1

Stimulating the Economy through Trade Facilitation

KOHEI SHOJI

Waseda University

Abstract

This paper analyzes the potential effects of investing in trade facilitation of

trade partner countries specifically for U.S. trade, finding large potential in

improving port environment and customs environment especially for U.S. exports.

It also finds that investments can be strategically placed to shape exports and

imports in U.S. interests. These findings are contrasted with current U.S.

Aid-For-Trade strategy which does not use this type of investment primarily as a

tool to stimulate the economy to come to the conclusion that a shift in policy may

be in the U.S.’s best economic interests.

1. Introduction

International trade is an integral part of the U.S. economy. Increasing exports

can increase production inside the U.S., creating new jobs; export-supported jobs

rose from 7.6 million in 1993 to 10.3 million in 2008, an increase of 2.7 million

jobs; this accounted for 40 percent of total job growth in the United States during

this period.1 Also, as U.S. multi-national companies continue to expand their

supply chains and markets globally, the competitiveness of the backbone of the

U.S. economy partly rests on the ability of them to smoothly move their goods

across borders. Therefore, as the FRB looks to cut back on its massive

quantitative easing measures, bolstering trade, especially exports, would provide

the U.S. economy with the much-needed stimulation.

Until recently, the primary focus of trade policy has been on reducing tariffs.

These negotiations at the WTO Rounds have slowed to a crawl; the ongoing

Doha Round has lasted for more than a decade. Partly because of this, the U.S.

1 International Trade Administration. “Exports Play Vital Role in Supporting U.S. Employment”

Last Modified May, 2010. Accessed September 1, 2013.

http://trade.gov/publications/ita-newsletter/0510/exports-play-vital-role-in-supporting-us-empl

oyment-0510.asp

2

shifted its focus more towards Free Trade Agreements (FTAs) signing 11 of them

from 2001 to 2007. However, with the expiration of the Trade Promotion

Agreement (TPA) in 2007, even this momentum has stalled. The only FTA the

U.S. is currently actively negotiating, the Trans Pacific Partnership, is one in

which the country already has FTA agreements with 72% of the countries

involved.2 With this background, more attention is being turned to alternative

ways in which to streamline trade.

One of these is investment in trade facilitation, which addresses the logistics

of moving goods through ports, the professionalism and efficiency of customs as

well as regulatory environments, the harmonization of standards, and

conformance to international or regional trade regulations.3 Amid a rapidly

globalizing and fragmenting supply chain, connectivity 4 becomes more

important; trade facilitation cuts the time required to import and export, reaping

efficiency gains within the supply chain. As will be shown in the literature

review, past research indicates that these cost reductions can have significant

effects, even compared to that of measures such as tariff elimination.

Government-induced investment and frameworks which accelerate investment

in trade facilitation could be an effective and innovative way in which to

stimulate trade, particularly exports, and boost the U.S. economy. However, until

now, research in assessing trade facilitation’s global and regional benefits have

been the mainstream, and barely any research has been aimed at its effects on the

bilateral trade of any country. This is probably because, unlike FTAs for example,

investment in trade facilitation has obvious and substantial externalities due to

the inclusive nature of its benefits, and is usually regarded as a public good. In

short, U.S. policymakers responsible for oversight of foreign aid programs,

primarily the Committee on Foreign Relations in the Senate and the Committee

of Foreign Affairs in the House of Representatives, have an idea of what it can

do for the world or the region as a whole. They don’t know what it can do for

their country and its trade.

This paper examines the benefits specifically to U.S. trade of U.S. investment

in partner countries’ trade facilitation by utilizing an augmented gravity model

similar to that used in Wilson, Mann, and Otsuki (2003), focusing mainly on

three variables; port infrastructure, customs environment, regulatory

2 Goods trade value based. 3 John S. Wilson, Catherine L. Mann, and Tsunehiro Otsuki, “Trade Facilitation and Economic

Development: A New Approach to Quantifying the Impact.” The World Bank Economic

Review, vol. 17 no.3 (2003): 367-368, doi:10.1093/wber/lhg027. 4 For more on “connectivity”, see Kimura and Ando (2005)

3

environment. The quantitative analysis is not limited only to developing

countries which are the recipients of Aid-For-Trade (AFT) ODA schemes. It

includes developed countries as well since they also have much need for this

type of investment, as will be seen in section 4. Therefore, in order to simplify,

Investment for Trade (IFT) will be used as a broader term to cover all technical

assistance and investment (or measures to promote it) in partner economies

(developing or developed) related to trade facilitation. The results of the analysis

will be contrasted with current U.S. trade strategy to come to policy implications.

