27840 Volume 1 :f^Ivumah' 1" Fe;I!. ,US.4;M ,.pw- Tir1a.'/flpPr S'ec'lr I 'l7it 7i, Il l/PU S I I)C/)ClPlfllL'lI LUs Is~i /IC Ulacifi Rc-~iol? w ~~~~~~~~~.Iiiit 2)()3 THE WORLD BANK NN or-k in P'r(gre- fblr pulic)i (dikCtl\Ssioh Trade and Logistics in East Asia A Development Agenda ~~~~~~~~~~~~~~~~~~M . A~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Robin CalrUtherS, Jitendra N. Ba.jpai aiid David I I, mclS F ' 2 FILE'COPY Trade and Logistics in East Asia A Development Agenda Robin Carruthers, Jitendra N. Bajpai, and David Hummels EASTR WORIUNG PAPER NO. 3 Transport Sector Unit, Infrastructure Department East Asia and Pacific Region June 2003 Prologue The report presented here is part of the strategy to promote trade competitiveness within the East Asia and Pacific Region. The first major result of this strategy is a recently released report, "East Asia Integrates". I The report presented here is supported by a CD that includes five working papers - four country papers and one special report on ports in their urban context. The papers were prepared for and by the East Asia Transport Unit (EASTR), as part of its assessment of the role of logistics in the region's current and future trade pattern. The work presented here draws extensively on an introductory report published in June 2002, "Trade and Logistics: An East Asian Perspective" as well as on the working papers, and concludes with a logistics development agenda for the next five to ten years. It describes the trade prospects of the region and indicates how they might be impacted by the pace of logistics development. The proposed development agenda aims to reduce logistics- imposed constraints to growth, and allows improved logistics to become a stimulus to increased trade, particularly within the region. The agenda is predicated on the different stages of economic development of various countries and the different role that trade and logistics will play in their growth over the next decade. The country working papers provide specific trade and logistics analyses for China ("Lagging Provinces"), Lao PDR, Philippines, and Vietnam. A special report addressing the issues of port devebpment inr relation to urban growth ("East Asia Ports in their Urban Context") is also included. The country working papers discuss the assessment of present logistics services and the impediments they impose upon, and opportunities they offer for, expanded trade. The last section of each report includes policy reform proposals for addressing these issues. The special report on ports was commissioned as it became apparent that export-oriented trade was heavily concentrated in port cities. It also concludes with suggested remedies including removal of non- maritime activities from downtown port areas, relocation of maritime activities, and improved urban access to ports, as well as for the encouragement of export-oriented activities away from the port cities themselves. We greatly appreciate the support given by the Singapore, Japanese, and Dutch Consultant Trust Funds with the preparation of the background analyses. 1 This report is now available on the World Bank website at htq:/Inwebl 8.worldbank.org/eap/eap.nsf/Sectors/PREM/CB904B865C48F74185256C290055BDE2?One nDocument ACRONYMS AFTA Asia Free Trade Area APEC Asia Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations EDI Electronic Data Interchange ESCAP Economic and Social Commission on Asia and the Pacific FDI Foreign Direct Investment FOB Free on Board GATS General Agreement on Trade in Services GDP Gross Domestic Product GFP Global Facilitation Partnership for Transport and Trade GMS Greater Mekong Sub-region ICAO International Civil Aviation Organization ICD Inland Container Terminal ICT Information and Communication Technology IMO International Maritime Organization MRC Mekong River Commission NAFTA North American Free Trade Area OECD Organization for Economic Cooperation and Development 2PL and 3PL Second Party Logistics and Third Party Logistics TEU Twenty Foot Equivalent Unit UNCTAD United Nations Conference on Trade and Development WCO World Customs Organization WTO World Trade Organization WHO World Heath Organization TRADE AND LOGISTICS IN EAST ASIA A DEVELOPMENT AGENDA By Robin Carruthers, Jitendra N. Bajpai, and David Hummels. 1. Introduction Progress on East Asia's logistics has failed to keep pace with its growth in trade. Developing countries in other regions are now catching up, so an acceleration of progress on logistics development will be crucial to sustaining East Asia's competitive advantages. While recent studies have indicated the importance of port efficiency (in terms of both operational efficiency and document facilitation) on trade competitiveness, 1 the arguments presented in this paper indicate that ports are only one source of the logistics impact on trade growth Land access to ports accounts for a higher proportion of the cost of getting products to market than either the costs associated with the port or the maritime voyage itself, and it is this area that offers the greatest scope for increasing trade competitiveness. The high costs of land access have restricted the benefits of trade growth to the areas immediately surrounding ports. If the benefits are to be more widely distributed the penalties of inaccessibility need to be addressed. High logistics costs from East Asian countries derive from: (i) poor transport infrastructure; (ii) under-developed transport and logistics services; and (iii) slow and costly bureaucratic procedures for dealing with both exported and imported goods. The balance between these three varies among countries, but whichever is the most important, dealing with that one alone without addressing the others is unlikely to produce a sustainable improvement in competitiveness. Facilitating trade growth has gained renewed prominence on the East Asian regional economic agenda. Though trade growth has had beneficial effects for East Asian incomes, much poverty remains; nearly half the region's population still lives on less than $2 per day. Finding ways to better integrate the poor into the regional and global economy is receiving heightened attention. In particular, "behind the border issues" have become central to the new trade agenda. In this paper we focus on logistics and transport issues as part of that agenda. Costs of transportation which have long been an important ingredient in regional competitiveness constitute a large fraction of the final price of goods. In more extreme cases, many producers find markets at home and abroad wholly inaccessible due to inadequate transport infrastructure, logistics systems, and trade facilitation. 1 Wilson, John S.; Catherine L. Mann, Tsunehiro Otsuki (March 2003): "Trade Facilitation and Economic Development: Measuring the Impact", World Bank Policy Research Working Paper No. 2988 - 2 - For countries that have moved beyond export of basic agricultural and mining commodities, logistics requirements become more onerous, not less. Manufacturing firms, especially those integrated into global production chains, seek not only low transport costs but also a host of sophisticated logistics needs, such as, short transit times, certain delivery schedules, careful handling of goods in cold storage chains, certification of product quality, and security of shipments from theft. In short, provision of basic transport infrastructure is not in and of itself sufficient to meet the logistics needs of manufacturing firms. The requisite policy agenda extends broadly, to stimulating the evolution of transport services, promulgating of product standards, licensing of imports, and encouraging foreign investment. The paper presents an overview of the logistics issues facing East Asia countries and proposes a development agenda for them. This is based on a recognition that the countries have basic differences in their level of development, extent of openness, and composition of trade. We begin by discussing the benefits of improved logistics, some of which apply broadly, and some of which apply more directly to manufacturing activities. We then organize the East Asia countries into an action matrix, and discuss the logistics needs appropriate to each group. 2. Trade and Logistics Nexus Why focus on logistics? The case is simple. Reducing the cost and improving the quality of logistics and transportation systems improves international market access and leads directly to increased trade, and through this, to higher incomes and the scope for significant reductions in poverty. We briefly review these macroeconomic connections, and then discuss in specific detail the microeconomic benefits accruing from improvements in logistics. This more specific discussion also provides occasion to review case study evidence on the breakdowns in transport and logistics systems, evidence that will guide our policy discussion in section 5. A. Improvements in logistics lead to trade and income growth There is substantial evidence linking transportation and logistics directly to improved export performance. The effects are especially strong when importers have at their disposal multiple suppliers of highly substitutable commodities. Comparing sales by manufacturers of similar products, Hummels (1999) estimates that exporters with 1 percent lower shipping costs will enjoy a 5-8 percent higher market share. Limao and Venables (2001) estimate that infrastructure quality accounts for 40 percent of the variation in transport costs for coastal countries and up to 60 percent for landlocked countries. Fink et al (2001) estimate that liberalizing the provision of port services and regulating the exercise of market power in shipping could reduce shipping costs by nearly a third. Within the East Asia region, a World Bank study by Wilson et al (2002) shows that there are substantial differences across countries in the quality of logistics and trade facilitation including ports infrastructure, customs clearance, regulatory administration, - 3 - and e-business use. They find that these differences are significantly related to differences in trade