Using Supply Chain Analysis to Examine the Costs of Non-Tariff Measures (NTMs) and the Benefits of Trade Facilitation

Ferrantino, Michael, “Using Supply Chain Analysis to Examine the Costs of Non-Tariff Measures (NTMs) and the Benefits of Trade Facilitation”, WTO, Research and Analysis, Geneva, 15/02/2012

Using Supply Chain Analysis to Examine the Costs of Non-Tariff Measures (NTMs) and the Benefits of Trade Facilitation

Michael J. Ferrantino — U.S. International Trade Commission

In recent decades, it has become increasingly common to produce goods in a number of geographically dispersed stages linked by international trade... At the same time, there is an increasing interest among policymakers in addressing barriers to trade other than tariffs, known collectively as “non-tariff measures” or NTMs. These include, but are not limited to, quantitative restrictions, technical barriers to trade (TBT), sanitary and phytosanitary measures (SPS) and price-based measures. When there is a preference to restrict imports, multiple NTMs may be in place. In such cases, it is natural for policymakers to want to know which are more restrictive or more important. Suppose that an imported product is affected simultaneously by non-automatic licensing, a technical standard, and slow customs procedures. The total effect of such procedures is estimated to be represented by a tariff equivalent of 50 percent. Is it possible to decompose the tariff equivalent, so that we can say, e.g. that non-automatic licensing has a 25 percent ad valorem equivalent, the technical standard 15 percent, and customs procedures 10 percent? Such decomposition would be very useful in prioritizing policy efforts, and targeting interventions to the most severe problems first.

One idea for decomposing the effects of NTMs is to study goods as they move through supply chains, as proposed in a recent WTO Staff Working Paper by Michael J. Ferrantino. Ideally, one would follow a typical exported good from its location of production (ex-farm or ex-factory) through multiple steps in the process of shipping and delivery. At each stage in the process, the price of the good increases, as additional costs is imposed.1 The costs associated with each move through the supply chain can be separated into their constituent parts. Different policies and practices affect these costs along the supply chain. For example, market distortions in international shipping specifically affect the difference between the f.o.b. and c.i.f. prices; import customs procedures affect the difference between the c.i.f. price and the landed duty-paid price, and restrictions on the size or hours of retail operations in the importing country affect the difference between the wholesale and retail price. Thus, it is possible at least in principle to have a common metric to compare the restrictiveness of different types of NTMs. Another advantage of a supply chain framework is that NTMs, which raise prices of traded goods, and trade facilitation efforts, which should lower prices, can be compared using a common metric. Furthermore, it should be possible in principle to compare actual costs at each step of the supply chain with best-practice costs, consisting of necessary marginal costs of processing the goods in the absence of rents, and with efficient use of technology. This would allow identifying where the greatest rents and inefficiencies are, and to define policy priorities.

Many modern supply chains involve different stages of production in different countries, and gathering components together from many locations for final assembly. This is particularly true for manufactures with multiple components such as electronics and motor vehicles.2

Looking at NTMs and trade facilitation from a supply chain perspective provides several policy insights. Some examples of these are presented below, and there are no doubt others.

1.There are low-level development traps associated with NTMs and lack of trade facilitation

Since the effects of NTMs and other trade costs compounds along the supply chain, NTMs can have a discontinuous effect on trade flows. Increased levels of trade costs can lead to a "tipping point", beyond which the operation of a modern supply chain becomes simply infeasible.

2.Lack of connections to final consumers' markets is especially detrimental

For many countries, NTMs take the form of licensing and certification requirements that slow exports. Technical inefficiency in export ports and low levels of sea and air connectivity can also inhibit competition and further raise the cost of trade. Thus, many countries are further away geographically from final markets than they would otherwise appear to be, and are knocked out of the final-assembly part of supply chains.

3.Time barriers are particularly important

The operation of regional supply chains requires the close coordination of the steps of production taking place in different countries. Delays at border checkpoints have a magnified effect on technical inefficiency. In many cases it is possible from a technical standpoint to conduct dispersed manufacturing over a large geographical area, but not possible from an economic standpoint because of government-induced delays at borders.

4.NTMs of the standards type can either promote or inhibit trade, depending on the situation.

The way that product standards interact with international trade is complex. Harmonized standards can promote trade, and also make supply chains more efficient. Other standards, aimed at enhancing product quality for the final consumer, can increase production costs and reduce trade. In such cases, the traditional cost-benefit considerations apply – do the social benefits of higher product quality and safety outweigh the costs of imposing the standard?

5.Regional initiatives can help bring supply chains to new parts of the world

The gains from improving efficiency of customs procedures can be multiplied if several countries in a region undertake such reforms together. Just as many regions are on the wrong side of the "tipping point" and do not attract global supply chains at present, the simultaneous reduction of trade costs in several neighboring countries is likely to have benefits over and above the benefits to each individual country, as it becomes feasible to locate several steps of a production process in different locations within a region to achieve stage-specific economies of scale.

6.NTMs affecting logistics and related services are particularly important

In almost all cases, the successful operation of supply chains is facilitated by third-party logistics firms (3PLs). In many countries national policies create barriers to entry for logistic services, which inhibits the growth of supply chains and thus international trade. This suggests one direct connection between trade policy and supply chains. Measures to liberalize market access in logistic services, whether unilateral, embodied in FTAs, or in the form of GATS commitments, can substantially enhance the feasibility and lower the costs of operating supply chains, with a concomitant growth in international trade.

Notes: A wide range of additional resources on NTMs and trade facilitation, including databases, quantitative methods, working papers, and research ideas of all sorts, can be found on the NTM Network Wiki. 1.The limited available evidence suggests that total mark-ups along the supply chain can be substantial. In one widely-cited exercise, the mark-up on Barbie dolls produced in China and sold in the United States has been estimated at is around 900 per cent. back to text 2. A classic example of this is the production of a computer disk drive. The disk drive is assembled in Thailand, which acts as the hub of the supply network, using 43 components from 10 other countries and 11 components produced in Thailand. The location of final computer assembly, say China, then serves as a larger hub linking the disk drive hub as well as other hubs for major components.