The next section provides an overview of U.S. AFT strategy. Section 3 provides

Japan’s AFT strategy, which has a very different motives behind it. Section 4 is a

literature review. Section 5 presents the data and methodology of the quantitative

analysis, and section 6 provides the results. The conclusion and policy

implications are stated in Section 7.

2. U.S. AFT in the Past Decade

Here, U.S. AFT over the past decade, 2002 to 2011, by sector and by recipient

is analyzed using the Creditor Reporting System database of the OECD. 10 years

of data is used in order get a full picture of the overarching U.S. strategy in this

particular area.

In terms of amounts, the U.S. is the largest donor country of AFT,5 with USD

6.7 billion given over the decade. It invests about an average ratio of ODA to

trade facilitation; 2.6% compared to an OECD average of 2.2%. When viewed

by the total amounts of U.S. AFT in the 5 years from 2002 to 2006 and the 5

years from 2007 to 2011, it has more than doubled from US$ 2.1 billion to

US$ 4.6 billion.

Regarding the allocation of those funds, trade facilitation most likely has not

been used primarily as a tool for enhancing U.S. trade, but more as a tool for

diplomacy and national security. Assessment of the recipients of US AFT as

reported in the OECD Creditor Reporting System reveals that, in the last decade,

68% of U.S. aid for “water transport” (sector 21040, henceforth WT) went to the

two countries of Benin and Cape Verde, the 114th and 206th largest goods

trading partner in 2012 respectively.6 Other main recipients include Iraq and

5 In this analysis, AFT is defined as ODA in sectors 33110 (trade policy and admin.

Management), 33120 (trade facilitation), 33181 (trade education/ training), 21010 (transport

policy and admin. management), 21040 (water transport), and 21050 (air transport) of the

Creditor Reporting System. The first three are categorized as AFT in customs environment,

while the latter three are classified as AFT in port environment. 6 Office of the United States Trade Representative. “Countries and Regions.” Accessed

December 11, 2013. http://www.ustr.gov/countries-regions/

4

Ghana, which received an additional 17%. For air transport (sector 21050,

henceforth AT), Mali, the U.S.'s 180th largest goods trading partner in 2010,7

received nearly half of the entire amount; the country and Iraq together received

over 70% of aid in this sector. In “Transport policy and administration

management” (sector 21010 henceforth TPAM), the three countries of

Afghanistan, Iraq, and the West Bank and Gaza Strip received 66% of U.S. ODA.

Georgia and Pakistan received another 11%. Facilitating trade with any of these

countries is unlikely to have any significant impact on the U.S. economy.

Why hasn’t AFT been focused on countries more likely to boost U.S. trade? A

thorough analysis of the congress committees and institutions in charge of

appropriation would be necessary in order to find the answer, and this is a

limitation of this paper. With that said, one reason may be the lack of a study

showing the benefits of IFT which accrue to the U.S. economy, as stated in the

introduction. Another could be that it is perceived to put a strain on the

government budget. However, the amount of government funds needed may be

less than commonly thought. Funding can increasingly be sourced through the

private sector in the midst of deregulation; Drewry Shipping Consultants

estimated that in 1991, the public sector handled around 42% of container port

throughput; by 2001 its share had decreased to approximately 27%.8 On the

other hand, the public sector is still necessary to work with private sector

investment in reducing financial and political risk as provider, financier and

regulator.9 Furthermore, providing loans instead of grants can further reduce

financial burden. In the current loan/grant composition of U.S. ODA, loans

represented less than 1% of total aid appropriations in 2010; this low ratio,

according to a Congressional Research Service Report, is due to the concerns of

both congress and the executive branch regarding the debt problems of

developing countries. 10 However, this does not necessarily apply to port

infrastructure or customs procedure upgrades, since loans can be more than

recouped directly through efficiency gains in most cases, as will be seen in the

literature review. In this case, no loan and no infrastructure improvement is much

7 Ibid. 8 Drewry Shipping Consultants, Global Container Terminals- Profits, Performance and

Prospects, (London: Drewry Shipping Consultants, 2002): 31. 9 Estache, Antonio and Tomás Serebrisky, “Where Do We Stand on Transport Infrastructure

Deregulation and Public-Private Partnership?” (World Bank Policy Research Working Paper,

2004): 5, http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-3356. 10 Tarnoff, Curt and Marian Leonardo Lawson, “Foreign Aid: An Introduction to U.S. Programs

and Policy,” (CRS Report for Congress, 2011): 25,

http://fpc.state.gov/documents/organization/157097.pdf.

5

worse for the recipient country. In this way, making use of private funding and

financing through loans can significantly reduce the costs on the U.S. budget.

