Facilitation 2.0: Enabling trade in the digital age

April 20, 2018

The expansion of the trade facilitation agenda, expressed as Facilitation 2.0, is critical in a time of global industrial and societal reorganisation, of which the digitisation of economic activity, a shifting volume and geography of foreign direct investment, and a rising share of high-productivity services are defining features. In the digital age, issues such as e-commerce, investment, and services have become the focus of economic policymaking for their potential to promote inclusive growth, and foster sustainable development. This article argues that in an increasingly integrated world, complexity requires a comprehensive facilitation agenda built on the foundations provided by the World Trade Organization's Trade Facilitation Agreement.

 

One year on from its entry into force, the World Trade Organization (WTO) Trade Facilitation Agreement (TFA), the only multilateral deal to have eluded the Doha Round deadlock, has allowed for sustained momentum on the trade policy reform agenda and provided new oxygen in a stifled negotiating environment. Ratified by four in five WTO members, the experience of the TFA makes a cogent case for the negotiation of trade-enabling rules. According to WTO data, the full implementation of the TFA could reduce worldwide trade costs by an average of 14.3 percent, with the largest gains for small and medium-size enterprises in developing and least developed countries. Lowered trade costs could precipitate an increase in world trade of US$1 trillion per year and the creation of an estimated 20 million jobs globally.

The New Frontier for Trade Facilitation

However significant, the TFA in its current form extends only to trade in physical goods and is insufficient for the features of the new economy, missing a large part of what increasingly matters to production models and economic development today. New and changing business models, structures of production, and policy aims reveal a new frontier for facilitation, necessary to catalyse and maximise benefits in the digital age. Simplified and harmonised procedures in key policy areas, namely, investment, services, and e-commerce are the next step in ensuring that the WTO effectively responds to 21st century economic and developmental imperatives, and reaffirm the relevance and centrality of the multilateral rules-based system.

The expansion of the trade facilitation agenda, expressed as Facilitation 2.0, is critical in a time of global industrial and societal reorganisation, of which the digitisation of economic activity, a shifting volume and geography of foreign direct investment (FDI), and a rising share of high-productivity services are defining features. In the digital age, issues such as e-commerce, investment, and services have become the focus of economic policymaking for their potential to promote inclusive growth, generate good-paying jobs, with potential transformative effects needed to break poverty cycles, and foster sustainable development.

An upgrade to Facilitation 2.0 would make it easier to both attract and target productive investments where needed in order to lever the goods-services-knowledge nexus. In an increasingly integrated world characterised by many moving pieces, complexity requires a responsive and more comprehensive facilitation. The fragmentation in production processes across numerous countries rests on narrow niches of specialisation and trading in tasks, fuelled by bundled or discrete flows of goods, services, investment, knowledge, and other intangible or digitalised components of technology.

With most of the global economic output captured in value chains, products today are likely to cross jurisdictions and borders several times before getting to a final destination. These customs-intensive journeys rely on well-oiled mechanisms with minimal administrative and regulatory friction at and behind the border. Trade costs are a key determinant for firms when sourcing or locating production and assembly facilities from specific countries. Further, more emerging technologies are in the process of disruption or incorporation of production and consumption cycles, including artificial intelligence, automation and blockchain, intensifying the sense of urgency to make the border-crossing more adequate and efficient.

TFA Ingredients

A look at the TFA reveals a solid foundation on which to dock future initiatives as related to e-commerce, services, investment, and goods. The agreement elaborates a set of binding, multilateral requirements putting transparency and non-discrimination at the backbone. It also provides for multidimensional action, establishing the requisite institutional arrangements at the WTO and national levels. Through the Committee on Trade Facilitation, members are able to share experiences, consult on the operation of the agreement and the furtherance of its objectives. The agreement also mandates the establishment of a national committee on trade facilitation by each member, or else the designation of an existing mechanism, in order to oversee implementation and facilitate domestic cooperation. Members are further bound to self-assessment, including the measurement of average release times and bottleneck identification, and reporting findings back to the WTO Committee.

