TFA: The Trillion Dollar Trade Deal That Just Came into Force

On February 22, 2017 Chad, Jordan and Rwanda ratified the Trade Facilitation Agreement (TFA). Thus the total number of countries having ratified this agreement exceeded the pre-defined threshold of a 110 required for it to enter into force. Interestingly, this was hardly picked up by the media – which might not be surprising given the somewhat technical nature of this agreement. The almost universal lack of media interest, however, becomes far more suprising, once we consider the estimated benefits of the agreement – the WTO calculates an annual gains of up to $1 trillion[1] – which far exceed the effects of other major trade agreements, such as TTIP (€ 215 billion)[2] or CETA (ca. € 20 billion)[3], which did receive a lot of media attention. This blogpost is going to briefly outline the content of this agreement and why it matters.

What is the TFA?

Barriers to trade are typically divided into two categories: tariff and non-tariff barriers to trade (NTBs). Since the successive GATT rounds have played an important task in reducing most tariffs, they no longer constitute the main obstacle to trade. Much more important are non-tariff barriers to trade. A large share of NTBs are due to different technical standards: A classic example is that in the EU, a car’s wing mirrors must be foldable, but in the USA not. This requires manufacturers to alter the car, depending on where it is going to be sold, which of course comes with a cost. That is why regulatory cooperation has been an important item in the negotiations of regional trade agreements and on the WTO agenda.

The TFA focusses on a different kind of NTB: It aims at reducing the costs that arise from administrative customs procedures, which are substantial. In short, the TFA aims at a simplification, harmonisation and modernisation of export and import procedures. UNCTAD estimates that the average customs transaction involves 20-30 different parties, 40 documents and 200 data elements (many of which are repetitive).[4] We have written about this before and it is easy to see how in practical terms, this constitutes a massive entry barrier to international markets. Simplifying customs procedures would lower the productivity threshold required for companies to be able to engage in international trade and thus provide better access to international markets.

The initiative to engage in trade facilitation was taken at the Singapore Ministerial Conference in December 1996 but formal negotiations only began after the Ministerial Conference in Cancún in 2003. It was agreed that three elements of the GATT treaties, freedom of transit (Article V), fees and formalities connected with importation and exportation (Article VIII) and the publication and administration of trade regulations (Article X) would be central to the efforts of trade facilitation. The negotiations on the TFA dealt with these issues but actually go much further. When the Singapore Ministerial Conference in 2013 concluded, it contained twelve disciplines of trade facilitations to which the signatories would commit:

As becomes clear, the content of the TFA is rather technical and does not have a very large controversial potential. It is however also easy to see how many of the practical problems that trading companies face are addressed by this treaty.

The WTO estimates that as a consequence of the TFA – if fully implemented –the average time to import will be reduced by a day and a half. This constitutes a 47 percent reduction over the current average. Time to export would even drop by two days (91 percent reduction of the current average). Mostly thanks to these speedier procedures, trade costs will be lowered substantially. The WTO calculates that the reduction of trade costs will fall between 9.6 percent (for countries which already have streamlined customs procedures) and 23.1 percent. Using a computable general equilibrium analysis (CGE), the WTO estimates that export gains due to the TFA would range between $ 750 billion and $ 1 trillion per annum. Increases in global volume exports could range between $ 1.8 trillion and $ 3.6 trillion. These gains are substantial, even compared to other trade agreements.

Why does the TFA matter?

But it’s not just the pecuniary value of the TFA that matters. In fact, there are three reasons why the TFA is an important step in terms of trade diplomacy and governance of international trade:

1. Addressing the changing nature of trade: A vast amount of international trade consists of standardised manufactured goods which are shipped in large batches. For this kind of trade, it is not hugely problematic, if customs procedures are a bit slow. Since the goods are standardised, the same classification and procedure is applicable to them – and since they are typically shipped in large batches, some delays are acceptable since retailers or subcontractors hold a stock of these goods, which constitute a buffer against disruptions in delivery. But the nature of many traded goods is changing. Modern production for many goods is much more specialised and tailored to the customer’s needs. In the trade of these goods, inefficient customs procedures are much more problematic. If a good is highly customised, its classification might become a tricky issue. The TFA increases the predictability of classification and therefore helps with this point. Also, since highly customised goods are, by definition, shipped in much smaller batches, it is virtually impossible to hold a stock of these goods in order to insure against delivery disruptions. Unpredictable customs procedures therefore imply a high risk to the sales or further production on the basis of highly customised goods. The TFA therefore helps developing economies to be able to be better integrated into global value chains. In addition, it improves one factor that is becoming increasingly important in order to determine the location of production: time to market. If customs procedures are more streamlined, time to market shrinks which can be a crucial factor in attracting production to a certain country.
2. The WTO is reasserting its role as a driver of trade: After the stalemate of the Doha Development Agenda, many observers doubted the ability of the WTO to bring complex trade negotiators with many diverging interests and veto players to a successful conclusion. Instead, many countries began to prefer negotiating their own regional trade agreements. With the TFA, the WTO has showed that multilateral solutions are possible. While one might argue that it has been picking low-hanging fruit, by focussing on a less controversial topic, it has been effective in concluding negotiations in an area where low hanging fruit yields a lot of benefit. One reason, why it was possible to overcome the difficulties in the negotiations on the TFA is the approach to dealing with the concerns of the developing economies. While without doubt developing economies are likely to gain most from trade facilitation, this is also an area that is particularly costly for them, both in financial terms, as well as, technical expertise in order to comply with the regulations. Therefore, the Trade Facilitation Agreement Facility (TFAF) was set up, to help developing countries in the implementation of this agreement. Through this facility, the WTO secretariat will provide technical assistance and engage in capacity building. In addition, special and differentiated (S&D) implementation of the TFA was agreed: While developed countries are required to apply it from the date it takes effect, developing countries and LDCs are only required to implement certain measures of the TFA for which they have declared themselves ready. While they will eventually be required to implement the remaining measures as well, they have a transition period for these. The measures in the TFA are broken into three tiers which will need to be successively implemented. This grants developing countries and LDCs the possibility to implement this agreement at their own speed and with respect to their administrative capacities. Such a tiered implementation scheme, combined with assistance and capacity building could be a strategy to overcome the imbalance in technical expertise and resources which has been problematic in the past.
3. Finally, the TFA enters into force at a crucial time. As the graph below shows, world trade has been mostly stagnant since the financial crisis. Especially over the last years, the WTO complained about a rise in protectionist provisions. Dealing with an important source of costs to trade will contribute to reviving international trade. This is an important sign at a time, when trade is increasingly under pressure.

[1] The full report is available here: https://www.wto.org/english/res_e/booksp_e/world_trade_report15_e.pdf

[2] This figure is based on a CEPR study, http://trade.ec.europa.eu/doclib/docs/2013/september/tradoc_151787.pdf

[3] According to a joint study by the European Commission and the Government of Canada: http://trade.ec.europa.eu/doclib/docs/2008/october/tradoc_141032.pdf

[4] https://www.wto.org/english/thewto_e/minist_e/mc9_e/brief_tradfa_e.htm