 40-65


Swine (fresh or frozen cuts) 11.5-45


Prepared bio meats 18-56


Sheep 37-104


Turkeys 4-83


Ducks (fresh or frozen) 13-30


Dairy products


– Milks and creams 7-185


– Yogurts 3-143


– Butter milks 7-264


– Cheeses 32-100


Dairy spreads 69-98


Cucumbers/gherkins 75.9-79.1


Fresh fruits 7-49


Bananas 1.17


Rice in husk 36-93


Sorghum 0.87


Wheat (durum) 0.8


Mushrooms 153·217


Processed fruits/jams 18-46


Fruit juices 13-200


Japan


Hams 178-252


Meat of swine 135-339


Dairy products 108-491


Whey 570-660


Peas 1085


Kidney beans 218


Wheat (durum) 247


Barley 255


Agricultural products with high rates
MFN bound


rate (%)


Rice in husk 770


Husked (brown) rice 568


Milled rice 770


Broken rice 693


Fruit juices 7-43


United States


Chicken (cuts) 10.7-12.3


Turkey 6.8-19.7


Dairy products 0.4-120


Mushrooms 11


Orange juice (frozen) 39


Grapefruit juice (concentrated and frozen) 28.5


Citrus juice (concentrated and frozen) 35.2


Cotton yarns and fi bres 0.44-32


European Union


Motor vehicles for transporting goods 22


Chassis fi tted with engines 19


Footwear (various types and parts) 18


Road tractors for semi-trailers and motor
vehicles for the transport of 10 or more
persons 16


Bicycles 15


VCRs, TVs and other electrical goods 14


Essential oils used in the food and drinks
industry 12.8


Twine, cordage, ropes and cables 12


Men’s and boys’ apparel 12


United States


Footwear (various) 37.5-48


Glassware (various) 25-38


Textiles and clothing items (various) 24.9-32


Goods vehicles (various) 25




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 113


THE DOHA ROUND OF TRADE NEGOTIATIONS


The current WTO Doha Round trade negotiations could lead to a reduction in the number of high rates,
particularly for non-agricultural products, where rates could be reduced to below 8% in developed countries.
If these goods were included in the special sectoral negotiations, the rates could be reduced to zero. This
would create market opportunities for those countries that pay MFN rates, including a number of developing
countries and LDCs that do not get comprehensive preferences in the EU and the United States markets.


However, for countries enjoying preferences under unilateral schemes or reciprocal preferential agreements,
there would be a major reduction in the value of their preferential margins. As a result, existing preference
benefi ciaries could see a decline in their exports. It is more diffi cult to predict what the rate will be in individual
developing country markets because the current proposals in the WTO negotiations envisage important
fl exibilities for those countries, as well as additional fl exibilities for LDCs, small and vulnerable economies,
and countries where the current binding coverage is less than 35% of all tariff lines. This suggests that MFN
rates could still be important in fast-growing markets, including China, India and Brazil.


Market access is more complicated for agricultural products than for industrial products. Under the current
framework for the WTO negotiations in agriculture, ‘tariff reductions will be made through a tiered formula.
Progressivity in tariff reductions will be achieved through deeper cuts in higher tariffs with fl exibilities for
sensitive products.’


The main proposals by developed and developing countries include four tiers within which tariff reductions
would be applied using different approaches. However, the developing country proposals also allow for
different tiers and tariff reductions for developing countries.


The tiers differ under various proposals on the table. For example, the EU proposal for developed countries
suggests tiers with thresholds of initial rates of 0%-30%, 30%-60%, 60%-90% and above 90%. Both groups of
countries propose ‘tariff caps’ to which high tariffs would have to be reduced. These caps are different under
the various proposals, with 100% the cap for developed countries. The cap for developing countries is 150%
under the EU and Group of Twenty (G20) proposals.


These proposals could lead to substantial tariff reductions. For example, under the EU and G20 proposals,
the cuts have been estimated at an average of 30% and a range of 21%-40% for developing countries, and
an average of 45% and a range of 31%-46% for developed countries. Under the United States proposal, the
cuts would be somewhat deeper.


However, there are provisions for exemptions to the tariff-cutting formulas that could signifi cantly reduce
the impact of the proposals. For example, the WTO July Framework5 states: ‘Members may designate an
appropriate number, to be negotiated, of tariff lines to be treated as Sensitive Products’, meaning that these
would be exempt from the cuts. Proposals for such exemptions range from 1%-15% of tariff lines, which may
seem modest. However, the World Bank has estimated that if developed countries excluded as few as 2% of
tariff lines, it would reduce their average tariff cuts by half because they have highly skewed tariff structures.


The WTO July Framework allows developing countries to exclude a number of products designated as
Special Products, based on criteria such as food security, livelihood security and rural development. This
could exclude as much as 20% of tariff lines.


The WTO July Framework also provides for substantial improvement in agricultural market access through
combinations of tariff rate quota commitments and tariff reductions. Tariff rate quotas (TRQs), which are
mostly applied by developed countries, allow a limited value or volume of imports at a low or modest tariff
rate, while imports beyond that limit pay a higher rate of duty. Which source of imports benefi ts from the in-
quota rate is left to the importing country. In practice, the quota is mostly allocated on the basis of historic
market share, which is a source of concern to new exporters who seek improved and more transparent
quota allocation. Out-of-quota rates would be subject to the tariff cutting formula, and there are proposals
for cutting the in-quota rate, which could provide a valuable increase in market access. However, there is
an expectation that most countries would designate the tariff lines with TRQs as sensitive, thereby excluding
them from tariff cuts.


5 The July Framework is a Decision adopted by the WTO General Council on 1 August 2004. (WTO document TN/S/16), paras. 28-29.)




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES114


REGIONAL TRADE AGREEMENTS


In addition to WTO negotiations, many countries are involved in regional trade agreements (RTAs), which are
reciprocal preferential agreements, not necessarily from the same geographic region. In recent years, most
trade liberalization – other than important unilateral reforms in China, India and other developing countries –
has taken place through RTAs. Negotiations are underway to expand the number of RTAs and to extend and
deepen existing ones.


The signifi cance of this trend can be judged by the rapid expansion in the number RTAs. As of 31 July 2010,
some 474 RTAs, counting goods and services notifi cations separately, have been notifi ed to the GATT/WTO.
Of these, 351 RTAs were notifi ed under Article XXIV of the GATT 1947 or GATT 1994 (RTAs in goods between
developed or developed and developing countries); 31 under the Enabling Clause (between developing
countries, or developed countries and LDCs); and 92 under Article V of the GATS (agreements in services).
Up to 31 July 2010, 283 agreements were in force. A comprehensive list of agreements is provided on the
WTO website.6


If account is taken of RTAs that are in force but have not been notifi ed, those signed but not yet in force,
those currently being negotiated, and those in the proposal stage, there were almost 400 RTAs scheduled
to be implemented by 2010. Of these RTAs, free trade agreements (FTAs) and partial scope agreements7
accounted for over 90%, while customs unions accounted for fewer than 10%.


Today, RTAs span the globe. All WTO members, except Mongolia, are parties to one or more agreements.
These are often overlapping, with different product coverage and implementation periods. Economists
disagree about the benefi ts of RTAs. One criticism is that they undermine the credibility of the WTO system,
which is anchored in the principle of non-discrimination.


There are some important distinctions in the WTO rules on RTAs between different groups of countries, which
explain the disparate coverage and time periods. For example, the main legal texts, GATT Article XXIV and the
WTO Understanding on the Interpretation of Article XXIV, concern agreements between developed countries
or between developed and developing countries.8 They cover free trade areas, where tariffs between partners
are eliminated but each partner retains a separate tariff against third countries. They also cover customs
unions, where internal tariffs are eliminated and the customs union adopts a common external tariff. The main
provisions are:


 Tariffs and other trade measures should be eliminated on essentially all originating trade among the parties
(Article XXIV:8).


 The adoption of an RTA does not imply the application of more restrictive trade measures against other,
non-party WTO members (Article XXIV:5).


 Agreements are also supposed to be implemented within a ‘reasonable time’, defi ned as 10 years.


RTAs among developing countries, including LDCs, are covered by the so-called Enabling Clause, negotiated
during the Tokyo Round of trade negotiations in 1979. The requirements for such agreements are less rigorous
than under Article XXIV, allowing for less coverage, partial reductions of tariffs and extended implementation
periods. These fl exibilities mean there is often considerable scope to widen such agreements across regions,
for example the new wave of South-South agreements covering many countries across geographic regions.


Agreements may also be extended to include more products. This is important because existing South-South
agreements, such as partial scope agreements that were common in Latin America, are often quite limited in
product coverage. Agreement can also be deepened by further tariff reductions, some of which are currently
set below MFN rates, but at a non-zero level. An important option for facilitating trade under such agreements
is to streamline customs and handling procedures, which have often been cumbersome and slow in the past.


The major non-reciprocal schemes of the United States and the EU are now being converted into schemes
intended to satisfy the requirements of Article XXIV. The main implication is that developing country partners


6 Available at: rtais.wto.org/UI/PublicMaintainRTAHome.aspx
7 For the most part, partial scope agreements concern RTAs concluded among developing countries.
8 In practice, agreements between developed and developing countries are often asymmetrical in the coverage and implementation
periods, allowing developing countries more latitude than under Article XXIV.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 115


will be required to provide preferences to developed country partners. Examples include the new generation
of EU Economic Partnership Agreements (EPAs) that are replacing prior unilateral preferences for ACP
countries under the Cotonou Agreement. The Cotonou Agreement is a comprehensive partnership agreement
between developing countries and the EU. Since 2000, it has been the framework for the EU’s relations with
79 countries from Africa, the Caribbean and the Pacifi c. Developing country partners are being granted
extended time periods for implementation and the adjustment process is being supported with bilateral aid.


These recent developments in RTAs mean that market access conditions are continuing to evolve, with
implications for parties to such agreements as well as exporters that are not parties. Obviously, countries
party to the agreements expect improved access. Countries that are not party may experience negative
trade diversion as sources of supply are shifted towards the participants. The business sector needs to
carefully monitor developments in such negotiations and to express their views to their governments and
trade negotiators.


In addition to tariffs, exporters must consider other charges on imports. In some cases, these are charges for
services, including stevedoring, port handling, and customs processing. In other cases, additional charges
may simply be other means of protection. These include consular or visa fees, lighthouse charges and
statistical taxes. Imports may also be subject to anti-dumping duties, countervailing measures against foreign
subsidies, surcharges for safeguard measures9 in trade agreements, or for balance of payments purposes.
Some of these charges are considered NTMs, which are discussed later in this chapter.


RULES OF ORIGIN


In determining whether an exporting business will benefi t from preferential treatment in foreign markets,
it is important to consider the often-complex rules of origin (ROOs).10 These rules, which can vary from
one tariff line to the next, are used to determine the appropriate tariff and other treatment to be afforded to
imported goods coming from different sources. This is because many goods pass through several stages
of processing in different countries, not all of which benefi t from the same treatment in the fi nal importing
country.


There are two kinds of ROOs: preferential and non-preferential. Non-preferential ROOs are used to determine
the country of origin for the application of quotas, anti-dumping, anti-circumvention, statistics or origin
labelling. The basis for the non-preferential rules originates from the Kyoto Convention that states that if a
product is wholly obtained or produced completely in one country, the product shall be deemed to have
origin in that country. A product produced in more than one country shall have origin in the country where the
last substantial transformation took place.


Preferential ROOs are used to administer preferences, whether under unilateral schemes such as the
Generalized System of Preferences or under a free trade agreement.11 The purpose of the rules is to prevent
‘trade defl ection’ or simply transhipment, where products from non-benefi ciary countries are re-directed
through a preference benefi ciary, perhaps with minimal re-labelling, to avoid payment of customs or anti-
dumping duties.


The principal rules used to determine origin are: (i) the percentage of value added in the countries where
processing takes place; (ii) whether the transformation of the product in the processing is ‘substantial, not
simply transhipped or re-labelled in the last country of shipment; or (iii) whether the transformation of the
product in its processing leads to a change in its tariff heading. Some countries, such as ASEAN members,
use a simple, generalized rule across all products and no one rule dominates. In this case, importing countries
may use any or all of these rules, and in the case of the value added rule (ad valorem), the percentage may
vary by tariff line.


9 A WTO member may take a ‘safeguard’ action (i.e. restrict imports of a product temporarily) to protect a specifi c domestic industry
from an increase in imports of any product that is causing, or that is threatening to cause, serious injury to the industry.
10 There is considerable literature on rules of origin, particularly in relation to the use of the Generalized System of Preferences, both in
explanatory material as well as economic analysis. See, for example, Inama, S., Rules of Origin in International Trade, Cambridge University
Press, 2009. This section provides only a brief introduction to alert readers to the importance and complexity of the issue.
11 In principle, customs unions do not require rules of origin because each member affords the same tariff treatment. However, it is
possible for individual members of a customs union to have different tariff treatment for third countries, particularly when such unions are
in the process of formation. Thus, while Turkey and the European Union have a customs union, Turkey does not afford the same treatment
to third countries as the European Union, and goods arriving in Turkey from third countries do not automatically then enter the European
Union free of duty.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES116


For example, in the Pan-European System of Rules of Origin there are some 200 pages of rules varying
almost line-by-line. In the Singapore-United States FTA there are over 240 pages of rules. An example of how
a little difference in production value-added can affect the determination of origin and hence the level of duty
is given in box 44.


There are several features of ROOs that infl uence which origin is conferred on a product: cumulation,
tolerance rules and absorption. Cumulation allows producers to import materials from a specifi c country or


Box 43: Circumvention through third-country assembly


In a GATT anti-dumping case concerning Brother typewriters from Chinese Taipei, the European Commission
terminated investigation proceedings on the ground that the production processes in Chinese Taipei were not
suffi cient to confi rm Taiwanese origin. The practical consequence was that the product assembled in Chinese
Taipei continued to have Japanese origin, and therefore was subject to the anti-dumping duties imposed on such
products originating in Japan. Subsequently, the customs authorities in some member states took the position
that anti-dumping duties should be levied retroactively on prior imported typewriters from Chinese Taipei. German
customs authorities ordered Brother to pay over DM 3 million in anti-dumping duties.


Source: WTO Secretariat.


Box 44: The Honda case


The complexities of rules of origin are illustrated by a dispute between Canada and the United States in the early
1990s concerning United States imports of Honda cars undergoing fi nal assembly in Canada, with some parts
from Japan and some from the United States. The question was whether the cars could be imported duty free from
Canada under the North America Free Trade Agreement (NAFTA) or whether they were considered to be Japanese
and subject to higher rates of duty.


Under the 1987 United States-Canada FTA* the origins of automobiles and their components are subject to a
change tariff heading (CTH) test, plus a minimum 50% local content requirement. Thus, if some component of an
automobile (engines in the Honda case), met the CTH test plus the 50% local content requirement in the United
States, they would be considered of United States origin. When an engine was used to complete an automobile in
Canada, the value of the engine as a whole (100%) would be counted as North American content and not only 50%
of the United States original content, and its whole value would be added to the local content acquired in Canada
to fulfi l the 50% local content requirement for the complete automobile. Conversely, when the subcomponents did
not require originating status, the whole value of the compound counted as foreign, i.e. Japanese.


However, in 1992 a United States customs investigation determined that Honda cars assembled in Canada and
exported to the United States did not meet 50% requirement because they contained too many Japanese parts,
some of which were part of the engine produced in the United States. United States customs did not treat the
engines produced in the United States with Japanese parts and incorporated in Honda cars assembled in Canada
as being of 100% United States origin, differing from the Canadian and Honda calculation of North American
content. Honda was then asked to pay a retroactive bill of US$ 17 million for the 2.5% ad valorem tariff Honda had
‘evaded’ on its exports from Canada to the United States.


According to the ruling, the whole value could not be counted as local content in calculating the required 50% local
content from the vehicle. As a consequence, the complete Hondas manufactured in Canada were not considered
to be North American as the automobiles no longer met the 50% local requirement, and were subject to duties as
if they were exported directly from Japan.


The irony is that at the same time United States authorities were arguing that Honda cars made in the United States
were of American origin and should not be counted as Japanese cars against the quota that France maintained
at that time on Japanese car imports.


Source: Based on Cantin, F., A. Lowenfeld, ‘Rules of Origin: The Canada-US FTA and the Honda case’, American Journal of
International Law, vol. 87, No. 3, 1993.


*This FTA preceded NAFTA, which came into effect in January 1994, and includes Mexico.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 117


region without affecting the origin, the most basic form occurring when the materials come from the country
for which the fi nal goods are destined. For example, under the African Growth and Opportunity Act (AGOA)
an African garment manufacturer/exporter imports fabric from the United States, produces garments with the
fabric, and exports the garment to the United States.


Diagonal cumulation occurs where inputs come from an approved third country or region. For example,
NAFTA member Canada imports garments from NAFTA member Mexico, which uses fabric produced in the
United States, another NAFTA member.


Full cumulation allows qualifying origin to be conferred even if the transformation is not suffi cient to meet
the normal ROO, in effect simply treating a good as if it were entirely produced in the last country of export.


Tolerance (or de minimis) rules, which relate only to substantial transformation or change of tariff heading, but
not to the value added rule, allow a certain percentage of non-originating material to be used without affecting
the preference. The absorption principle provides that parts of materials that have acquired originating status
by satisfying the ROOs for that product can be treated as being of domestic origin in any further processing
or transformation.


ROOs are particularly complex in the case of textiles and clothing, which are very important exports
of developing countries and LDCs. For example, in the EU, ROOs for cotton clothing require that the
manufacturing process be from yarn forward, meaning that imported fabric cannot be used and the yarn
must be produced locally. The United States applies the change of tariff heading rule that precludes the use
of imported cotton fabric, yarn and cotton thread, and also requires that visible lining cannot be imported.
See box 45 for a discussion of the impact of the relaxed ROOs under AGOA on African countries.


Box 45: Effects of EU and United States rules of origin on African exports of textiles
and clothing


Currently the European Union and the United States offer preferential market access to exports from a group of
African countries. Although similar regarding the extent of preferences for apparel, a key sector for LDCs, these
agreements differ regarding ROOs. The EU’s Everything But Arms initiative and the Cotonou Agreement require
yarn to be woven into fabric and then made up into apparel in the same country or in a country qualifying for
cumulation. However, the African Growth and Opportunity Act (AGOA) grants a special regime to ‘lesser developed
countries’, which allows them to use fabric of any origin and still meet the criteria for preferences.


