45160 Trade Issue Brief WORLD BANK, WASHINGTON, DC June 2008 Benjamin J. Taylor and John S. Wilsoni Trade Facilitation Reform Promises Large Gains to Trade in Mexicoii According to research at the World Bank, trade facilitation efforts in Mexico and its primary trading partners have the potential to increase Mexican exports by $34 billion a year. The study estimates that these improvements could increase Mexican imports by $16.5 billion per year, or about 15.2 percent of Mexico's average imports for the years 2000 to 2003. Combining both Mexico's unilateral reforms and those of its trading partners yields improvements in Mexico's export and import flows of 24 and 15.2 percent, respectively. As a result of increases in trade volumes, the study estimates that new jobs would also be created in Mexico (Soloaga, Wilson, and Mejia--SWM 2006). Building Mexican Competitiveness considering the number of documents required to process border transactions. Mexico has a strong opportunity--and incentive--to continue to expand productivity and economic growth In fact, the average amount of documentation required and reduce poverty. This includes continued cuts in for cross-border transactions in Mexico is on par with red tape, lowered border barriers, and reforms to OECD countries. Nevertheless, the benefits of decrease trade costs. Mexico's trade policy performing so well in certain trade-related measures liberalization programs over the past two decades have cannot be fully realized if other transaction-related reduced poverty by more than 3 percent (Nicita 2007). aspects remain expensive. Due mostly to the cost and The benefits, however, have been distributed unevenly difficulty of inland transport, the average per container across regions and sectors of the economy due to a lack import cost for Mexico is about $900 more than other of complimentary trade reforms. comparably developed countries, and is almost double the regional average ($2,411 versus $1,208). The Increases in wages for skilled labor, for example, have average amount of time to export goods is 17 days, outpaced increases in unskilled wages, leading to almost double the OECD average (Doing Business greater overall inequality in wealth. This disparity is 2008). particularly evident in the central and southern regions of the country, which have poorer infrastructure and The Model institutional capacity. By contrast, the wealthier northern states, which have better links to the U.S. Within this context, SWM (2006) examine the market and increased access to foreign direct potential impacts of trade facilitation reforms in four investment, have benefited immensely (Nicita 2007). areas: port efficiency, customs, information technology, and regulatory environment (including According to the World Bank's Doing Business 2008 standards). The authors follow a simulation strategy survey, more than two-thirds of the costs associated that uses a formula to design a unique program of with importing goods into Mexico are related to inland reform for each country in the sample, and apply it to transportation. By contrast, Mexico scores well in the specific case of Mexico. The formula brings contrast to other middle-income countries when below-average countries in the group half-way to the average for the entire set of countries. The standard gravity formulation includes various measures of Mexican reforms in trade facilitation, in particular market size (gross domestic product per capita), improvements in port efficiency. measures of remoteness (distance and adjacency), and measures of kinship (regional trade arrangements and Chart 2 shows a summary of expected impacts, by language/ethnic similarities). To this basic formulation sector, of unilateral reform on exports and imports as a the authors add tariff data and the trade facilitation share of the overall effect of the simulations. On the indicators. export side, the regulatory environment seems to be most important, as it accounts for 31 percent of the Mexico's baseline share in global industrial exports is increase in exports. However, port efficiency and the 3 percent overall. It is between 2.7 percent for food, customs environment are also important determinants beverages, and tobacco, and 4 percent for vehicles and of the changes estimated, each accounting for more machinery--the sectors considered here. With respect than 20 percent of the change in exports. to imports, Mexico's overall share is about 3 percent as well. Imports for the food, beverages, and tobacco CHART 2: SHARE OF MEXICAN EFFORTS IN sector represent 1.6 percent of global total imports. The TRADE FACILITATION ON TOTAL IMPACT textiles and vehicles sector represents about 2.6 percent OF SIMULATIONS of global imports, and the