performance, and conclude that substantial growth in trade within the East Asia region could be accomplished by bringing lagging countries up to median performance levels. Further, improving access to international markets raises incomes. Frankel and Romer (1999) show that countries more proximate to world markets enjoy higher levels of trade, and that a 1 percent rise in the trade to GDP ratio increases income per person by at least 0.5 percent. Estimates by Redding and Venables (2002) indicate that more than 70 percent of the variation in per capita income across countries can be explained by the geography of market and supplier access. Better access to coasts alone raises incomes by 20 percent. The linkages between trade growth and income growth are especially strong in East Asia. In the last thirty years, East Asia's share of world trade has tripled (from 5 percent to 15 percent), while the number of people earning below $1 per day (1985 prices) has dropped almost two-thirds from 717 million to 250 million. Access to international markets appears to be important for understanding income differences within as well as across countries. Internal and effectively landlocked regions within countries have systematically lower levels of income. In a paper focused on China's internal regions, Wei and Yi (2001) shows that trade levels, trade growth, and income growth rates all exhibit a distinct drop as one gets further from coastal areas.2 The evidence on inland regions makes an especially strong case for the importance of access to international markets. B. Improved logistics brings wide range of benefits What are the specific benefits of improved logistics? Here, we describe channels through which improved logistics can improve welfare in developing economies, with examples and evidence taken from both academic studies and from a series of country studies undertaken recently by the Transport Unit of the East Asia and Pacific region of the World Bank. Improved logistics reduce the "wedge" between prices paid by consumers and received by producers The cost of moving goods between markets increases prices paid by consumers and reduces prices received by producers. On the consumer side, this effect can be seen most clearly by examining the price of goods at the port relative to the price of goods inland. Producers will not ship goods inland unless the price they receive, net of shipping, is at least as high as prices at the port. This means that inland consumers will bear the full burden of shipping costs for any goods not produced locally. These price gaps can be substantial. Data from Mongolia show substantial price variation between 2 Gallup, Sachs and Mellinger (1999) point out that "core" coastal regions worldwide contain 10 percent of world population but 35 percent of gross world product. Ulaanbaatar and outlying regions, with as much as 67 percent of the higher costs in outlying regions coming from the extra transport costs. A similar logic applies to exports. International markets will not pay more for goods produced in inland regions, and so the ex- factory or ex-farm prices will be reduced by the full inland logistics costs of access to the port. These costs can be substantial. Table 1 shows that more than two-thirds of the total cost of container transport from Chongqing China to the west coast of the United States consists of land access to the port and port handling charges. Table 1: Composition Of Logistics Costs Of Container Transport From Chongqing To The US West Coast Acfivity U$ per TEU % of total cost Land access to port 2300 63% Port handling 200 5% Maritime transport 750 21% Port handling 150 4% Land access to final destination 250 70/o Total 3,650 100% Source: World Bank estimates based on interviews with freight forwarders This necessarily shows up in factor prices, such as land values and wages which are low in the interior provinces. Inland regions are therefore squeezed on two sides-by higher prices for their imported consumption items and lower net revenues for their exported output (with resulting lower wages).3 Figure 1 in which poverty rates across Laotian provinces are graphed against road access in the rainy season, shows that regions which enjoy more days of road access have much lower rates of poverty. Similar arguments apply equally well across countries. A country with high logistics costs is, in a broad economic sense, "far" from international markets so that prices of imports are high, and prices for exported goods are low. A manufacturer in Thailand claimed to be closer in time and cost to the United States than to Vietnam because of the poor land access facilities. 3 Transport cost incidence is the primary reason why incomes drop off as international market access drops, as shown in Wei and Yi (2001) for China, and Frarnkel and Romer (1999) and Redding and Venables (2002) worldwide. Figure 1: Lao PDR: Poverty and Accessibility 60 70 60. L 0 60 e 40~~~ c 30 0 25 404 45 *0 5 O e5 ; . 20.. . * Rainy Season Road access (%) Source: Hummels' calculations based on "Logistics Development and Trade Facilitation in Lao, PDR " Improved logistics insures against regional price fluctuations Agricultural production is subject to wide productivity fluctuations due to unpredictable climatic variation. For example, one region may experience drought conditions and food shortages while another enjoys sufficient rainfall and ample harvests. If poor logistics and transportation systems separate the regions, the climate variation has adverse consequences for both. Consumers in the shortfall region face very high food prices, while producers in the surplus region face a market glut. In contrast, good internal logistics facilitates surplus commodity shipments to shortfall regions, smoothing price variation between them. This is a kind of crop insurance-consumers in shortfall regions are insured against high prices while producers in surplus regions are insured against low prices. These problems are especially pronounced within countries such as Lao PDR, Vietnam, and Cambodia where agricultural production is a large portion of national output, and where interior regions are poorly connected. This is not merely a matter of the cost of shipping, but also whether a region can be reached at all. In Lao PDR, for example, provincial roads are passable less than half the time during the rainy season. Better market access appears to dampen price volatility for a broad range of products. Engel and Rogers (1996) show that the volatility in goods' prices between city pairs rises with the distance between the cities, and is especially large for city pairs across -6 - national borders. Essentially, arbitrage is necessary to narrow price differentials across locations, and this is much harder to achieve when logistics are poor. Improved logistics reduces inventory holding costs Low quality transport and logistics systems lead not only to increased costs of delivery, but also to uncertainty about the timing of delivery. Producers cannot manufacture goods unless they have the parts and components necessary for assembly, and retailers cannot sell goods to consumers unless they are in stock, so firms must hold large inventories of goods as insurance against uncertainty in delivery times. Gausch and Kogan (2001) find that inventory holdings in the manufacturing sector are two to five times higher in developing countries than in the United States, and estimate that cutting inventories in half could reduce unit production costs by 20 percent. What causes long and uncertain delivery times? The first reason is infrastructure quality-roads may be impassable or the roads can cause damage to trucks that result in high costs and long delays. Second, peak load congestion is a severe problem in areas where population and manufacturing intensity has expanded faster than infrastructure capacity. In Ho Chi Minh City, the government bans trucks over 2 tons in the inner city between 6 a.m. and 6 p.m. to combat growing traffic congestion, so manufactures must hold large inventories all day rather than delivering mid-day shipments, and trucks sit idle during the day. Contrast this with modem just- in-time techniques, in which deliveries are continuous, and the transportation capital stock is in constant use. Leaner production techniques require a substantial flow of information. Manufacturing firms can only run with small parts inventories if they know with certainty where and when the next shipment will arrive. This requires in turn sophisticated electronic data interchange (EDI). Many countries in the region are far from achieving a competitive status of their EDI systems (see Table 5 on page 13). Finally, certainty in delivery requires that shipments are secure from theft and pilferage. This problem is likely to be most serious for products that are of high value, but are sufficiently homogeneous that gray markets exist for re-sale. Firms may undertake defensive strategies to avoid theft that result in higher transport costs and uncertainty in delivery times. For example, manufacturers of integrated circuits in the Philippines reduce hijacking of shipments by using irregular and therefore costly transport schedules. Improved logistics increases consumers choice, producers sources of supply and potential markets for their products Lower logistics costs can result in lower consumer prices and through this can give greater choice of products. Consumers have fewer varieties and higher prices in markets that are effectively shielded from pro-competitive price effects by high access - 7 - costs, an effect that is most pronounced in areas with low population density and poor external access. So not only are direct living costs reduced, but living standards are increased through greater choice with improved logistics. Recent work shows that most of the differences in trade levels between small and large economies can be accounted for by differences in the range of goods that are traded. In addition, much of the growth in imports due to lowering trade costs comes by expanding the product set.4 Romer (1994) shows that