A recent study found that the relaxation by the United States of ROOs for apparel from Africa under AGOA
increased imports from the seven main exporters by about 300%. This large effect was considered to be particularly
noteworthy because, ‘an analysis based solely on the high utilization rates of preferences might erroneously
conclude that the special ‘double transformation’ requirements in T&A (textiles and apparel) had little effect’. An
analysis at the product level revealed that less restrictive ROOs are associated with an expansion of the range of
exported apparel. Indeed, under preferential market access, more lenient ROOs reduce costs for exporters and
may encourage export diversifi cation or export growth at the margin.


The author claims: ‘To our knowledge, this is the fi rst research that has looked at the relationship between ROOs
and export diversifi cation.’ With respect to the dynamic effects of AGOA-specifi c rules, the author found evidence
that the uptake of preferences was gradual over time, taking place in the fi rst three years during which a country
benefi ts from the specifi c rules. The research also revealed that the impact of the AGOA-specifi c rules on exports
was different across countries, and that the differences in ROOs accounted for differences in performance. However,
the study could not fully take account of the quality of infrastructure, political and social stability, governance, and
fi scal policies aimed at attracting foreign investment in accounting for the uneven effects.


The author commented that many analysts believe that the primary reason for Asian investment in apparel
industries in African countries was to circumvent United States barriers to imports from Asian countries. But,
he notes, the removal of quotas at end of the Agreement on Textiles and Clothing and of any other barriers
will erode preferences for apparel exported by those countries in subsequent years, a fact that highlights the
importance of lenient ROOs.


Source: Portugal-Perez, A., ‘The costs of rules of origin in apparel: African preferential exports to the United States and the
European Union’, Policy Issues in International Trade and Commodities Study Series No. 39, UN, New York and Geneva, 2008.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES118


Currently, the United States applies liberal ROOs to textiles and clothing products from African countries
covered by AGOA, but there is no certainty that this tolerance will be continued indefi nitely as these rules are
reviewed from time to time.


ROOs can protect domestic producers in the importing country. They may also raise the costs of supplying
the markets of the importer that grants the preference by requiring changes in production that use higher
cost inputs as well as in proving conformity with the rules. ROOs may be an important factor in investment
decisions if they create uncertainty as to the degree of preferential access that will be available for the
fi nished goods. ROOs may therefore determine the economic effects of preference systems. However, ROOs
are irrelevant for a very large number of items that are duty free in major markets.


There are no WTO provisions on preferential ROOs. WTO members are free to apply their own ROOs, as
illustrated in box 46.


NON-TARIFF MEASURES GROW IN IMPORTANCE


The ongoing decline of tariff rates has brought into sharper focus the importance of non-tariff measures
(NTMs) that may used to protect, support and regulate certain sectors. For example, agriculture often
benefi ts from domestic supports as well as export subsidies. The services sector may receive various kinds
of assistance, but most importantly is often subject to regulatory measures intended to ensure a standard of
service or, intentionally or otherwise, to provide support for domestic suppliers. NTMs may be applied directly
or indirectly, for example, to inputs rather than to fi nal goods.


According to recent ITC surveys, NTMs are among the top three trade-related concerns, constituting one
of the most important challenges to developing countries’ exports, especially in the aftermath of the recent
fi nancial crisis. Given that access to information, technical infrastructure and capacities are more limited in
developing countries, their exporters are more likely to be negatively affected by NTMs.


NTMS AFFECTING GOODS


NTMs are complex, encompassing policy measures and instruments – except ordinary customs duties –
related to exports, imports and production of goods and services. In agriculture, a number of measures affect
international markets for key products of export interest to developing countries. For example, the United States
provides substantial support to its cotton producers, thus reducing export opportunities for poor countries that
have few alternative exports. European countries and the United States offer a range of export subsidies or
subsidized export credits that enable their fi rms to compete more effectively in international markets.


These subsidies hurt developing countries, which do not have the funds to provide similar measures, and are
among the key issues in the WTO negotiations. For example, subsidized cereal exports have provided cheap
food for net-food-importing countries, many in Africa. However, there is increasing recognition that subsidies
discourage local production in extremely poor countries where there is high dependency on agriculture.


Box 46: Implications of the absence of multilateral rules


The absence of multilateral rules of origin has allowed the United States and the EU to issue ad hoc determinations
in origin disputes. In the 1980s, an investigation conducted by the European Commission at the Ricoh photocopier
plant in California concluded that the photocopiers should be denied United States origin and should continue to
be considered Japanese.


Subsequently, the European Commission enacted a specifi c regulation on the origin of photocopiers. As a result of
this origin determination, anti-dumping duties imposed on direct imports of Ricoh photocopiers from Japan were
extended to Ricoh exports from California to the EU, despite the fact that these photocopiers presumably included
substantial United States value added.


Source: Globalization and the International Trading System, UNCTAD/ITCD/TSB/2. UNCTAD, 24 March 1998.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 119


NTMs include instruments such as sanitary and phytosanitary measures (SPS), technical barriers to trade
(TBT), quotas, anti-competitive measures, import or export licenses, export restrictions. They also include
customs surcharges, fi nancial measures, anti-dumping measures, and other charges mentioned in the
previous section. In services, where there are few international rules, controls are usually exercised through
regulation that may discriminate against foreign suppliers.


To better understand NTMs, international organizations have developed a classifi cation system that allows
some measurement of the incidence of NTMs and the share of trade in goods affected by them. Box 47
provides a review of the current system. Further details are provided in the annex.


Box 47: Classifi cation of non-tariff measures (NTMs)


In 2009, the following classifi cation of NTMs was prepared by a group of technical experts from the Food and
Agriculture Organization, IMF, ITC, OECD, UNCTAD, the United Nations Industrial Development Organization
(UNIDO), the World Bank and the WTO. It will be used to collect, classify and disseminate information on NTMs
applied in various countries. The goal is to create a global database on the NTMs. UNCTAD, the World Bank and
ITC are working together on this project.


NTMs include SPS and TBT measures, quotas, anti-competitive measures, import or export licenses, export
restrictions, customs surcharges, fi nancial measures and anti-dumping measures.


The classifi cation differentiates NTMs according to 16 chapters denoted by alphabetical letters, each
containing sub-branches (1 digit), twigs (2 digits) and leafs (3 digits). This classifi cation drew upon the
existing, but outdated, UNCTAD Coding System of Trade Control Measures (TCMCS), and has been modifi ed
and expanded by adding various categories to refl ect the current trading conditions.


No data will be collected for several chapters of the classifi cation, including government procurement,
subsidies and ROOs.


Source: UNCTAD.


Technical
measures


A Sanitary and phyto-sanitary measures (SPS)


B Technical barriers to trade (TBT)


C Pre-shipment inspection and other formalities


D Price control measures


E Licenses, quotas, prohibition & other quantity control measures


F Charges, taxes and other para-tariff measures


G Finance measures


H Anti-competitive measures


I Trade-related investment measures


J Distribution restrictions


K Restrictions on post-sales services


L Subsidies (excluding export subsidies)


M Government procurement restrictions


N Intellectual property


O Rules of origin


P Export-related measures (including export subsidies)


Non-
technical
measures


Export
measures


Im
p


o
rt


m
ea


su
re


s


Chapter




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES120


NTMS AFFECTING SERVICES


This section provides a brief introduction to issues exporters of services may face. Trade in services is a highly
specialized area with an abundant literature. Interested readers are referred to the websites of WTO, ITC
and other major international organizations that have produced general and sector-specifi c information on
international trade in services, some of which is designed to assist developing countries in WTO negotiations
and in developing their potential for exporting services.12


International trade in services received little attention prior to the Uruguay Round of trade negotiations. One
major accomplishment of that Round was the General GATS, intended to bring trade in services within the
purview of the WTO. GATS is a framework agreement to be elaborated in future negotiations. GATS also
helps to focus policymakers in defi ning services and how to classify commitments on services. As a result,
the NTMs affecting international trade in services were written down.


The WTO classifi cation system consists of 12 core service sectors, which are further subdivided into some
160 sub-sectors.


Business services (including professional services and computer services)


 Communication services
 Construction and related engineering services
 Distribution services
 Educational services
 Environmental services
 Financial services (including insurance and banking)
 Health-related and social services
 Tourism and travel-related services
 Recreational, cultural and sporting services
 Transport services
 Other services not included elsewhere


Under this classifi cation system, any service sector may be included in a member’s schedule of commitments
with specifi c market access and national treatment obligations. Each WTO member submitted a schedule
under the GATS. GATS spells out four ‘modes’ by which trade in services was supplied, depending on the
territorial presence of the supplier and the consumer at the time of the transaction:


From the territory of one member into the territory of any other member (Mode 1 – cross-border trade);


 In the territory of one member to the service consumer of any other member (Mode 2 – consumption
abroad);


 By a service supplier of one member, through commercial presence, in the territory of any other member
(Mode 3 – commercial presence);


 By a service supplier of one member, through the presence of natural persons of a member in the territory
of any other member (Mode 4 – presence of natural persons).


Box 48 gives examples of the four modes of supply.


The GATS defi nition of services is somewhat broader than that used for the construction of balance of
payments (BOP) statistics. While BOP statistics focus on residency rather than nationality, i.e. a service is
exported if it is traded between residents and non-residents, certain transactions falling under the GATS, in
particular in the case of Mode 3, typically involve only residents of the country concerned.


12 A recent publication that may be of interest: Cattaneo, O., International trade in services: new trends and opportunities for developing
countries, World Bank, Washington, D.C., 2009.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 121


Commercial linkages may exist. A company established under Mode 3 in country A may employ nationals
from country B (Mode 4) to export services cross border into countries B, C, etc. Similarly, business visits to
country A (Mode 4) may be needed to provide technical back up or other support complement; cross-border
supplies or, for example, to upgrade the capacity of a locally established offi ce.


As with GATT, the main principles of GATS are MFN and national treatment. The market access available in
principle was set out in a written schedule of commitments by each WTO member at the end of the Uruguay
Round of trade negotiations and is now being renegotiated in the Doha Round. However, actual treatment
may deviate from the commitments, as in the case of goods where applied tariffs are often lower than bound
levels. The treatment afforded in practice depends on (i) whether members chose to commit to pre-existing
levels of openness when they submitted their schedule of commitments; (ii) whether they have undertaken
unilateral reforms, and (iii) whether they have negotiated further market opening under bilateral or regional
agreements, which are called Economic Partnership Agreements in GATS terminology.13


The WTO provides a hypothetical example for a mythical country, Arcadia, shown in box 49.


Box 49 presents a realistic but simplifi ed scenario. In some countries the schedules of commitments run to
many pages. The example of Arcadia illustrates that in the area of services the main measures in use are
forms of government regulation establishing areas where foreigners may participate and to what extent.
Unlike tariffs, but similar to many non-tariff measures for goods, it is diffi cult to estimate the quantitative
impact of service measures.14


Access to various sectors of the Arcadian market for services depends on meeting certain conditions that
may not even be within the power of the foreign exporting company. By contrast, even in respect of technical
barriers to trade, which is discussed later in this chapter, it is up to the foreign company to decide whether or
not it will devote the resources necessary to meet a standard in the foreign market and hence gain access.


At the end of the Uruguay Round when service commitments were scheduled, researchers catalogued the
existence of measures by WTO members by sector and by type of measure. An example of this effort by the


13 GATS EPAs are regional agreements in services only. EU EPAs with ACP partners can cover goods and services.
14 There have been attempts at estimating the quantitative impact of measures in the area of services, mainly based on gravity models
that postulate that the unexplained residual error is associated with the presence of a measure affecting certain fl ows of international trade
in services.


Box 48: Examples of the four modes of supply from the perspective of importing
‘country A’


Mode 1: Cross-border trade


A user in country A receives services from abroad through its telecommunications or postal infrastructure. Such
supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural
drawings.


Mode 2: Consumption abroad


Nationals of country A have travelled abroad as tourists, students, or patients to consume services.


Mode 3: Commercial presence


The service is provided in country A by a locally established affi liate, subsidiary, or representative offi ce of a foreign-
owned and controlled company (bank, hotel group, construction company, etc.)


Mode 4: Presence of natural persons


A foreign national provides a service in country A as an independent supplier (e.g. consultant, health worker) or
employee of a service supplier (e.g. consultancy fi rm, hospital, construction company).


Source: WTO.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES122


World Bank is shown in table 11, which breaks down the number of commitments by the number of GATS
sectors and by high-income countries (HIC) (i.e. developed countries in the World Bank terminology) and
by low- and middle-income countries (LMIC) (i.e. developing countries). As noted in the table, these are
the actual commitments that are currently being negotiated in the Doha Round, to which must be added
commitments made by countries that have acceded to the WTO since the end of the Uruguay Round in 1995.


Generally, developed countries made more commitments than developing countries in almost all sectors
(see table 11). Sectors with the fewest commitments were land, water and air transport, postal services, basic
telecoms, R&D, education, health and social, and recreation/culture. Developing countries have some export
interest in the latter three groups of services. They also have an interest in business services, computer-
related services and construction, where there is a relatively high level of commitments.


There have been several studies of developing country interest in future liberalization of the services market.
Estimates suggest that liberalization of the temporary movement of labour would be of particular interest,
and potentially worth several hundred billion United States dollars to developing countries. However, this is a
highly sensitive area and few analysts expect there to be any serious commitment to liberalization except on
an ad hoc basis when it suits countries that have serious labour shortages.


Developing countries also have potential interest in transport, back-offi ce services, and tourism. Some
developing countries have become successful in retail, legal services, accounting, engineering and health
services. Suggestions have been made as to how developing countries can enhance their supply capabilities
for international trade in services beyond areas dependent on low-cost labour.


Few observers expect there to be important commitments to new liberalization in the Doha Round of trade
negotiations, but there is some evidence of liberalization in practice. Developing countries need to seek out
opportunities and determine the specifi c conditions that will allow them to exploit openings in the services
market. Recent sectoral studies by ITC and other agencies could prove a useful starting point, supplemented
with specifi c technical assistance.


Box 49: Sample schedule of commitments – Arcadia


Modes of supply: (1) Cross-border trade; (2) Consumption abroad; (3) Commercial presence; (4) Presence of
natural persons


Sector or sub-sector Limitations on market access
Limitations on national


treatment
Additional


commitments


I. Horizontal commitments


All sectors included in the
schedule


(4) Unbound, other than for


(a) temporary presence, as intra-
corporate transferees, of essential
senior executives and specialists;
and


(b) presence for up to 90 days of
representatives of a service provider
to negotiate sales of services


(3) Authorization is
required for acquisition of
land by foreigners


II. Sector-specifi c commitments


4. Distribution services


C. Retailing services (CPC
631, 632)


(1) Unbound (except for mail order:
none) (2) None (3) Foreign equity
participation limited to 51% (4)
Unbound, except as indicated in
horizontal section


(1) Unbound (except for
mail order: none)


(2) None


(3) Investment grants
are available only to
companies controlled by
Arcadian nationals


(4) Unbound


Source: WTO.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 123


Table 11: GATS commitments by sector


GATS Sector


Number of
GATS sectors
and modes of


supply


Average number of
commitments


Commitments/GATS
items per sector (%)


High-
income


countries


Low- and
middle-
income


countries


High-
income


countries


Low- and
middle-
income


countries


Construction 20 11.2 3.3 56.0 16.5


Motor vehicle repair 4 1.8 0.3 45.0 7.5


Wholesale trade 8 4.6 0.5 57.5 6.3


Retail trade 8 4.4 0.8 55.0 10.0


Hotel/restaurants 4 2.8 2.8 70.0 70.0


Land transport 40 9.4 2.3 23.5 5.8


Water transport 48 4.4 3.0 9.2 6.3


Air Transport 20 3.7 1.5 18.5 7.5


Auxiliary transport 20 5.1 1.3 25.5 6.5


Postal services 4 1.3 0.6 32.5 15.0


Basic telecoms 28 1.5 1.3 5.4 4.6


Value-added telecom 28 18.7 5.0 66.8 7.8


Financial services 60 31.3 12.4 52.2 20.6


Real estate services 8 3.5 0.3 43.8 3.8


Rental activities 20 9.5 1.3 47.5 6.5


Computer-related 20 15.5 4.2 77.5 21.0


R&D services 12 4.1 1.0 34.2 0.3


Business services 108 56.5 12.2 47.9 11.3


Refuse disposal 16 8.8 1.0 55.0 6.3


Education 20 4.7 1.3 23.5 6.5


Health and social 24 5.0 1.9 20.8 7.9


Recreation/culture 48 13.3 4.6 27.9 9.6


Source: Hoekman, B., ‘Assessing the General Agreement on Trade in Services’, in Martin, W. and L.A. Winters (eds.), The
Uruguay Round and the Developing Economies, World Bank, Washington, D.C., 1995.


This is an area where it is not possible to fi nd customs agents who have experience in all manner of goods.
Developing countries should challenge the agencies to provide practical advice in their areas of actual and
potential interest in making realistic assessments of their capabilities, in identifying markets and conditions of
entry, and helping them to meet those requirements. ITC and UNCTAD have already carried out a number of
studies in the area of services that provide useful ideas and guidance on how to enter international markets
for services.


WHY ARE NTMS USED?


Like tariffs, NTMs are used for a variety of reasons. They may be used as part of national policy to promote
production generally, for example, through regional, scientifi c, or educational policies that provide support
that is legal under WTO rules. NTMs may also be used to foster specifi c sectors favoured by the government.
These sectors could include mining, petroleum exploration, farming, manufacture of specifi c goods, such
as motor vehicles or aircraft, or services such as tourism and telecommunications. However, NTMs to foster
specifi c sectors favoured by the government may or may not be permitted under WTO rules.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES124


NTMs may be used for other objectives, such as protecting the environment or human or animal life or
plants, including endangered species. Some measures are used for moral reasons, such as prohibitions on
pornographic material, or, in some countries, importation of alcohol. Other measures, such as pre-shipment
inspection or customs valuation methods, may be used to ensure the right duty is charged and collected.
NTMs may also be used for national security reasons, such as prohibition against arms importation or in
support of sanctions imposed by the United Nations.


WHAT ARE THE EFFECTS OF NTMS?