3. An Alternative AFT Strategy: Japan

Not all countries follow the U.S.’s pattern when it comes to deciding where to

invest their ODAs in trade facilitation.

Here let us take Japan, the largest donor of ODA in trade in AT and WT, and

the 3rd largest in Trade-PAM, as an example. In short, it can be said that they puts

more emphasis on economic objectives. Compared to the U.S., Japan gives much

more to AT and WT both by amount and as a proportion of total ODA. Japan

gave US$ 4.24 billion in the two sectors, about 3% percent of total Japanese

ODA or 59% and 69% of all global ODA in the two sectors. Furthermore, the

selection of countries for trade-facilitation-related ODA seems to have an

economy-oriented approach as well. The four countries of Thailand, Indonesia,

Philippines, and Vietnam, which all rank in the top 20 trade partner countries by

volume with Japan in 2012,11 receive 72.7%, 43.4%, and 72.9% respectively of

Japanese aid for TPAM, WT, and AT. Another difference is that much of the

ODA are loans. Specific examples include loans to an international airport

development project in 2002 and 2004 with a total of US$ 693 million to support

the growing demand by passengers and freight.12 Another is the Lach Huyen

Port Infrastructure Construction project in Vietnam, into which Japan has given

over US$ 100 million in loans in 2011. The project is also a good example of an

effective use of PPP. Investments consist of VND 18.6 trillion sourced from

ODA and the State budget, and VND 6.57 trillion from a joint venture of

Vietnamese and Japanese enterprises.13 Although the recipients for other AFT

sectors14 are more dispersed, the 4 countries (and China) receive a lion’s share

of Japanese aid.

The evidence points to a more economy-oriented, PPP and loan-centric

approach to its ODA policy which the U.S. may be able to learn from as an

alternative strategy.

11 According to data by JETRO, they ranked in 5th, 9th, 16th, and 17th, respectively in Japanese

exports, and 12th, 9th, 20th and 15th respectively in Japanese imports. 12 Japan International Cooperation Agency. “Activities in Thailand.” Accessed September 1,

2013. http://www.jica.go.jp/thailand/english/activities/loan02.html 13 Communist Party of Vietnam. “Lach Huyen port infrastructure construction project

inaugurated” Last updated April 15, 2013.

http://dangcongsan.vn/cpv/Modules/News_English/News_Detail_E.aspx?CN_ID=580463&C

O_ID=30180 14 See footnote 5 for details

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4. Literature Review

Here, the theoretical, qualitative and quantitative evidence that IFT increases

trade will be examined.

Theoretical foundations rest on new theories of trade which, unlike the

Heckscher-Ohlin Model, explain within-sector heterogeneity in trade structure.

Derived by Krugman, 15 these take into account agglomeration through

economies of scale, and transport cost, linking them with the overall distribution

of exports and FDI. Accordingly, in a model of heterogeneous firm behavior

presented by Helpman et al.,16 lower trade costs cause foreign markets to be

served more by exports relative to FDI sales.17 As fragmentation of the supply

chain accelerates, this importance of service link costs which enable firms to take

advantage of differences in location advantages across countries burgeons; this is

especially the case for East Asia.18

There has been much research aimed at comprehensively quantifying the

effects of this increased efficiency through trade facilitation, often finding

favorable results. The gravity model has often been used in these analyses,

although they vary in the variables used, and the data which constitute those

variables. Perhaps the most widely cited of these are Wilson, Mann, and Otsuki

(henceforth WMO1)19 and Wilson, Mann, and Otsuki (henceforth WMO2),20 in

which separate indices are used for port infrastructure, customs environment,

regulatory environment and services infrastructure. They find that efforts to

improve these four areas can all have profound impacts on trade volume.

A channel by which trade facilitation impacts efficiency is time; time is money,

especially when it comes to trade. Hummels and Schaur estimate using a

computable general equilibrium model that each day in transit (which includes

days at the border) is worth 0.6% to 2.3% of the value of the good for U.S.

imports.21 Since a 6,000 TEU ship, for instance, costs up to US$ 45,000 per day

15 See Krugman (1980) 16 See Helpman et al (2004)

17 For in depth theoretical analysis on trade costs, see Krugman and Venables (1995) and

Markusen and Venables (1999). 18 Fukunari Kimura and Mitsuyo Ando, “Two-dimensional fragmentation in East Asia:

Conceptual framework and empirics,” International Review of Economics and Finance, no. 14

(2005): 318. 19 Wilson, Mann, and Otsuki, “Trade Facilitation and Economic Development: A New Approach

to Quantifying the Impact,” 367-389. 20 John S. Wilson, Catherine L. Mann, and Tsunehiro Otsuki, “Assessing the Benefits of Trade

Facilitation: A Global Perspective,” The World Economy, no. 28 (2004): 841-871,

doi:10.1111/j.1467-9701.2005.00709.x 21 David Hummels and Georg Schaur. “Time as a Trade Barrier,” NBER Working Paper Series,

no. 17758 (2012): 5. http://www.nber.org/papers/w17758

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to operate, longer turnaround times can mean hundreds of thousands of dollars in

efficiency losses in terms of this cost alone.22 Needless to say, these costs are

added to the cost of the good.