the welfare benefits from expanded product variety can dwarf those estimated from standard calculations of the gains from trade. Manufacturing firms are also consumers, with similar gains. Feenstra et al (1999) show that expanding input variety in Taiwan and South Korea is associated with productivity growth in manufacturing. Improved logistics encourages greater variety in production in several ways. First, they may lower the fixed costs of expansion directly. There are significant scale advantages to providing transportation hubs, warehousing, and logistics services that can be shared by many firms. Second, by lowering marginal costs of serving markets, it is possible to increase sales and spread entry costs over more units. In addition, with improved logistics, producers can sell more goods in more markets. Evenett and Venables (2001) show that 40 percent of trade growth in the East Asian region is accounted for by offering new product lines, and extending exports of existing product lines to new trading partners. There are important diversification benefits for both agricultural and industrial based economies, since specialization in a narrow range of products can be dangerous because of price volatility for both. Recent large declines in export prices and terms of trade have inflicted significant income losses on agriculturalbased East Asian countries5 with agricultural prices falling by a cumulative one-third in the period 1998 to 2001. Copra, coconut oil and coffee6 prices fell by over 50-70 percent in 1998-2001, palm oil, rice and rubber by 40-50 percent, and cocoa and lumber by 30-40 percent. All these are important agricultural products from South East Asia and the Pacific Islands. Semiconductor prices also slumped with the global hi-tech recession in late 2000. The terms of trade of the many net oil importers in the region were also reduced by the rise in oil prices that averaged US$23-24 a barrel in 1999-2001, nearly 30 percent more than the average of the preceding years. The more diversified economies of the region suffered less than those such as Mongolia and Samoa that depend on a small number of products for a high proportion of their export earnings. 4 See Hunmels and Klenow (2001) for cross-sectional comparisons of small and large economies, and Hillberry and McDaniel (2002) for an examination of how trade liberalization affects trade growth. 5 "East Asia Rebounds, But How Far?", East Asia and Pacific Region, World Bank, April, 2002. 6 Vietnam emerged as the second largest producer of coffee but suffered 14 percent drop in receipts in 2000 despite a 52 percent increase in volume. - 8 - The diversification argument also applies across markets, as reliance on a single export destination leaves firms subject to significant business cycle risk. The market destinations for the East Asia region's exports are mainly the industrial countries, with the United States, Europe, and Japan together taking nearly half of the exports of developing countries in the region. Intra-regional trade is limited and largely commodity-based. Within the Association of Southeast Asian Nations (ASEAN), internal trade is limited to only about 20% percent of the total, considerably less than in most other regions. One of the main reasons for the limited intra-regional trade is the pattern of logistics costs and the institutional barriers to land-based trade, which makes many countries of the region effectively closer to industrial countries than their geographical neighbors. While the proposed conversion of ASEAN to a free-trade area would do much to remove tariff barriers, unless there is a corresponding change in the implementation of customs and other restrictions on trade, supported by a reduction in logistics costs, the benefits of tariff reductions will not be fully realized. Improved logistics accelerates the movement towards higher-value commodities and more sophisticated manufactures East Asian regional development has followed a pattern termed the 'flying geese" effect. The first wave of growth was in Japan, followed by a second wave of the "Four Tigers" - Hong Kong, the Republic of Korea, Singapore, and Taiwan The third wave occurred in Indonesia, Malaysia, and Thailand. The transition economies of China and Vietnam are expected to represent the next wave based on their achievements in the last decade (Figure 2). Figure 2: 'The Flying Geese' of East Asia .irs tbe market ecoanomies a- nd then the transaion econanies Anutuii routhb 14 a 10. h &g The "flying geese" metaphor captures a progression not only in incomes, but in policies, and export patterns. Successive waves copied the effective institutions, policies and technologies of previous waves of growing economies, though changing and - 9 - adapting the approaches of the leaders to suit their needs. These waves also progressed from resource-based manufacturing to labor- intensive manufacturing, and finally to high technology manufacturing (Table 2). Table 2: Structure of Manufactured Exports by Country (% by value) Resource based Low/medium High technology technology Country 1985 199 198 1996 1985 1996 Hong Kong 2. 4. 78.5 66.7 19.4 28.S Singapore 42. 12. 25.4 21.9 32.: 65.4 Korea 7. 9. 72.1 5 20.1 35.6 Taiwan 8. 5.1 70.6 54.1 20.7 40.8 Indonesia 72. 34.9 25.1 50. 2.7 14.7 Malaysia 53.7 17. 15. 21. X 31.1 60.4 Thailand 42.1 14. 44.8 49. 13.1 36.4 China 11.7 9. 78.9 69. 9. 20.5 Source: Sanjaya Lall, Exports of Manufactures by Developing Countries: Emerging Patterns of Trade and Location, Oxford Review of Economic Policy, 1998, 14:54-73 This development pattern is connected to logistics in several ways. As countries move from resource extraction through sophisticated manufacturing, the value/weight ratio of their exports rise rapidly. Holding constant the nature of transport services, this can represent a substantial reduction in transportation costs. However, these more sophisticated goods generally impose substantially greater demands on the quality of logistics and transportation services. For example, iron ore and bulk grains may be heavy and therefore difficult to move over land for long distances, but their shipment is otherwise uncomplicated. High value agriculture (flowers, fruits, and seafood) requires careful handling, timeliness, and product standardization. Electronics manufacturing requires all this, as well as tightly integrated supply chains. As such, logistics and manufacturing capabilities must develop together. 3. Logistics Development in East Asia: Regional Perspective Despite two decades of improvements, there remains significant scope for further reductions in logistics costs. Many logistics issues are common throughout the region, while others are specific to groups of countries, to particular countries and even to particular flows of products between pairs of countries. An assessment of the issues at - 10- the country and specific trade flow level is provided in a number of country studies7 undertaken for the World Bank in the last year, but some illustrative examples are provided here. Maritime issues Use of containerized shipping has increased throughout the region (Table 3). During the 1990s total container movements increased at a rate just under 10 percent per year, with the greatest percentage gains made in the ports of China and new ports in Malaysia and Thailand.8 The rapid growth in container usage represents both a revolutionary change in maritime technology and a significant logistics challenge to economies in the region. Table 3: Container Movements At Selected East Asian Ports Port 1995 1996 1997 1998 1999 2000 2001 Growth Kaig Knng 12.550 13,460 14,567 14,582 16211 17,800 17,900 6 1% hnoJNOre 11.846 12.944 14.135 15.136 15945 17.040 lh20 4.6% Shanghai 1,196 1,305 2,527 3,066 4,206 5,613 6,310 31.9% ortKlang 1,134 1,410 1,685 1,820 2,550 3,206 3,759 22.1% Chababg n.a. 729 1,036 1,425 1,756 2,195 2,424 27.1% Qingdao 603 810 1,031 1,213 1,540 2,100 2,639 27.9% ianjin 702 822 935 1,018 1,302 1,708 2,010 19.2% Gunagzhou 515 558 6S7 848 1,179 1,430 1,628 21.1% aidiunaTaiwan 447 695 842 880 1.107 1.130 1,069 15.6% otal(EastAsia) 54,433 57,836 65,119 68,155 75,155 83,422 94,267 9.6% KandSinaaDore % 45% 46% 44% 44% 43% 42% 35% Source: Containerization International, March 2002 Regional container ports are increasing their efficiency in handling containers, but this is insufficient to deal with the rapidly increasing demand for berth space. While the capacity of the container fleet on the East Asian routes increased at an average rate of more than 20 percent per year between 1980 and 2000, capacity of container berths to handle those ships increased at less than 8 percent per year. Countries are responding to this shortage by adding new berths, converting general cargo berths to container handling, and developing new ports.9 Expanded capacity, however, requires greater land area for use in container storage, road and rail links, and associated services. 7 Philippine Logistics Study, (John Arnold and Theresa Villareal), Logistics Development, Trade Facilitation and its impact on Poverty Reduction in China's Lagging Provinces, (International Trade Institute of Singapore), Vietnam Logistics Development and Trade Facilitation (Nomura Research Institute), Logistics Development and Trade Facilitation in Lao PDR (John Arnold, Ruth Banomyong and Nipawis Ritthironk) and Mongolia Trade Competitiveness (Infrastructure Services). 8 Frenkel, E.G., "China's Maritime Developments" Maritime Policy Management, Vol 25, No. 3 (1998) 235-249. 