NTMs can have potentially serious effects on international trade. They impact the cost, price or quantity of the
goods affected. Measures such as anti-dumping duties, countervailing measures and various other charges
directly increase prices. Subsidies may directly affect production or exports as a support measures intended
to reduce prices or they may operate indirectly as a subsidy on material or other inputs to production or trade.
Examples of indirect subsidies are those on the use of fertilizers, water, gas or electricity or on interest rates
on borrowed investment capital or export credits for trade. Measures directly affecting quantities may include
prohibitions, quantitative restrictions and import licences.


However, other measures not ostensibly intended to have a direct impact on price or quantity may have
similar effects. For example, TBT or SPS measures may be intended to protect health. However, public health
may be used as an excuse for protecting local industries. Irrespective of the validity of the rationale, the cost
of meeting these standards will raise the cost of production and the price. Experience shows that monitoring
measures are often a prelude to imposing other restrictions and tend to have a ‘chilling’ or harassing effect
on trade, which leads to reductions in quantity or increased prices of the exported goods as exporters try to
allay fears of a fl ood of cheap imports. Either way, the measure will affect both price and quantity of the good
concerned, and there will be consequences for trade, production, government revenues and producer and
consumer welfare.


There is considerable literature on the technically complicated process of estimating the economic impact
of NTMs, which is beyond the scope of this chapter. However, the economic effect of certain measures, and
therefore their protectionist potential, can be very signifi cant.


For example, research shows that NTMs contribute to a large share of trade restrictiveness across countries.15
On average, they add an additional 87% to the restrictiveness imposed by tariffs. This implies that on average
tariffs are still more important in the cases covered by the research, but the contribution of NTMs to the overall
restrictiveness increases with income per capita. Rich countries have a greater tendency than poor countries
to impose less transparent NTMs on their imports.


However, for specifi c products the impact of NTMs can be higher than the average. For 55% of tariff lines the
ad valorem equivalent (AVE) of NTMs is higher than the tariff, with simple average AVE ranging from zero to
51%. These results suggest that tariffs are more important for some products than NTMs, but in other cases
the reverse is true – hence, the need for thorough research on market conditions.


A study using fi rm-level data generated from 16 developing countries in the World Bank Technical Barriers to
Trade (TBT) Survey Database, fi nds that standards increase short-run production costs by requiring additional
inputs of labour and capital.16 It also fi nds that the fi xed costs of compliance are non-trivial; approximately
US$ 425,000 per fi rm, or on average about 4.7% of value added.


WHO USES NTMS AND WHAT IS THEIR EFFECT?


As shown in box 50, technical regulations and anti-dumping actions are used to a great extent by developed
countries, while in developing countries customs procedures, additional charges and regulatory procedures
are perceived as the main issues. The exports of developing countries seem to be particularly vulnerable to
such measures in developed and developing country markets. There is considerable variation, with some


15 Kee, Hiau Looi; A. Nicita and M. Olarreaga, ‘Estimating Trade Restrictiveness Indices’, Economic Journal, January 2009.
16 Maskus, K., T. Otsuki and J. Wilson, ‘The Cost of Compliance with Product Standards for Firms in Developing Countries: An
Econometric Study’, Policy Research Working Paper 3590, World Bank, Washington, D.C., 2005.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 125


developing country markets becoming important users of the anti-dumping mechanism and other developing
countries being the main targets. Such measures have a chilling effect on other trading partners and similar
products. If exporters see anti-dumping measures being applied against another export business in their own
country or from another exporting country for the same or similar products, they may become more cautious
in their pricing practices and in aggressive marketing.


There is little question that anti-dumping measures have become more widespread since the end of the
Uruguay Round, as tariffs have been reduced and the use of other measures eliminated or curtailed under
WTO rules. For example, textile quotas have been eliminated. Exporters should be aware of the countries
and sectors that apply these measures as they have often been extended to other exporters. Exporting fi rms
need to be sure that they are exporting at prices that are not lower than their domestic sales price. Table 12
shows which WTO countries have applied such measures by sector between January 1995 and June 2010.


Box 50: Recent trends in NTMs


A 2008 UNCTAD survey identifi ed trends between 1994 and 2006 in NTMs of concern to developing countries and
found the following:


In accessing developed country markets the most typical barriers faced by developing country exporters are
technical measures, including technical regulations, standards and SPS regulations, and price control measures,
such as anti-dumping actions.


In trade between developing countries, customs and administrative entry procedures, para-tariff measures (e.g.
import surcharges and additional charges), and other regulatory measures affecting infrastructure and institutions
are among constraining trade obstacles.


Products of export interest to developing countries, such as agricultural and fi sheries products, electrical equipment,
pharmaceuticals, textiles and clothing, are the most affected by NTMs. The most recent trend indicates increasing
use of technical measures, as well as quantitative measures associated with technical measures, and decreasing
use of all other measures.


A report from the Imani Development Board suggests that NTMs have become signifi cantly less identifi able. In
the past, state involvement through price controls, foreign currency controls, state marketing and import licensing
meant that such barriers to trade were clear. Today, most of these controls have been lifted in most countries.
Existing NTMs are inclined to be more arbitrary, qualitative and often non-transparent. The lack of transparency for
regulating trade between governments has increased the misuse of the system.


70


60


50


40


30


20


10


0
Tariff


measures
(tariff rate
quota etc.)


Price
control


measures


Finance
measures


Refundable
deposit for
sensitive
product


categories


Automatic
licensing
measures


Quality
control


measures


Prior
authorization
for sensitive


product


Quotas for
sensitive
product


categories


Prohibition
for sensitive


product
categories


Monopolistic
measures


Technical
measures


1994


2006


5.8


0.3


7.1


1.8 2 1.5 0.6
2.8 1.7


49.2


34.8


18.1
17.1


0.2 0.2
2.5


6.8


1.3 1.5


31.9


58.5


Source: Imani Development Board, Inventory of Regional Non-Barriers: Synthesis Report, 2007, UNCTAD, Development and
Globalization, Facts and Figures.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES126


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bl


e
12


:
A


nt
i-d


um
pi


ng
m


ea
su


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s


in
iti


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an


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y


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se


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or


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ep


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rt


in
g



co


un
tr


y


Live animal


products


Vegetable


products


Animal and


vegetable fats


Food,


beverages,


tobacco


Minerals


Chemicals


Resin, plastic,


rubber


Hides, skins,


travel goods


Wood, cork


articles


Paper


Textiles


Footwear


Stone,


ceramic glass


Base metals


Machinery,


electrical


equipment


Vehicles


Instruments,


clocks,


recorders


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manufactures


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ta


l


A
rg


en
tin


a
1






1


9
13



3


6
17


1
8


60
38


11
5


17
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16


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18


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81


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ra


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18


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1


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ex


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ew


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CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 127


R
ep


o
rt


in
g



co


un
tr


y


Live animal


products


Vegetable


products


Animal and


vegetable fats


Food,


beverages,


tobacco


Minerals


Chemicals


Resin, plastic,


rubber


Hides, skins,


travel goods


Wood, cork


articles


Paper


Textiles


Footwear


Stone,


ceramic glass


Base metals


Machinery,


electrical


equipment


Vehicles


Instruments,


clocks,


recorders


Miscellaneous


manufactures


To
ta


l


P
hi


lip
pi


ne
s









2


1





2


3
3








11


Po
la


nd








1
2






2











4
9


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in


ga
po


re




















2






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ou


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ca


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1






19


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hi


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ai


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ai


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in


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rk


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12
47



6



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5


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kr


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ne









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ni


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ta


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11
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4
41


21


2
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2
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9


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ru


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ay























1





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ne


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el


a
(B


ol
iv


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ia


n
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ep
. o


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3






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25


To
ta


l
26


37
2


27
50


49
4


31
5


2
42


10
2


22
1


23
69


70
3


20
9


24
24


63
24


33




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES128


Today, exporters perceive technical measures as the biggest problem they face, while quantity control
measures, such as prohibitions and quotas, have become much less important (see fi gure in box 50). This
is because measures such as textile and clothing restrictions have been eliminated over several rounds of
international trade negotiations and in RTAs. At the same time, WTO rules and rules in most RTAs permit the
use of technical measures for health and safety reasons. Anti-dumping duties, countervailing measures and
safeguards are also permitted to countermand what are considered to be unfair practices by other countries.
This issue is discussed later in this chapter, under the section Competition from Third Countries.


Several examples of the issues at stake and some of the frustration dealing with them have been documented
for Philippines exporters of agricultural products by the Philippine Institute for Development Studies, as
described in box 51.


TECHNICAL BARRIERS: WHY EXPORTERS WORRY
The main concerns of exporters relate to two different types of measures: technical barriers to trade (TBT)
and sanitary and phytosanitary (SPS) measures, which are covered by two WTO agreements, as discussed in
box 52. These measures usually serve legitimate public policy goals, including protecting human health and
safety, or the environment. The WTO does not set these standards. Most standards are set by international
organizations: the International Organization for Standardization, the International Electrotechnical
Commission, the International Telecommunications Union, the FAO/WHO Codex Alimentarius Commission,
the International Offi ce of Epizootics, and the International Plant Protection Convention. These international
standards are then rendered in national law, which includes implementing regulations.


However, some countries may use standards that go beyond international standards for domestic reasons,
and these may be permitted under WTO rules, subject to certain conditions.


WTO PRINCIPLES FOR STANDARD SETTING


The WTO does not set standards, it establishes rules or principles under which standards must be set and
applied. The WTO requires that the setting of standards conform to the following principles:


 Avoidance of unnecessary obstacles to trade;
 Non-discrimination and national treatment;
 Based on scientifi c principles;
 Harmonization to reduce costs in production, conformity assessment, etc.


Transparency
The ideas behind these principles are that standards need to have valid scientifi c reasons and that standards
and their administration should be fair and transparent. This is intended to protect WTO members from
arbitrary decisions taken for protectionist reasons, that is, for the purposes of assisting or sheltering local
industry from foreign competition, but hiding behind measures that are purportedly for health or safety
reasons.


In addition to arbitrary administration of standards, exporters are concerned that technical barriers can
impact negatively on the capacity of fi rms. Developing countries and LDCs are concerned that arbitrary
administration of standards and technical barriers will prevent them from effectively exporting their goods.
NTMs can infl uence supply capacities, export competitiveness and market access for developing countries
and LDCs. For example, according to a World Bank study, a strict European Union standard allowing only
4 ppb total afl atoxins in cereals, dried fruits and nuts for direct human consumption is estimated to decrease
African exports of these products by 64% or US$ 670 million. Codex Alimentarius established a less stringent
standard 15 ppb.17


17 Wilson, J. and T. Otsuki, Food Safety and Trade: Winners and Losers in a Non-Harmonized World, World Development Research Group,
Washington, D.C., World Bank, 2002.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 129


Box 51: Philippines: examples of NTMs affecting agriculture


Mangoes


The Philippine mango enjoys great demand in East Asia. However, to gain market entry exporters face some
stringent requirements. For example, to enter Japan and the Republic of Korea, fruits need to undergo vapour heat
treatment (VHT) to remove fruit fl ies. Government representatives from Japan and the Republic Korea supervise
the process, with the exporting company fi nancing the entire operation, including the expenses of the foreign
inspectors’ stay in the Philippines. Despite these precautions, Diamond Star Agro Products, a major mango
exporter, incurred a loss of approximately PHP 9 million when one of its shipments was found not to comply with
Japan’s chlorpyriphos residue limits. The company had invested several million pesos to upgrade and improve the
testing of its products for exports. Japan intends to further lower the limits for 44 other chemicals, which results in
higher costs to exporters for laboratory tests and inspections.


Tuna


The European Union submitted a notifi cation in December 2007 that it would be reducing the maximum residue
limit (MRL) of lead in tuna from the 0.5 ppm limit outlined by the internationally accepted Codex Alimentarius to 0.2
ppm. The cited reason was the negative effect of excessive lead on children’s intelligence quotient. About 35% of
Philippine tuna exports go to the European Union. Hence, this stringent directive alarmed the Philippines. Because
the European Union was unable to present strong scientifi c basis for the proposal, the Philippines submitted a
formal position paper claiming that the prevailing 0.5 ppm standard is suffi cient to address the EU’s concern.
The canned tuna industry admits that an MRL of 0.2 ppm will force some exporting companies out of the trade
business as natural conditions in the quality of Philippine waters would prevent them from attaining a lower level
of lead content.


Chemicals in foods


Some countries impose maximum levels for, or completely prohibit, certain chemicals in foods. For instance,
certain chemicals in food colouring traditionally used in the Philippines are banned in the European Union, forcing
noodle exporters to alter their production practices and use of ingredients. Similarly, high levels of particular
chemicals contained in soy sauce are prohibited, preventing soy sauce exporters from accessing the market.
Differing requirements among countries have forced exporters to alter their formulations to suit each one, taking
away economies of scale and increasing the necessary capital investment for alternative processes.


Wood packaging


Products are not the only targets of specifi c processing requirements. In particular, wood packaging material, such
as wooden crates and palettes, are required to be fumigated prior to shipment. The Bureau of Plant Industry must
certify the fumigation process. Because all accredited fumigators are currently based in Manila, transportation costs
add to the exporters’ fi nancial burden. The European Union also proposed debarking in addition to fumigation, but
this requirement was postponed after receiving complaints from trading partners. The additional requirement was
more restrictive than international standards. From 1 January 2009, all wood packaging material imported into the
European Union must be debarked.


Labelling


In East Asia, many issues involve sanitary and phytosanitary standards. But EU member states, like other
developed countries in the West, are particularly strict when it comes to labelling practices. A shipment
by Fiesta Brands, a long-time manufacturer and exporter of coconut products, was delayed because the
packaging gave the manufacturing plant address as a particular highway, which it had done for years.
However, it was not accepted as an exact address. The company was forced to ask the government for an
exact offi cial address, which took nearly two months.


Source: Philippine Institute for Development Studies, Policy Notes No. 2007-10, December 2007.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES130


Small and medium-sized enterprises (SMEs) are more vulnerable than larger companies to the effects of trade
barriers. SMEs tend to have limited resources and less ability to absorb risks, especially when operating in
intensely competitive markets. When faced with trade barriers, SMEs may have to forgo a market completely,
or incur additional variable costs that could impair their competitiveness.18


WHAT CAN EXPORTERS DO ABOUT TECHNICAL BARRIERS?


In preparing a strategy to deal with NTMs, there are four potential options. First, developing countries need
to participate more effectively in the work of the international standards setting organizations. However, this
requires a high degree of technical skills, and participation is costly and long term.


Second, developing countries may negotiate mutual recognition agreements, which would obviate the need
to meet the foreign market standards.19 This may be an option where the trading partners have similar existing
standards, for example, between highly industrialized countries or between developing countries that are
parties to a regional agreement. However, it may not be a practical option for developing countries seeking
access to sophisticated international markets.


Third, exporters can challenge the use of measures that create unjustifi ed barriers to trade in the WTO
dispute settlement process or in negotiation. An example is given in box 53.


Fourth, the most realistic choice for exporters is to try to meet the standards in the markets they seek to
penetrate. This is the focus of the remaining part of this section.


Meeting international standards or setting higher national standards is not straightforward. As noted in a
recent report by UNIDO, while the TBT and SPS institutional infrastructure and services are taken for granted
in industrialized countries, this is often not the case for most developing, potentially exporting, countries
where even the rudimentary elements of this infrastructure are missing.20


Acknowledging this problem when the WTO agreements were drafted, a special clause was introduced to
suggest that industrialized countries should provide related technical assistance if so requested by those
countries not having the full infrastructure in place. Thus, an option is to seek technical assistance from the
country whose market the exporter is trying to penetrate. Table 13 lists common needs of exporters related
to technical barriers to trade/sanitary and phytosanitary measures (TBT/SPS) compliance requirements,
including standards, testing, metrology, system certifi cation, inspection, traceability, packaging and labelling.
Table 13 also sets out the infrastructure and institutional services needed to support these requirements.


18 ‘The Role of Trade Barriers in SMEs Internationalisation’, Trade Policy Working Paper No. 45, OECD, 2006.
Available at: www.oecd.org/dataoecd/34/25/37872326.pdf
19 Vergano P. and F. Vergano, Vietnam’s Fisheries Exports to the EC Public-Private Collaboration to Address Non-Tariff Measures, ITC,
2009. Available at: www.intracen.org/btp/publications/vietnam-fi sheries.pdf
20 Trade Capacity Building Report, UNIDO, 2008.
Available at: www.unido.org/fi leadmin/media/documents/pdf/tcb_unido_submission.pdf


Box 52: Defi ning technical barriers to trade and sanitary and phytosanitary measures


Technical barriers to trade (TBT) refer to technical regulations and voluntary standards that set out specifi c
characteristics of a product, such as size, shape, design, functions and performance, or the way a product is
labelled or packaged. Also included are technical procedures that confi rm products comply with regulations and
standards.


Sanitary regulations restrict or prohibit the importation and marketing of certain animal species, or products thereof,
to prevent the introduction or spread of pests or diseases.


Phytosanitary regulations restrict or prohibit the importation and marketing of certain plant species, or products of
these plants, so as to prevent the introduction or spread of plant pests or pathogens.


Source: Organisation for Economic Co-operation and Development, Technical Barriers to Trade; OECD, Phytosanitary
Regulations.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 131


Table 13: Common needs of exporters – TBT/SPS compliance requirements


Exporter’s needs Compliance requirement
Necessary infrastructure and/or


service


Access to standards and technical
regulations


Product standards/technical
regulations, including packaging and
labelling


Reference centre in standards body or
other organization


Local product testing recognized by the
(international) client


Internationally recognized (accredited)
conformity assessment services


Testing laboratory upgrading
towards internationally recognized
accreditation. MRAs (mutual recognition
arrangements) between accreditation
bodies


Accuracy of measurement, precision
manufacture


Internationally recognized equipment
calibration; measurement traceability
to International System of Units (SI)
(measurement) standard


Metrology laboratory upgrading towards
internationally recognized accreditation;
inter-calibration schemes


Ensure continuity of product
characteristics and quality


Enterprise Quality Management System
Certifi cation (ISO 9001)


Certifi cation and consultancy capacity,
and internationally recognized certifi ers


Ensure continuity in managing
environmental impact


Enterprise Environmental Management
System Certifi cation (ISO 14001)


Certifi cation and consultancy capacity,
and internationally recognized certifi ers


Food safety assurance Management system to control food
contamination (HACCP)


Certifi cation and consultancy capacity,
and internationally recognized certifi ers


Address consumer concerns relating to
child labour, workers exploitation, etc.