In reality, efficiency losses from delays have a profound effect on international

trade. Currently, many developing countries, such as China, India, Thailand, and

Brazil have been reported to be suffering serious problems with port congestion.

The port of Santos in Brazil saw the worst congestion in years this year, with

ships waiting as much as 2 weeks to file into port.23 In Thailand, port congestion

was blamed to have driven up prices, not only in imports, but also in exports.24

Indeed, Francois and Manchin find that variation in infrastructure relative to the

expected values for a given income cohort is strongly linked to exports.25 In

addition, not only developing economies faced delays; developed countries’ ports

were some of the worst congested, with multi-million TEU ports such as Los

Angeles, Long Beach, Vancouver, Montreal, Rotterdam, Antwerp, Southampton,

and Singapore experiencing periods of extreme difficulty in handling cargo.26

On the other hand, investment may not keep up; according to a report by the

American Society of Civil Engineers, in the U.S. alone, there will be a US$ 16

billion gap between predicted funding and what will be needed for waterways

and marine port infrastructure, and a US$ 39 billion gap for airports.27

IFT is a way to counter these funding problems. Cali and Velde use an export

demand model to analyze the effect of aid on the cost of trading, and find that an

increasing in AFT by US$ 390,000 is associated with a US$ 82 reduction in the

costs of importing a 20-foot container of goods.28 Also, Vijil and Wagner show

that a 10% increase in aid for infrastructure commitments leads to an average

22 Drewry Shipping Consultants and Inmar Lodges, “Global port congestion: No quick fix,” Port

Technology International, ed 27. (2005), 112.

http://www.porttechnology.org/images/uploads/technical_papers/PT26-06.pdf 23 Julia Carneiro, “Brazil congestion delays export of record soybean crop,” BBC News, last

updated April 20, 2013. http://www.bbc.co.uk/news/world-latin-america-22188250 24 Supunnabul, Suwannakij and Luzi Ann Javier, “Sugar Rising on Worst Thai Port Congestion:

Freight Markets,” Bloomberg, last updated June 14, 2011.

http://www.bloomberg.com/news/2011-06-14/sugar-rising-as-thailand-port-congestion-worst-i

n-memory-freight-markets.html 25 Joseph Francois and Miriam Manchin, “Institutions, Infrastructure, and Trade.” World Bank

Policy Paper Series, no. 4152 (2007): 22. 26 Drewry Shipping Consultants and Lodges, “Global port congestion: No quick fix,” 111 27 American Society of Civil Engineers, Failure to Act: The Impact of Current Infrastructure

Investment on America’s Economic Future, (Virginia: American Society of Civil Engineers,

2013), 7.

http://www.asce.org/uploadedFiles/Infrastructure/Failure_to_Act/Failure_to_Act_Report.pdf 28 Massimiliano Cali and Dirk Willem Te Velde, “Does Aid for Trade Really Improve Trade

Performance?” World Development, no. 39 (2010): 733,

http://www.sciencedirect.com/science/article/pii/S0305750X10002378

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increase in the exports over GDP ratio of a recipient of 2.3%, which is equivalent

to a 2.7% decrease in tariff and non-tariff barriers.29 Investment in improving

port infrastructure can consist of building new ports or airports, or improving

facilities (loading, scanning, storage, connections to ground transport, etc.) for

faster turnaround times. These measures can be expensive relative to customs

efficiency improvements, but increasingly through deregulation, projects can be

partly financed through the private sector, as seen in section 3. PPP allows

investment in multiple costly projects in a short period of time, but it is only

possible when there are appropriate levels of risk; the plans and regulations

regarding the projects need to be transparent, and projects requiring large

amounts of investment recouped in long periods of time require some forms of

public finance and guarantees.30 For developed countries, government-assisted

frameworks can expedite overseas investment in trade infrastructure. An example

is the Global Strategic Investment Alliance created by Canadian pension fund

OMERS in 2012, in which a consortium of Japanese public and private

institutions participate as well.