9 Vitasa, H.R. and N. Seprato, "Maritime Sector Developments in ASEAN Countries" Paper presented to the UNDP Conference on Trade and Development, Jakarta, October 1999. - 11 - Municipalities find it increasingly difficult to accommodate both the added space requirements and the road congestion that results from the high volumes of truck traffic servicing the ports. One response is to move port activities out of downtown urban areas, while retaining the employment and business activities that the ports attract. In some instances the only feasible solution to these conflicting pressures is to build new ports. Often it is possible to move the non-maritime port activities (mostly value-added production and packaging services) to locations closer to the industries served by the port and build rail links to provide efficient, non-road access to the port.'0 Increased East Asian trade volumes have led liner services to introduce large container ships that require deeper access channels that can oftenonly be provided by voluminous dredging. Ports that are in river estuaries (such as Bangkok, Haiphong, Saigon, and Shanghai) may become less competitive than coastal deep-water ports (such as Laem Chabang and Hong Kong). Some existing estuarial ports are already looking for new developments on the coast to overcome this disadvantage. Further scope for cost reductions through increasing vessel size are limited and the next development is likely to be more direct services from what are now feeder ports. With higher volumes and more efficient smaller vessels, this could overcome the high cost penalty of transfers in the hub ports. The start of this trend can already be seen in Table 3 with the slower growth rates of the two regional mega-ports, Hong Kong and Singapore. Multi-modal transport Though containerization of general cargo has been increasing in most of the region, containers are often used only for the maritime part of the trip, with containers being stuffed and un-stuffed in the ports rather than at the origin of their cargo. This eliminates the main cost saving advantage of container use. Countries that can best encourage door-to-door movement of containers using multi-modal transport will be better equipped to compete and to bring trade benefits to their more remote regions. Four elements are critical to achieving this integration. The first is matching inland and maritime infrastructure. An important reason that containers do not move inland from container ports is that road and rail infrastructure is not appropriate (e.g., load carrying capacity and vehicle dimension) for the transport of loaded containers. The second key to successful multi-modal transport is simplified trade documentation. Examples include the use of throughway bills and single invoices for all modes. In this respect the countries of East Asia are quite similar to their competitors, as evidenced by Table 4 which gives comparative data for the time it takes to process 10 Rafferty, Laurel, "East Asia Ports in their Urban Context ", East Asia Transport Sector Unit Working Paper No. 8, 2003, World Bank. - 12 - documents for customs clearance for container, and less than container load, sea freight, and air freight. Another regulatory change-the ability to clear containers for tariffs, customs, health, and taxation charges at inland locations away from the ports-would help reduce problems of port congestion. Table 4: Customs Clearance Times Averag days for customs clearance ____________ Air Sea LCL SEA FCL France 1 4 2 Germany 1 1 eece 1 1 1 etherlands 1 2 2 Spain 0 . 2 2 2 weden 1 2 2 USA 2 3 3 Average 1.3 2.1 1.9 China 4 30 5 Hong Kong 2 4 3 ndonesia 3 4 4 Malaysia 4 4 4 Philippines 4 5 3 Singapore 2 3 3 Taiwan 4 10 7 Thailand 5 5 5 Vietnam 5 7 7 Average 3.7 8.0 4.6 Argentina 7 15 12 Brazil 10 10 10 India 8 10 12 Russia 10 12 15 Mxico 4 7 4 Mozambique 5 8 8 Zimbabwe 4 5 5 Average 6.9 9.6 9.4 Note: LCL is Less than Container Load, while FCL is full Container Load Source: International Exhibition Logistics Associatesl' (http.//www.iela.org) Third, an efficient freight forwarding industry is needed. Third Party Logistics (3PL), in which an industry contracts out its logistics functions to specialized suppliers of logistics services, is a well-advanced concept in only a few East Asian countries. In Quoted in"Facilitating Trade: The East Asian Experience in a Comparative Context", Janet Tay Consultants Pte. Ltd for the World Bank, May, 2002 - 13 - others, progression to the earlier stage of Second Party Logistics (2PL), in which companies unify their internal transportation and warehousing functions, and create their own internal logistics departments, is still under way. In contrast, in industrial countries almost a third of logistics turnover is contracted to 3PL providers. In many industrialized East Asian countries barely 10 percent of trade-related transport services are provided in this way. Fourth, effective communications systems are essential for freight forwarders to take advantage of the shipping alternatives available and to keep their clients aware of the status and location of their freight. While there has been growth in the quality and scope of information systems in even the least accessible countries (Table 5), few of these have been able to develop freight forwarding agencies comparable with those in the more accessible and trade-open countries. Table 5: EDI and Transport E-Commerce in Selected Countries Traders in Customs Traders in All parties Electronic Country Port Port EDI Agency Customs electronically trade in Operators System MIS EDI linked transport MIS system services Japan X X X X Singapore X X X X X X Korea X X X X X X Thailand X X X X X X Philippines X X X X Indonesia X X X X Vietnam none Lao PDR none Cambodia none Source: Based on Review of Transport in the ESCAP Region 1996-2001, UNESCAP, 2002 Land Transport High costs of land access to ports, reinforced by the effects of production agglomeration, have resulted in an excessive concentration of export-related activities in port cities. The consequence is congestion in port cities and little economic development away from the ports. For instance, in China, more than 90 percent of Foreign Direct Investment (FDI) in export-oriented activities has gone to the four main coastal provinces (Guangdong, Jiangsu, Fujian and Shanghai). Similarly, the multiplier effect of the textile export boom in Cambodia has been limited largely to areas easily accessible to the deep- water port at Sihanoukville. Concentration of manufacturing activities in port cities, while beneficial to firms that move in, results in significant social costs. Traffic congestion costs can be - 14- enormous. A recent study in Bangkok estimated that moving port-related activities out of the downtown area would result in a 10 percent reduction in peak- hour trips and would entail benefits of up to US$400 million annually. 12 Traffic also results in air pollution, which continues to be a serious issue in many cities of the region, notably Bangkok, Beijing, and Manila, where suspended particulate matter often exceeds WHO guidelines by a factor of more than two. Furthermore, container terminals require vast land areas and efficient access corridors, which are often incompatible with other land uses in urban areas. Many port cities are addressing the issue by building (or proposing to build) new ports or terminals away from the established urban areas. But this can be prohibitively expensive. A more cost-effective alternative is to keep the water-based activities in their existing location but moving the land-based activities to an inland location with high accessibility to both the remaining port area and the industrial activities that will use it most One of the principal objectives of the development of the Waigaoqiao container terminal and Luojing coal terminal in Shanghai was to move port-based traffic out of the urban area. This was achieved between 1996 and 1998. As a result, port traffic handled at terminals within the city was reduced by about 13 million tons, while that in the new terminals outside the city increased by about the same amount. However, the urban traffic associated with the existing port needs to be reduced even further. Reduction of port access costs depends on having adequate infrastructure, appropriate vehicles, and logistics technology that allows these to be used efficiently. Improved transport infrastructure in trade corridors is another important part of a regional poverty reduction strategy that will facilitate the attraction of FDI and trade-based growth away from port cities. While infrastructure development in competing modes can be one way of stimulating inter- modal competition, it can be a costly solution in the early stages of trade corridor expansion. Coordination between agencies responsible for different modes will be an essential component in the planning of expansion of transport infrastructure in trade corridors. Airfreight Airfreight accounts for only about 1 percent of East Asia's international trade by volume, but over 35 percent by value. Airfreight is more important for East Asia's international trade than for other regions for two reasons. First, its distance from the two major markets of the United States and Europe makes timely delivery impossible via maritime transport. Second, the commodity structure of East Asian trade has shifted toward manufactures that require timeliness in delivery. Moreover, because these manufactures have high value-to- weight ratios, the ad- valorem cost of air transport is comparatively low. The importance of airfreight to Asia can be seen by examining a ranking of cargo volumes by airport. Considering airports outside the United States, those in East Asia 12 UN ESCAP (2000). "State of the Environment in Asia and the Pacific," (ST/ESCAP/2087), 2000. - 15 - took ten of the top fifteen places for air freight volume in both 2000 and 2001. They account for more than 30 percent of air freight at the top thirty airports worldwide (Table 6). Table 6: Ranking Of Major Freight Airports In East Asia, 2001 Global Rank Airport Code Tons of Cargo 3 Hong Kong HKG 2,099,605 5 Tokyo NRT 1680,938 8 Singapore SIN 1,529,930 15 Incheon ICN 1,196,845 16 Taipei TPE 1,189,874 18 Osaka KIX 871,161 19 Bangkok BKK 842,588 23 Tokyo HND 725,124 27 Seoul SEL 598,620 28 Beijing PEK 586,704 Total East Asia 33,210,120 % of total top thirty 34.1% Source: Airports Council International, 2002 Good airfreight transport facilities are important in attracting fast growing, high value-added industries. Hence, competition between airports in the region to act as a hub for major logistics companies is growing. The smaller and newer airports that can offer better services are growing faster than the larger ones. Both Beijing (starting from a low base) and Hong Kong (starting from a high base) have experienced high growth rates, despite the opening of competing airports in Macau, Zuhai, and Guangzhou and massive investment in updating freight facilities at Shanghai. Both the new airports (Zuhai and Macau) have found it difficult to attract airlines from Hong Kong. Despite a difficult beginning, Macau has since started to earn a reputation for efficiency and for being a freight user- friendly location. The progress of air freight forwarding and air freight logistics in Korea, Hong Kong, Japan, and Singapore compares favorably with that in the United States and Europe. Some countries of the region however, still depend on a few multi- national air carriers to provide efficient air freight logistics. 