Richard North, 07/07/2015  
 

000a Nigeria-006 traffic.jpg 

Central to the coming referendum campaign will be the question of our trading relations with Europe (and within that the EU) and with the rest of the world. This question may become pivotal, especially if we are unable to give the assurances that trade flows will continue, risking damage to the UK economy.

But what is particularly striking about the popular debate so far – that which we have followed – is the superficiality of the arguments, couched mainly in terms of tariffs and their affordability.

In the real word, however, what we are increasingly seeing is the type of narrative here, which has the World Economic Forum (WEF) tell us:
National trade policy has become more complex; it is no longer largely about tariff reduction. Decision making is less straightforward, requiring collaboration among stakeholders as well as coalitions of government departments, outsourced providers, infrastructure investors and digital expertise.
Although tariffs do still have a role, in restricting trade or directing flows, they have been largely replaced by non-tariff barriers (NTBs), sometimes called technical barriers to trade (TBTs). This we have remarked upon in earlier blogposts, although the concept of there being barriers other than tariffs has barely if at all percolated the upper reaches of the Eurosceptic aristocracy.

Sometimes, one wonders if they read their own material. In 2012, an IEA report stressed that: "Non-tariff barriers need to be brought to the forefront of the trade debate". This was with reference to developing countries, where NTBs make it difficult to move into the export of higher value added products. Yet it is hard to get people such as Ruth Lea even to mention NTBs in any context, while Global Britain managed to produce a whole report on international trading without referring to them.

What is massively important to the debate is the growing range, scale and complexity of these barriers, and the realisation that there can be no adequate exit settlement with the EU unless there are very clear and detailed agreements in place to deal with existing and new barriers. Effectively, without measures to deal with NTBs, trade will be difficult and expensive (more so than it is already).

As far as the EU goes, though, the main NTBs tend to be regulatory measures. Differences in the regulations applying to the single market and those adopted by exporters seeking entry to the market can have a powerful negative effect. As a result, there is strong pressure for exporting countries to conform with EU law, even when there is no strict legislative requirement – the so-called Brussels effect.

However, NTBs are by no means confined to trade with the EU. They occur on a global scale, affecting developed countries exporting to less developed countries, and damaging trade prospects of developing countries.

As to the nature of the NTBs which confront global traders, the picture we have used (top) illustrates one of them – chronic traffic congestion on the link road to the Nigerian port of Apapa, part of the Lagos complex. It was recently estimated that this was costing close to £20 million a day, causing serious damage to the national economy.

But, as this report indicates, congestion is only one of the issues. There were about 15 different agencies extorting money from importers, and each would do a separate inspection, but there are still seven. And although the president had introduced a regime that required the inspections to be simultaneous, they could still hold back shipments while they awaited bribes.

"They've all got a scam going, from the guy that wheels your trolley out to the senior customs officers", says an official at a container company at Apapa. He added that Nigerian authorities inspected 70 percent of cargo, compared with around five percent in the European Union.

The "gridlock", however, remains the main problem. As of the end of June, Mr Olayiwola Shittu, President of the Association of Nigerian Licensed Customs Agents, said his members were getting ready to down tools, "as the situation had become unbearable".

With the gridlock, he said, economic activities in the ports had collapsed and man-hour loss enormous. "It takes about four days for a trailer to have access to load at the terminals. Without solution soon, our association may have no option than to close the ports for fuel tankers to take over permanently", he said.

This situation actually raises a different point – one what addresses claims that we could survive without the EU, making up for the loss by increasing our trade with the rest of the world, and in particular the Commonwealth. Nigeria is one of the larger (and wealthier) Commonwealth countries which, we are told, has huge potential as an alternative to the EU.

Yet, in reality, there is little extra value to be gained from exports to this country, or many others. While the markets look attractive, NTBs can erode profitability to the extent that they are no longer viable.

In Ghana, for instance - another Commonwealth country - delayed customs clearances at the seaports cost importers in excess of $70 million annually in demurrage charges, and millions more in extra rents. There are also costs associated with the movement of containers from the port to the off-dock terminals, and sending them back to the port for scanning as a result of lack of pre-arrival shipment information to select their appropriate risk channels.

