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

Michael J. Ferrantino U.S. International Trade Commission

Agenda
1. Critically examine the barriers along the supply chain affecting the intra-industry trade
and scale economies.
2. What would be the implications of these barriers on the H-O trade Model.

Background:
Recently producing goods in a number of geographically dispersed stages which are linked by
international trade has become common. This has implications for analysis of trade facilitation
and Non-tariff measures, Policymakers are interested in addressing barriers to trade other than
tariff. These include, but are not limited to, quantitative restrictions, technical barriers to trade
(TBT), sanitary and phytosanitary measures (SPS) and price-based measures.

Why there is a need to understand NTMs and their effect on supply


chain?

Develop a common metric for comparison of trade facilitation efforts;


To enable comparison of NTMs, which raise prices of traded goods, and trade facilitation
efforts, which should lower prices in a supply chain framework.
To understand the degree of restrictiveness of various NTMs;
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.
To prioritize the Policy efforts;
Furthermore, it should be possible in principle to compare actual costs at each step of the
supply chain with best-practice costs. This would allow identifying where the greatest
rents and inefficiencies are, and to define policy priorities.

Examining the barriers along the supply chain stages affecting the intra
industry trade and scale economies;
Retail price
Wholesale
Price
Landed
duty- paid price
CIF price
when imported
FOB price
when exported
Factory or
farm price

Retail markups

Wholesale
markups

Tariffs

Freight and
insurance costs

Land transport
and port costs

The discussion that follows will consider the types of costs, both monetary and time
costs, associated with traveling through each step of the supply chain, as well as the
types of costs and delays attributable to policy. These policies may include NTMs as
traditionally conceived, inadequacies in trade facilitation, or other types of policies
insofar as they add to the costs and time associated with an international transaction.

Linear Supply Chain;


Let us consider first the case of a good which is produced in a single location in the exporting
Country such as an agricultural good or a carpet, and simply moved from place to place until it reaches
the consumer in the importing country.
a) Ex-Farm/Ex-Factory;
Compliance with importing countries policies, procedure and standards may require
changes in production procedure which alter the cost of production are considered part
of NTMs.
b) Movement to Port;
Artificial increase in cost at port gate due to lack of competition/monopoly of trucking
companies is part of NTMs

c) Export Procedures;
Procedure such as warehousing, stacking of container, loading of ships and other
bureaucratic formalities increase cost or causing the time delays are considered as
equivalent of NTMs.
d) International Transportation;
Technological improvements like use of bar code to track shipments, containerization as
opposed to bulk shipping, single linear routes have improved the efficiency of trade and
act as trade facilitators. Similar gains have improved the efficiency of air transport as well
reducing the gap between CIF and FOB price for same transaction.
e) Import Procedures;
Difference arising out of technical and managerial efficiency in port operations and
various import related procedures can restrict or facilitate the trade thus affecting the
overall efficiency of supply chain.
f) Customs;
Documentation requirements, direct consignment requirements, restrictive regulations
on land, sea and air transport and requirements to pass through a specific port can cause
unnecessary delay in import procedures thus aversely affecting the supply chain and
overall trade efficiencies.
g) Wholesaling and Retailing;
Some part of wholesaling and retailing related efficiencies can be attributed to wholesale
and trade related in inefficiencies but majority of it is policy related such as limited entry
into logistic services and restrictions, hours of retail operations, FDI limitations in
distribution. All of these factors can be classified as NTMs as they affect the market for
internationally traded goods.

Hub and Spoke Supply Chain


Hub and spoke model is applicable in case of manufacturers with multiple components
such as electronic and motor vehicles. It typically involves gathering components
together from many locations for final assembly.
Logistics firms have many strategy to reduce number of times a material move such as
maintaining hub warehouses and milk runs system which involves regular trucks runs within
the country.
Trade cost must be reduced to minimum to enable hub and spoke supply chain to operate.
Hub and spoke supply chain can operate only if NTMs, tariffs, transport and logistics cost
doesnt exceed the final price.

Thus NTMs can be prohibitive in nature to the establishment of supply chain if above
mentioned costs exceed final price of product.

Conclusions:
Looking at NTMs and trade facilitation from a supply chain perspective provides several policy
insights. Some examples of these are presented below;
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 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. 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 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.

Implications of NTMs on H-O Model

Understanding the H-O Model;


A nation will produce the commodity whose production requires the intensive use of Nations
Relatively abundant factor and import the commodity whose production requires intensive use
of Nations relatively scarce factor.
According to this theorem factor endowment are basic determinant of comparative advantage.
Factor abundance and their prices are cause of difference in relative commodity prices.

Assumptions