4. Country Group Perspective There exists great variation within the East Asian region in the quality of logistics services and development needs going forward. One useful way to organize thinking about these needs is to place countries on a graph of trade openness and accessibility (Figure 3). Countries lying above the horizontal axis score high on openness indices taken from the Global Competitiveness Report 2001-2002 (World Economic Forum, - 16- 2002). Countries lying to the right of the vertical axis are accessible to world markets in the sense of having superior logistics and low transportation costs. 13 Figure 3: Potential Contribution of Transport to Economic Growth in East Asia 2AA *~Twzma____ + M ^ FF-osn . 1 L1*Laoooos y>P1 p0e II -15.00 , 000 v 6 ' ' OW." P rO o 0 b 5.00 10.00 15.00 , w \wS VL-l ' ' ~~~~~~~~~Accessibilit S 8 , 5~~~~~~~~050 Source: Trends in Trade and Logistics, An East Asia Perspective, Robin Carruthers and Jitendra N. Bajpai, EASTR Working Paper No. 2, June 2002, World Bank The combination of these two measures, groups countries on the basis of current logistics status, as well as on the value of improved openness and logistics services in the future. That is, countries with fewer political barriers to trade can enjoy greater returns to logistics investments than countries whose tariff structures would prevent much trade growth even with world class infrastructure. Similarly, WTO accession may be of limited value if logistics services are of insufficient quality to support trade growth. This figure suggests two additional correlates: per capita incomes, and the commodity structure of trade. Countries in the upper right quadrant enjoy higher incomes than those in the lower left, and their exports are high technology manufactures rather than resource-based commodities. Causality likely runs both ways. Countries like 13 The measures of openness are based on those indicated in the Global Competitiveness Report 2001- 2002 (World Economic Forum, 2002). Values for countries not included in this Report have been added using World Bank assessments of the three indices used in the Report (Technology, Public Institutions, and Macroeconomic Environment). All values have been normalized for the countries of East Asia. The reasures of Accessibility are based on the cost of transporting a standard TEU from the metropolitan region of the largest port to Hamburg. For inland regions, the land transport cost to the metropolitan region has been added. - 17 - Singapore and Hong Kong have grown rich in part because past investments in superior logistics abilities have facilitated trade. Meanwhile, low income countries like Mongolia, Lao PDR, and Cambodia suffer from poor coverage of basic road access (Table 7), while the region's middle- income countries have similar coverage to that oftheir competitors in other regions. Similarly, sophisticated logistics facilitate the move up te manufacturing quality ladder, while private sector logistics improvements may be driven by demands from advanced manufacturers. Table 7: Availability of Transport Infrastructure Total roads % of Railways No. of Airports with Km/1000 roads Paved km2 that are Km/1000 runways longer than _______ _ paved kn 1523m/ 1000 km' Cambodia 78.6 11.6 3.3 22.1 China 146.3 28.3 7.1 27.4 Indonesia 178.5 46.3 3.4 32.8 Lao PDR 59.1 24.0 0 25.3 Korea 888.9 74.7 31.7 375.7 Malaysia 196.1 75.3 5.5 63.7 Mongolia 2.2 46.1 1.2 4.5 Philippines 6665 19.8 3.0 113.3 Thailand 125.7 97.5 7.9 75.9 Vietnam 283.1 25.1 9.5 45.5 Argentina 78.6 29.5 12.3 32.8 Brazil 234.0 9.3 3.6 21.3 Mexico 167.9 29.7 9.3 64.8 USA 695.4 90.1 23.2 190.7 France 1621.8 100.0 58.1 138.1 Poland 1218.6 65.6 74.9 236.7 Source: East Asia Transport and Logistics Strategy: Measuring Progress, Policy Research Corporation on the basis of CIA (2002) Using Figure 3, we place countries of the region into four groups and discuss each in Mmrn o Group 1: Outward-oriented highly accessible countries (Singapore, HK, Korea, and Taiwan) o Group 2: Outward-oriented accessible countries (Thailand, Philippines, Malaysia, China, and Indonesia) o Group 3: Less open and accessible countries (Vietnam and Cambodia) o Group 4 : Land-locked and Island countries (Mongolia, Lao PDR, PNG, and Samoa) - 18 - Group 1: Outward oriented highly accessible countries (Singapore, HK, Korea, and Taiwan) In these higher income countries exports have shifted toward higher technology manufactures and on to services. Logistics costs are at very competitive levels, transport volumes are high, and multi-modal linkages are well-developed. However, given the strength of global competition these countries have to maintain logistics costs and quality at competitive levels in tune with the evolution in technology and recent security requirements. Box 1: South Korea's successful integraton ofports and land transport networks South Korea has one of East Asia's most developed land access networks to its ports, making use of road and rail links to the ports of Pusan and Kwangyang, the latter alongside a major steel mill and industrial complex and now in its second stage of development with a potential capacity of 2.4 million TEU (twenty foot equivalent unit, size of a standard container). Both Pusan and Kwangyang have been planned in conjunction with major road and rail links to Korea's major manufacturing regions. Pusan in particular has adopted a strategy of encouraging people to live and work in the city, and has for this reason developed a new port area away from the downtown area to allow the original port area to be redeveloped for residential and commercial use. This has reduced traffic congestion and air pollution, and improved logistics efficiency has made the new port easier to reach from the city's industrial areas and the rest of Korea. The Yangsan inland container terminal has been constructed to relieve port generated traffic congestion and environmental problems resulting from the massive transport movements the port generates. Another inland container terminal (ICD) is under development in the center of the Korean peninsula, to serve the growing industrial zones on the west coast and in the central region of the country. Together with the ports, the ICDs are part of a logistics system based on an advanced EDI and information service. In this way, Korea will be able to maintain the competitiveness of its industrial base, while moving its manufacturing away from the existing congested urban areas and spreading its benefits more widely throughout the country. Hong Kong and Singapore have specialized in providing logistics services as a transshipment hub for neighboring states. While Singapore was the main transshipment stop for much of South East Asia including Indonesia, Hong Kong specialized in direct shipment to and from neighboring Guangdong Province, the manufacturing region where nearly 40 percent of China's exports are produced. These two mega-ports are now facing competition from emerging regional ports, Singapore, from Tanjung Pelepas (TJP) in Malaysia and Laem Chabang in Thailand, and Hong Kong, from the rapidly expanding container ports of the Pearl River delta in China's southern coast Transactionand time cost advantages are the major success factors for these and other newly emerging ports. Other advantages include the - 19 - efficiency of auxiliary services (particularly customs and freight forwarding) and logistics efficiencies through less congested road and rail access, and better links to national and international transport networks. The competitive advantage of Tenang Pelepas relative to Singapore will increase with the future expansion of Malaysian rail network, linking the port to Thailand, Vietnam, and Cambodia. Likewise, growth in traffic through ports in southern China is expected to accelerate withthe dismantling of the restrictions on direct imports of American and Taiwanese goods, until now, one of Hong Kong's main advantages. Group 2: Outward-oriented accessible countries (Thailand, Philippines, Malaysia, China, and Indonesia) Group 2 countries face daunting problems in addressing the logistics impediments to higher pro-poor economic growth. A common feature of this Group is that they are still in the early stages of designing national policies and institutional structures that encourage rather than inhibit multi- modal transport services, essential for increased external and domestic trade. Inadequate and inefficient port and shipping facilities, transport services, and land infrastructure still persist in many parts of these countries. Also the rural infrastructure (roads and water transport) is often inadequate, causing long transport times and high transport costs, which in turn hamper the development of domestic markets and lead to substantial inter-regional price differences within these countries (Philippines, China, and Indonesia). In some cases, quasi-legal and illegal road tolls are charged by local authorities and other agencies, often as a desperate way of raising revenue, but always to the detriment of accessibility to both domestic and international markets. In the countries of this Group, the form of contracts for international trade and transport discourages multi-modal use. It is common