Five years after the entry into force of the WTO Trade Facilitation Agreement (TFA), many countries have made progress in implementing the agreement, much technical assistance has been provided, and a lot of success stories have been highlighted at the project or national level for specific measures. But can we find any macro-level quantitative evidence of the impact of the WTO Trade Facilitation Agreement on trade costs?
Using the latest release of the ESCAP-World Bank bilateral trade costs dataset, we estimate the effects of participation in the TFA on trade costs. Using a variety of models, we find robust and statistically significant evidence that implementation of the WTO TFA reduces trade costs by 1 to 4 per cent on average. The TFA impact in reducing trade costs is strongest between OECD and non-OECD economies, with trade cost reduction across models ranging between 3 to 5 per cent. South-South trade cost reductions from TFA implementation (i.e., between non-OECD countries) are less than 2 per cent. Trade cost reductions between advanced economies are not significant, which is to be expected since these countries were supposed to have achieved full implementation by the time of entry into force.
Participation in regional trade agreements, which is also included in the models estimated, reduce trade costs by 2 to 10 per cent on average. This is consistent with earlier findings which indicated that trade facilitation provisions in regional trade agreements (RTA) contribute to reduce trade costs, both among RTA members but also with all trade partners. Multilateral spillovers from trade facilitation measures in RTAs on trade costs are found to exceed any discriminatory effects within three years of an RTA’s entry into force, highlighting the complementarity between regional and global trade facilitation initiatives.
While significant, the trade cost savings associated with WTO TFA found in this post-accession analysis are much lower than the potential trade cost saving estimates circulated prior to adoption of the treaty. Such estimates of potential cost saving estimates typically range from 11-14 per cent on average, focusing on implementation of specific measures within the TFA. One possible implication of this dichotomy is that WTO members still have much to do to implement the WTO TFA in full, both in letter and in spirit.
Indeed, the ADB-ESCAP Asia-Pacific Trade Facilitation Report 2021 finds that achieving full implementation of the TFA could still reduce trade costs by another 6 per cent in Asia and the Pacific. It further highlights that greater trade cost savings can be achieved through a TFA+ approach focused on accelerating digitalization of trade procedures. Such an approach, already enabled in Asia-Pacific by a UN treaty called the Framework Agreement on Facilitation of Cross-Border Paperless Trade in Asia and the Pacific, could help reduce trade cost by an additional 7 per cent, also making trade more resilient and reducing its impact on the environment.
The results of this ex-post analysis may be surprising to some. After all, trade costs did increase substantially since the COVID-19 crisis in 2020 and do remain high, with issues of containers stuck at ports and sky-high operating costs for exporters reported almost daily in newspapers. One explanation for this is that trade costs have many components, and the WTO TFA only deals with one of them, i.e., reducing the cost at borders associated with complying with regulatory requirements. Arguably, the recent rise in trade cost has been mostly associated with disruption in transport services leading to higher shipping costs, something not within the scope of the TFA. However, an additional explanation is that traditional trade procedures and facilitation measures have not been sufficiently resilient to the pandemic crisis. The UN Global Survey on Digital and Sustainable Trade Facilitation 2021 indeed revealed that many countries did not, and still do not, have adequate plans for facilitating trade and business continuity at borders during crises situations. This is certainly something that should be the focus of future work under the WTO TFA, as argued earlier.