Social accountability (SA8000) Certifi cation and consultancy capacity,
and internationally recognized certifi ers.


Traceability of products and inputs from
fork/shelf to farm/producer


Traceability system Certifi cation and consultancy capacity,
and internationally recognized certifi ers


Examination of shipment content to
order


Product inspection Cross-border inspection services


Source: Trade Capacity Building Report, UNIDO, 2008.


For exporters to provide proof of compliance with common international standards in the TBT/SPS
agreements, complex standards, metrology, testing and quality (SMTQ) infrastructure is required. This can
be implemented in either a country or a region.


Countries implement these various requirements so that their exports can enter target markets. Creating
domestic standards and using internationally recognized standards also helps countries avoid becoming
dumping grounds for sub-standard products, upgrades their image, and increases the marketability of their
products and processes.


Box 53: Viet Nam: case study – private associations defend industry


The Vietnam Association of Seafood Exporters and Producers (VASEP) represents most important fi rms in
the sector, promoting seafood exports. When the United States brought an anti-dumping case against VASEP
members over catfi sh exports, VASEP actively supported its members. It established a dedicated fund to defend
the case, assisted members to fi nd a law fi rm to protect their interests, and coordinated the defence.


VASEP also provided information to members as the case developed, launched international campaigns to protect
the interests of Vietnamese producers and exporters, and published a White Book to counter price estimates used
by United States authorities as proof of dumping. Although its members lost the case, VASEP’s campaign set a
precedent for future action and was a good example for other business associations in Viet Nam.


Source: The Role of Trade Barriers in SMEs Internationalisation, Trade Policy Working Paper No. 45, OECD, 2006. Available at:
www.oecd.org/dataoecd/34/25/37872326.pdf




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES132


Exporting countries need to establish two key institutions: a standards body and an accreditation body. The
standards body is ‘responsible for standards formulation, dissemination, consumer protection and market
surveillance’.21 It should be a member of international standards setting organizations (ISO, CODEX), and
function as the de-facto WTO TBT/SPS enquiry point. The accreditation body provides the critical conformity
assessment infrastructure. Domestically, the accreditation body is responsible for accrediting laboratories,
system certifi ers and inspection bodies.


In some countries, national standards bodies (NSB) are called ‘institutions’ or ‘institutes’ (e.g. Sri Lanka
Standards Institution, British Standards Institute); in other countries they are called ‘associations’ (e.g.
Standards Association of Zimbabwe) or ‘bureaus’ (e.g. Bureau of Indian Standards).


In addition to this institutional infrastructure, enterprises also require various management system certifi cations.
The national standards body is typically responsible for both generating awareness of these management
systems at enterprise level and for training auditors.


To attain system certifi cation, the country requires internationally recognized certifi cation bodies. Enterprises
also need testing services for chemical, microbiology, textile and leather, and other products. In the global
trading environment, laboratories providing such services must have international accreditation to guarantee
global acceptance of the certifi cates granted, and to avoid costly duplicative foreign testing.


Establishing operational systems for conformity assessment and accreditation or upgrading existing national
systems to meet foreign market requirements tends to require technical assistance from relevant international
agencies. When developing infrastructure for the compliance required to support a country’s exports, the
following steps are important:


 Identify the country’s export sectors and the range of products produced;
 Identify the markets for which these products are destined and the TBT/SPS requirements that must be


met in those markets;
 Determine the trade volumes and calculate the number of laboratory tests and inspections, equipment


calibrations and enterprise system certifi cations needed to meet TBT/SPS conformity requirements.22


The UNIDO website states the following:


‘The range of identifi ed tests defi nes the necessary laboratory infrastructure – calibration, microbiological,
chemical, and other sector-specifi c testing.


Each laboratory category would respond to the identifi ed spectrum of tests and have to dispose of the
defi ned capacity of tests to be conducted.


Then, depending on the extent of the country export potential, key export sectors, geographic
dispersion of export production, the number of laboratories required to satisfy the testing needs can be
approximated.’23


Governments can use various strategies when upgrading infrastructure and seeking accreditation of existing
laboratories:


 Public-private partnerships (PPPs). Private sector participation in the design, fi nancing and execution
of infrastructure projects is recognized as a means to reduce the large gap between infrastructure needs
and limited government resources.24 Public-private partnerships (PPPs) are common instruments for
infrastructure projects for quality, sanitary and phytosanitary controls and compliance.


 Attract foreign investment. Internationally recognized laboratories could be invited to invest. Investors can
generate adequate returns by charging appropriate fees for testing.


21 For further information see the UNIDO webpage, Standards Bodies, available at: www.unido.org/index.php?id=o72302
22 Ibid.
23 Ibid.
24 Aggarwal, R. and A. Huelin, ‘The private sector: Important partners in aid for trade,’ International Trade Forum, Issue 4/2009, ITC, 2009.
Available at: www.tradeforum.org/news/fullstory.php/aid/1495/The_private_sector:_Important_partners_in_aid_for_trade.html




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 133


 Business-to-business assistance.25 By establishing links between large corporations and SMEs, local
fi rms can boost their competitiveness and become integrated into global supply chains. The main reasons
given by foreign investors for low levels of purchases from local suppliers include concerns that goods and
services from local suppliers do not meet their quality, price and delivery requirements. Foreign investors
often regard local suppliers as unresponsive to their requests for improved quality, delivery and price.
Large companies can assist in overcoming these trade barriers and act as channels for small producers to
export their goods and services. They can also help small producers enhance the quality of their products
through training programmes and contractual arrangements.


 Regional cooperation. Establishing laboratories for use by exporters from several countries can create
economies of scale and maintain adequate standards. One example is the Quality Programme adopted
by the Economic Community of West African States (ECOWAS), which is in the process of being enforced
across the sub-region.26


 Financial and technical assistance. Financial and technical assistance can be sought from international
donors to upgrade compliance infrastructure in the areas of standards and conformity assessment –
testing, calibration and accreditation. Box 54 details the benefi t of donor assistance in Sri Lanka.


 Trade advocacy. Governments can assist exporters to overcome trade barriers by ‘directly interceding
on exporters’ behalf with foreign government offi cials. This can involve various actions, including active
in-market representation by consular staff, meetings by high-level government offi cials, or discussion in
multilateral fora’.27


25 Ibid.
26 Trade and Investment Conference, ECOWAS, 2009. Available at: acpbusinessclimate.org/projets/WP2.28.2-1.057/documents/
WP2.28.2-1.057_brochure_en.pdf
27 Ibid.


Box 54: Sri Lanka: internationally recognized conformity infrastructure


Sri Lanka’s export sector is based on processed products such as garments and textiles, ceramics, rubber
and shrimp. In the absence of internationally accredited testing laboratories able to issue globally accepted
testing certifi cates, Sri Lankan exporters were faced with the problem of proving compliance with international
market requirements and getting their products to these markets. Recognizing the importance of having testing
capacities developed locally, UNIDO, with a fi nancial contribution of US$ 1.8 million from the Norwegian Agency
for Development Cooperation (NORAD), provided signifi cant support for Sri Lanka’s conformity infrastructure.


The assistance was timely and of strategic importance, not only in cutting the high costs of testing nationally
manufactured products abroad, but also in providing Sri Lankan exporters assurance of the conformity of their
products with international standards and those of recipient markets.


The UNIDO/NORAD support resulted in seven internationally accredited laboratories in Sri Lanka for food analysis
and chemical, microbiological and rubber/plastics testing. It helped establish and upgrade the testing laboratories
following the ISO/IEC 17025 guidelines and led them towards international accreditation from the Swedish Board for
Accreditation and Conformity Assessment (SWEDAC). To ensure testing accuracy and ensure reliable calibration
of testing equipment, the country’s metrology capabilities were strengthened by upgrading the industrial metrology
laboratories in the areas of dimensional, volume, mass, thermometry, pressure and electrical metrology so as to
achieve international accreditation of their services through SWEDAC.


Source: Industrial Development Report, UNIDO, 2009.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES134


EXPORTING IN THE PRESENCE OF DOMINANT FIRMS
Today, a large share of international trade is intra-fi rm trade, which takes place within rather than between
fi rms. As economies grow, an increasing share of their trade occurs within the same broad industry, intra-
industry trade, with trade in intermediate products such as parts sent for incorporation into a fi nal (or other
intermediate) product in another country. An example is steel plate or engines for incorporation into cars.


In some areas, such as trade in fresh produce, fi rms have virtual monopolies as sellers, or monopsonies
(a market in which only one buyer faces many sellers) as purchasers, or both. It is often very diffi cult for
individuals or small businesses to enter such markets as independent traders. Moreover, when dealing with
such large enterprises, developing country businesses may not always receive what they consider to be fair
prices, which is part of the impetus for the fair trade movement of recent years. At the same time, there is
widespread recognition that in the right conditions such alliances can be benefi cial.28


Where there are dominant fi rms, penetrating foreign markets may require making strategic marketing
alliances or joining part of a value chain. This approach can apply to goods as well as services. Value chains
are also important in trade in intermediate products, which are estimated to account for 56% of trade in
goods and 73% of trade in services.29 This is because inward foreign direct investment from transnational
companies and sales of foreign affi liates in services – as well outward stocks and sales of foreign affi liates
– also generate imports of intermediate products, which underlines the importance of vertical specialization
networks.30 Vertical specialization networks are production arrangements in which fi rms make fi nal goods in
multiple stages located in multiple countries.


THE IMPORTANCE OF VALUE CHAINS
For developing countries, these fi ndings regarding the size of trade in intermediate products are signifi cant
because these countries are important exporters of raw materials and intermediate products, while their
presence in trade in fi nished goods is more limited. However, there is the possibility that with training or
experience they may be able to move up the production chain into more advanced manufactured products.
Trade in intermediate products is highly price sensitive and it is easy for large fi rms to switch sources of supply.
This underscores the usefulness of participating in value chains that provide stable contractual relationships.


Value chains cover the range of transactions and support services, such as fi nance, logistics and transport,
required to bring a product or service from its origins to its end use. Thus, value chains begin with raw
materials and other inputs, moving through production and processing into packaging, marketing and sales
in domestic and international markets. For every product or service, value chains include all of the enterprises
involved in supplying, producing, processing and buying, as well as the organizations that provide the
technical, business and fi nancial services to support the export process.31


In addition to the benefi ts of participating in trade in intermediates, participating in a value chain has several
advantages for the small exporter from a marketing perspective. Value chain participation offers a package
of information on the mechanics of trading, including fi nance, transport and customs, as well as information
on packaging and labelling and market requirements. It may offer information about shifts in demand so that
the exporter can adapt rapidly to change. It may also provide useful allies against protectionist threats and
other changes in the conditions of access. For example, allies in the United States market helped to enact
the AGOA and maintain rules of origin benefi cial to African exporters.


28 Unleashing Entrepreneurship: Making Business Work for the Poor, UN Commission on the Private Sector and Development, UNDP,
2008. Available at: www.undp.org/cpsd/indexF.html


Creating Value for All: Strategies for Doing Business with the Poor, UNDP 2008. Available at: www.undp.org/gimlaunch
29 Miroudot, S., R. Lanz and A. Ragoussis, ‘Trade in Intermediate Goods and Services’, OECD Trade Policy Working Paper No. 93,
OECD, Paris, 2009. World Trade Report 2008 – Trade in a Globalizing World, WTO, Geneva, 2009.
30 Ibid.
31 Kaplinsky, R. and M. Morris, A Handbook for Value Chain Research, International Development Research Council, Ottawa, 2000.
Available at: www.globalvaluechains.org/docs/VchNov01.pdf.


Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ), USAID and other development organizations have also produced useful
guides and methodologies on the value chain.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 135


Another example is Thailand, which has become a hub of vehicle production for regional and global markets
through its linkages with car producers and parts and components suppliers (see box 55). Thailand’s
business-friendly environment, important policy reforms and greater regional integration were important.
However, transnational corporations at different levels of the production process and in the international
marketing of the fi nal product also played a key role.


ITC BUILDS CAPACITY
ITC assists small business by connecting them with value chains or supporting them to be able to engage in
direct marketing. For example, ITC assists enterprises to connect directly with buyers and learn the precise
specifi cations and quality requirements of major markets. ITC also sponsors exporters to prepare for and
attend international trade fairs. ITC facilitates bringing buyers and sellers together in face-to-face meetings.
However, success requires careful preparation, including trade fl ow analyses that help to identify products
with complementary business interests; supply and demand surveys documenting market characteristics
and business practices; and identifying enterprises most active in particular product sectors.


Box 55: Thailand: global integration of the auto industry


In Thailand, as in many other countries, the automobile industry was an early target for industrial development
through import substitution. Tariffs on completely knocked down (CKD) kits were set much lower than completely
built up (CBU) vehicles to encourage local assembly. Concern that the initial scheme had failed to lead to broader-
based industrial development prompted Thailand to adopt a local content policy in 1975, with corresponding
adjustment of tariff rates on CBUs and CKD kits to provide greater incentives to use local parts. Local content
requirements were increased in the mid-1980s.


The late 1980s saw a shift from domestic market orientation towards global integration, setting the stage for
Thailand to emerge as a centre of automobile and auto part manufacturing in the region. The Thai economy
entered a period of rapid economic growth. Limits on the number of series of local cars and the import ban on
imports of new cars were lifted. The abolition of the local content scheme from 2000 was announced as part of
Thailand’s compliance with the new WTO Trade-Related Investment Measures Agreement. In the area of foreign
direct investment policy, all selective incentives granted to export-oriented activities and a 49% equity ownership
restriction on domestic market oriented projects were abolished, with immediate effect in 1999.


In 1995, Thailand became a signatory to the ASEAN Brand-to-Brand Complementation Scheme, aimed at
promoting trade in parts and components among automotive companies operating in the ASEAN region. Thailand
also implemented general tariff cuts on CBU passenger vehicles and rates were also reduced in successive stages
on CKD kits starting in 1992, exposing the domestic industry to increased competition.


However, the cascading nature of the tariff structure provides substantial effective protection from domestic motor
vehicle production, estimated as high as 64.8%, but this has not been a binding constraint on auto exports since
the local industry has become integrated in a global network.


Under the domestic reforms and the greater integration in the ASEAN and the wider Asia Pacifi c region, the Thai
auto industry has undergone a major transformation and has experienced rapid export-oriented growth. No single
factor explains this success. However, credit is given to multinational corporations that set up production plants in
Thailand to service the global market.


While major companies such as Toyota and Honda use Thailand as an important regional production base for
small cars, most manufacturers also use Thailand as the main base for one-ton pickups, which like the small cars
are then marketed through their outlets in other countries. It is also notable that of the 1,454 indigenous parts
suppliers, the large majority of fi rst-tier suppliers operate under technology agreements with foreign producers.


Source: Athurkola, P. and A. Kohpaiboon, Thailand in Global Automobile Networks, Case Study, ITC, Geneva, 2011.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES136


ITC then provides the platform for negotiations between ‘matched’ enterprises, which are expected to show
their commitment by covering the costs of their participation. ITC also has programmes to assist small
businesses in marketing using modern information technologies.


COMPETITION FROM THIRD COUNTRIES
Exporters trying to penetrate a foreign market must be concerned about competition from other third country
exporters. As discussed earlier, an important factor is differing terms of access for different exporters. Some
exporters may be eligible for preferential tariff treatment, more favourable ROOs, or application of NTMs
whose impact may not fall equally on all third countries.


Competitors for foreign markets may use various instruments to promote national exports, some of which
may not comply with international rules. For example, if the competitor is using an export subsidy, it is likely
illegal for products, but unlikely to be illegal under current rules for services exports. Whether subsidies are
currently legal for agricultural exports depends on whether they were declared during the Uruguay Round
of trade negotiations and whether the levels fall within the scale of commitments for cutting back their use.


Exporters faced with illegal subsidies can resort to bilateral discussions and, if that fails, invoke the WTO
dispute settlement mechanism. This approach was used successfully in recent years by non-benefi ciary
countries, mainly in Latin America, against European Union policies supporting bananas from ACP countries.
However, it seems unlikely that an importing country would pursue an anti-dumping action against a business
competitor from a third country for the benefi t of a disadvantaged exporter.


In the case of legal supports by third country competitors, the longer-term solution is to seek to change
the rules by negotiation. The disadvantaged exporting country should seek support from a coalition of
other interested governments. This is what has happened with the agreed elimination of agricultural export
subsidies in the current WTO Doha Round of trade negotiations, although implementation will not likely be
achieved until the negotiations are concluded.


CONCLUSION


STRATEGIES FOR MARKET ACCESS


The business sector has a vital interest in shifting market trends and conditions of access, changes in trade
and related policies, and negotiations affecting trade in goods and services. Developing country exports
have grown at high rates in recent years, and ITC has a range of tools to help exporters identify market
opportunities.


While average tariffs on agricultural and industrial goods are modest, there are important areas of interest
to developing countries and LDCs where protection levels are quite high and NTMs can be important – in
some cases more important than tariffs. In the case of services, it is diffi cult to assess the impact of trade
regulations, and there have been only a few attempts to make such calculations. However, restrictions on
the movement of labour seem to have a strong negative effect on the potential earnings of the developing
countries. Negotiated changes in trade regimes will present new opportunities for some countries and pose
challenges for others, for example, through the loss of preferences. Businesses must prepare for change.


Businesses have considerable concerns about the growing incidence of NTMs, such as TBT and SPS.
Environmental measures and anti-dumping duties are also more important today. This is partly due to success
in reducing tariffs and eliminating quotas and other NTMs in earlier trade negotiations. Occasionally, the issue
is not the existence of such measures, which may be for socially desirable reasons, such as environmental
protection, but the manner in which they are administered. WTO and most regional agreements make
provision for consultations and dispute settlement procedures to resolve disagreement concerning the use
of NTMs. NTMs are being discussed in several areas of the Doha Round of trade negotiations, potentially
leading to further clarifi cations on the use of NTMs.


In December 2005, a WTO Ministerial Declaration recognized the key role ITC can play as an interlocutor for
business and a provider of technical assistance. The Ministers declared, ‘We encourage all [WTO] Members




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 137


to cooperate with the International Trade Centre, which complements the work of the WTO by providing a
platform for business to interact with trade negotiators, and practical advice for [SMEs] to benefi t from the
multilateral trading system.’