The TFA already displays areas of compatibility with what the new economy requires. The agreement puts a dedicated focus on procedures and global standards key in a global value chain (GVC) world. The TFA encourages the use of international standards, and further urges members to share information and best practices on standard implementation.

The TFA offers vital lessons for the multilateral trade system in differentiating between levels of capabilities and capacity, equipped with an innovative mechanism based on staggered implementation schedules for members at different stages of development, underpinned by the provision of technical assistance. This new model directly ties the requirement to implement the agreement to the capacity of the country to do so for the first time since the WTO’s establishment.

Key elements have already carried over into other venues, including Brazil’s communication towards a possible multilateral framework on investment facilitation circulated in January, where obligations for implementation hinge on the level of development. Through this method of variable differentiation, the TFA holds the key to the much-needed flexibility that rule-making requires to advance.

The agreement affords further protections for developing and least developed country (LDC) members, including a two-year grace period temporarily exempting developing countries from the WTO Dispute Settlement Understanding (DSU) on provisions designated for immediate implementation. LDCs are granted relief from the DSU for six years on provisions for immediate enactment, and eight years on those to be implemented after a transitional period and those that require assistance. (Members are encouraged to exercise “due restraint” and show consideration when raising disputes with LDCs irrespective of grace period.) Members confronted with difficulties in putting provisions into effect further to the allowed transition time can either be granted an extended implementation period or have their case appraised by an ad hoc expert group who will be able to make a recommendation.

Towards Facilitation 2.0

Global production networks involve more interaction with domestic institutions and non-tradable networks (e.g. logistics, supply, knowledge) requiring bridging of institutional weaknesses and information asymmetries and deficiencies, particularly in developing countries.Behind-the-border barriers include policies, rules, procedures, legal frameworks, or lack thereof that unnecessarily impede cross-border transactions. The scope of Facilitation 2.0 reaches behind the border to deepen efficiency gains, seeking to promote trade and development through enhanced interoperability among domestic regulatory frameworks and improved coherence between trade agreements governing the different components of the new economy. The components of Facilitation 2.0 are strongly intertwined, and they can only deliver optimal results when their design and implementation are coherent and synergetic. If such processes are conducted in isolated siloes, there would be a risk of potential inconsistency and premature obsolescence.

The internet reduces operating costs allowing firms, particularly small and medium-sized enterprises (SMEs), access to global markets, as opposed to relying on a physical commercial presence to conduct business by traditional means. Through enabling broader participation in trade, e-commerce carries with it immense development potential and opportunity for inclusive growth. A lack of coherent regulations relating to e-commerce incurs high costs and delays, and can represent an obstacle for SMEs and erode the appeal of cross-border e-commerce for business to business or business to consumer transactions. Facilitating e-commerce would entail fostering a transparent, secure, and predictable regulatory environment, including harnessing paperless trade for the more efficient processing of e-commerce shipments of physical or digital goods, strengthening access to finance, the promotion of consumer protection, and identifying supply side gaps including knowledge of trade rules and standards.

Adding a services facilitation component would aim to reduce opaque procedures and other bottlenecks facing services and suppliers in order to boost global services flows. Potential efforts here could include streamlining the establishment of subsidiaries or branches through a “single window” for foreign service suppliers, or easing the movement of services suppliers across borders through simplified visa procedures, and ensuring that measures relating to taxation are not designed in such a way so as to disadvantage foreign service suppliers.

Flows of foreign direct investment are required to mobilise resources for development, allowing for the diffusion of technology and know-how across borders. Investment facilitation aims to help countries attract and benefit from investment, counteracting unduly excessive regulation, weak legal systems, poor infrastructure raising transportation costs, onerous licensing procedures, and underdeveloped frameworks for cultivating competition which can impede investment in domestic businesses. Investment further spurs exports and supports entry into global markets. Investment facilitation would complement trade facilitation, enabling and easing participation in  globalised markets for goods, services, and in the digital economy.