for the purchaser of exports to contract FOB in the port of the exporting country, with the seller (producer) being responsible for contracting landside delivery to the specified port. Because no one agent assumes responsibility for the whole logistics chain, the full advantages of multi- modal transport are not realized. With the exception of Thailand, the penetration rate of 3PL service provider in logistics business is often low, for example, less than 10 percent in China. In some cases large exporters have developed their own well- integrated logistics, such as, large international agro-product companies in Philippines. Trade documentation is a particularly difficult hurdle for international trade with an inland origin or destination, with a great reluctance on the part of customs and health authorities to allow inland clearance. Estimates based on interviews with freight forwarders in the interior of China indicate that inland transport costs can account for about two-thirds of the total transport costs (Table 8). For most hub ports the costs of port handling, maritime transport, and final delivery in the destination country are largely independent of the city of origin, but the costs of access to the hub port vary with distance, transport mode, and density of demand. In the context of the WTO requirements custom fees will be reduced. - 20 - Moreover, recent liberalization has led to an influx of foreign shipping services such that by the end of 2002 they accounted for almost 60% of China's export trade. Group 3: Less open and accessible countries (Vietnam and Cambodia) and Group 4: Land locked and Island countries (Mongolia, Lao PDR, PNG, and Samoa) Countries in these groups are mostly low income and either former centrally planned socialist economies or small island states, dependent on a small number of commodities and tourism. Their regimes, recent history, and geographic position are largely responsible for the small role of international trade in their national economies. With the exception of Vietnam, they have low population density, small domestic markets, and primarily small- scale agrarian economies of a subsistence nature. Formal external trade is small, although in some cases is complemented by substantial informal trade. Table 8: Transport Cost to Ports From Inland Origins in China City and Province Port Truck Rail (U_$/TEU) (U$/TEU) Xian, Shaanxi Qingdao 1,577 603 _______________________ Tianjim 1,127 596 Lanzou, Gansu Lianyungang 1,464 742 Qindao 1,127 676 Hohot, Inner Mongolia Tianjim 496 416 Qinhuangdao 563 467 Nanning, Guangxi Guangzhou 676 517 Kunming,Yunnan Guangzhou 789 689 Changsha, Hunan Shanghai 1,577 570 Guiyang,Guizhou Guangzhou 1,532 818 Shanghai 1,915 875 Chongching City Shanghai 1,757 669 Source: ITIS estimates based on interviews withfreightforwarders Many logistics constraints hamper the economic growth of these countries, with the most fundamental being the lack of adequate infrastructure. Poor roads and other transport infrastructure not only lead to frequent closures and suspension of services but also require the use of small and inefficient vehicles and vessels, which have high operating costs. For example, in Cambodia, truck rates for distances over 100 km vary from 137 to 467 riel/tonne/km depending upon road conditions. Similarly, in Lao PDR, almost 40 percent of villages are more than 6 km from a main road, half are not accessible during rainy season, one quarter of the district centers lack year-round road access and a quarter of provincial and local roads cannot be used during the rainy season. This not only makes it difficult to get outputs to markets, but also increases the import costs of essential consumer products and inputs such as fertilizers. Government policies lack stability, consistency, and transparency, creating many additional problems for the processing, storage, transport, grading, marketing, and sale of - 21 - products. Policy coordination between central and provincial authorities is poor. Most countries of this Group suffer from a highly distorted price system, a remnant of a previously centrally planned economy. National standards and practices in product quality, packaging, storage, and transport conditions are often rudimentary, and farmers are disorganized and lack management, marketing, and logistics capabilities. In Vietnam, though overall port, cargo handling, trucking, and rail tariffs may not be excessive, relative inefficiencies impose high costs in terms of inventory and unproductive time of vessels and road vehicles. For instance, the day-time truck bans in Ho Chi Minh and Hanoi cities impose a very high logistics costs as discussed earlier in terms of longer lead and travel times, lower vehicle utilizatiorq and diseconomies in consignment size. A possible solution lies in the private provision of transport and logistics services as private operators are generally far more efficient than those in the public sector. However, given the high and fixed costs of entry, private service firms are reluctant to provide services where trade volumes are low. Strengthening of logistic services through improved information to farmers and through cooperative efforts could provide significant improvements. The experience of Thailand as its exports progressed upwards through the value chain may provide a useful example. The first focus was on commercial rather than subsistence crops, which have considerable potential for growth Incentives were given for improvements in the supply of fertilizers and improved seed, harvesting techniques, post harvest storage and processing, information on prices and markets and marketing, as well as on improving access to domestic and international markets. In many of the countries of this Group the inland transport system is below international standards, lacking container freight stations, yards, and trucks in the inland regions. For instance, in Papua New Guinea, the Highlands Highway, the prime road corridor used for the export of minerals and coffee, suffers from sub-standard roads for container movement by trucks, poor maintenance, and frequent closures causing enormous loss in trade. Border procedures are also cumbersome and time-consuming in these countries, due to excessive and ad hoc regulatory requirements. Container tracking capability is particularly poor, with shippers often unaware of their containers' whereabouts. In Cambodia, which experiences enormous competitive pressures from its neighbors, customs clearance takes 8 days for imports and 10-14 days for exports while informal payments are necessary to handle vessels beyond 5 p.m. in its main port, Sihanoukville. Port charges at Sihanoukville are the highest in the region, almost four times that of Thailand's Songkhla port which is comparable in size. 14 The inter-modal transport systems for most countries are poorly integrated, with no streamlined procedures to support the seamless movement of containers between coastal and inland areas. 4Ministry of Commerce (2001), "Integration and Competitiveness Study- Part B", A pilot study prepared under the Integrated Framework for Trade-related TA. - 22 - The potential impact of improved multi- modal transport is well illustrated in a recent study on the time and costs of container movements from Lao PDR to Europe, 15 which showed that alternative multi-modal routes could reduce the present high door-to- door cost (through Danang and Singapore) by almost one third (Table 9). Table 9: Multi-Modal Routing Alternatives From Lao PDR To Europe Feeder port Hub port Distance Time Cost (kms) (days) (U$ per TEU) Danang Singapore 18,329 31/32 3,420 Bangkok Singapore 17,549 30/31 2,477 Laem Chabang Singapore 17,630 30/31 2,435 Port Klang 16,905 27/28 2,270 Source: Multi-modal transport systems: The case of the Laotian garment industry, Banomyong and Beresford, 2000 For the landlocked countries, land border crossings invariably involve delays and costs arising from the inefficient application of national regulations, difficulties in cargo and document clearance, unnecessarily long storage, high insurance premiums, and long waiting times. As an example, Mongolian rail freight arriving at the border with China often waits for days for Chinese rail wagons to continue their transport to the port of Tianjin. Documentation is often inadequate due to lack of qualified staff at the relevant ministries or government departments. Border delays lead to extra storage charges, which cannot always be properly controlled. Detailed customs statistics are often collected at a high cost to traders, but data that might be of use to them is not compiled, published, or analyzed. In many cases the customs regulations and procedures are excessive and inefficient. Remote Regions within Countries Many of the East Asian countries have vast remote areas with poor connections to other domestic markets, as well as to international sea and air gateways. The problem begins with low population density and geographic remoteness, but is made worse by the absence of basic transport infrastructure. Of course, if markets are distant and trade volumes are low, then it becomes difficult to justify the construction and the proper maintenance of these basic infrastructures. This creates a vicious cycle, resulting in transport costs so high that these remote areas become nearly autarkic. For example, consider the high transport costs prevailing in Lao PDR. Trucking time between Thai ports and the Laotian border are slow and freight tariffs are high because of long distances, the absence of back haul, and the bad condition of the connecting road. All this is exacerbated by slow and unpredictable border crossing 15 Banomyong, R. and A.K.C. Beresford, "Multi-modal transport systems: The case of the Laotian garment Industry", Trois-Rivieres, France (May 2000). - 23 - procedures. Remoteness is not limited to landlocked regions. In the Philippines, Mindanao is very poorly connected to population cores with limited containerized cargo services. Logistics difficulties associated with remoteness extend beyond the frequency and cost of transport. Many of the key outlying counties and villages in the Chinese provinces of Hunan and Yunnan are poorly connected to the main cities. It is difficult to maintain road access into interior regions and harder yet to maintain supporting logistics facilities (such as warehouses, cold storage rooms, inter- modal terminals, and information structures to control flows) in the rural areas. As a consequence, cargo consolidation is limited, harvests cannot be stored, and perishable products do not survive shipments. The immediate consequence is a large and widening income gap between urban and rural areas. People and productive activities become concentrated in urban cores. The gap itself creates pressures for additional ruralto-urban migration flows. This creates immense problems for the cities: traffic congestion, inner city distribution difficulties, air pollution, and inaccessibility of industrial areas. Meanwhile, population density in the remote regions falls still lower, and with it, the ability to maintain linkages. 