India, on the other hand, is often cited as a potential export target for an independent UK, especially as Australia has recently concluded a bilateral deal, while the EU has failed to reach an agreement, after talks were started in 2007 and abandoned in 2013.

At the root of the problem, though, is India's insistence on rigorous and complex rules of origin (ROO). With 70 percent of India-Australia trade comprising minerals, this particular non-tariff barrier is hardly problematical, but it is not acceptable to the EU and there are no indications that it would be any more acceptable to the UK. ROO, in fact, present difficulties for a wide range of countries.

Only now, with India prepared to rework its strategy is there any likelihood of an agreement, but even then some pundits do not rate the chances as high.

Elsewhere, government-mandated NTBs can be even more formidable than India can manage. In the Republic of Korea, there had been a total ban on imported cars until 1989 but, after the outright bans had been lifted, the government directed that all purchasers of imported cars would automatically have their taxes audited.

But this is only the tip of a gigantic iceberg. This report sets out more details on non-tariff barriers. In Brazil, for instance, it tells us that internal transport and communications infrastructure, coupled with customs procedures barriers, affect agriculture commodity supply chains that start in remote locations.

The lack of infrastructure creates delays and potentially demurrage costs of around US$25,000 per vessel per day; lack of information and communication technology reduces operating efficiencies of truck fleet by four percent; and managing customs paperwork takes some 12 times longer in Brazil than in the European Union (a full day versus a couple of hours).

In South-East Asia, the substandard infrastructure, poor quality control and a corrupt business environment in the rubber market make the supply chain for finished goods unreliable. Eliminating such barriers could reduce carried inventories by 90 days, representing a ten percent reduction in landed cost.

A Mexican chemical company is hampered by registration regulations in the European Union requiring redundant local lab testing, which delays delivery several weeks. The deteriorating business environment increases inspection rates of chemical products into Mexico eightfold as a response to the rise of illegal drug trafficking, which adds US$750 to US$ 1,800 per shipment.

In more general terms, we then see reported that, in air freight, the complexity of handling physical paperwork along the global cargo chain is a major cause of delays and hidden costs. Adopting electronic documentation for the air cargo industry could yield US$12 billion in annual savings and prevent 70-80 percent of paperwork-related delays.

The point confirmed by this review of NTBs is that, in the wider world, regulation is only one dimension of an expanding problem. Nevertheless, dealing with them holds out the prospect of considerable rewards. In relation to supply chain management, alone, tackling the full range of NTBs could yield improvements in GDP up to six times greater than deliverable from removing tariffs.

Supply chain management features especially in the World Economic Forum report. Here, it suggests that reducing supply chain barriers to trade could increase global GDP by nearly five percent and trade by fifteen percent.

The benefits of improved global trade facilitation far exceed those available from further tariff reduction. Estimates suggest that an ambitious (but still incomplete) improvement in two key components of supply chain barriers, border administration and transport and communications infrastructure, with all countries raising their performance halfway to global best practice, would lead to an increase of approximately US$ 2.6 trillion (4.7 percent) in global GDP and US$ 1.6 trillion (14.5 percent) in global exports.

By contrast, the gains available from complete worldwide tariff elimination amount to no more than US$ 400 billion (0.7 percent) in global GDP and US$ 1.1 trillion (10.1 percent) in global exports. Even a more modest improvement in trade facilitation, in which all countries raised their performance halfway to regional best practice, would lead to increases of US$ 1.5 trillion (2.6 percent) in global GDP and US$ 1.0 trillion (9.4 percent) in global exports.

These findings open up new vistas which will provide the substance of future blogposts, covering multiple sectors, including the automotive industry. The essence is that NTBs are the key, not only to our successful withdrawal from the EU, but also to improvements in world trade. Dealing with them must form a central part of the "no" campaign.

The crucial element, though, is that we cannot look immediately to increased world trade as a safety net in the event that we lose access to the EU. While there is potential, the global trading system is dysfunctional. There are no early or easy gains to be made.

Whether we like it or not, therefore, we are going to have to reach a workable settlement with the EU. Whatever trade we have with Member States, we need to keep. Stepping into the wider world presents is own problems. It is not an easy option and never will be as long as we suffer the tyranny of non-tariff barriers.






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