machinery sector represents Import about 3.8 percent. Export 6% 14% 0% Simulation Results 19% 20% 0% 6% Chart 1 indicates that the simulation yields a relatively high impact on textile exports (51.5 percent), and, 24% although still important, lower percentage impacts in 31% 80% machinery (28.6 percent); food, beverages, and tobacco Port Customs Regulation Services Other (22 percent); and vehicles (15 percent). In all these sectors, more than 80 percent of the expected increase in exports is due to Mexico's unilateral improvements in trade facilitation measures. With respect to imports, improvements in port efficiency proved to be the most important factor; it CHART 1: EXPECTED IMPACT ON MEXICAN accounts for about 80 percent of the increase in INDUSTRIAL EXPORT VALUES FROM incoming trade volumes. At the sector level, IMPROVEMENTS IN TRADE FACILITATION improvements in port efficiency account for 69 and 54 percent of the increment in the imports of food and machinery, respectively. 60 50 The Wider Potential Benefits of Reform in Mexico 40 % 30 SWM (2006) further the analysis by making an 20 10 assessment of the likely impact of the simulated trade 0 volumes on Mexican labor demand. The increase in Food Textiles Transport Machinery exports produces demand for new jobs; changes in imports also contribute to employment expansion. About half the increased labor demand comes from the With respect to Mexican imports, the simulation yields textile sector, which has the highest demand elasticity a higher percentage impact on food, beverages, and to international trade (0.062) and also the highest tobacco imports (21.8 percent) and textile imports expected increase in exports and imports (46 and 14 (14.1 percent), and lower impacts in machinery (8.2 percent, respectively). percent) and in vehicles (2.9 percent). At the aggregate level, 80 percent of the changes in imports are due to 2 It is increasingly evident that the scope and benefits of Further Reading unilateral trade facilitation reforms could be very large for Mexico. The expected increases of about 24 percent Nicita, Alessandro. 2004. "Who Benefited from Trade for exports and about 15 percent for imports suggest Liberalization in Mexico?" World Bank, Washington, DC. that trade facilitation measures should continue to be among the important areas for continued reform in Soloaga, Isidro, John S. Wilson, and Alejandro Mejia. 2006. "Moving Forward Faster: Trade Facilitation Reform and 2008 and beyond. Mexican Competitiveness." World Bank, Washington, DC. Among specific policy options to be considered are Villa, Juan Carlos. 2007. "Transaction Costs in the customs modernization, road infrastructure Transportation Sector and Infrastructure in North America: development, and rail sector reform. The Mexican Exploring Harmonization of Standards." CEPAL. (August). customs system should continue to work toward greater modernization so as to reduce the transaction World Bank. 2008. "Doing Business 2008." World Bank, costs of importing and exporting goods, as well as Washington, DC. toward greater security. This could be achieved through the adoption of new risk assessment World Bank. 2003. "Lessons from NAFTA for Latin America and the Caribbean Countries: A Summary of Research procedures and an electronic "single window" medium. Findings." World Bank, Washington, DC. In addition, Mexico has the ability to further utilize World Bank. 2007. "Mexico: Trade Brief." World Bank, innovative financing schemes that have recently been Washington, DC. made available in order to accelerate improvements in its national highway system. Road networks leading to land ports, for example, are in dire need of investment i The findings, interpretations, and conclusions expressed in in order to make them more suitable for use by heavy this paper are entirely those of the authors. They do not vehicles. Presently, heavy trucks are destroying access necessarily represent the view of the World Bank, its roads to major boarder cities, thus increasing truck Executive Directors, or the countries they represent. operation costs along these corridors. ii This brief is aligned with and has benefited from a project With respect to the rail sector, there are two main on Trade Costs and Facilitation at the World Bank, with policy issues that need to be addressed in order to support of the U.K. Department for International increase efficiency. The first is the lack of an Development. agreement between rail concessionaires on track rights and interline connections. The second is antiquated requirements that necessitate crew changes at border crossings. Both practices increase rail transport costs and divert traffic to other modes of transport that are already overburdened (CEPAL 2007). 3