The average global customs transaction involves 20 to 30 parties, 40 documents, 200 data elements — 30 of which are repeated at least 30 times — and the rekeying of 60 to 70 percent of all data at least once, according to a recent study by the UN Conference on Trade and Development. Although tariffs have dropped because of a multitude of international trade agreements, the cost of complying with customs formalities may exceed the cost of duties to be paid.
In a global economy based increasingly on just-in-time production and delivery, such findings strike shippers and transportation providers as unfortunate, especially when many are fearful that populist governments are about to take measures that restrict market access to foreign-made products through various protectionist means. Traders need fast and predictable release of goods, executives and policymakers agree. That’s why they have welcomed bold initiatives that simplify and harmonize the flow of trade information shared by shippers, customs agencies, and other stakeholders in the global trade process.
Enter the World Trade Organization’s (WTO's) Trade Facilitation Agreement (TFA), which finally was implemented in late February after 114 of its member countries completed their domestic ratification processes. Ultimately, when its provisions are fully implemented, world GDP will increase by nearly $1 trillion annually, the Peterson Institute for International Economics estimates. The reason being that the TFA contains sweeping provisions for expediting the movement, release, and clearance of goods, including goods in transit; for publishing up-to-date data about rules and regulations critical for speeding up trade facilitation; and multiple other measures that will cut costs and speed transactions.
The TFA has been years in coming. Megan Giblin, director of customs and trade facilitation at the United States Council for International Business, said the basis of the TFA emerged from exploratory talks about such issues in the late 1990s. In developed countries, customs agencies have gradually been modernizing their customs laws and developing best practices in preparation, for several years.
“Those countries that are developed [will] implement these measures immediately. For developing and least developing countries, they get to implement them over time. What we’re seeing is codification and the ability, from a compliance perspective, to have teeth on these measures,” Giblin said.
Improving the flow of trade-related information is critical to the payoff. “Not all countries publish their customs tariffs,” Giblin said. “Not all publish their information about who to contact. Not everybody publishes their basic rules and information on the import and exports. Not everybody provides for reviewing comments of proposed regulations. These are some of the core basic functions that are going to impact the bottom lines of companies, because things like advance rulings on classifications help determine landed costs.”
She added: “The process has historically been very opaque” and especially troublesome for small companies. “If you don’t know what the rules are, how can you apply them?” Prior to the FTA, “not everyone has had their information online, and not everybody has consolidated [their trade-related] information. So, you must go to multiple sources to determine the customs tariff on a product. Countries like India have historically published their customs tariff, but then you have had to look at a bunch of other administrative notifications that update the duty rates. It is not consolidated information, in some cases. This agreement is going to provide that transparency and predictability” online.
In the case of some countries, companies currently may have to access a country budget to find out more information on duty rates, or find specific notifications from different ministries beyond customs. “It’s convoluted, and there’s no clarity about who [your] industry should necessarily reach out to,” Giblin said. The TFA provides such clarity and transparency.
Most critically, the TFA will allow for companies to understand quickly what the rules are, so they can export with assurance that they are not failing to comply with them. “If everybody is providing the same level of transparency and ability [needed] to appeal decisions, then everyone will know how to operate,” she said. “That will lead to increased exports of products. And that will likely give a boost to the US economy and result in more jobs.”
The TFA could be a particularly powerful boon for smaller companies — in the US and abroad — that often have less capacity to access expertise than multinationals do. “The entry into force of the TFA is a watershed moment for global trade,” said Sunil Bharti Mittal, chairman of the International Chamber of Commerce. “The reality today is that many small businesses find themselves unable to trade internationally due to complex customs requirements. By cutting unnecessary red tape at borders, the TFA will have a transformational effect on the ability of entrepreneurs in developing nations.”
Moreover, a TFA Facility has been created to help ensure that developing countries obtain the levels of assistance they will need, if they are to reap the full benefits of the TFA. According to a study by the 21-nation Asia-Pacific Economic Cooperation, these trade facilitation programs are likely to generate gains for APEC countries equal to about 0.26 percent of their aggregate real GDP, or almost double the expected gains from any further tariff reductions.
The study estimated the savings would be 1 to 2 percent of import prices for developing countries in the region. Other provisions also require WTO members to accept e-payments and electronic versions of certain documents where such practices are appropriate and possible.
Several TFA provisions govern how fees and penalties are imposed on traders. For example, fees and charges for customs processing of imports and exports shall be limited to the approximate cost of the services rendered. Because it’s helpful if rules and procedures are predictable and familiar across borders, the TFA also contains articles about Border Agency Cooperation and Customs Cooperation, which require that WTO members establish a single window or entry point to participating authorities or agencies.
The TFA also provides opportunities for traders and other interested parties to comment on proposed rules related to the movement of goods. WTO members must provide a right to appeal customs agencies’ administrative decisions. The agreement also recognizes the needs of developing countries, providing special and differential treatment for these members as they seek to implement the agreement.
For their part, EU officials announced that the TFA will play a significant role in increasing developing countries’ involvement in global value chains. For that reason, the European Union has committed 400 million euros to help developing countries carry out the reforms needed to comply with the rules set by TFA.
According to the Organization for Economic Cooperation and Development, the potential cost reduction from a full implementation of the WTO TFA amounts to 16.5 percent of total costs for low income countries, 17.4 percent for lower middle income countries, and 14.6 percent for upper middle income countries.
Contact Alan M. Field at email@example.com.