Transaction Costs and Trade
Facilitation in South Asia
Upali Wickramasinghe
Professor, Department of Economics, University of Sri Jayewardenepura
Prepared for the Expert Meeting on the Regional Integration in Asia on Fostering Trade
Through Private-Public Dialogue, New Delhi, India, 28-29 2007, organized by the
International Trade Centre, Geneva and ICRIER – New Delhi
Outline
Framework of analysis
Transaction costs (TC)
Trade facilitation (TF)
Minimizing TC through TF
South Asia’s current situation
2
Transaction Cost & Trade Facilitation
Pb
B
TC
A
B
Ps
Trade Facilitation, Market Efficiency
3
Major components
TC = Pb – Ps – A
A = Necessary costs
B = Unnecessary costs
Our target: unnecessary costs, arising from
various market inefficiencies
Understanding these sources is critical for
policy reforms
4
Learning from the Literature
Coase (1937): Theory of the firm
 Firms are there to minimize transaction costs of the market
mechanism
What are transaction costs of the market
mechanism?
 discovering relevant prices (this could be reduced but not
eliminated)
 costs of negotiating and writing enforceable contracts for
each exchange transaction, which can be large if there is
uncertainty
 Renegotiation of contracts from time to time because of
inherent uncertainty of the future
5
Elements of TC
 Obtaining
information about foreign
trading partners and regulations
 Verifying the credibility of new
trading partners
 Negotiating and screening of potential
buyers / sellers
 Coordinating and monitoring
contractual arrangements
6
Elements of TC
 Ensuring
against ‘sovereign risk’,
since property rights cannot be
easily enforced in the international
arena
 cost of customs procedures
 cost of corruption
7
Individual-Specific TCs
 Some TCs vary by individuals due to differences in:
 Available information set; Search; Capacity to take risks;
Access to networks
 Results:
 Individuals attempt to min. TC, resulting in the emergence
of various institutional mechanisms including the
emergence of firms in handling TCs, bribery and
corruption (Coase, 1937; Alchian and Demsetz, 1972; Hoff
and Stiglitz, 1990; North, 1990)
 Reductions in TCs also affect the structure and
performance of organizations
 Heterogeneous market behavior (Bardhan,1989; Sadoulet
and de Janvry, 1995
8
Product-Specific TCs
 Examples: TCs for cars and vegetables are not the
same
 Vegetables:
 Meet phytosanitary procedures, such as treatment,
inspection, or storage costs during quarantine
 Food safety
 Environmental regulations
 Cars:




Information
Risk
Financial constraints
Environmental regulations
9
Why do TCs arise?

Information:
 Space and time
 Information asymmetries





Risk and Uncertainty
Coordination of economic activities
Differences in legal systems, which makes it
difficult to enforce contracts
Regulatory regimes
‘Trust’ among importers and exporters
10
Transaction cost in a broader perspective
11
Transport

Transport costs + Transport cost incidence
(share of international shipping costs in the value of trade)
outweigh tariff in many developing
countries (World Bank, 2001)
 Transports costs are particularly high for
low-value products, which are produced by
developing countries, and land-locked
countries
 Sea freight for cargo loaded in Asia have
not fallen but loaded in the west have
12
Transport
 South Asia is well endowed with ports numbering
250, and 25 of them ports are in operation (RSI, 2005)
 The efficiency of the ports measured in the speed
of handling cargo in South Asia is still low in
comparison to East Asia
 Areas that need improvement in South Asia:




Maritime cargo handling
storage facilities
fuelling and watering
repair facilities
 Transport problems of land-locked countries are
severe – need attention to multi-model transport
facilitation
13
ICT

Internet penetration for business:
 South Asia 28.6%
 India 35.9%
 Bangladesh 31%
 Sri Lanka 29%
 Pakistan (18%) but improved much faster in the last year or so
 East Asia & the Pacific 27%
 OECD 80%

Other key factors (2006 enterprise survey):
South Asia
East Asia
Time to get an electrical
connection
55 days
12 days
Time to get a telephone
connection
64 days
10 days
14
Trade Procedures and Documentation
Time for
import (days)
Signatures
for import
(number)
Documents
for import
(number)
Time for
export (days)
Signatures
for export
(number)
1
Documents
for export
(number)
Region
/Economy
Trading Across Borders
East Asia & Pacific
7.1
7.2
25.8
10.3
9
28.6
Europe & Central Asia
7.7
10.9
31.6
11.7
15
43
Latin America &
7.5
8
30.3
10.6
11
37
Caribbean
Middle East & North
7.3
14.5
33.6
10.6
21.3
41.9
Africa
OECD
5.3
3.2
12.6
6.9
3.3
14
South Asia
8.1
12.1
33.7
12.8
24
46.5
Sub-Saharan Africa
8.5
18.9
48.6
12.8
29.9
60.5
Denmark
3
2
5
3
1
5
Bangladesh
7
15
35
16
38
57
Bhutan
10
12
39
14
12
42
India
10
22
36
15
27
43
Maldives
7
4
24
12
4
29
Nepal
7
12
44
10
24
38
Pakistan
8
10
33
12
15
39
Sri Lanka
8
10
25
13
15
27
Source: World Bank (2006), Doing Business in 2006: Creating Jobs, World Bank and International Finance
Corporation: Washington D.C
1. Procedural re quirements for exporting and importing a standardize d cargo of goods of a company with
more than 100 employees
15
India-Bangladesh Bilateral Trade and Potential Free Trade Agreement Bangladesh
Development Series Paper No: 13 December 2006 World Bank
16
Transport and Customs Clearance
17
Trade Procedures and Documentation
Benefits of improvements in customs
procedures or removal of unnecessary:
 Efficiency gain for both the exporter and the
importer
 Increase in government revenue for the
importing country
 Reduction in corruption is critical for a country
(in many countries corruption begins at the customs)
 We all understand the benefits and the standards
procedures that can be adopted in streamlining
customs procedures, but the mechanics are
problematic for several reasons
18
Trade Procedures and Documentation