5. Logistics Development Agenda Domestic Integration: A priority For countries in groups 3 and 4, and especially for landlocked regions and remote regions within Group 2 countries (China, Thailand, Philippines and Indonesia), the development of more tightly integrated domestic markets and logistics systems is a high priority. Besides the provision of reliable and lowest possible transport costs by promoting an appropriate mix of modes (roads, waterways, and rail) complementary institutional actions must be taken to ensure the availability of transport services in remote areas (trucks, inter- island shipping, buses, etc.) and the right conditions for market development (e.g., post-harvest services, cargo consolidation through farmer or business associations, information on prices and market demand, access to credits, human skilL etc.). Private sector response in logistics industry Many logistics needs are better served by the private rather than the public sector. The market response for each type of service will vary by the stage of development, and the role of government in creating an enabling environment. Very simple extractive industries may not require advanced logistics abilities, and the absence of a flourishing private sector is less of a handicap. However, high value agriculture (e.g., seafood, flowers, and fruits) and manufacturing products (fashion textile, electronic assembly, and machines) do require more sophisticated logistics services such as freight forwarding, 3PL, warehousing, storage, packaging, e-business use, and trucking. - 24 - The difficulty is that domestic providers of these services may not be up to international standards. For example, because of concerns about the quality of local freight forwarders, Japanese manufacturers in Vietnam insist on working with freight forwarders that are joint venture partners with familiar (Japanese) logistics providers. Part of the insistence may be a need for superior technology that the foreign logistics providers can offer. Some of it may also be due to the long-standing relationship between the manufacturer and logistics provider. Freight forwarders who fail to provide reliable delivery times and careful handling, jeopardize contracts not only in Vietnam, but also back in Japan. Often, the government provides the main impetus for developing a market- responsive private logistics industry. In many countries, the government may consider withdrawing from the direct provision of these services while creating the right enabling environment for the competition and investment in logistics businesses. This may entail legalizing and deregulating freight forwarders, and allowing new entrants, including international companies, who can be a major source to transfer capital, technology, and new management practices in developing sophisticated services. Even areas such as port management and operations that are traditionally with the government may benefit from private services provision. 16 The countries in groups 1, 2 and 3 are likely to reap a very high pay-off from a well-developed private logistics industry. Regulatory Environment Transport A common problem in East Asia countries is regulatory coordination across modes. One regulatory agency monitors ports, another roads, a third rail, and each may have different plans, standards, and reporting requirements. This becomes problematic for firms seeking seamless freight movement across modes. Establishment of a transparent and uniform regulatory and legal regime is a prerequisite for an effective transport ministry. One solution would be regulatory consolidation so that businesses face consistent rules. Moreover, government should promote an integrated planning framework for developing main transport and trade corridors, with established hierarchies of modal interfaces (inland terminals, container stations, cargo clearance facilities with respect to customs, health inspections, and tax payments). A second problem is that access to publicly administered transportation may not be allocated according to an efficient market-based pricing model. In central regions of China, for example, some bulk commodities are allowed queuing priority on rail lines. Such a practice reverses the priorities that would exist if market prices deternined queuing. Often there are public or private monopolies such as Philippines Ports Authority and private shipping cartels (Vinamarine and Vinalines in Vietnam), or traders cartel for freight forwarding in Lao PDR. These monopolies are unable to provide satisfactory services despite high service charges. 16 See Fink et al (2001) for the Latin American experience with port privatization. - 25 - The countries already within the WTO such as China, and those likely to join in the near future (Cambodia, Vietnam, and Lao PDR) need to review their transport regulations and policies in light of the impact of accession and application of the GATS rules on their industry. This review would be in terms of non-discrimination between foreign and local service providers, transparency of rules and regulations, and elimination of quantitative restrictions. Cross Border Facilitation Cross border facilitation is a key intervention in lowering overall export and irnport transactions costs leading to high returns for all East Asian countries, though less for Group 1 countries. This can best be achieved through harmonization and simplification of customs procedures, infornation sharing, ICT and customs modernization, establishment of transparent transit rules, and post-entry compliance audit. The interests of related public and private communities including customs, freight forwarders, shippers, port operators, shipping lines, and insurers and bankers, must be internalized in improving a facilitation process. The emerging concern for security in trade further reinforces the need to integrate the efficiency and enforcement needs in a more rigorous fashion taking into account the risk profile of cargo, intelligence information, and nature of trade transactions. Countries should immediately act on their identified capacity-building needs and application of necessary equipment and technologies for trade facilitation (advance cargo and passenger information system, cargo handling equipment, EDI, etc.) in light of the international best practices promoted by international and regional institutions such as World Customs Organization (WCO), International Maritime Organization (IMO), International Civil Aviation Organization (ICAO), United Nations Conference on Trade and Development (UNCTAD), United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), Asia- Pacific Economic Cooperation (APEC), and ASEAN. Urban Land Use and Management Urban governments need to exercise land use policies which are market responsive for the location of logistics infiastructure and ports. This is perhaps more difficult than it sounds because of externalities which are difficult to quantify in monetary terms. Firms move production into clusters because they enjoy positive productivity externalities-informnation spillovers, access to intermediate inputs, and specialized human capital. However, they do not take into account the effect that their move has on increasing already severe congestion. Decisions to decongest or relocate facilities should take into account the trade- offs between the positive (agglomeration economy) and negative externalities (congestion and pollution) of businesses, or facilities (such as ports or container depots) that are to be displaced. Unfortunately, our ability to measure these externalities, especially positive spillovers, is quite limited. - 26 - Standardization The benefits of standardizing products can be illustrated nicely by describing the Philippine tomato industry. At present there is no national standard for sorting and grading tomatoes, so these processes are repeated at each stage of the domestic marketing chain. Growers handpick and separate good quality fruits from those with visible defects, then sell them. In a central market, they are again sorted into small, medium and large sizes for shipment to Manila. Final inspection is done by random sampling at the pier before the tomatoes are loaded into container vans for shipment to Manila. All this takes place before the tomatoes are shipped to foreign markets where the process is repeated. To insure product standardization and quality, governments should set and maintain national and ISO standards, including for bonded and cold stores. Unintended Regulatorv Consequences Many logistics difficulties are caused by regulatory policies not directly related to logistics. For example, Vietnam imposes strict import licensing requirements for electronics manufacturers outside of export processing zones, conditional on promises to export. It is then necessary to document that the parts can be matched one to one with the final product, which is done by packing the parts into assembly kits. This imposes additional logistics costs, including packaging the parts into the kits, and the relative inefficiency of