Harnessing trade facilitation for regional integration

At a time when “trade wars” loom large on the worldwide economy, global value chains register a marked slowdown and witness a process of regionalization, and – more generally – globalization faces some backlash, the debate on how to best operationalize regional integration is particularly relevant. Even more in the African context, as the landmark Agreement establishing the African Continental Free Trade Agreement (AfCFTA) entered into force a few months back, on 30 May 2019.

High-level speakers and experts working in Africa and Asia met at the side-event organized by UNCTAD on “Harnessing trade facilitation for regional integration: Experiences from Asia and Africa“ during the WTO AidForTrade Global Review 2019 in Geneva on 4 July 2019 to share their concrete experiences on how trade facilitation can be best harnessed to deepen regional integration. This article enumerates key takeaways from these discussions.

Regional integration: a key, multidimensional process

Regional integration is a multidimensional phenomenon, which involves international trade and investment flows, infrastructure, connectivity, circulation of people, technologies and knowledge. It can contribute to economic growth and sustainable development through economies of scale and better allocation of productive resources within a regional space. Albeit through different methodologies, this multifaceted perspective is reflected in the construction of synthetic indices such as the African Regional Integration Index and the Asia-Pacific Regional Cooperation and Integration Index, which have been developed recently to monitor progress on the distinct facets of regional integration.

Beyond synthetic indices and analytical considerations, what matters is the practical impact on the ground. In this respect, East and South-East Asia are key hotspots for global and regional value chain activities, with over 60 per cent of intra-regional exports; in this context, ASEAN is the largest Regional Economic Community (REC) (with 24 per cent of the region’s trade being intra-regional) driving the regional integration process through its trade policy decisions.

The situation is radically different in Africa. Notwithstanding a plethora of Regional Economic Communities (RECs), trade integration in the continent has remained fairly shallow by international standards, averaging some 16 per cent of the continent’s trade, despite few notable exceptions such as the East African Community (19 per cent of trade is intra-regional) and the Southern African Development Community (also 19 per cent of the region’s trade is intra-regional).

Intra-regional Trade - Export product (%)

Perhaps more importantly, if Africa’s participation to global value chains has been on the rise, this has predominantly happened in the context of exports of raw material and primary commodities (forward participation) embodying limited value addition.

Conversely, exports to the intra-African market, though relatively small in size,  are significantly more diversified than Africa’s exports to the rest of the world, and the overwhelming majority of African economies export more sophisticated products to their neighbours than to other non-African partners. For this reason, boosting the provision of infrastructural, enhancing transport and communication connectivity and adopting concerted trade policies to foster greater regional integration could provide a springboard for accelerating Africa’s industrialization and structural transformation.

In this respect, with the bulk of intra-African trade still taking place within existing RECs, the implementation of the AfCFTA could potentially bring about sizeable benefits and help better harnessing trade complementarities within the continent. From the private sector perspective, this could also help attracting additional investment. Indeed, market size, trade costs, tariffs and non-tariff barriers were mentioned as key drivers of investment decisions for a multinational company like Pernod-Ricard, which produces and distributes premium alcoholic beverages and increasingly operates in regional markets in both Asia and Africa.

Beyond tariffs: the potential role of trade facilitation

As tariffs progressively declined, thanks to unilateral liberalization and to the increasing number of trade agreements,  discussion on the restrictiveness of trade procedures and non-tariff measures have acquired more relevance. In Africa, for instance, UNCTAD estimated that non-tariff measures tend to raise unit values of traded products by 15 to 30 per cent in food and agricultural sectors, and by five to 20 per cent in manufacturing sectors.

