Trade costs is a critical policy issue facing Brazil, Russia, India and China?the BRIC countries as an increasing number of developing countries are seeking to participate more actively in international trade. A recent surge in intra-regional flows in goods, capital and labour between the BRIC economies underscores the importance of policy initiatives those can control the cost of production as well as trading across borders. Higher the trade costs, lower is the volume of trade. Trade costs?delays, documents and administrative fees?continue to slow business in many developing countries. In general, the relationship between trade flows and trade costs is non-linear and negative. The country?s infrastructure plays a vital role in carrying trade.
Transport and communication infrastructure and institutional quality are significant determinant not only for a country?s export levels but also for the likelihood of exports. The quality of infrastructure is an important determinant of trade performance wherein port efficiency alone has the largest impact on trade among all indicators of infrastructure as also technology. As more products move internationally, so do new technologies that reduce trade costs, for example, e-filling of cargo documents has reduced delays in many ports and airports.
Popularly speaking, trade costs include all costs incurred in getting a good to a final user other than the marginal cost of producing the goods itself, such as transportation costs?both freight costs and time costs, policy barriers?tariffs and non-tariff barriers, information costs, contract enforcement costs, costs associated with the use of different currencies, legal and regulatory costs, and local distribution costs?wholesale and retail. Higher trade cost is an obstacle to trade and it impedes the realisation of gains from trade liberalisation. Gains from trade depend not only on the tariff liberalisation but also on the quality of infrastructure and related services. Improved infrastructural and logistics services play an important role in the flow of international trade. On the one hand, it generates enormous wealth by reducing costs of trade because of its non-discriminatory and non-rivalry characteristics, and, on the other, it integrates production and trade across countries.
However, progress in BRIC in reducing costs of trade across border is uneven. The effective rate of protection provided by the transport costs in many cases is higher than that provided by tariffs. This is true for Brazil, Russia, India and China, where transport cost incidence for exports is a couple of times higher than tariff-cost incidence. Needless to mention, supply constraints are the primary factors that have limited the ability of many countries to exploit trade opportunities. As a result, complimentary trade policies focusing trade costs have gained immense importance in enhancing international trade.
In recent years, BRIC countries have witnessed a steep rise in trade in goods and also a spread of regional and bilateral integration and cooperation initiatives. On the one hand, trade volume in BRIC has been rising at a very rapid pace, and, on the other, the composition of trade between BRIC is taking a new shape.
BRIC countries are gradually specialising in trade in intermediate and finished products, for example, China, where effectiveness of transport infrastructure plays an important role in trade and international integration.
Reduction of trade costs helps traders get their goods to the market more quickly and cheaply. Considering the increase in trade interdependency in BRIC, the need for better enabling environment for trade in BRIC countries has gained high momentum. On the demand side, the noticeable development is that tariff barrier in most of the BRIC countries for example, India and China, has become low as a result of trade liberalisation. However, on the supply side, rising trade costs is having an adverse impact on trade. Freight costs are one of the major components of trade costs.
While freight costs for imports in developed countries continue to be lower than those of developing countries, the same in the case of BRIC is high thereby affecting the comparative advantage of these economies.
World Bank?s Doing Business Database compiles procedural requirements for exporting and importing a standardised cargo of goods?textile and clothing and agriculture. For exporting goods, procedures range from packing the goods at the factory to their departure from the port of exit.
Meanwhile, the global rank of India and Russia is very much on the side of laggards, whereas the same for China and Brazil is very encouraging and is supposed to catch up the OECD average. Paying on an average $2,237 per container is very high thereby making Russia uncompetitive in the global market. Russia still takes on an average 39 days to clear an export consignment whereas India takes near very close to a month.
?The author is fellow, Research and Information System for Developing Countries (RIS), New Delhi. The views are personal.