However, this investment in increasing port infrastructure capacity and

efficiency will not be beneficial if they are not backed by efficient customs

procedures and regulatory procedures; trade facilitation needs to be done

system-wide, since attacking one element will only end in congestion of

another.31 According to the OECD, Indian port equipment remains idle about

20% of the time and the port of Baku in Azerbaijan was working at about 13% of

its capacity in the early 2000s. Customs and regulatory inefficiencies were two

of the main causes.32 In fact, a survey of business representatives by the Asia

Pacific Association of Canada showed that customs procedures were the most

serious trade impediments in developing countries (port infrastructure was not

reviewed under this survey, however).33

29 Mariana Vijil and Laurent Wagner, “Does Aid for Trade Enhance Export Performance?

Investigating the Infrastructure Channel,” The World Economy, no. 35 (2012): 861,

doi:10.1111/j.1467-9701.2012.01437.x 30 Asian Development Bank, Developing Best Practices for Promoting Private Sector Investment

in Infrastructure: Ports (Manila: ADB Publishing, 2001): 4-5. 31 Ward, Thomas. “Port congestion: To strengthen the link, reforge the chain,” Port Technology

International Ed 27. (2005), 103.

http://www.porttechnology.org/images/uploads/technical_papers/PT27-36.pdf 32 OECD, “Trade Facilitation Reforms in the Service of Development” (Working Paper for the

Working Party of the Trade Committee, OECD, 2003), 12.

http://vi.unctad.org/files/studytour/strussia10/files/12%20April/Hoffmann%20UNCTAD/OEC

D_TF%20Reform.pdf. 33 Asian Pacific Foundation of Canada, “Survey on Customs Mobility in the APEC Region,”

Last updated July 2000. http://m.asiapacific.ca/sites/default/files/filefield/abacsurvey.pdf

9

One example of streamlining customs procedures is the automation and

upgrading of IT systems. All developed countries and the vast majority of

developing countries have adopted some kind of automated trade system already.

The most widely used of these is ASYCUDA, whose average implementation

cost is US$ 2 million, excluding equipment and infrastructure. The software is

provided by UNCTAD at no cost. UNCTAD says that with its implementation,

countries can expect a 10% increase in revenue, substantive reductions in

clearance times, and reliable trade statistics to manage fiscal and economic

analysis.34 Examples of exceptional reductions include Morocco’s, in which

average clearance times dropped from 132 hours in 1997 to less than an hour in

2002, and that of Costa Rica, in which clearance times decreased from 144 hours

to around 2 hours.35 Implementation, operating, and updating costs are often

balanced by user fees and increased revenue from customs. A widely-cited study

by Duval takes into account expert opinion on 12 different types of trade

facilitation measures and finds long-term benefits often exceed the

implementation costs of all examined measures.36

Nowadays there are emerging trends to upgrade to paperless trading systems,

which can simplify and reduce costs of customs procedures by eliminating the

exchange of billions of paper documents. This system has reduced average

customs clearance times from 5.3 to 1.5 hours in Taiwan, and 12.2 to 1.1 hours

for Mexico. Also, single window systems can also streamline the process by

eliminating the need for separate transactions with separate ministries. Senegal is

one of the few countries who have put in this in place, whose yearly costs of

US$ 715,000 of the system are fully covered by an annual average of

US$ 956,000 in revenue from service charges.37

Appropriate risk management procedures can also simplify the customs

process, and reduce clearance times significantly. Efficient techniques can allow

for programs which expedite procedures for authorized traders, reducing the

number of on required checks. In Morocco, risk management reduced the

34 UNCTAD, “Computerizing customs procedures: removing a hurdle to economic development,”

Accessed September 15, 2013. http://unctad.org/en/Docs/iaosmisc200519_en.pdf 35 OECD, “The Role of Automation in Trade Facilitation,” OECD Trade Policy Papers, no. 22

(2005): 12,

http://search.oecd.org/officialdocuments/displaydocumentpdf/?doclanguage=en&cote=td/tc/w

p%282003%2921/final. 36 Yan Duval, “Costs and Benefits of Implementing Trade Facilitations Measures under

Negotiations at the WTO: An Exploratory Survey,” Asia-Pacific Research and Training

Network on Trade Working Paper Series, no 3 (2006): 2,

http://www.unescap.org/tid/artnet/pub/wp306.pdf. 37 OECD, “The Role of Automation in Trade Facilitation,” 10.

10

inspection rates from 100% to 10%, while that in Thailand declined from 100%

to around 21%. Implementation costs have been more than recouped through

efficiency gains.38 Helble, Mann, and Wilson find that a 1% increase in aid

(US$ 4.86 million) for trade policy reform and regulatory reform is associated

with increases in exports of receiving countries of about US$ 347 million.39

Regulatory reform by means of increased transparency is also effective. A

study finds that the potential gains for APEC economies from improvement in

transparency can add up to US$ 148 billion, or 7.5% of baseline trade.40

Summing up, the effectiveness of trade facilitation and IFT on cross-border

trade has been stressed in both theory and application. However, these past

studies all assess the benefits on a global or regional scale, and thus provide a

basis primarily for multilateral measures trade facilitation; they do not provide

clear implications for single countries.