ITC disseminates information about the state of trade negotiations to the business community in the developing
world. This has contributed towards enabling the business community to play a more active advocacy role
with their governments, particularly in relation to sector-specifi c analyses where the negotiations will have a
direct bearing on their future activities. Examples include new market opportunities as barriers come down in
foreign markets or pressure to adjust as protection of the domestic market is reduced.


In addition to more active advocacy to promote their own interests in trade negotiations, developing countries
need to position themselves to take advantage of trade opportunities resulting from trade policy changes
and market developments. Identifying markets, including potential niches, and the conditions for success
in those markets (such as changing trends and tastes) are essential areas where ITC provides assistance.


While WTO negotiations have moved slowly, partly due to the complexity of issues and number of participants,
there has been a rapid increase in the number of regional agreements in recent years. This trend seems to
be continuing. One explanation for this trend is pressure from business communities that have strong links
in neighbouring countries where business can more clearly calculate the potential gains and risks from
strengthening ties in wider regional markets without waiting for results from the WTO. Business needs to take
an active role in all of these negotiations to ensure that the outcome facilitates trade and investment, and that
bureaucratic obstacles are minimized.


WTO negotiations will lead to a loss of preferences in some key areas of interest to developing countries.
For example, African countries should not expect to continue to benefi t from the United States’ Africa Growth
and Opportunity Act to the same degree as in the past. Businesses must move from a strategy based
on exploiting preferences toward one of increasing competitiveness in international markets, including
by participating in global value chains. Raising productivity and reducing costs are key to increasing
competitiveness. Government action is also needed to improve infrastructure, vocational training, fi nancial
markets, and legal and institutional frameworks, while reducing bureaucratic obstacles to doing business
and facilitating investment.


Businesses must be alert to challenges arising from changes in trading conditions, including the emergence
of new competitors and the use by third countries of various legal and illegal instruments to promote their
exports. Changes in trade regimes at home and abroad may lead to increased competition. Businesses
may be able to meet this competition by improving their competitiveness in existing lines of production.
However, businesses may also need to adapt, for example, by shifting to alternative products based on
existing technological bases.


Governments must be concerned about negative effects on the private sector as well as in the labour market.
Governments may need to implement adjustment programmes, supporting retraining of workers to help
them and the businesses in which they are employed to cope with changes, and, where necessary, facilitate
movement into new lines of production.


Changes in trade regimes rarely occur overnight. The business community and governments normally have
some time to adapt to new situations. In the WTO there is usually an implementation period of 5 to 10 years,
which may require legislative action by member states. However, in the past some shifts have occurred relatively
quickly and a number of developing countries have had diffi culties in adapting to new situations. Assistance is
available from ITC and other international organizations, through bilateral support, and from NGOs.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES138


ANNEX: NON-TARIFF MEASURES – CLASSIFICATION FOR
TRADE IN GOODS
The following taxonomy of NTMs was prepared by technical experts from international organizations,
including the Food and Agriculture Organization of the United Nations (FAO), International Monetary Fund
(IMF), ITC, Organisation for Economic Co-operation and Development (OECD), United Nations Conference
on Trade and Development (UNCTAD), United Nations Industrial Development Organization (UNIDO), the
World Bank and World Trade Organization (WTO). This classifi cation is used to collect, classify, analyse and
disseminate information on NTMs received from offi cial sources, such as government regulations, and from
perception-based data, such as surveys.


The classifi cation differentiates NTMs according to 16 chapters (denoted by alphabetical letters), each
comprising sub-branches (1-digit), twigs (2-digits) and leafs (3-digits). This classifi cation drew upon the
existing, but outdated, UNCTAD Coding System of Trade Control Measures (TCMCS), and has been modifi ed
and expanded by adding various categories of measures to refl ect current trading conditions. The current
NTM classifi cation was fi nalized in November 2009.


Chapter A, on sanitary and phytosanitary (SPS) measures, refers to laws, decrees, regulations, requirements,
standards and procedures to protect human, animal or plant life or health from risks such as the establishment
or spread of pests, diseases, disease-carrying organisms or disease-causing organisms; and risks from
additives, contaminants, toxins, disease-causing organisms in foods, beverages or feedstuffs. The chapter
is also known as SPS.


Chapter B, on technical measures, contains measures involving technical specifi cation of products or
production processes and conformity assessment systems. This chapter is also known as technical barriers
to trade (TBT). TBT measures are most often applied to industrial goods, but can be also applied to agricultural
products. An NTM applied to agricultural products is classifi ed as a technical measure if its objective is not
food safety. If the objective is food safety, the measure is classifi ed as SPS.


Chapter C, on pre-shipment inspection and other (customs) formalities, refers to checking, consigning,
monitoring and controlling shipments of goods before or at entry into the destination country. Inspections
and quarantine are examples of such measures.


Chapter D, on price control measures, includes measures to control the prices of imported articles to:
support the domestic price of certain products when the import prices of these goods are lower; establish
the domestic price of certain products because of price fl uctuation in domestic markets or price instability in
a foreign market; and counteract the damage resulting from ‘unfair’ foreign trade practices.


Chapter E, on licences, quotas, prohibitions and other quantity control measures, includes measures that
restrain the quantity traded, such as quotas, and licenses and import prohibitions that are not SPS-related
(SPS-related licenses and prohibitions are classifi ed under Chapter A).


Chapter F, on charges, taxes and other para-tariff measures, refers to measures, other than tariff measures,
that increase the cost of imports in a similar manner, i.e. by a fi xed percentage or amount. These are also
known as para-tariff measures.


Chapter G, on fi nance measures, refers to measures that are intended to regulate the access to and cost of
foreign exchange for imports and defi ne the terms of payment.


Chapter H, on anti-competitive measures, refers to measures that are intended to grant exclusive or special
preferences or privileges to one or more limited groups of economic operators.


Chapter I, on trade related investment measures, covers measures that restrict investment by requiring local
content, or requiring that investment should be related to export to balance imports.


Chapter J, on distribution restrictions, refers to restrictive measures related to internal distribution of imported
products.




CHAPTER 4 – ADDRESS EXPORT MARKET ISSUES 139


Chapter K, on restriction on post-sales services, refers to measures restricting producers of exported goods
from providing post-sales service in the importing country.


Chapter L, on subsidies, includes measures related to domestic government support to producers, such as
direct or potential transfer of funds (e.g. grants, loans, equity infusions), payments to a funding mechanism
and income or price support.


Chapter M, on government procurement restrictions, refers to measures controlling the purchase of goods
by government agencies, generally by preferring national providers


Chapter N on intellectual property refers to measures related to intellectual property rights in trade. Intellectual
property legislation covers patents, trademarks, industrial designs, layout designs of integrated circuits,
copyright, geographical indications and trade secrets.


Chapter O, on rules of origin, covers laws, regulations and administrative determinations of general application
applied by government of importing countries to determine the country of origin of goods.


Chapter P, on export-related measures, encompasses all measures that countries apply to their exports. It
includes export taxes, export quotas or export prohibitions, among others. This chapter has to be used when
the measure is applied by the exporting country, i.e. when certain documentation has to be granted by the
home country’s customs, which is not required by the importing partner. All the other chapters (A to O) refer
to measures that countries apply to their imports.






CHAPTER 5


IMPROVE INPUTS AND
CAPITAL GOODS


INTRODUCTION........................................................................................................................................... 142


MARKET OPENNESS AS A MEANS OF REDUCING COSTS .................................................................. 143


ELIMINATING ANTI-EXPORT BIAS............................................................................................................. 145


ACTIONS TO REDUCE THE COSTS OF INPUTS ..................................................................................... 146


WTO RULES ON SUBSIDIES ...................................................................................................................... 146


SPECIAL TARIFF RELIEF SCHEMES.......................................................................................................... 149


EXPORT RESTRICTIONS AND TAXES ....................................................................................................... 152


SPECIAL ECONOMIC ZONES.................................................................................................................... 152


REGIONAL SOURCING ............................................................................................................................... 157


SUPPORTS FOR INPUTS TO EXPORTS .................................................................................................... 157


ACTIONS TO ASSIST PRODUCTION AND OPENNESS TO FDI ............................................................ 158


CONCLUSION .............................................................................................................................................. 160




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS142


IMPROVE INPUTS AND CAPITAL
GOODS


INTRODUCTION
Access to inputs of goods and services at world prices and ability to take advantage of export opportunities
under given conditions of access, discussed in chapter 4, may be crucial to export competitiveness. Ultimately,
given equal terms of access as competitors, competitiveness in a foreign market implies being able to deliver
at a fi nal price that is lower than that of competitors taking account of conditions of sale, quality, delivery times
and, where appropriate, after sales services. This fi nal price of the good or service is itself a composite of
production costs as well as delivery costs, which may be even higher than the costs of production.


For example, the cost of production of a banana in Latin America has been estimated at as little as 10% of the
fi nal retail price in a European supermarket. The remaining 90% of the retail price is explained by the various
services that are used in getting the banana from the farm gate to the supermarket shelf. For other products,
the corresponding percentage likely ranges from 10% to 50%. Everything else being equal, international
competitiveness depends largely on the price of imports of goods and services used not only in production
but also in the delivery of the good or service to the consumer or user.


At the production level – the farm or factory gate or equivalent in services – the key factors in competitiveness
are total factor productivity and the cost of inputs into the production process. In turn, productivity depends on
a number of factors, such as technology, the quality of labour (the appropriate skill/wage cost combination),
and management. The appropriate technology can vary according to the production scale and cost of other
inputs, such as labour, energy and so on, in the producing country. For example, the appropriate technology
in a small market, protected by high transport costs, and where labour costs are also low may be quite
different from a large market with high labour costs in an industry subject to important economies of scale.


As an illustration, in a small country iron ingots might be produced economically in a simple charcoal foundry.
At a different level of sophistication, steel might be produced in a mini-mill (depending on access to scrap
metal), while in a large country a fully integrated steel mill might be appropriate. However, when it comes
to exporting, the large-scale producer will likely capture the global market, but there may still be export
opportunities for small-scale producers in neighbouring countries that are also distant from the large-scale
producer. As a result, international competitiveness may depend on having access to technology and inputs
of materials, parts and components at world prices.


However, the fi nal retail price also depends on the costs of the services required to deliver the goods or
services to the purchaser, including transport, insurance, fi nance and telecommunications, etc. The exporting
country also needs to look at liberalization in the services sectors to ensure that its exports of goods have
access to services at world prices. This is equally, if not more, important for exports of services, such as
tourism, and other potential exports in business services, banking and information technology industries
where some developing countries are now achieving export success.


How can developing country producers of goods and services who wish to achieve international
competitiveness ensure they have access to inputs at world prices? It may well be that in the relevant sector
the domestic market is highly competitive and already produces goods and services at world prices because
of domestic competition. However, not all countries can achieve comparative advantage in all sectors even if
they have absolute advantage in all areas, which is unlikely.


In the delivery of goods and services to international markets, does the exporter have access to the services
necessary for trade at competitive prices? In the longer term, it is desirable to try to assure openness to
competition from world price suppliers to keep the domestic market competitive and provide inputs at world
prices for exporters of goods and services.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 143


MARKET OPENNESS CAN REDUCE COSTS
It is generally accepted among economists that, subject to certain qualifi cations, openness is the key to
economic growth, at least in the long term. This has been key in the policy prescriptions of international
fi nancial institutions for many years. This is based on the notion that openness leads to cost-reducing
specialization, to improved allocation of scarce resources, to the improved functioning of the economy, and
hence to growth.


But there are situations that may warrant some form of intervention, based on long-standing ideas in welfare
economics and the so-called theory of the second-best, for example, to protect the environment.1 There is no
guarantee that the process of moving towards greater openness will be achieved quickly and without costly
adjustment. This leads to the discussion in the next section as to how to reduce the costs of exporters while
the move to greater openness is being phased in.


While some industrial countries have pursued more openness to trade, others pursued a more cautious
approach. Many economies turned inwards in the wake of the depression of the 1930s, leaving high tariff
and non-tariff barriers (NTBs) that have taken many years to reduce. In developing countries, there was also
a period when the thinking in development economics was in favour of import-substitution industrialization.
This was based on the work of Raúl Prebisch2 of the Economic Commission for Latin America and of
Hans Singer,3 then at the United Nations Department of Economic Affairs. Singer warned of a long-term
deterioration in the terms of trade for developing countries, with their commodity export prices falling relative
to their manufacturing import prices.


Contrary to the views of many neo-classical economists at the time, the Prebisch-Singer thesis (as it came to
be called) foresaw that a continuing dependence on primary exports would lead most developing countries
down the path of increasing indebtedness and would widen global income inequalities. On these terms,
free trade could never be fair trade, and they called for import substitution, tariff controls and a drive for
industrialization.4 Their work also became the basis for the Generalized System of Preferences (GSP), trying
to give developing country exports an edge in major markets.


However, from the mid-1980s, the Washington Consensus on trade led to the most important trade reforms
across the developing world and transition economies in recent history under International Monetary Fund
and World Bank structural reform programmes. These ‘autonomous’ reforms among developing countries
since the mid-1980s, carried out with varying degrees of enthusiasm, led to dramatic reductions in trade
intervention among developing countries and increased the openness of their economies towards foreign
investment.


Tariffs fell from some very high levels to moderate rates and there was substantial rationalization of tariff
structures, reducing the number of bands, in a few cases, to a single level. NTBs, such as quotas, were
largely eliminated. This process has continued in countries such as China and India so that their applied rates
are now below 10%. Moreover, under these reform programmes, the dispersion in rates across sectors has
been substantially reduced and tariff escalation is now more marked in developed than developing countries.


Apart from traditional trade theory, the reform process was justifi ed by statistical evidence linking openness
to growth.5 And there were some notable successes, particularly in East Asia. However, not all the successes
could be attributed to the application of orthodox trade policies – there were also a number of failures,


1 British economist Arthur Cecil Pigou’s Wealth and Welfare, published in 1912, discusses this. Pigou was later heavily criticized,
although criticism of his role for the state looks weaker in the light of the fi nancial crisis of 2008. British economist James Meade’s Trade
and Welfare, published in 1955, also discusses this issue. However, it often seems that policymakers prefer to focus on a naive, simplistic
version of theory that appeals to their vision.
2 Prebisch, R., ‘The Economic Development of Latin America and its Principal Problems’, New York, United Nations, 1950.
3 Singer, H., ‘The Distribution of Gains Between Investing and Borrowing Countries’, American Economic Review 40, No. 2, pp. 473-485,
1950.
4 Toye, J. and R. Toye, The UN and Global Political Economy: Trade, Finance, and Development; Chapter 5, Bloomington and
Indianapolis, Indiana University Press, 2004.
5 Dollar, D. and A. Kraay, ‘Trade, Growth and Poverty’, Economic Journal, 114: 493, pp. 22-49, 2004. However, as Dollar emphasized
on a number of occasions, these were statistical results with a number of countries falling above and below the central fi nding. See
also: Sachs, J. and W. Warner, ‘Globalization and economic reform in developing countries’, Brookings Papers on Economic Activity, 1,
Washington, D.C., Brookings Institution, 1995. In 2002, Turkish economist Dani Rodrik and Venezuelan economist Francisco Rodriguez
criticized the robustness of the statistical results.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS144


especially in Africa, and there has recently been some serious rethinking in the Bretton Woods institutions
about trade policy prescriptions. Many of the reforms were carried out in the face of developments in trade
theory that challenged the new conventional wisdom.6


A reappraisal of the impact of trade reforms intensifi ed following the global economic slowdown in the wake
of the Asian, Russian and Brazilian crises of 1997-1998, some two years after the conclusion of the Uruguay
Round and the establishment of the World Trade Organization (WTO). The long overdue revisiting of the
orthodoxy represented by the Washington Consensus was signalled in a number of ways. First, there was
the intellectual challenge by American economist Joseph Stiglitz and Turkish economist Dani Rodrik, who
queried the emphasis placed on openness and the lack of attention to institutional and governance issues.7
Second, problems in implementing WTO agreements led to the breakdown of attempts to launch a new trade
negotiating round in Seattle in 1999. Third, the 1990s saw a dramatic increase in the number of regional trade
agreements. Finally, growing evidence emerged of the failure of trade reforms, especially in Africa.


In 2008, the Commission on Growth and Development (hereafter the Growth Commission) noted that relying
on markets to allocate resources effi ciently is clearly necessary but ‘that is not the same thing as letting some
combination of markets and a menu of reforms determine outcomes’. The Commission continues: ‘Wedded
to the goal of high growth, governments should be pragmatic in their pursuit of it. Orthodoxies apply only so
far … if there were just one valid growth doctrine, we are confi dent we would have found it.’8 The Commission
noted that economists can say with some confi dence how a mature market economy will respond to policy
prescriptions. However, mature markets rely on deep institutional underpinnings that defi ne property rights,
enforce contracts, convey prices and bridge informational gaps between buyers and sellers, which are often
lacking in developing countries.


Noting that an important part of development is precisely the creation of these institutionalized capabilities,
the Growth Commission states:


‘We do not know in detail how these institutions can be engineered, and policymakers cannot always
know how a market will function without them. The impact of policy shifts and reforms is therefore harder
to predict accurately in a developing economy. At this stage, our models or predictive devices are, in
important respects, incomplete. As a result, it is prudent for governments to pursue an experimental
approach to the implementation of economic policy.’


In this respect, the Commission quotes Chinese leader and reformer Deng Xiaoping’s oft-quoted dictum to
‘cross the river by feeling for the stones’, and it argues that governments should sometimes move forward
step by step, avoiding sudden shifts in policy where the potential risks outweigh the benefi ts. This will limit
the potential damage of any policy misstep, making it easier for the government and the economy to right
itself. It also notes that making policy is only part of the battle; policies must also be faithfully implemented
and tolerably administered.


While the Growth Commission remarkably says almost nothing about trade policy, it touches on a number
of closely related areas, including briefl y on what it calls the ‘great symbolic importance’ of the Doha Round,
apparently accepting the downgrading by many economists of its economic signifi cance. In the areas of export
promotion (including explicit or implicit subsidies, but not trade fairs, etc.) and industrial policy (in particular
targeting, rather than cluster group formation, etc.), the Growth Commission indicates the various sides of
the debate that were heard during its work. Orthodoxy suggests that neither export promotion nor industrial
policies work. However, the Commission, in a clear break with orthodoxy, suggests that, ‘If an economy is


6 Krugman, P., ‘Scale Economies, Product Differentiation, and the Pattern of Trade’, American Economic Review, 70, pp. 469-479, 1980.