Facilitation 2.0 will also consider the important role of two cross-cutting policy areas, which interact horizontally with these core areas: innovation towards the unobstructed flow of ideas and knowledge across borders; and dispute settlement key to ensuring enforceability and accountability for each issue area.

TBT/SPS: The Unfinished Business in Enabling Trade in Goods

The procedural and documentation requirements in trade, while costly for business and consuming of government resources, can be necessary to realise policy goals, including the protection of the environment or for security. The WTO Agreement on Technical Barriers to Trade (TBT) and the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) moderate these cases, maintaining the right to regulate on balance with ensuring that such measures are not any more trade-restrictive than required for the desired protection.

The TFA is in many ways complementary to the TBT and SPS Agreements and surpasses them in some respects. This overlap and any resultant conflicts are governed in the TFA with the clause, “nothing in this Agreement shall be construed as diminishing the rights and obligations of Members” under the TBT and SPS agreements. Much work remains to be done in clarifying the intersection of these various agreements, and further building coherence between them in view of modern terms of production, leveraging the linkages for effective implementation and streamlined technical assistance.

The TFA can in many ways reduce the compliance costs of SPS measures for developing countries and LDCs where agriculture is often a key sector, helping to avert delays at the border and uncertainty about requirements in SPS controls. The agreement provides for inter-agency cooperation both domestically and at border crossings, establishing mutually agreed terms with members with a common border, coordinating procedures, aligning working hours, and sharing common facilities. It also calls for the establishment of single windows to enable traders to submit documentation through one entry point to the participating authorities and agencies, including SPS border authorities.

TFA provisions aimed at improved and streamlined testing and inspection procedures to reduce the time to reach the market have a bearing on SPS (Articles 5, 7, 8, and 12), providing guidance to authorities for inspecting foodstuffs and sampling goods, and providing priority treatment for and careful storage in the examination of perishable goods.

The frameworks for Facilitation 2.0 could reach WTO-wide, building onto and clarifying the application of certain rules in the General Agreement on Trade in Services (GATS), TBT/SPS, and other relevant agreements.

Facilitation 2.0 is by nature a multidimensional challenge, involving unilateral institutional reform, coherent trade policies, and multiparty initiatives at different international fora, including the WTO and regional trade agreements (RTAs). Cutting costs to trade and investment is different from cutting a tariff – it takes behavioural change and diligent collective action towards implementation in order to reap the economic benefits. Once the rules are in place, their realisation is contingent on a culture of compliance and a conducive business environment at the country level. The G20 trade ministers have endorsed commensurate domestic policy reform as part of national growth strategies as key to addressing trade costs, which the scope of Facilitation 2.0 must be sure not to neglect.

Some of the components of Facilitation 2.0 are already part of the multilateral discussion. Through the existing proposals on e-commerce, investment facilitation, services facilitation, and domestic regulations in services, WTO members have begun to address some of the trade topics related to Facilitation 2.0. Furthermore, the joint ministerial statements on Investment Facilitation for Development, Electronic Commerce, and Services Domestic Regulations issued at the WTO’s 11th Ministerial Conference (MC11) are indicative of the modality and direction of an eventual move towards Facilitation 2.0-related trade talks at the WTO. Building onto the TFA experience, topics under discussion in other parts of the WTO could be re-engaged and brought onto this path in order to reinvigorate conversation with a focus on the facilitation aspects which enjoy broad agreement.

Facilitation 2.0 will also need to take into account areas where trade facilitation has been a focus of rule-making at the regional level. The scope, depth, and sophistication of trade facilitation provisions in RTAs has grown immensely since they first began to be regularly incorporated by the late 1990s, today sometimes surpassing the TFA in the detail and coverage of their commitments. For example, while the TFA frequently references electronic documentation for facilitating trade at the border, WTO negotiations on trade facilitation did not explicitly cover e-commerce. Provisions aimed at facilitating digital trade have however been written into RTAs, including measures relating to electronic signatures and paperless trading, as well as requirements to establish a domestic legal and regulatory e-commerce framework.