5. Data and Methodology

The objective in this paper is to find the potential effects of IFT on U.S. trade.

The data and methodology used in this analysis, explained below, will be

based on the augmented gravity model used in WMO1. The gravity model, first

developed by Tinbergen41 in 1962, is a popular tool used in assessing bilateral

trade because of its relative simplicity and high explanatory power. In the most

basic specification, the log of bilateral export and import flows (in real value)

between the U.S. and a partner country is regressed on logs of GNP of exporters

and importers, and the geographic distance between each pair of countries. Some

models add dummies for countries with preferential trade agreements, and for

those who have the same language as a common language, and countries which

share borders. These variables are all used, along with 3 measures related to

trade facilitation as defined below:

Port efficiency (PE), designed to measure the quality of infrastructure of

ports and airports.

38 Evdokia Moise, “The Cost of Introducing and Implementing Trade Facilitation Measures,” in

Overcoming Border Bottlenecks: The Costs and Benefits of Trade Facilitation, ed. OECD

(Paris: OECD, 2009): 200-201. 39 Mathias Helble, Catherine L. Mann and John S. Wilson, “Aid-for-trade facilitation,” Review of

World Economics, no. 148 (2011): 374, doi:10.1007/s10290-011-0115-9. 40 Mathias Helble, Ben Shepherd, and John S. Wilson, “Transparency, trade costs, and regional

integration in the Asia Pacific,” World Bank Policy Research Working Paper, no. 4401 (2009):

28. 41 See Jan Tinbergen, Shaping the World Economy, (New York: Twentieth Century Fund, 1962).

11

Customs environment (CE), designed to measure direct customs costs as

well as administrative transparency of customs and border crossings.

Regulatory environment (RE), designed to measure the economy's

transparency and degree of corruption.

Each of the PE, CE, and RE indicators are constructed using two inputs in

order to assess comprehensively what they are meant to represent, and to

diversify the data which it is based on for reliability.42 The PE indicator is

composed of the Quality of Port Infrastructure Index and the Quality of Air

Transport Infrastructure Index both released by the World Economic Forum in its

Global Competitiveness Indicators (WEF GCI). CE is a combination of the

“Cost to Import” figures of the World Bank, and the “Burdensomeness of

Customs Procedures” indicator of WEF GCI. RE is constructed using the

“Transparency of Government” and the “Corruptions Perceptions Index”

released by WEF GCI and Transparency International, respectively. Details of

the sources used for the indexed inputs are in table 1. Data is collected for the 4

years of 2008 through 2011, determined for availability reasons. They are

organized as unbalanced panel data, with the country/year combinations lacking

in any one of the indices excluded from the sample.

Table 1

The model used is illustrated below:

ln(eximvtij) =β0 +β1ln(distij) +β2ln(gnpt

i) +β3ln(gnptj) +β4ln(prclvt

i) +β5ln(prclvtj)+

β6ln(aptarti) + β7ln(pet

i) + β8ln(petj) +β9ln(ret

i)+ β10ln(retj) + β11ln(cet

i) +

β12ln(cetj)+ β13dfta + β16dbord + β17dlang + et

ij

i and j stand for the importer and exporter respectively. t denotes trading years

42 These raw data series are then indexed to the average of each series. Next, these inputs into the

three trade facilitation indicators are averaged, for simplicity.

Var Inputs Source Mean Std. Dev. Min Min Country Max Max Country

Port Facilities WEF GCI 4.216 1.159 1.397 Kyrgyz Rep. 2010 6.817 Hong Kong 2010

Air Transport Quality WEF GCI 4.679 1.126 2.078 Haiti 2011 6.916 Hong Kong 2010

Cost to Import World Bank 1.291 0.609 0.176 Chad 2010, 2011 3.448 Malaysia 2011

Burdensomeness of Customs Procedures

WEF GCI 1.000 0.217 0.447 Venezuela 2009 1.585 Hong Kong 2010

Tranparency of Government

WEF GCI 0.999 0.176 0.498 Venezuela 2008 1.474 Singapore 2010

Corruptions Perceptions Index

Transpanecy Intl 0.987 0.495 0.323 Haiti 2008 2.189 New Zealand 2011

PE

RE

CE

12

(t= 2008, 2009, 2010, 2011). eximv is data for U.S. imports and exports by trade

volume taken from the International Trade Commission. This allows us to assess

data specifically for the U.S. dist represents distance between Chicago (not

Washington D.C. in order to avoid an east coast geographical bias). gnp, prclv,

and aptar are data take from the World Bank database, and represent gross

national product, price level, and applied tariff rate, respectively. dfta, dbord, and

dlang each represent an FTA dummy, a border dummy, and a common language

dummy respectively.