Krugman, P., Strategic Trade Policy and the New International Economics, Cambridge, MIT Press, 1986.


In 1992, Krugman expressed disappointment that the ‘fairly radical change in the way that economists explain international trade has so
far at least had relatively little impact on their recommendations about trade policy.’ See: Krugman, P., ‘Does the New Trade Theory Require
a New Trade Policy?’ The World Economy, 15:4, 1992.
7 Stiglitz, J., Globalization and Its Discontents, New York, W.W. Norton, 2002.


Rodrik, D., Has Globalization Gone Too Far? Washington, D.C., Institute for International Economics, 1997.
8 The Growth Report – Strategies for Sustained Growth and Inclusive Development, Commission on Growth and Development,
International Bank for Reconstruction and Development/World Bank, 2008. Available at: www.growthcommission.org/index.
php?Itemid=169&id=96&option=com_content&task=view




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 145


failing to diversify its exports and failing to generate productive jobs in new industries, governments do look
for ways to try to jump-start the process, and they should.’ However, the Commission hedges its bets by
arguing that these efforts should bow to certain disciplines:


 First, they should be temporary, because the problems they are designed to overcome are not permanent.
 Second, they should be evaluated critically and abandoned quickly if they are not producing the desired


results. Subsidies may be justifi ed if an export industry cannot get started without them. But if it cannot
keep going without them, the original policy was a mistake and the subsidies should be abandoned.


 Third, although such policies will discriminate in favour of exports, they should remain as neutral as
possible about which exports. As far as possible, they should be agnostic about particular industries,
leaving the remainder of the choice to private investors. Finally and importantly, export promotion is not a
good substitute for other key supportive ingredients: education, infrastructure, responsive regulation, etc.


Thus, among professional economists, science is pointing towards a more cautious approach to openness
to trade or at least to unfettered, rapid liberalization in the face of adjustment costs and the existence of
externalities. This poses the question as to how to reduce the burden of existing trade interventions in goods
and services on exporters in the short term.


ELIMINATING ANTI-EXPORT BIAS
Apart from the general argument on the benefi ts of a more open economy – at least in the longer term – it
has also been long recognized that protecting domestic industries can create diffi culties for exporters by
raising the price of inputs.9 In general, tariffs and other measures that protect domestic industries create
disincentives to export.10 This can be explained in several ways.


First, tariffs directly raise the price of imported inputs: raw materials, and intermediate and capital goods.
They also increase the profi tability of the protected import competing sector, which is then able to bid up the
price of other inputs, such as land, labour (wage rates) and services. This has a negative effect on exporters
who have to meet those prices or bids for their inputs.


Second, as an alternative way of thinking about the issue, tariffs will likely reduce imports, with a positive
impact on the balance of payments, and a consequential upward pressure on the local currency, leading
to an appreciation. This means that exports become more expensive for foreigners and they are negatively
affected.


Either way, protection or other forms of intervention for a preferred import-competing sector has a negative
impact on the export sector, producing an anti-export bias. This applies even when the imported inputs are
duty free to exporters, because they still have to compete for inputs that are not imported, but whose prices
are affected by the protected or supported sector that bids up the prices of those inputs.


However, openness in itself may not be suffi cient. There may be an absence of competition in the domestic
market that also needs to be addressed. For example, when Argentina substantially reduced protection on
cars and other goods to reduce prices as part of its anti-infl ationary drive following the adoption of the Law
of the Convertibility of the Austral in 1991 (a convertibility standard for the peso), it found that large domestic
fi rms in the distribution trade did not need to reduce retail prices. This required adopting more aggressive
competition law. In Colombia, following the opening of the banking sector to foreign banks in the late 1990s,
the arrival of foreign banks led to an improvement in the quality of banking services, including by local banks,
but there appears to be no lowering of interest rates or any other sign of price competition as a result of
improved banking technologies, with foreign banks comfortably co-existing with local banks.


Only a comprehensive opening of the economy in goods and services, supported by efforts to improve
competition in the domestic market, can eliminate the anti-export bias. The diffi culty is that eliminating the


9 This has its intellectual basis in: Lerner, A. P., ‘The Symmetry between Import and Export Taxes,’ Economica, (New Series), 3(11),
pp. 306-313, 1936.
10 Aron, J., B. Kahn and G. Kingdon, editors, South African Economic Policy under Democracy, New York, Oxford University Press, 2009.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS146


measures that protect or support the import competing sector in goods or services may be diffi cult to reduce
or eliminate in the short term without causing severe structural adjustment problems, as discussed in the
previous section.


How can a government act to reduce the costs of inputs into the export of goods and services without
engaging in potentially disruptive, comprehensive liberalization in the short term? The options available to
governments to assist exporters are to act directly on import, export or production costs, including through
some long-term measures that are not specifi c to international trade. However, in pursuing some of these
specifi c measures, governments must fi nd means that will not run afoul of WTO rules, whose reach has
extended since the days of the earlier General Agreement on Tariffs and Trade (GATT). Some of the measures
used by successful exporters in the past, for example, in East Asia, are no longer legally available to newer
exporters. Moreover, the Doha Round could well lead to a further tightening of those rules.


REDUCING INPUT COSTS
There are a number of means that can be used to lower the costs of imported inputs for export industries, but
under WTO rules some care has to be taken to ensure that these are not uniquely for exporters or there is a
risk that the scheme would be considered as an export subsidy.


Some countries favour using specialized schemes because they are easier to administer than larger scale
national reforms. Such schemes include using duty drawback and special import licenses for exporters,
as well as specialized schemes, like bonded manufacturing and export processing zones. Developing
countries can benefi t using more favourable rules regarding subsidies to support local industry, such as duty
drawback, special economic zones (SEZs), condoning or not collecting government revenues otherwise due,
and export credits.


Governments need to further consider the merits of liberalizing on a preferential liberalization or most favoured
nation (MFN) basis. Before looking in some detail at these various approaches, it is useful to briefl y review
WTO rules on subsidies, which cover domestic supports as well as export subsidies.


WTO RULES ON SUBSIDIES
The WTO’s subsidy rules are highly complex, distinguishing between domestic supports (subsidies)
and export subsidies, and providing for differential treatment of agriculture and manufactured products.
Subsidies are defi ned as fi nancial commitments by a government. They may take the form of direct or indirect
fi nancial transfers, government practices involving transfers, foregone revenues, provisions of goods and
services (other than infrastructure), or some form of price or income support. Some subsidies are prohibited,
while others are considered ‘actionable’, being subject to action at the multilateral level or to countervailing
measures.11


All ‘specifi c’ subsidies, which have to be notifi ed to the WTO, are subsidies that are not generally available,
i.e. subsidies that are targeted to particular enterprises, industries or regions, as well as export subsidies
and import-substitution subsidies. The WTO Agreement on Subsidies and Countervailing Measures (the
SCM Agreement) classifi ed specifi c subsidies under three different categories: prohibited (red), actionable
(amber), and non-actionable (green) subsidies, known as the traffi c lights approach. However, the non-
actionable class was eliminated on 31 December 1999. In addition, the WTO Agreement on Agriculture
prohibits the use of export subsidies, except in conjunction with product-specifi c reduction commitments,
and defi nes the conditions under which certain types of domestic subsidies (green box, blue box or special
and differential treatment (S&D) box)12 are exempt from reduction commitments.


11 The agreement also originally contained a third category: non-actionable subsidies. This category existed for fi ve years, ending on 31
December 1999, and was not extended. The agreement applies to agricultural goods as well as industrial products.
12 The S&D box offers special and differential treatment for developing countries.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 147


A WTO member can use the WTO’s dispute settlement procedure to seek the withdrawal of the subsidy
granted by another member or the removal of its adverse effects. Alternatively, and more commonly, the
member can launch its own investigation and ultimately charge extra duty (known as countervailing duty) on
subsidized imports that are found to be hurting domestic producers.


Prohibited subsidies are subsidies that require recipients to meet certain export targets, or to use domestic
goods instead of imported goods. They are prohibited because they are specifi cally designed to distort
international trade, and are therefore likely to hurt other countries’ trade. Prohibited export subsidies are the
subject of the Illustrative List of Export Subsidies, provided in Annex I to the SCM Agreement. These include
direct and indirect subsidies linked to exports, including services in their production, transport and marketing,
as well as associated export credit and insurance schemes. Also prohibited is the full or partial remission
of direct taxes and social welfare charges or special direct tax deductions that are not also available to
production for domestic consumption. Exemption or remission of indirect taxes must not exceed the level of
such taxes paid on production or sale for domestic consumption. For example value-added tax (VAT) rebates
must not exceed the normal VAT rate.


Among the prohibitions are a number of variations on ‘simplifi ed’ drawback schemes, which are common
in developing countries, for example providing a ‘drawback’ that is a fi xed percentage of the free on board
(FOB) value of the exports and not linked to the duty paid on imported inputs. Also prohibited is a reduction of
tariffs on imported inputs up to an equivalent value of exported fi nal goods. For example, export performance
schemes that do not require the same or identical components to be re-exported may be considered as
export subsidies. Some exports from export processing zones may fall under this provision.


Actionable subsidies are subsidies that cause adverse effects (injury, nullifi cation or impairment of benefi ts,
or serious prejudice) to a WTO member. A rebuttable presumption of serious prejudice arises in cases where
the amount of the total ad valorem subsidy (based on the actual price of the good being subsidized) exceeds
5%, where subsidies are used to cover operating losses, or where there is direct debt forgiveness. The
SCM agreement defi nes three types of damage they can cause: (i) one member’s subsidies may hurt a
domestic industry in an importing member; (ii) they may hurt rival exporters from another member when the
two compete in third markets; (iii) domestic subsidies in one member may hurt exporters trying to compete in
the subsidizing member’s domestic market. If the WTO Dispute Settlement Body rules that the subsidy does
have an adverse effect, the subsidy must be withdrawn or its adverse effect must be removed.


If domestic producers are hurt by imports of subsidized products, countervailing duty (CVD) can be imposed.
The subsidized exporter can also agree to raise its export prices as an alternative to its exports being
charged countervailing duty, known as a ‘voluntary export price undertaking’. With limited exceptions, serious
prejudice claims cannot be brought against developing countries. Matters related to this kind of subsidy may
be referred to the Dispute Settlement Body.


Under the WTO Agreement on Agriculture, all subsidies other than ‘green box’ support measures are
actionable through CVD measures. Green box subsidies are subsidies considered to have no or minimal
trade distortion effects or effects on production and that meet programme-specifi c criteria. These include
general services; public stockholding for food security purposes; domestic food aid; production-limiting
programmes; direct payments to producers; decoupled income support; programmes related to structural
adjustment, income insurance and safety nets; regional assistance; and environmental payments (Annex II
of the Agreement).


Actionable agricultural subsidies include ‘blue box’ subsidies, covering some payments under production-
limiting programmes provided they meet certain conditions. Also actionable in this way are de minimis, or
maximum permissible level, product-specifi c support, valued at less than 5% of the value of production of
the product, as well as non-product-specifi c support that is less than 5% of the total value of a country’s
agricultural production. In addition, CVD actions may be taken against investment and input subsidies
allowed for developing countries under Article 6:2 of the Agreement (the ‘S&D box’).


In the past, developing countries had considerable latitude to use export subsidies for industrial goods.
The Tokyo Round code formally recognized that subsidies were ‘an integral part of economic development
programmes of developing countries’. However, this only protected them from the application of countervailing
measures if they entered into a commitment to reduce or eliminate export subsidies ‘when the use of such
export subsidies [is] inconsistent with its competitive and development needs’ (Article 14:5). In practice, few
developing countries acceded to the code because of this constraint.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS148


Under the WTO, developing countries and economies in transition are covered by the general prohibition on
the use of export subsidies for industrial goods. However, developing countries have been given a maximum
of eight years to phase out export subsidies, with some possibility for an extension; economies in transition
are given a maximum of seven years. Least developed countries (LDCs) and developing countries with less
than US$ 1,000 per capita GNP are exempted from disciplines on prohibited export subsidies.


Developing countries’ subsidies of limited duration that are linked to privatization programmes are not subject
to multilateral action under the SCM Agreement, although they may still be countervailed. Under the de minimis
provisions of the Agreement, developing countries are exempted from the application countervailing duties
when their subsidy levels do not exceed 2% (or 3% where a country accelerates the timetable for eliminating
export subsidies), or import shares are less than 4%, and cumulatively among countries benefi ting from this
provision with less than 9% of total imports.


Measures that are not considered to be subsidies include: (i) duty drawback schemes, where the precise
or lesser amount of duty is rebated on the export of a component incorporated in a fi nal good; and (ii) the
precise or lesser exemption or remission of indirect taxes that are normally payable in respect of production
and distribution of like goods sold for domestic consumption, e.g. sales taxes or VAT, but not direct taxes
(i.e. on wages, profi ts, etc.). Prior to the Uruguay Round, import duties could not be rebated on imported
inputs, such as fuels, used in the production process. However, this is now allowed under the Guidelines on
Consumption of Inputs used in the Production Process (Annex II to the SCM Agreement). Export credits and
export credit guarantee or insurance programmes below cost are prohibited, but not if the loans are made
above cost but below market rates, or, in the case of export credits, they are provided in accordance with the
terms of the Organisation for Economic Co-operation and Development’s (OECD) arrangement on Offi cially
Supported Export Credits.


Box 56: The SCM Agreement: options for a developing country


If the country is an LDC or one of those countries listed in Annex VII (b) of the SCM Agreement, it could introduce
or maintain grants and schemes foregoing or not collecting certain government revenue contingent upon export
performance.


 It could forego, in part or totally, the customs duties payable on imports of capital goods used for the production
of existing or new export products, such as banana and mango chips.


 It could forego, partially or totally, company tax payable with respect to profi ts obtained through the export
business of agro-industrial companies.


 Other more specifi c schemes would include special deductions, such as double deductions, for certain
activities that the authorities consider would promote exports. These could involve double deductions for all
foreign advertising activities or for attending trade fairs in exporting countries.


Nevertheless, because these subsidies are contingent upon export performance, they could be subject to
countervailing measures by the domestic industries of importing members if they can show injury. This applies even
to LDC subsidies, although LDCs could get some protection from the de minimis clause. These programmes are
very frequently targeted in countervailing investigations carried out by Australia, Canada, the European Union and
the United States. They can also be challenged through the multilateral track. The United States Tax Treatment for
Foreign Sales Corporations is one example. Countries should carefully weigh the risks entailed by these schemes
when devising and implementing them.


Regardless of its status, a country could develop programmes not contingent upon export performance. These
programmes could be similar to those under option one, but the export contingency requirement would be
removed. The effect of these schemes would be felt across a company’s entire production and would, therefore,
impact its exported goods only in part. These would therefore constitute indirect export promotion measures.


Countries may devise schemes that do not fall under the scope of the SCM Agreement either by ensuring that
they do not fall under any of the fi nancial contribution categories set out in Article 1.1, or by making any scheme
non-specifi c.


Source: De Baere, P. and C. Du Parc, ‘Export Promotion and the WTO: A brief guide, 2009’, ITC.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 149


SPECIAL TARIFF RELIEF SCHEMES
There are a number of options for providing relief from payment of tariff duties that can be used to assist
exporters of goods and services and that do not confl ict with WTO rules. These include relief from payment
of duty under certain conditions, temporary admission schemes and duty drawback schemes.


RELIEF FROM PAYMENT OF DUTY


Most countries allow duty-free entry of goods under certain conditions, for example personal effects, goods
under a specifi ed value, etc. However, some duty waiver schemes are less well known and are of potential
interest to business. These include the waiving of duty if the goods are intended for certain purposes.
Examples include imports for use by certain branches of government, such as the armed forces and law
enforcement agencies. Exemptions also include equipment for use in hospitals, which is of commercial
interest in those countries that attract foreign patients for medical treatment.


From a commercial perspective, the more interesting schemes include the import of goods used in export
businesses such as tourism. Similarly, other major investment projects oriented towards exports sometimes
obtain duty-free entry for capital goods. The diffi culty is staying within the limits of the WTO rules as exported
goods using such duty-free imports could be considered as specifi c subsidies and prohibited. This is not a
problem so far for tourist projects or for other export-oriented services as these are not covered by the WTO
SCM Agreement, the Agreement on Trade-related Investment Measures (TRIMS), nor as yet the General
Agreement on Trade in Services (GATS). Duty-free admission may also be offered for temporary imports of
goods for repair and re-export, and equipment for use in civil engineering projects that is intended for re-
export on completion of the project. This exemption might be of interest to several export-oriented service
industries.


Another scheme is the waiver of duties on goods that are not produced in the country. If the producer can
show that no goods that would serve the purpose are available from local producers, an exemption may
be obtained. However, this can lead to the exporter designing the export goods to ensure there are no
locally produced inputs, causing distortions in the intended government incentive schemes to assist local
production. For this reason, some years ago Australia abolished its ‘by-law’ entry scheme that was used for
this purpose.


TEMPORARY ADMISSION REGIMES


Under temporary admission regimes (TARs), regular trader/producers can have the initial duty payment on
imported materials waived, but they must subsequently provide proof of the incorporation of the imported
materials in their exports. This has a cash-fl ow advantage for business, but revenue agencies are often
reluctant to implement such schemes and are concerned about possible fraud. However, if suitable
guarantees can be worked out, this procedure can be used to reduce the costs of doing business, pending
more general liberalization.


DUTY DRAWBACK SCHEMES


Duty drawback schemes, which are more common than TAR schemes, entail the return to the importer/
producer/exporter of the duty paid on materials that are imported and then incorporated in goods that are
then exported. These schemes provide manufactured goods exporters with imported material inputs at world
prices, thus increasing their profi tability, while maintaining the protection for domestic industries that compete
with imports. These schemes are particularly advantageous in countries where tariffs for intermediate
products are high because the duties paid will be refunded when the product, into which the imported input
has been incorporated, is exported.


Duties are initially paid as goods are landed. Refunds are provided upon shipment of export goods that
include dutiable components. However, the amount refunded has to be precisely calculated so that there is
no suggestion of any subsidy by the government, as has been alleged in some averaging schemes in the
past.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS150


A perceived disadvantage in the operation of some schemes is that revenue agencies are often reluctant to
return the duty and there are often extensive delays in such reimbursements. In countries with high infl ation
rates these delays are a particular disadvantage.