Traders invent ‘institutions’ (rules of the game) to
minimize TCs
‘Rent seeking behavior’ and ‘corruption’ in many
cases are the results of their attempt to min. TCs
Once established, these ‘institutions’ become so
strong, and reforms become difficult
Strong political will or external pressure are needed
in many cases; therefore, there is a strong case for
regional or multilateral approach for resolving the
impasse
May be public-private dialogues can help, but
separating genuine private & public representatives
from corrupt ones is not easy
19
Trade Procedures and Documentation
 Three critical achievements in customs reforms:
 Transparency: low-cost access to relevant trade and
procedural information
 Predictability: requires the provision of clear customs
regulations that are made available in advance, and
uniformly and effectively enforced; that will help
exporters / importers plan and make decisions on import,
marketing, and investment decisions
 Participation: of the private sector is essential to obtain
reliable information and to serve as a reality check and
watchdog for government action; provide feedback
necessary for monitoring access to and quality of the
services
20
Attempts for trade facilitation in
South Asia

Each country has made some attempt to
comply with GATT requirements, but in
general import/export procedures are
cumbersome and inefficient, and have high
TCs
21
GATT Article V: Freedom of Transit
GATT Article V:
Freedom of transit
Bangladesh
 Critical for Bang
and India
 Bang. Has not
agreed so far
India
Nepal
 Not much
 Governed by
headway in transit
India-Nepal
issue with
Treaty
Bangladesh
 Transit for Nepal
is governed
through IndoNepal Treaty
 India, Bangladesh
and Nepal have
so far not acceded
to international
transit
conventions
Pakistan
 Not featured
Sri Lanka
 Not
featured
22
GATT Article VIII: Fees and Formalities connected with Imports and Exports
Bangladesh
India
Nepal
Pakistan
Sri Lanka
Simplification of
formalities
 Self-assessment
and rapid
clearance
 Several
programs are
underway, but
not so much
progress
 Making some
progress but
slow
 Not much
progress
 Atte mpted early
but the progress
is slow
Simplification of
tariff structure
 Some effort but
not significant
 Still complex
 Smaller numbe r
of tariff bands
 Still relatively
complex
 Certain sensitive
items are subject
to specific or
compound rates
 Complex set of
require ments
exist
 Lot of
procedures
 Complex set of
conditions exist
 Introduced
Electronic
Assessment
System (EASY)
in 2000
 Atte mpted
earlier but again
has introduced
more bands and
exceptions
 A numbe r of fees
and levies still in
operation
Levy of fees and
charges
 Three types of
surcharges are
levied
 Some fees are
based on service
cost, but others
are still charged
on ad-valorem
basis
 Large number of
levies and
charges
Simplification of
documentation
procedures
No progress
 Impressive
progress in
Electronic Data
Inte rchange
(EDI)
 Implemented
ASYCUDA and
IT-based system
in three entry
points
Processing time
No progress
 Principles have
accepted, but
imple mentation
is weak across
India
 Not much
progress
 Not published
times yet
 Made headway
but slow
progress
 ASYUDA ++
since 2003
 Valuation
database for risk
manage ment has
been establis hed
 Committed to
introduce
international
standards
 Expected to
achieve through
automation
23
GATT Article X: Publication and administration of trade regulations
Publication of
regulations
Advance rulings
Bangladesh
India
Nepal
 Publicize all trade
related
regulations in
official gazettes
No progress
 Publicize all trade
related
regulations in
official gazettes
 Authority
established in
1999, but scope is
limited to foreign
firms
 Widely used
 Publishes all trade
related
regulations in
gazettes
 No mechanism
 Official gazettes
are published
regularly
 Official gazettes
are published
regularly
 No known
procedure

 Committed under
WTO accession
 Increased use of
the Internet
 Recognized the
Nepal Bureau
Standards and
Meteorology
 No formal
mechanism
 No officially
recognized
institution
 Introduced
electronic
customs
documents under
ASYCUDA
 No single window
 Several agencies
are involved
 Has provisions,
Department of
Commerce is
responsible
 Has provisions,
the Ministry of
Trade is
responsible
Use of electronic media
 Introduced
SPEED and
ASYCUDA
Enquiry points
 No known
enquiry points
 No official
enquiry point
Cons ultative mechanis m
 Has been
established
 Some progress
Appeal process
 Have provisions,
but slow
 Has an elaborate
appeal process
 Customs Excise
and Gold Control
Appellate
Tribunal is the
highest authority
Pakistan
 Some progress
Sri Lanka
 Established a
permanent Tariff
Advisory Council
 Has provisions;
Director General
of Commerce is
responsible
24
Further Avenues

SAFTA (Article 8 additional measures)
adopted trade facilitation measures to
complement the regional trade liberalization
 Sub-regional arrangements are at an
advanced stage
25
Issues, priorities and strategies

Trade facilitation, although important, is not a
burning issue for South Asia given the urgency of
many other issues
 People seem to have got accustomed to the ‘status
quo’ and there is no strong pressure to change
 Governments are concerned over the heavy
upfront investment on trade facilitation, of which
benefits are not well known, because earlier
reforms have not produced much results
 Regional arrangements can play a major role,
given resistance to include trade facilitation under
the WTO under binding constraints
26