The first attempts to bring trade facilitation into RTAs were fairly limited, providing for basic transparency disciplines and other simple customs reforms, but the launch of the TFA negotiations gave new impetus to progress. At the same time, many countries carried over topics already tried and tested in RTAs to Geneva negotiations. Many RTAs have trended towards addressing behind-the-border obstacles in addition to customs issues. However, on the whole RTAs tend to contain more restricted support for technical assistance and capacity building as compared to the TFA, and lack built-in flexibilities for developing country partners.

The diffusion of trade facilitation aspects in RTAs requires a concerted effort to build coherence at the regional and multilateral levels to avoid overlapping agreements. Through its RTA Exchange initiative, jointly implemented with the Inter-American Development Bank (IDB), ICTSD is looking at how RTAs have addressed some of the elements of Facilitation 2.0. This would allow negotiators and policymakers to identify best practices, share experiences, and eventually embed coherence-building mechanisms into the fabric of future trade talks.

Where Facilitation 2.0 Begins and Ends

Facilitation 2.0 will operate at the policy frameworks level, knitted into the activities of other actors working at the different stages in the lifecycle of trade facilitation efforts. It will strive towards a coherent multilateral solution anchored on the TFA, and counteract splintering across different stakeholders.

Facilitation 2.0 does not seek to set standards, nor will it act as a focal point to ensure coherence in the development of standards, where others such as UN/CEFACT (the United Nations Centre for Trade Facilitation and Electronic Business) are working. It does not seek to focus solely on reforms at the national level towards improved border procedures, identifying areas for governments to prioritise as with the Organisation for Economic Co-operation (OECD) trade facilitation indicators. It does not focus on implementation, helping with needs identification as United Nations Conference on Trade and Development (UNCTAD) activities, nor to provide support for countries seeking assistance to implement the TFA, for example the work carried out by the World Bank Trade Facilitation Support Programme and the World Customs Organization (WCO). It also does not seek to play an intermediary role, encouraging private and public stakeholder coordination to identify bottlenecks in the supply chain, as is the case of the Global Alliance for Trade Facilitation.

In its behind-the-border approach, Facilitation 2.0 can complement progress on other agendas, including on regulatory cooperation. Deeper impediments to cross-border trade can stem from incompatibilities in regulations across jurisdictions in the new reality of global value chains. Harmonisation across regulations would reduce transaction costs for business of all sizes, with particular benefits accruing to enterprises in developing countries.

Facilitation 2.0 could also help to support domestic regulations in services, where weak national regulations can often pose disguised restrictions to trade in services, and translate into unnecessary and deterrent trade costs for service providers. Advancing international obligations in this area could furnish guidance and technical assistance to give countries impetus to implement regulatory reforms, particularly for developing countries, to mitigate complex, overly burdensome, and opaque qualification procedures and licensing requirements.

Further work is needed in international rulemaking in terms of enabling e-commerce, investment, and trade in goods and services. The demonstrated economic weight of cutting trade costs makes this an area to act on. With the added leeway introduced in the TFA model on differentiation, members could be able to thread the needle on issues of great sustainable development potential by agreeing first on a facilitation dimension. Facilitation 2.0 is the next step in ensuring that benefits of the new economy accrue not only in the consumer realm, but also economy-wide, allowing all countries to maximise their participation in development-oriented transformative ways.

 

Ricardo Meléndez-Ortiz is Chief Executive Officer of ICTSD. Follow him @RMelendezOrtiz

The author would like to thank Emily Bloom, Andrew Crosby, and Felipe Sandoval for their valuable assistance and inputs in preparing this article.

Topics: WORLD TRADE ORGANIZATION (WTO) SERVICES ELECTRONIC COMMERCE TRADE FACILITATION INVESTMENT RTA EXCHANGE

Authors: RICARDO MELÉNDEZ-ORTIZ

RTA

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