Impact of trade facilitation provisions on GVCs: An econometric analysis

A recent analysis investigated the impact of TF provisions on GVC firms’ export decisions at the extensive margin (whether trade occurs) and intensive margin (the level of trade, once it occurs) (Lee, Rocha, and Ruta 2021). It used detailed firm-level data from Peru, collected by the World Bank’s Exporter Dynamics Database (Fernandes, Freund, and Pierola 2016), for which export and import records of all firms were available for 2000–17. The information on the import side of exporting firms—whether they import, what, and from where—allowed an econometric analysis of whether TF provisions had a differential impact on GVC firms through the importing channel.

To capture differential impacts, the analysis distinguished three types of firms: (a) traditional exporters that relied on domestic inputs for their exports; (b) GVC firms that imported intermediate inputs from other countries as well as exporting; and (c) bilateral GVC firms, a subset of GVC firms that imported inputs from and exported to the same countries. GVC firms could presumably achieve larger gains than traditional exporters from enhanced TF through both the importing and exporting channels as PTA provisions improved border efficiency and transparency at both Peru’s and the partner’s borders.

The study had three main findings:

• First, the effect of PTAs on export performance varied across different types of firms, at both the extensive and intensive margins. GVC firms that imported intermediate inputs benefited more, especially when they imported inputs from PTA partner countries. • Second, TF provisions promoted the export performance of GVC firms by reducing trade costs and uncertainty associated with import processes at both the home country’s border and the destination country’s border. For Peru, the main benefit of TF provisions in PTAs seemed to result from efficiency enhancements at its own border, which allow GVC firms to get their inputs faster and more predictably. • Third, the evidence supported both preferential and nondiscriminatory benefits of the TF provisions of PTAs, because gains were observed for GVC firms whether they imported inputs from PTA partner countries or from elsewhere.

These findings support policies to include TF provisions in DTAs. As Latin America and the Caribbean countries seek to integrate further into regional and global value chains, TF reforms can reduce trade costs and times for GVC firms. DTAs can encourage such reforms through TF provisions, which often go beyond partners’ multilateral commitments.

The trade-promoting impact of those provisions in DTAs is particularly strong for GVC firms, increasing the region’s competitiveness and promoting further regional

integration into GVCs. GVC firms that import and export from DTA partner countries benefit the most, boosting intraregional trade and supply chain development in Latin America and the Caribbean. And the nondiscriminatory benefits of some DTA TF commitments spill over to GVC firms that import inputs from countries other than the partner country, boosting a more general integration into regional and global value chains.

TF provisions of PTAs have characteristics that differentiate them from unilateral reforms or from implementation of the WTO TFA. First, because PTAs take place between two (or more) partner countries, the provisions affect import and export procedures in both partner countries. For example, the TF provisions in a country’s agreement with its partner could enhance the efficiency of border procedures in both countries. The bilateral nature of PTAs means that increased efficiency at the destination country’s border can promote the home country’s exports, even when efficiency gains only affect import procedures.

Second, some provisions tend to be nondiscriminatory, while others grant preferential treatment to PTA partner countries. For example, establishing a single window for firms to submit documentation for import, export, or transit of goods can enhance border efficiency. Single windows are typically nonpreferential, so even if a PTA provision triggered the establishment of the single window, the gain spreads beyond the PTA partner country because all trade flowing across the border becomes more efficient. But other provisions (such as the exchange of information or the mutual recognition of AEOs) may provide preferential gains to PTA partners, with few spillover effects to other trading partners.

To capture these different characteristics, figure 3.5 illustrates the effect of TF provisions on the three types of exporters described in the last section, using as an example the US–Peru PTA. TF provisions in this agreement can affect import procedures at the borders of both Peru and the United States. On both sides, some provisions will affect imports from all countries in the same way; we refer to these provisions as mostfavored-nation (MFN) provisions. Other provisions provide preferential treatment to imports from the partner country only. These elements will generate specific effects of the PTA on Peruvian exporters to the United States.

TF provisions will affect traditional exporters and GVC firms in different ways. First, consider the traditional exporter, which relies only on domestic inputs to export. TF provisions in the US–Peru PTA promote Peruvian exports to the United States by simplifying import procedures at the US border. Peruvian exporters thus benefit from TF measures at the US destination, whether the measures are MFN or applied preferentially. In figure 3.5, imports by the United States correspond to channels (c) and (d).