 WTO members may establish duty drawback schemes provided the following:
 Customs duties have been paid on inputs used for the production of the fi nished product;
 The amount of drawback does not exceed the amount of duties levied on inputs consumed in the exported


good;
 There is a verifi cation system to check the inputs used in the production of the exported goods as well as


amounts of the inputs concerned.


Also included in drawback schemes are ‘substitution drawback systems’ (Annex III of the SCM Agreement).
Such systems allow for the refund or drawback of import charges on inputs that are consumed in the production
process of another product and where the export of this latter product contains domestic inputs having the
same quality and characteristics as those substituted for the imported inputs.13 The main requirement for
substitution drawback systems is that the home market inputs substituted for imported inputs must be equal
in quantity to and have the same quality and characteristics as the imported inputs being substituted.


For example, an entrepreneur produces PET chips using terephthalic acid (PTA) and ethylene glycol (EG).
PTA and EG are procured domestically as well as imported. PET chips are sold both on the domestic market
and on the export market. It so happens that PET chips manufactured by using domestically procured PTA
and EG are sold on the export market, whereas the PET chips manufactured by using imported PTA and EG
are sold on the domestic market. The entrepreneur can still claim refund of duties paid on imported PET and
EG under the substitution drawback system under the following conditions: (i) the imported goods being
substituted should normally be these two chemical substances (‘same quality and characteristics’); and (ii)
the domestic inputs must be used in equal quantities to the imported inputs that are being substituted.


Duty drawback schemes are implemented in different ways by member countries. Generally, in developed
countries there are sophisticated means that normally allow for the establishment of clear linkages between
the imported inputs for which exemption or remission of import charges is sought and the exported product.
New technologies can facilitate these procedures. By contrast, developing countries have weaker customs
administration and the revenue authorities are reluctant to reimburse pre-paid duties because of fi nancial
diffi culties.14 In particular, some developing countries believe that implementing the procedures of developed
countries would be ‘impracticable’ and ‘places an onerous burden due to the prevalence of a large number
of small and medium enterprises’. These countries consider that ‘[t]he administrative machinery required
for such verifi cation of inputs would be prohibitive in terms of costs’.15 To meet the criteria, some developing
countries, such as India, have developed and apply what is known as standard input-output norms (SCION)
or similar averaging procedures.16 However, such verifi cation systems have been frequently rejected for not
being reasonable and effective in the context of countervailing investigations.


Developing countries need to ensure that the verifi cation systems are in full compliance with the provisions of
the SCM Agreement. It may be advisable for such countries to seek technical assistance from the customs
authorities of developed countries or from compliant developing countries to set up the appropriate verifi cation
systems. Although some proposals in the current round of trade negotiations call for technical assistance on
this matter, such assistance has not yet been realized.


A World Bank analysis of export competitiveness and duty drawback is provided in box 57.


13 Annex III of the SCM Agreement.
14 More information is available from World Bank’s Export Competitiveness and Duty Drawback web link: web.worldbank.org/WBSITE/
EXTERNAL/TOPICS/TRADE/0,,contentMDK:20540524~pagePK:148956~piPK:216618~theSitePK:239071,00.html
15 Ibid.
16 Both determine the average amount of various inputs required for manufacture of one unit of the fi nal product.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 151


Whether countries should embrace or abandon such drawback schemes depends on a country’s
development priorities and economic conditions.17 An increase in the drawback has a positive impact
on export competitiveness and employment, but could lead to exports with low domestic value added.
The welfare effects of duty drawback reform are ambiguous. An increase in the drawback is more likely
to improve welfare if the economy is small with high input tariffs, low initial drawback, low administrative
costs and leakages in the tariff collection system. For example, if China were to remove its duty drawback
after meeting its WTO commitments, it would deepen its domestic supply chains and improve welfare, but
hurt the country’s economic effi ciency, export competitiveness and real factor incomes. It is argued that
further liberalization could mitigate these negative effects. However, there are arguments that, while such
liberalization is a long-term goal, in the short term liberalization could cause disruptive structural adjustment
problems. In essence, the argument is that all special schemes must be seen as measures undertaken
pending longer term liberalization.


17 Ianchovichina, E., ‘Duty Drawbacks, Competitiveness and Growth: Are Duty Drawbacks Worth the Hassle?’, Policy Research Working
Paper 3498, Washington, D.C., World Bank, 2005.


Box 57: Export competitiveness and duty drawback


Duty drawback schemes are used in highly protected economies to provide exporters of manufactured goods with
imported inputs at world prices, thus increasing their profi tability, while protecting domestic industries that compete
with imports. The choice of export drawbacks is reinforced by international regulations, namely the GATT, which
prohibits the use of direct export subsidies, but allows drawbacks.


Administrative mechanics of drawback programmes


Duties are paid as goods are landed. Refunds are provided upon shipment of export goods, which include dutiable
components.


Modes of duty drawback


 Direct identifi cation of manufacturers
 Substitution drawback
 Same condition drawback
 Shipment-by-shipment based on predetermined input/output standards
 Pre-agreed schedule (fi xed drawback schedule) – a list of the fi xed money value of duties to be refunded for


one unit of an export commodity; countries using such schedules usually revise them every three-to-six months


Costs and negative effects of duty drawbacks


 Loss of government revenue
 Creates opportunities for cheating and abuse
 Absorbs administrative resources for its implementation
 Drawbacks do not offset non-tariff barriers against imported inputs


Lessons learned


The Republic of Korea and Chinese Taipei are notable examples of economies able to achieve strong export growth
with protectionist policies. Their success is associated with a unique set of policies and circumstances not easily
replicated in other countries, specifi cally authoritarian regimes able to suppress rent-seeking behaviour, which
in turn made possible the use of other industry and trade promotion measures. Furthermore, both economies
recognized the disadvantages of protection and undertook to liberalize imports.


The implementation of duty drawback programmes in developing countries has not fared very well for various
reasons, including administrative weaknesses in customs administration, poor statistical infrastructure and failure
of the government to reimburse pre-paid duties because of fi nancial diffi culties.


Source: Export Competitiveness and Duty Drawback, World Bank. Available at: http://web.worldbank.org/WBSITE/EXTERNAL/
TOPICS/TRADE/0,,contentMDK:20540524~pagePK:148956~piPK:216618~theSitePK:239071,00.html.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS152


EXPORT RESTRICTIONS AND TAXES
Export restrictions and taxes are sometimes used to limit the exports of raw materials used in the production
of fi nal or intermediate goods intended for export. However, export restrictions are also used to reduce the
costs and increase the supply of inputs of raw materials for the export of intermediate or fi nal goods.


Under WTO rules, GATT Article XI (General Elimination of Quantitative Restrictions) prohibits the use by WTO
members of prohibitions or restrictions (other than duties, taxes or other charges), through the use of quotas
or export licences or other measures on the exportation or sale for export of any product destined for the
market of another member. (Article XI also covers import restrictions.) However, Article XI does not extend to:


 Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs
or other products essential to the exporting contracting party;


 Export or import prohibitions or restrictions necessary to the application of standards or regulations for the
classifi cation, grading or marketing of commodities in international trade.


Paralleling these provisions, Article XX(i), concerning general exceptions, permits the use of restrictions
‘on exports of domestic materials necessary to ensure essential quantities of such materials to a domestic
processing industry during periods when the domestic price of such materials is held below the world price
as part of a governmental stabilization plan, provided that such restrictions do not lead to any increase in the
exports of or the protection afforded to such domestic industry, and do not depart from provisions relating to
non-discrimination’.


Several developing countries have restricted exports or applied export taxes to limit the export of raw materials
such as logs, raw hides and skins, and vegetable oil seeds, to ensure supplies for domestic processing
industries and drive down domestic prices. Even though they reduce the domestic prices of inputs to the
export industry, such measures are not considered to be export subsidies. Some WTO members consider
that export taxes used in this way provide an unfair advantage to the using industries in the exporting country
and there have been discussions in the Doha trade negotiations on disciplining such measures.


Other measures that have attracted attention include:


 Ukraine: export taxes restrictive investment rules and dual prices (i.e. lower prices for domestic buyers
than for exports);


 Russian Federation: export restrictions, restrictive investment rules and dual prices (gas and timber);
 China: export restrictions, subsidies and export taxes;
 Gulf States: dual prices, export taxes and restrictive investment rules;
 Some African countries: export taxes;
 India: import duties, additional taxes and restrictive investment rules;
 Argentina: differential taxes.18


Other products where export restrictions or taxes are used include copper, molybdenum, and other non-
ferrous metals, ammonium paratungstate (APT), metal scrap, coke, agricultural raw materials and various
chemicals.


SPECIAL ECONOMIC ZONES
For many countries, large-scale trade liberalization on a national scale is not possible in both the short and
medium term. Therefore, many countries, going beyond duty drawback and other special tariff regimes for
exporters, choose to liberalize trade and investment in geographically delineated economic areas, such
as export processing zones (EPZs), special industrial zones, special economic zones (SEZs) or export
promotion zones. Some of these are specifi c to exporting while others take the form of industrial parks


18 The issue was discussed in an OECD workshop on raw materials. ‘Economic impacts and policy objectives of export restrictions’,
BIAC Discussion Paper, OECD, Paris, 2009.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 153


available to production for export or the domestic market. Recent estimates by the World Bank indicate that
there are currently more than 3,000 SEZs established in some 135 countries. Overall, SEZs are estimated
to account for more than US$ 200 billion in global exports and employ directly at least 40 million workers.19


Production of goods may co-exist with operations in the area of services in such zones. Indeed, the World Bank
notes that the traditional manufacturing-oriented processing zone is becoming increasingly anachronistic,
despite the continued importance of global production networks.20 This is so for three main reasons. First, by
limiting activities to manufacturing only, EPZs restrict opportunities for investment and growth in the services
sector, one of the most important opportunities for growth in middle-income and even many low-income
countries. Second, the traditional EPZ tends to create an enclave that is separated from the national market,
undermining its potential to create effective domestic linkages. Finally, the traditional EPZ model relies on
unsustainable fi scal incentives to attract investment. As a result, there has been a gradual shift from traditional
EPZs to special economic zones (SEZs), which normally cover larger land areas, offer greater fl exibility for
services and other non-manufacturing activities (including residential and tourism development), and include
a greater mix of export and domestic-market focused activities.


Many zones have existed for a long-time. The fi rst zone was Ireland’s Shannon Airport EPZ established in
1958. However, zones are largely seen as an intermediary step towards longer term liberalization. Zones
also have externalities in that they facilitate cooperation among fi rms in similar or linked activities, transfer
of technology and management know-how. Many of the initial zones in East Asia played a critical role in
facilitating industrial development and upgrading the ‘tiger economies’. Similarly, the later adoption of the
model by China provided a platform for attracting foreign direct investment (FDI) and not only supported
the development of its export-oriented manufacturing sector, but also served as a catalyst for sweeping
economic reforms across the country.


Industrial parks are not merely an interim step towards wider economic liberalization but are also a means of
concentrating infrastructure in a zone, often near a major transport node (port, airport, rail head, etc.), thereby
limiting expenditure. These and other SEZs also aim to overcome barriers that hinder investment in the wider
economy, including restrictive policies, poor governance, inadequate infrastructure, and problematic access
to land. While the features of each zone vary from country to country, SEZs tend to offer export-oriented
investors three main advantages relative to the domestic investment environment:


 They offer a special customs environment, including effi cient customs administration and (usually) access
to imported inputs free of tariffs and duties.


 They have historically offered a range of fi scal incentives, including corporate tax holidays and reductions,
along with an improved administrative environment.


 They provide infrastructure (including land, factory shells and utilities) that is more accessible and reliable
than would normally be available outside the zones.


The WTO does not prohibit EPZs or other SEZs as such, but governments using or considering using SEZs
must abide by WTO rules, particularly those regarding subsidies, as well as give careful consideration to their
economic feasibility.


While each country has its own reasons for creating zones, they quite often involve the following objectives:


 Increase exports;
 Attract foreign capital and achieve accrued capital;
 Introduce new technology, especially in the industrial fi eld;
 Provide employment opportunities;
 Generate a substantial skill surge.21


Free zones and similar schemes have become popular tools to promote exports, especially in developing
countries. This is particularly true for countries in which import tariffs are, or have been, high. Companies


19 For a useful overview see: Farole, T., ‘Special Economic Zones Performance, policy and practice – with a focus on sub-Saharan
Africa,’ World Bank, March 2011. Available at: siteresources.worldbank.org/INTRANETTRADE/Resources/Pubs/SpecialEconomicZones_
Sep2010.pdf
20 Ibid.
21 Objectives as cited in the website of the Ministry of Trade and Industry of Egypt. Available at www.tpegypt.gov.eg/ENG/FreeZone.aspx




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS154


operating under these schemes have traditionally been exempt from paying customs duties on imports of
raw materials, and often intermediate inputs and capital goods, used for the production of exported goods.
Zones can be publicly or privately owned or managed and can be ‘high end’ or ‘low end’, depending on the
quality of the management, facilities and services provided. They tend to encourage the establishment of
related industries to form clusters, and as they grow, tend to attract new companies operating in the specifi c
fi eld in which the free zone specializes.22


Government should further provide effi cient, streamlined, and prompt services for setting up and running
export processing zones (approval of investment applications, customs and other supervisory institutions).
Privately owned and managed zones should be encouraged. If zones are public, considerable autonomy
should be granted. Zone fi rms exporting from one member of a trade arrangement should be aware of
potentially complex rules of origin and restrictions.23 Finally, is it important to develop special customs rules
and regulations drawing upon WCO and WTO provisions, and fast-track implementation of automated
customs systems, with proper inventory controls and audit systems within SEZs.24


Yet, EPZs are a ‘less than optimal strategy’25 and should not be favoured over overall improvements to the
business environment and economy-wide strategies. This is because EPZs are distortionary trade instruments
and introduce an element of discretion into the policy environment. Furthermore, low levels of FDI infl ow may
be due to inadequate legal or regulatory frameworks or distorted economic incentives in other areas of the
economy, such as private property laws.26


EPZs are more likely to succeed when monetary and fi scal policies (low infl ation, budget management,
independent monetary policy), are sound and stable, private property and investment laws are clear, fi rms
are free to repatriate earnings at market rates, and there are no restrictions on foreign exchange.


22 De Baere, P. and C. Du Parc, Export Promotion and the WTO: A Brief Guide, ITC, 2009. Available at: www.intracen.org/eshop/Free-
publications/Export_Promotion_WTO.pdf
23 Zones in countries that are members of preferential trade arrangements (regional or bilateral) may be more attractive to fi rms targeting
these markets because such a membership enlarges potential market size and eases entry barriers. However, exports from these zones
may face complex rules of origin regulations and restrictions.
24 Special Economic Zones in Indonesia: Attracting Investment to Create Welfare for the Indonesian People, International Financial
Corporation, World Bank. Available at: www.ifc.org/ifcext/eastasia.nsf/AttachmentsByTitle/SEZ+brochure_eng/$FILE/Economic+Zone_
english_FINAL.pdf
25 Engman, M., O. Onodera and E. Pinali, ‘Export Processing Zones: Past and Future Role in Trade Development,’ Trade Policy Working
Paper No. 53, Paris, OECD, 2007.
26 Madani, D., ‘A Review of the Role and Impact of Export Processing Zones’, World Bank, 1999. siteresources.worldbank.org/
INTRANETTRADE/Resources/MadaniEPZ.pdf


Box 58: Common features of SEZs


SEZs have a number of common features:


 They allow duty-free imports of raw and intermediate inputs and capital goods for export production.
 Government red tape is streamlined, allowing one-stop shopping for permits, investment applications, etc.
 Labour laws are often more fl exible than for most fi rms in the domestic market.
 Firms in zones are given generous, long-term tax concessions.
 Communications services and infrastructure are more advanced than in other parts of the country; utility and


rental subsidies are common.


 Zone fi rms can be domestic, foreign or joint ventures.
 FDI plays a prominent role.


Source: Export Competitiveness and Export Processing Zones, World Bank, Available at: web.worldbank.org/WBSITE/
EXTERNAL/TOPICS/TRADE/0,,contentMDK:20540534~pagePK:148956~piPK:216618~theSitePK:239071,00.html




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 155


Even if export promotion is in order (i.e. WTO-compatible and deemed a solution to the country’s low FDI
infl ow), an EPZ may not be the best instrument to achieve such a goal. If these economies are intent on
establishing new zones, they should pursue minimal differential fi scal incentives compared to the national
standards, minimizing their distortionary impact on the host economy.27


SEZs can be useful in countries at earlier stages of development because they are usually easier to administer
than full-scale national liberalization reform. SEZs can logically serve as a bridge to trade liberalization on a
national basis. They reduce the anti-export bias of high tariffs by permitting an exporting company to access
inputs at global prices, and therefore may aid in the creation of an export industry and improve a country’s
trade balance.


However, there are many examples of failures of SEZs, where investments in zone infrastructure resulted in
‘white elephants’, or where zones have largely resulted in industry taking advantage of tax breaks without
producing any substantial employment or export earnings. Moreover, many zones that appear to have
been successful in the short term have failed to remain sustainable once labour costs have risen or when
preferential trade access is no longer an advantage, which is what happened in many countries with the end
of the Multifi bre Arrangement. In effect, new trade rules in 2006 ended this GATT-WTO provision that helped
textile industries in developing countries, putting millions of workers at risk. Zone failures can be attributed to
a variety of causes. Too often, zones are plagued with the same problems that hinder investment in the wider
economy, such as unstable electricity, lack of water, heavy bureaucracy and ineffi cient and corrupt customs.
In addition, broader competitiveness challenges, including policy instability, poor national governance, and
low productivity, often undermine the potential of zones.


Box 59 provides an overview of some the main measures required when implementing SEZs, as well as
Costa Rica’s and Senegal’s experience with implementing such schemes. Box 60 provides an example of
how Nepal was able to use an SEZ for its textiles and clothing exports.


The experiences of Nepal and Vanuatu, small LDCs with SEZs, are discussed in boxes 61 and 62.


