Supply chain was a key theme for the World Economic Forum, which met in Davos last month. In its report, Enabling Trade: Valuing Growth Opportunities, it argues that reducing supply chain barriers is more effective in stimulating trade that reducing import tarrifs.
Reducing supply chain barriers could increase global GDP up to six times more than reducing all import tariffs, according to a report by the World Economic Forum in collaboration with Bain & Company and the World Bank.
The report, Enabling Trade: Valuing Growth Opportunities, finds that if all countries reduce supply chain barriers halfway to global best practice, global GDP could increase by 4.7 per cent and world trade by 14.5 per cent. In comparison, completely eliminating tariffs could increase global GDP by 0.7 per cent and world trade by 10.1 per cent.
Even a less ambitious set of reforms that moves countries halfway to regional best practice could increase global GDP by 2.6 per cent and world trade by 9.4 per cent. Economic gains from reducing supply chain barriers are also more evenly distributed across countries than the gains associated with tariff elimination.
Enabling Trade: Valuing Growth Opportunities was initiated by the Forum’s Global Agenda Councils on Logistics & Supply Chains and Global Trade & FDI.
In his foreword to the report, Scott Davis chief executive officer of UPS, says: “To reduce barriers to trade, the global business community needs to be innovative and put forth best practices that can be co-ordinated among small and medium-sized businesses, as well as large multinationals throughout many industries. In tandem, governments need to prioritise investments and ensure collaboration across countries, benefitting consumers through lower costs and more efficient global supply chains.
“Reducing these trade barriers, such as customs clearance delays, lack of standardised procedures and poor infrastructure, will not be easy to achieve. However, by recognising that we are now a global market and focusing on the ‘whole of the supply chain’, we can collectively create a more stable global economy.”
The report argues that lowering supply chain barriers is effective because it eliminates resource waste and reduces costs to trading firms and, by extension, lowers prices to consumers and businesses.
“Supply chain barriers can result from inefficient customs and administrative procedures, complex regulation and weaknesses in infrastructure services, among many others. The supply chain is the network of activities involved in producing and getting a product to consumers, and spans the manufacturing process as well as transport and distribution services.”
Regions that stand to benefit in particular under these scenarios are sub-Saharan Africa and South East Asia. Such large increases in GDP would be associated with positive effects on unemployment, potentially adding millions of jobs to the global workforce.
“The Forum’s Enabling Trade programme has endeavoured to highlight the fundamental attributes that enable a country to facilitate trade,” says Børge Brende, managing director, World Economic Forum. “Through a vivid repository of case studies, which provide an on-the-ground view of everyday barriers that companies face along trade lanes, this report shows that removing barriers to supply chains can enhance economic competitiveness and generate significant welfare benefits and jobs for countries.”
The report recommends that governments create a focal point to co-ordinate and oversee all regulation that directly impacts supply chains; that public-private partnerships be established to undertake regular data collection, monitoring and analysis of factors affecting supply chain performance; and that governments pursue a more holistic, supply-chain-centred approach towards international trade negotiations to ensure that trade agreements have greater relevance for international business and do more to benefit consumers and households.
“Supply chain barriers are more significant impediments to trade than import tariffs,” says Bernard Hoekman, director of the World Bank’s International Trade Department, who is also the Chair of the Forum’s Global Agenda Council on Logistics & Supply Chains. “Lowering these barriers will reduce costs for businesses, and help generate more jobs and economic opportunities for people.”
– In Brazil, managing customs paperwork for exports of agricultural commodities can take 12 times longer than in the European Union.
– Poor quality infrastructure services can increase the input material costs of consumer goods by up to 200 per cent in certain African countries.
– In Madagascar, supply chain barriers can account for about 4 per cent of total revenues of a textile producer (through higher freight costs and increased inventories).
– Obtaining licences and lack of co-ordination among regulatory agencies in the US leads to delays in up to 30 per cent of chemical shipments for one company – each late shipment costs $60,000 per day.
– In Russia, product testing and licensing in the computer sector can lead to high admin costs and delay time-to-market anywhere from 10 days to eight weeks.
– Local content requirements, rule-of-origin restrictions and pilferage at the border, can increase costs by 6-9 per cent of consumer technology products in the Middle East and North Africa.
– Eliminating supply chain barriers in the South East Asian rubber market could reduce carried inventories by 90 days.
– India’s Preferential Market Access regulation could increase costs by 10 per cent, over the cost of imports.
– Electronic documentation for the air cargo industry could save $12bn a year and prevent 70-80 per cent of paperwork-related delays.
– Easing regulatory compliance of international trade that SMEs face when selling through the Internet could increase cross-border SME sales by 60-80 per cent.