The Error term etij is defined as:

etij=αj+γt+εt

ij 43

The same model is used for six separate analyses: one with the full dataset,

one each for low to low-middle income countries (GNP per capita of under USD

4090) and upper-middle to high income countries (GNP per capita of over USD

4090), and three sector specific analyses concerning the most important sectors

to U.S. trade and its economy using SITC Revision 3 single-digit categorization:

food and live animals (section 0), machinery and transport equipment (section 7),

and miscellaneous manufactured articles (section 8). In table 2, these six

regression results are labeled as Full, LMI, HMI, SITC 0, SITC 7, and SITC 8

respectively.

6. Results

Results show that, out of the trade facilitation variables, the importers’ port

infrastructure generally affects trade the most, indicating that IFT will generally

increase U.S. exports rather than imports. It is positive and statistically

significant, with relatively large coefficients in most models. For example, a 1%

rise in PEi in our Full, HMI, and SITC 8 models will result in a 2.7%, 3.7%, and

1.3% increase in U.S. exports or imports respectively. Comparing with other

variables, if the U.S. invests money into improving port facilities by 1% in the

index, this is equivalent to about 300%, 400%, and 140% of the effect on U.S.

exports which signing an FTA has, respectively. 44 Also looking at the

coefficients on PEi across models, it can be said that outbound investment in port

infrastructure has a relatively large impact on exports to developed and

43 αj represents exporting country fixed effects, γt represents time-specific fixed effects. 44 The FTA dummy had positive and significant coefficients for all of the models.

13

upper-middle income markets. Sector-wise, the effect of PEi is also strong in

manufacturing exports. As PEj is insignificant in most cases, IFT in a partner

countries’ infrastructure is predicted to increase U.S. exports more than imports

for most countries and sectors.45 An exception is the agricultural sector, in which

IFT will increase exports rather than imports.46 These illustrate the different

effects IFT has on trade depending on sector.

Coefficients for importer’s customs environment (CEi) were significant in half

of the models: for the LMI, SITC 0, and SITC 8 variables, it showed that a 1

percent increase in the index would entail a .38%, .39%, and .53% increase in the

countries’ imports. Therefore, U.S. funding and technical assistance for

improving partner countries’ customs procedures by 3.0%, 3.5%, and 1.7 percent

measured by the index would have an impact to U.S. export values equivalent to

concluding an FTA. The coefficients are smaller than those seen in the PEi

variables, but since customs improvements usually require less funding than

infrastructure products,47 the efficiency of each dollar invested should be greater

than what is implied by simply comparing coefficients. Also, none of the models

showed significance for the exporter’s variable (CEj), suggesting that improving

customs environments also have a stronger effect on exports than imports. It is

interesting to note that this is also true of SITC 0, which showed the opposite

result for PEj and PEi. Another interesting find is that this is also true of the HMI

model: another result very different from that of PE.

Applied tariff levels showed no significance in all of the models and very low

coefficients, signalizing that further reductions have little effect on trade. This

illustrates the low levels of applied tariffs already achieved by past WTO rounds.

A limitation of the model was that it was unable to correctly measure the

impact of regulatory environment in some models, suggesting that it was

absorbing the effects of other existing and potential variables. The negative

coefficients on RE variable are not consistent with theory, and cannot be

comprehended as being correct. Another area for future research is cost analysis,

which is necessary to compute the effect of each dollar. This would also be

important evidence in reaching policy implications.

Lastly pairwise Granger Causality was checked between relevant variables.

45 The p-value of the coefficient for PEi in the LMI model was .101. Therefore, even though it

cannot be considered significant at 10 percent, it can be presumed here to be of some

significance. 46 coefficients for PEi and PEj were 1.32 and 4.19, respectively 47 Although sections 3 and 4 provide a rough outline, cost analysis is an area requiring further

study.

14

The rationale behind this is that countries may invest more into ports because of

increased trade, which would cause upward bias in the coefficients due to

causality problems.48 The trade facilitation variables for the importer are tested

for causality both ways with the import volume from Japan (IV), while those for

the exporter are tested both ways with export volume to Japan (EV). These were

run in the full sample between PEi and U.S. export volumes, as well as CEi and

U.S. export volumes. It was also run in the SITC 0 Model between PEj and U.S.

import volumes. All time lags are 1 year due to restrictions on available data,

which is a limitation of this research.49

The test results are shown in table 3. They show no evidence of causality

problems, as none of the null hypotheses for trade volume not Granger causing

PEi, CEi, PEj, were rejected, but all for the converse were rejected at the 95

percent confidence level for the first two and 99 percent confidence level for the

last. These can be considered to be reasonably robust results rejecting the notion

that trade facilitation does not cause trade volume, but not rejecting the view that

trade volume does not cause trade facilitation.