Unlike sanitary and phytosanitary measures or technical barriers to trade, whose prevalence is relatively higher in developed economies, trade frictions related to cumbersome and costly border procedures are particularly prominent among developing countries. Unlike in Asia, where the average time and monetary costs for documentary and border compliance are only slightly larger than the world average, custom procedures in Africa tend to be 58 per cent more time- consuming and 52 per cent more expensive (regional comparisons based on country-level data from Doing Business 2019). Moreover, these additional costs are compounded with those stemming from poor infrastructural provisions and less efficient logistical and distribution networks. This creates a significant competitiveness wedge penalizing local producers and traders, especially in the context of global value chains entailing multiple border crossing along the production process. Moreover, there is evidence that heightened transaction costs and other non-tariff barriers remain a significant hindrance to Africa’s integration into the global market, but also – and perhaps more importantly – to its own regional integration especially across existing RECs. The lack of transparency of rules and regulations opens the door to uncertainty and discretionary application of rules. Given the fixed cost element of many border procedures and documentation requirements, Small and Medium Enterprises are often disproportionately affected, as they cannot afford dedicated staff for these administrative procedures. All of this suggest that trade facilitation reforms could go a long way in reducing trade frictions, simplifying trade procedures and contributing to a smooth implementation of regional integration strategies. Moreover, the viability of regional value chains and regional industrial clusters requires, among other conditions, smooth and transparent cross-border trade procedures to facilitate intra-regional trade and harness scale economies. In this context, UNCTAD assists developing countries including African ones, with improving their custom processes through the UNCTAD-ASYCUDA programme. The ASYCUDA programme aims at speeding up customs clearance through the introduction of computerization and simplification of procedures and thus minimizing administrative costs to the business community and the economies of countries. It also aims at increasing customs revenue, which is often the major contributor to national budgets in most countries, by ensuring that all goods are declared, that duty/tax calculations are correct and that duty/exemptions, preference regimes, etc. are correctly applied and managed. Furthermore, it aims at producing reliable and timely trade and fiscal statistics to assist in the economic planning process as a by-product of the customs clearance process. An important objective of ASYCUDA projects is to implement the systems as efficiently as possible with a full transfer of know-how to national customs administrations at the lowest possible cost for countries and donors. Projects also introduce international standards, including UNCEFACT, and the active cooperation among a steadily growing number of ASYCUDA user countries further increases mutual benefits. The implementation of ASYCUDA often results in improved rankings in the World Bank’s Doing Business Ranking for beneficiary countries[1].

(Preferential) rules of origin provide a clear example of the linkages between non-tariff measures, regional integration and the trade facilitation agenda. By determining the conditions under which goods can be eligible for preferential treatment, they define the scope of regional trade agreements, and jointly with preference margins (i.e. the difference between MFN and preferential tariffs) they influence their utilization. In other words, along with tariff liberalization schedules, rules of origin are a critical trade policy tool to foster regional integration and enhance consistency between trade policy framework and industrial policy objectives. Simultaneously, the practical implementation of rules of origin pertains directly to customs authorities and intersects in several areas with trade facilitation reforms, as articulated also in a recent UNCTAD report on the AfCFTA. For instance, provisions of the WTO Trade Facilitation Agreement pertaining to transparency, goods classification and advanced rulings are directly related to rules of origin implementation. In turn, rules of origin can also affect trade frictions and hence the need for trade facilitation reforms. Indeed, while it is recommended that rules of origin be simple, transparent, predictable and easily administered, this is often not the case, adding further complexity to international trade.

More broadly, if there are areas where specific trade facilitation measures could be sequenced in such a way as to facilitate first and foremost regional integration, it is also true that the latter should be regarded as an opportunity to undertake trade facilitation reforms in a coordinated way, enhancing the related institutional framework, boosting customs cooperation and information-sharing. This suggests that strategically harnessing trade facilitation reforms could promote more effective regional integration, but also help ensuring more inclusive outcomes. For instance, providing an online user-friendly repository of rules of origin provisions and related tariff rates could improve transparency and predictability of regional trade regimes, while also supporting SMEs in the complex task of obtaining and “deciphering” related rules and regulations. The in-built flexibilities of the Trade Facilitation Agreement could facilitate this process, especially in the case of Least Developed Countries.

The importance of experience sharing

The discussions held during the UNCTAD Side-event in the WTO AidforTrade Global Review 2019 on 4^th July 2019 highlighted the wealth of distinct experiences and institutional frameworks across countries and regions. Despite this, most of the panellists underscored the importance of mutual learning and experience sharing. Interestingly, concrete examples of measures that could be scaled up or adapted to broader contexts were mentioned by panellists from both regions. These included the ASEAN-wide self-certification schemes, as well as the regional custom bond guarantees and Simplified Trade Regime for small-scale cross-border traders adopted by COMESA. Other concrete interventions pointed out to promising opportunities for reducing trade costs through digital technologies, as is the case with the ASEAN single window, or with COMESA’s online reporting tool for non-tariff barriers.

The need for capacity development and institutional support remains critical for trade facilitation, as does political will; hence the importance of multi-stakeholder dialogues to keep the political momentum. These ideas, along with the need for close coordination between the National Trade Facilitation Committees and related committees overseeing regional integration issues, are also at the basis of UNCTAD’s engagement in technical assistance programs, along with our partners, including continental and regional institutions as well as their member states.

[1] A recent example includes Mauritania which improved its ranking in the “Trading Across Borders” sub-index of the World  Bank  Doing  Business index by  23 ranks between 2016 and 2017, following the implementation of the programme. See: “ASYCUDA in Action, Compendium 2019”. https://asycuda.org/en/

For more information contact:

Celine Bacrot

Division on Technology and Logistics | Trade Logistics Branch | Trade Facilitation Section | Celine.Bacrot@unctad.org

Giovanni Valensisi

Division for Africa, Least Developed Countries (LDCs) and Special Programmes | Research and Policy Analysis Branch | LDCs Section | Giovanni.Valensisi@unctad.org