27 Ibid.


Box 59: Costa Rica and Senegal: experiences


Costa Rica established its fi rst EPZs in the early 1980s in the port cities of Puntarenas and Limón, both of which were
economically depressed areas. To attract foreign investment, the authorities designed a system of fi scal incentives
for interested fi rms to locate in these zones. However, mainly due to their locations, these initial attempts were
unsuccessful in attracting large investment and saw only a few fi rms and jobs created. The majority of companies
invested in operations in private zones, which were subsequently formed in the central region of the country. These
areas had better infrastructure facilities, access to specialized services, and abundant skilled workers that made
the locations more attractive. EPZ investors preferred better supporting conditions than incentives.


Since 1990, export-oriented activity in Costa Rica has increased rapidly under the EPZ and the Regime of Temporary
Admission (RTA). Between 1991 and1996 employment increased annually by more than 7% and net EPZ and RTA
exports increased annually by more than 14%. In 2005, 8% of Costa Rica’s total export volume and 53% of total
value originated in EPZs. Intel Corporation drives this value-added production as the largest exporter. In 2005 EPZs
were employing around 39,000 people, 5,000 more than in 2001.


Senegal established an EPZ near the port of Dakar in 1974, but the project failed and was abandoned in 1999.
At the time of closure, the Dakar EPZ had hosted only 14 active enterprises with a total of 940 employees. The
principal reasons of failure included excessive bureaucracy (customs procedures, long delays in acquiring permits
etc.), unfortunate location (12 km from the Dakar port), an obligation for companies to hire more than 150 people,
and rigid and constraining labour regulations.


Source: Engman, M., O. Onodera and E. Pinali, ‘Export Processing Zones: Past and Future Role in Trade Development,’ Trade
Policy Working Paper No. 53, Paris, OECD, 2007.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS156


Box 60: Nepal: ensuring textile and apparel benefi t from SEZs


Textile and apparel comprises around 18% of the total export trade and around 30% of the third-country (other
than India) trade of Nepal. The industry provides job to around 50,000 Nepalese, with women holding 50% of
the jobs. With an average family size of fi ve, around 250,000 people are dependent on this sector. The sector is
reeling under diffi culty with the phase-out of quotas under the Multi-fi bre Agreement since January 2005. With the
operation of only rail-connected ICD (inland container depot) in the border city of Birgunj, the Nepalese textile and
apparel industry is seeking to succeed in the international market by reducing transaction costs and increasing
competitiveness, which may be achieved by relocating the industrial establishments in the vicinity of the dry port.


There is tremendous pressure on the government to initiate the development of an SEZ in or near the dry port.
Developing such a facility will help eliminate the process of duty drawback and bonded warehousing as the raw
materials for producing apparel will directly land at the customs bond area. The additional transportation charges
for transferring the raw materials to distant locations and re-transportation of the fi nished goods to the dry port for
exporting abroad would be greatly reduced, thereby increasing the competitiveness of the products. The industry
established in the SEZ is also expected to enjoy some other incentives in the form of taxes and credit benefi ts,
export incentives and the fl exible labour laws. The result would be reduced transaction costs and increased
competitiveness of the Nepalese apparel industry. The Government of Nepal has already initiated the process of
setting up such a zone for the larger interest of the export sector.


Source: Ojha P., Nepalese Experience in Liberalization of Trade Logistics Services. Report prepared by Purushottam Ojha, Joint
Secretary, Offi ce of Prime Minister and Council of Ministers, Nepal. Available at: www.unescap.org/tid/artnet/mtg/tfri_s3ojha.pdf.


Box 61: Nepal creates a business-friendly investment climate


To attract foreign and domestic investment in the industrial sector policies were simplifi ed and clarifi ed. The
investment climate was made more conducive by introducing a number of policy measures and procedural
simplifi cations. In addition, Nepal’s government developed a package of incentives. Industries established with
foreign investment in the form of joint ventures or wholly foreign owned units are entitled to the facilities and
incentives.


Industries using 80% or more domestic raw materials and employing 100% locals are exempt from 10% of income
tax. Manufacturing industries importing plants, machines and equipment for production with a duty rate of 5% are
exempted from sales tax under certain conditions.


Tax reductions or other tax-related measures include income tax rebates of 30%, 25% and 20% for certain industries
(except industries to do with cigarettes, bidis, alcohol and beer) established and operating in remote, undeveloped
or underdeveloped areas of the country, respectively. Industries (other than those manufacturing cigarettes, bidis,
cigars, tobacco, alcohol, beer, sawmill products and those using catechu) using more than 80% or more of the
local raw materials for their production and employing all human resources from among Nepali citizens are granted
a rebate at the rate of 10% of the income tax.


Further measures include duty drawback – any duty or taxes levied on the raw materials, auxiliary raw materials,
etc. used for producing goods for export are entitled to a refund based on the quantity of export – and exemption
from customs duties for specifi ed manufacturing industries importing plant machinery and equipment under
certain conditions. Nepal is exempt from countervailing investigations because as an LDC, WTO rules allow certain
de minimis level for subsidies.


Government measures provide for various repatriation facilities. Export-oriented industrial companies can open
foreign exchange accounts. Industries incorporated as 100% foreign owned or as a joint venture may also open a
foreign exchange account to deposit the equity share of the foreign party in convertible currency. This can be used
only to import equipment, plants and other fi xed assets..


Source: De Baere, P. and C. Du Parc, ‘Export Promotion and the WTO: A brief guide, 2009’, ITC.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 157


REGIONAL SOURCING
Best practices suggest using regional sources of materials and goods due to shorter delivery time. For
example, intermediary products such as fi bres, fabrics and trims are available on world markets, but it is faster
to source them from nearby countries. As a country’s capacity to export grows, it needs larger quantities of
production inputs. As the order value increases and government and business obtain more bargaining power
with suppliers, discounts and lower prices for raw materials may be available.


One way to obtain materials at lower prices, without global liberalization, is to enter into regional trade
agreements, thereby reducing tariffs. Such an agreement needs to meet WTO rules, but these are relatively
relaxed for developing countries and even more so for LDCs.


However, restrictive rules of origin in foreign markets may undermine competitiveness by constraining access
to the cheapest inputs. If the product does not meet these conditions, its duty-free status is lost and normal
import duties will be applicable. Provisions for cumulation within regional and multilateral trade agreements
lessen the impact of restrictive rules and stimulate regional integration, but such provisions are not always
available as the importing country often uses restrictive rules of origin to support its own suppliers.


SUPPORTS FOR INPUTS TO EXPORTS


SUBSIDIES FOR INPUTS


Direct subsidies to exports of goods are prohibited or actionable under WTO rules. The WTO also considers
support for inputs to production for export as subsidies. Thus, specifi c subsidies for inputs or material,
components or services, such as energy, water or electricity, would be considered as subsidies for the fi nal
goods, despite the fact that at the time of writing there are no rules on subsidies for international trade in
services.


EXPORT CREDITS AND EXPORT FINANCE


Export credits arise whenever a buyer or a supplier of exported goods or services is allowed to defer payment
for a certain period of time. The types of export credits that involve a certain degree of offi cial support are
mainly granted to fi nance the export of capital goods and related services. How offi cial support is granted
varies from country to country. In most countries such support is given to the banking sector either directly or
through a specialized intermediary. In other countries the funds necessary for the granting of export credits
are provided directly by government agencies.


Box 62: Vanuatu promotes investments and exports


Vanuatu does not provide income tax holidays or similar type of measures because there is no corporate tax.
However, it uses other measures to promote investments and exports. Most signifi cantly, full exemptions are
applied on trade taxes for manufacturing, processing and mineral exploration and extraction of raw materials
and capital items. For other sectors, there is a reduction of trade taxes. In addition, the government supports and
encourages all export-oriented investments and does not levy any export taxes on the export of any goods or
services (this is with the exception of shells and raw logs). In addition, export manufacturers are exempt from trade
taxes on their production inputs and from any taxes on exports.


Vanuatu is somewhat unusual in not imposing corporate taxes. Hence, investment and export promotion incentives
focus on exemption from trade taxes, as well as institutional support for investors and exporters.


Source: De Baere, P., C. Du Parc, Export Promotion and the WTO: A brief guide, 2009, ITC.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS158


Export credits can take the form either of a supplier or a buyer credit. Supplier credits are extended by the
exporting company, which then arranges refi nancing. In the case of the buyer credit, the exporter’s bank, or
another fi nancial institution, lends funds to the buyer in the importing market. Export credits can be medium
term (two to fi ve years) or long term (at least fi ve years). The objective is the promotion of exported goods
and services in foreign markets.


WTO rules concerning export credits are included in Item (k) of the Illustrative List in Annex I of the SCM
Agreement as follows. Grants by governments below certain interest rates or payments by governments of
at least part of the costs incurred by exporters or fi nancial institutions in obtaining credits used in order to
secure a material advantage concerning export credit terms are considered as prohibited export subsidies.
Any member seeking to grant export credits in excess of the terms permitted under the OECD Arrangement
on Guidelines for Offi cially Supported Export Credits, for example at lower interest rates or longer maturity,
must notify this intention to all fellow members accompanied by a detailed explanation of the reasons for
such deviation.28


The use of export credits to support agricultural exports is being discussed in the current Doha Round, where
support by the United States has been criticized by its trading partners.


Providing fi nance to assist exporters is not in itself an export subsidy, nor is it contrary to WTO rules. The
issue is whether the fi nance is provided at subsidized rates. The problem in many developing countries is
that small- and medium-sized enterprises (SMEs) often have diffi culty obtaining access to export fi nance or
fi nance for investment purposes at competitive rates. Larger fi rms tend not to have this problem, especially
if they are affi liates of large international corporations, through which they may have access to international
fi nancial markets. However, developing country SMEs have to borrow on the domestic market where interest
rates are often 30% or more. Part of the problem is fi nancial market weakness in many developing countries.


Opening up the fi nancial market with adequate regulatory control over capitalization is one approach to
strengthening the market; however, there may also be a need to take measures to ensure competition. The
entry of foreign banks may not lead to reduced borrowing costs if they enter into some form of collusion
with existing local banks. A solution in some countries has been to establish a state bank for development
purposes or to provide export fi nance at reasonable rates. An example is the Brazilian National Development
Bank, which is able to borrow at sovereign rates and relends with a margin to cover costs. Mauritius also has
a development bank, which is credited as being one source of the country’s export success.


ATTRACTING FDI
Where conditions are favourable, governments can strategically support domestic suppliers of goods and
materials with general measures that are commonly used in key export areas, avoiding specifi c measures that
would be contrary to WTO rules. The World Economic Forum argues, ‘there is an extensive range of policies,
instruments and institutions involved in the public and private sectors for building competitiveness. Other
than providing a supportive macroeconomic framework, there are policies to support trade and industry –
covering primary, secondary and tertiary industries – that are not covered by WTO rules. For example, policies
for science and technology, including technical education, are important in building competitiveness in the
longer term’.29 Institution building or institutional reform can help establish a more stable and secure legal
framework that is friendlier towards investment by foreign fi rms and local investors. There is strong evidence
supporting the need to tackle weaknesses in production capacities in developing countries.30


28 This is in accordance with the conditions set out in the OECD Arrangement on Guidelines for Offi cially Supported Export Credits.
According to WTO case law, it is not suffi cient to selectively comply with certain terms enshrined in the OECD Arrangement, e.g. the
established interest rate. On the contrary, WTO members have to comply with all the criteria set out in the Arrangement.
29 The Global Competitiveness Report 2006-2007, editors, López-Claros, A., M. E. Porter, X. Sala-i-Martin and K. Schwab, World
Economic Forum.
30 See for example UNCTAD’s Least Developed Countries Reports for 2004 and 2006.


See also: Fugazza, M., ‘Export Performance and its Determinants: Supply and Demand Constraints’, Policy Issues in International Trade
and Commodities Study Series No. 26, UNCTAD, 2004. Fugazza carried out a multi-country econometric study of the determinants of
export performance and comments: ‘African and Middle Eastern countries appear to have faced severe supply capacity constraints in the
last two decades, while their access to foreign markets has remained largely unchanged’.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS 159


Openness to FDI can support production, including production of goods and services for export. For example,
in Colombia market-seeking FDI seems to have brought about some effi ciencies as foreign fi rms have
applied their management, technical and logistical expertise in several industries, including beer, tobacco,
banking and telecommunications. In telecommunications, FDI has taken over cellular companies formerly in
the hands of the domestic private sector and state-run long-distance operators.


Market-seeking FDI in Colombia has also invested in greenfi eld operations, primarily in the retail business
where large French (Carrefour and Casino), Chilean (Falabella, Sodimac) and Dutch (Makro) retailers
have built new stores, which makes an impact on the retail business and the real estate market, as well as
(positively) on the quality of supplies of producers.


These policies have boosted Columbia’s competitiveness. The country’s ranking rose from 65 in 2001 to 56
in 2002 in the World Economic Forum’s Competitiveness Index. In the World Bank’s Doing Business 2008,
Colombia is reported to have defeated the trend in Latin America and has become one of the top-10 global
reformers.


In the context of building productive supply capacities, and hence providing ready access to domestically
produced inputs in goods and services, one area that merits particular attention in developing countries and
LDCs is the development of the private sector, especially SMEs. ITC has a number of programmes to help


Box 63: Colombia encourages investment and export promotion


Business analysts have recognized Colombia’s government policy towards investment and export promotion.
According to the World Bank’s Doing Business Report 2009, Colombia ranked in second place in Latin America in
the ease of doing business. As part of its overall reform programme, initiated in the late 1990s, Colombia took the
following initiatives:


 Eliminated a number of bureaucratic processes and prevented government agencies from creating new ones
under the Anti-Red Tape Law (Ley Antitrámites);


 Simplifi ed the tax structure, reducing the number of taxes, expanding electronic fi ling and reducing the frequency
of payments;


 Provided improved investor protection;
 Undertook labour market, fi nancial sector and trade liberalization reforms;
 Adopted a fl exible exchange rate regime and strengthened fi nancial supervision and regulation;
 Brought infl ation under control (remaining at below 10%);
 Made a major effort to strengthen security and fi ght corruption;
 Took steps to boost competitiveness through investment in science, technology and education;
 Instigated a process of building public support for its reforms through the National Council for Competitiveness.


The government’s investment and export promotion strategy uses duty-free zones to promote the industrial
processing of goods and services, primarily for export, and provides tax and procedural incentives to users of the
free trade zones. Important features of the Colombian investment and export promotion measures are:


 Special import and export programmes enable producers to seek duty exemption on inputs in the production
of exported goods;


 The Permanent Customs Users, a programme that allows business providers to obtain duty drawbacks if their
operations exceed US$ 6 million during the previous year;


 The Temporary Imports for Re-Exporting Unaltered Products programme, which allows importers to import
products duty free provided that they are re-exported in the same state as they were when imported into the
country;


 The Highly Exporting Users programme, which offers a number of tax incentives to companies that export at
least 30% of total sales;


 Special customs zones that offer tax benefi ts to companies that set up operations in designated areas;
 Sales tax (VAT) exemption, which is granted for industrial machinery that is imported into Colombia.


Source: Doing Business in Colombia 2008 and Doing Business in Colombia 2009, Washington, D.C., World Bank.




CHAPTER 5 – IMPROVE INPUTS AND CAPITAL GOODS160


businesses, particularly SMEs striving to achieve and maintain a competitive edge in the global market. ITC
works directly these SMEs, as well as with national trade support institutions. This is vital for their sustained
and improved access to trade-related services, such as fi nancing, help in maintaining quality standards,
advice on export packaging and ready information on the legal requirements of international business.


ITC’s Trade Finance programme is specifi cally designed to facilitate access to fi nance for SMEs exporting from
developing and transition economy countries. Another programme to promote the creation of sustainable
SMEs is Empretec, a United Nations programme established by the United Nations Conference on Trade
and Development (UNCTAD). Empretec supports entrepreneurs in building innovative and internationally
competitive SMEs.


Participating in global value chains is another way for businesses in developing countries to fi nd markets, as
discussed in chapter 4, and to access inputs of materials, capital goods, know-how and services needed
to deliver exports to world markets at competitive prices. ITC works with national institutions to improve their
ability to provide consultancy support, information and training across the purchasing and supply chain.
This involves: diagnosing supply bottlenecks and problems; monitoring supply markets; implementing
effective purchasing strategies; optimizing the quality of goods; managing the inbound logistics process;
and protecting imported goods against damage, loss and ineffi cient use.


CONCLUSION
Access to inputs of materials, capital, technology and a range of services is critical for international
competitiveness. Thus, export success depends both on achieving economic production and being able to
deliver goods and services to the world market at competitive prices.


Economists see the comprehensive opening of markets in goods and services, accompanied by measures
to ensure competition, as the best means of reducing the anti-export bias associated with import protection.
However, this may not be feasible in the short term for political reasons associated with the costs of adjustment,
nor desirable in the presence of externalities. At the same time, there is a range of short-term and longer-term
options that can boost competitiveness. In the longer term, apart from the progressive opening of markets
and stimulating competition, there are also measures to improve the functioning of the domestic economy
and good governance that help provide a more business-friendly environment for establishing and operating
a business. Measures may also be taken to increase competitiveness more generally, such as encouraging
FDI, support for SMEs and participating in global value chains.


In the short term, there are various means to reduce the costs of inputs to exporters, but the options are more
limited than in the past because of the tightening of multilateral rules on the use of subsidies. The options
to reduce the costs of inputs to exporters include duty waiver, duty drawback, and temporary admission
regimes. Financial market reforms can also help reduce the costs of investment, complemented where
necessary with the establishment of national development or export-import banks to increase competition in
the quality and price of fi nancial services. Improving the operation of fi nancial markets can facilitate access
to export credits and export insurance facilities without breaching WTO rules.


SEZs, including export processing zones and broader industrial parks, are a useful means of reducing the
costs of infrastructure and services for manufactures and, increasingly, for services. SEZs have often been
used to facilitate the administration of special tariff regimes and cut administrative formalities. They are seen
as useful in providing externalities through the transfer of technology, as well as management and labour
skills to other fi rms in the zones. SEZs have sometimes been effective in generating jobs in depressed
regions. Although special tax incentives have been used in these zones, experience shows that factors other
than tax regimes are more critical, including the availability of skilled labour, political stability and ease of
doing business. In this sense, they are best seen as a model for wider reforms to be applied throughout the
economy.




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© International Trade Centre 2011


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EXPORT IMPACT FOR GOOD


National Trade Policy
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