In sum, there are four major implications of the analysis: one is that trade

facilitation by investing in another countries’ port or customs environments is a

powerful way in which to increase U.S. trade. This is true relative to other

measures, such as implementing FTAs or lowering tariffs. The second is that it

boosts U.S. exports, but in most cases does not have a strong effect on imports.

Thirdly, investment to countries with different incomes per capita, or investment

by different methods (funding for CEi or PEi), has different effects on trade flows.

For U.S. exports, IFT into ports into developed countries may be more effective

than that into developing countries, and IFT into customs environments in

developing countries may be more effective than that into developed countries.

Lastly, IFT has different effects depending on sector. For example, IFT into

improving port infrastructure of a country where U.S. imports much agricultural

products from can be predicted to have stronger relative effect on imports flows

than export flows as opposed to IFT into a country which the U.S. imports little

agricultural products from but exports more machinery to.

These have intriguing policy implications which will be discussed in the

conclusion.

48 These were tests lacking in WMO1, and WMO2. For WMO2, this was probably because only

2 years of data were assessed, making no room for time lags. 49 A longer time lag may be necessary to appropriately assess causality problems, especially in

the case of regressors such as PE. However, this was not possible due to the length of the time

series (4 years) of the data.

15

7. Conclusion

Trade facilitation has been shown to increase trade efficiencies in large

degrees in a global or regional context in previous research. As multilateral talks

in the WTO and negotiations for U.S. FTAs have both slowed in recent years, the

relative importance of trade facilitation has significantly increased. This is

especially true as the U.S., to which international trade is a crucial part of the

Dataset Null Hyp. F-Value P-ValuePEJ→EV*** 12.544 0.000EV→PEJ 0.288 0.592

PEI→IV** 4.914 0.028IV→PEI 0.837 0.361CEI→IV** 4.852 0.029IV→CEI -12.024 1.000

Null hypotheses that “A does not Granger cause B” is shown as A→B.

SITC 0

Full

Rejection at 95 percent, and 99 percent confidence levels are denoted by ** and ***, respectively.

Source: Author’s calculations

Table 3 : Granger Causality Test

16

economy and job market, looks for a way to stimulate its economy in the midst

of the decreasing amounts of quantitative easing by the FRB. On the other hand,

as global trade grows at exponential rates, there is much room for improvement

in port infrastructure and customs environment of both developed and

developing countries.

This paper examined the effects of IFT on U.S. trade. The results of the

analysis in the paper using the gravity model show the large impact of improving

port facilities and customs environment can have; even small increases in the

indices for the importer’s PE and CE can have larger impacts than signing an

FTA or abolishing tariffs. Additionally, it was found that IFT in the PE and CE

sectors increases trade volume mostly through increasing U.S. exports rather

than imports. Next, the analysis indicated that investment in PE and CE of

partner trade countries especially stimulates exports in the sectors most

important in value to U.S. exports; manufacturing. Lastly, from the

sector-specific and country-specific analysis, it was seen that investments have

differing impacts depending on the receiving country and sector; therefore,

investments may be strategically placed to fit the U.S.’s goals. For example,

according to the findings, if the U.S. wants to improve its trade balance without

increasing imports in the agricultural sector, it can invest in the ports of countries

which the U.S. trades with intensively in manufactured products, but doesn’t

import much agricultural products from. Alternatively, it could invest in

improved customs policies especially of low and middle income economies.

Despite the potential impacts of IFT, it is currently not being actively used in

U.S. AFT strategy as an economic tool (some potential reasons are presented in

section 2). Some limitations of this paper do exist, as pointed out in previous

sections. However, given that potential effects of trade outbound investment in

trade facilitation (especially to exports) were shown to be significant, that the

investments can be customized to fit the U.S.’s desired effect on trade structure,

and that the cost on the government budget can be reduced through PPP schemes

(made possible by deregulation in the past 2 decades) and by appropriating loans

(recoverable by efficiency gains) instead of grants, related committees in the

Congress and Senate may want to consider seriously a change in AFT strategy.

Countries such as Japan may provide some clues to undergo this shift.

Government-lead frameworks and funds to increase long-term investment in

developed countries may also be effective. We now have reason to believe these

measures may help bolster the U.S. economy and improve the welfare of the

American people.

17

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