Trade Facilitation
standards, partly because of problems with access to accreditation. Small countries should thus benefit from regional integration (World Bank 2005). Setting up regional certification and accreditation bodies, or opening regional markets for such bodies, could be a way to provide cheaper and better testing, building on scale economies and comparative advantage. Regional approaches can make sense for countries facing serious shortages in technical skills, which can be an issue for modern trade facilitation techniques.12 For instance, Cambodia, the Lao People’s Democratic Republic, and Vietnam are all deficient in standards infrastructure, and lack of certification and accreditation is a common problem (Haddad 2008). Once again, solutions to national constraints are not necessarily regional; the opening of certification and accreditation markets to international companies may be enough to remedy the absence of national providers of such services. In some instances, however, market openness may not be enough, and access to regional providers (implying open access to testing and certification in neighboring countries and perhaps some form of formal arrangement) might be needed. Another sector in which size can be an important constraint is the backbone services that are crucial to trade transactions: finance and insurance, transport and logistics, handling, measurement services, and communication services. The supply of these services for trade transactions can require a scale of production that extends beyond national borders.13 Insurance and financial services (letters of credit, guarantees, insurance, and the like) constitute key inputs for the capacity to trade internationally. National operators in developing countries may not be able to provide these services, or only at noncompetitive prices. According to the European Bank for Reconstruction and Development (EBRD 2003), national banking systems do not pool enough capital to underwrite trade transactions.14 Small firms often lack access to the financial guarantees for payments that would allow them to export.15 Fixed costs and geographic factors confer natural monopoly characteristics on some modes of transport, particularly rail and maritime at the national level, that can be mitigated or even eliminated in a broader regional setting. For instance, regional transport hubs help realize economies of scale and create extra competition.16 For freight transport, the emergence of multimodal hubs, generally located near important existing air, sea, or rail infrastructure, generates important economies of scale, through higher utilization of infrastructure, as well as efficiency gains (compared with point-to-point routes) through competition between modes of transport (Müller-Jentsch 2003). Transport hubs depend as much, and probably
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more, on the liberalization of regional transport services (through, e.g., relaxation of cabotage restrictions or expansion of air traffic rights) than on the availability of infrastructure. Indeed, transport hubs tend to be geographically mobile, suggesting the secondary importance of infrastructure as a determinant of their location. Regional Cross-Border Externalities Regional agreements can serve as a policy coordination mechanism to help prevent individual countries from adopting national strategies that fall short of optimal global outcomes. Lack of coordination is in some instances linked to externality problems—problems that affect the welfare of individual countries but cannot be handled by these countries alone. Although the distinction between positive and negative externalities is not really important from a strict analytical point of view, it may be useful from a policy viewpoint because each may raise different implementation challenges. Positive (or negative) externalities arise when actions by one or more countries create benefits (impose costs) that are not taken into account in the decision to perform that action. In other words, the private cost to the country that originates the action does not equal its social cost. Negative externalities. Countries that carry on transit trade can be tempted to use trade-restricting policies such as setting revenue-maximizing fees for transit, imposing compulsory transit routes and checkpoints, limiting access to foreign transporters, or requiring securitized convoys. Fees and requirements may exceed the cost of the services provided (use of roads, provision of security, and so on) or go beyond the measures strictly necessary for secure transit.17 In the worst cases, the motives behind these policies are protectionist; often, countries simply fail to consider the negative externalities imposed on neighbors.18 The risk of negative spillovers is particularly important when alternative transit routes are few, as is frequently the case in Africa.19 Domestic transport infrastructure constraints often have regional implications, justifying, from an economic perspective, regional ports or airport hubs. Landlocked countries depend on the quality of their neighbors’ infrastructure. To illustrate, Uganda’s most important transport and trade facilitation issues are outside the country’s direct control (Uganda 2006). Tanzania and Kenya, its coastal neighbors, offer poor trade facilitation—the Kenyan port of Mombasa, which handles 95 percent of Uganda’s external trade traffic, is congested; transit bond regimes are financially burdensome; and rail transit does not offer a competitive alternative to poor road transport and expensive