Second, consider the GVC firm that imports intermediate inputs from a third country and exports to the United States. This firms benefits both from improved

Figure 3.5 Effect through different channels of trade facilitation provisions in the US–Peru PTA

Peruvian exporters benefit from channels • (c) + (d) if they (only) export to the United States (traditional exporters); • (a) + (c) + (d) if they import inputs from rest of the world and export to the United States (GVC firms); or • (a) + (b) + (c) + (d) if they import inputs from the United States and reexport to the United States (bilateral

GVC firms).

(a) Most-favored-nation (c)

World

United States Peru World

Peru United States

(b) Preferential

Imports from the United States to Peru

Peru’s border Source: World Bank. Note: GVC = global value chain; PTA = preferential trade agreement.

(d)

Imports from Peru to the United States

United States’ border

procedures at the US border for processing its shipments and from expedited or more predictable import procedures at the Peruvian border. To the extent that the TF measures in the PTA affect import shipments from all countries (MFN provisions), GVC firms will gain from the enhanced efficiency in their supply chains regardless of where they import inputs from. Those gains are represented by (a) + (c) + (d) in figure 3.5.

Finally, consider the bilateral GVC firms, which both import intermediates from the United States and export to the United States. Those firms benefit from the most channels because their import shipments of intermediate inputs from the United States gain from both nondiscriminatory and preferential provisions. Their potential gains are characterized by (a) + (b) + (c) + (d).

Between 2000 and 2017, Peru entered 12 PTAs, with 38 countries represented in the agreements. The agreements vary in depth and in TF provisions (figure 3.6). Although deeper trade agreements tend to cover more TF provisions on average, the correlation is not perfect. For example, the Peru–Republic of Korea (2011) and EU–Colombia–Peru (2013) PTAs have the most provisions overall among Peru’s PTAs, but the Canada–Peru (2009) and Panama–Peru (2012) PTAs have the most TF provisions. The imperfect correlation allows identifying the TF provisions’ effects while controlling for the overall depth of agreements.

Figure 3.6 TF provisions in Peru’s PTAs vary in depth

40

Number of TF provisions

35 30 25 20 15 10 5 0 Canada–Peru (2009)Peru–Chile (2009)Peru–Singapore (2009)US–Peru (2009)Peru–China (2010)Peru–Chile (2009) Peru–Korea, Rep. (2011)Japan–Peru (2012)Panama–Peru (2012)Peru–Mexico (2012)Costa Rica–Peru (2013)EU–Colombia–Peru (2013) TF and customs (left scale) Total provisions (right scale) 450 400 350 300 250 200 150 100 50 0 Number of total provisions

Sources: World Bank’s Deep Trade Agreements database; Mattoo, Rocha, and Ruta 2020. Note: The figure includes all of Peru’s preferential trade agreements (PTAs) that entered into force between 2000 and 2017. “Depth” refers to the number of enforceable policy areas in a PTA. EU = European Union; TF = trade facilitation.

The econometric analysis examined the impact of PTAs and TF provisions on the three types of firms based on their GVC participation status (Lee, Rocha, and Ruta 2021). Before delving into TF, the analysis tested whether regional trade agreements themselves had a differential impact on the export performance of GVC firms. If PTA provisions, including those related to TF and customs, had heterogeneous effects on firms that participate in GVCs, a regression using interaction terms for different types of firms would capture that (box 3.2).

Estimation results confirmed that PTAs had a differential effect on GVC firms at both the extensive and intensive margins (figure 3.7; see annex 3A, table 3A.2). Having a PTA in force increased the likelihood that a firm would export to the partner country by an average of 0.3 percent (figure 3.7, panel a), but the effects were significantly different for GVC firms that imported intermediate inputs and exported. The positive impact of a PTA on exporting was significantly larger for firms that imported inputs, with a small negative coefficient on firms that only exported. For GVC firms, a PTA increased the likelihood of exports by 1.8 percent on average. Furthermore, for bilateral GVC firms—those that both imported inputs from the PTA partner country and exported to that country—the effect was even larger, averaging 6.3 percent.