transporting a kit of dissimilarly shaped parts, then distributing them to parts piles at the assembly factor. The logistics costs run as much as 60 percent greater than an unconstrained system. Less obvious, but perhaps more pronounced, are the cost savings lost from being unable to source parts from lower cost suppliers as they become available. The argument is not that Vietnam should eliminate these import licensing requirements, but rather that it may want to evaluate the unintended costs that the requirements place on its logistics system. Perhaps these costs are worth bearing, and perhaps not, but they should not be ignored. Security The fall-out of September 11th has heightened the importance of efficient and secure trade facilitation in supporting trade- led growth Recognizing that security and facilitation are two sides of the same coin, an integral approach to supply chain management would be better than the current practice of limiting security risks of imports by improving a few discrete points of supply chains (customs). Since 90% of the world cargo is carried by containers the security initiatives are presently targeting these, as well as, air cargo/passenger movements. The impact of increased transport costs related to security has already begun to affect trade volumes and competitiveness of ports. According to an Organization for Economic Cooperation and Development (OECD) estimate, trading costs excluding the increased inventory and other "behind the border" - 27 - costs, have risen by about 1-3 percent, resulting in a loss of about US$75 billion in aggregate welfare. All the international agencies involved directly in international trade are acting to allow exporting countries to achieve higher security as expeditiously as possible. In addition, they are making a major contribution by providing funding for the procurement of equipment and technical assistance in drafting regulations and training for customs and security staff in implementation. The selected solutions for efficiency, safety, and security are likely to vary by countries in order to reflect country conditions (human skill and resources, technology, and quality of facilities), risk profile of countries involved and nature of trade transactions. The WCO task force on Security and Trade Facilitation on international supply chain is expected to develop appropriate processes and identify supporting capacity-building needs. However, from a developing country's perspective the costs and challenge in trade facilitation have risen and any increase in trading costs will affect the level of trade for those who cannot manage to contain the increase in transaction costs. Traditional security methods result in processes that increase the cycle time for activities, such as queuing to go through metal detectors and physical inspections. However, since goods and raw materials can be secured after inspection at the point of origin, this is the preferred approach both from security and efficiency perspectives. If such technology solutions can be implemented for the one percent of shippers that account for more than 60 percent of all container movements at the point of origin, then national security agencies can focus on a more thorough examination of the remaining 40 percent of containers. The overall result should be to minimize the impact on the flow of international trade. A key to this approach is the security of containers once they have left their country of origin. A number of technologies are already available that allow a container to be tracked and monitored at all times between its origin and destination However for the expected security to be realized, standard technologies and information systems need to be shared between governmental agencies, shippers, and cotporations. 17 Regional Cooperation This sharing is best achieved through a regional dialogue, that is also key to the harmonization of national, regional, and international rules and policies relating to trade facilitation Cooperation is especially important in assisting landlocked countries (Mongolia and Lao PDR) and those with long land borders, mostly in the Mekong region. For example, Laotian imports and exports face long delays clearing Thai customs. The problem is that Thailand has limited interest in speeding up the process for goods bound 17 This paragraph is based onFriction Over Security Gaps, Ram Reddy. http://www.intelligententerprise.coni/ - 28 - for Lao PDR With their own trade, presumably there is a constituency that would like to see customs procedures move along more quickly, but the only constraint on Thai procrastination is the possibility that Laotian traders will go through Vietnam. The on-going regional and sub-regional initiatives (ASEAN, APEC, Mekong River Commission (MRC) and Greater Mekong Sub-region (GMS)) provide, on a regular basis, opportunities to cooperate on country-specific investments and reforms to address the regional needs for cross border transport links (e.g., UNESCAP promoted Asian Highways and railways, MRC proposal on the use of Mekong river), improved customs processing, and hannonization of rules dealing with customs, vehicle standards, border crossings by vehicles registered in neighboring or third countries, movement of hazardous material, insurance coverage, safety, and treatment of transit traffic. The Bank's country-specific programs, and more specifically, the Global Facilitation Partnership for Transport and Trade (GFP)'8 which consists of over 100 international, public and private agencies, can also assist countries through investments and technical assistance on trade facilitation issues while serving as a major source for knowledge- sharing in global best practices and capacity building (e.g., distance learning and tool kits on customs modernization, supply chain management, port modernization, etc.). 18 The Global Facilitation Partnershipfor Transportation and Trade (GFP) aims at pulling together all interested parties, public and private, national and international, who want to help achieve significant improvements in transport and trade facilitation in Bank member countries. The Partners will together agree to design and undertake specific programs towards meeting this objective, making use of their respective comparative advantage in the subject matter in a coordinated fashion. httr://wblnOO18.worldbank.or/twu/Zfg. nsf/ - 29 - References: Banomyong, R. and A.K.C. Beresford. 2000. "Multi-modal Transport Systems: The case of the Laotian Garment Industry." Trois-Rivieres, France. Engel, Charles and John. H. Rogers. 1996. "How Wide is the Border?" American Economic Review 86(5), December, p. 452- 472. Evenett, Simon J. and Anthony J. Venables. 2001. "The Geographic Spread of Trade: Evidence From Twenty Four Developing Countries." Processed. Munich: European Research Workshop in Intematiomi Trade (ERWIT) June 14, 2002. Feenstra, Robert C. , Dorsati Madani, Tzu-Han Yang, and Chi-Yuan Liang. 1999. "Testing Endogenous Growth in South Korea and Taiwan" Journal of Development Economics, 60(2), p. 317-41. Fink, Carsten; Aaditya Mattoo, and Ileana Cristina Neagu. 2002. "Trade in International Maritime Services: How Much Does Policy Matter?" World Bank Economic Review, No. 16, p. 81-108. Frankel, Jeffrey and David Romer. 1999. "Does Trade Cause Growth?" American Economic Review, Vol 89, No 3, p. 1- 16. Frenkel, E.G. 1998. "China's Maritime Developments." Maritime Policy Management, Vol 25, No 3., p. 235-249. Gallup, John Luke and Jeffrey Sachs with Andrew D. Mellinger. 1999. "Geography and Economic Growth" International Regional Science Review, p. 179-232. Gausch, Luis J. and J. Kogan 2001. "Inventory in Developing Countries: Level and Determinants, a Red Flag on Competitiveness and Growth" World Bank, Washington, D.C. Hillberry, Russell and Christine McDanieL 2002. "A Decomposition of North American Trade Growth since NAFTA. " International Economic Review, May/June 2002 pp. 1-6. Hummels, David. 1999. "Towards a Geogrpahy of Trade Costs." Processed. Graduate School of Business, University of Chicago. Hummels, David and Peter Klenow. 2001. "The Variety and Quality of Nation's Trade." National Bureau of Economic Research Working Paper No. w8712. Cambridge, MA Lall, Sanjaya. 1998. "Exports of Manufactures by Developing Countries: Emerging Patterns of Trade and Location" Oxford Review of Economic Policy, 14, p. 54-73. - 30 - Limao, Nuno and Anthony Venables. 2001. "Infrastructure, Geographical Disadvantage, Transport Costs and Trade." World Bank Economic Review, 15, p. 451-479. Ministry of Commerce, Cambodia. 2001. "Integration and Competitiveness Study - Part B." A pilot study prepared under the Integrated Framework for Trade-related TA. Redding, Stephen and Anthony J. Venables. 2002. "Economic Geography and International Inequality." Center for Economic Policy Research Discussion Paper No. 2568. London Romer, PauL 1994. "New Goods, Old Theory, and the Welfare Costs of Trade Restrictions." Journal of Development Economics, 43, p. 5-38. Tay, Janet 2002 "Facilitating Trade: The East Asian Experience in a Comparative Context." Report for the World Bank, Washington, D.C. UN ESCAP. 2000. "State of the Environment in Asia and the Pacific." ST/ESCAP/2087. Vitasa, H.R. and N. Seprato. 1999. "Maritime Sector Developments in ASEAN Countries." Paper presented to the United Nations Development Program Conference on Trade and Development, Jakarta. October Walkenhorst, Peter. 2003. "Cost Implications of trade security for Developing Countries." Paper presented at a joint meeting between Global Facilitation Partnership and the World Customs Organizatioib Brussels. Wattanapanom, de Lombaerde and Wanart. 1997. "The relocation of the garment industry as an instrument for regional development in the Northeastern region of Thailand." Center for Association of South East Asian Nations Studies, Working Paper No. 11, Jakarta. Wei, Shang-Jin and Yi Wu 2001. "Globalization and Inequality: Evidence from China." National Bureau of Economic Research Working Paper No. 8611. Washington, D.C. Wilson, John S.; Catherine Mann, Yuen Pau Woo, Nizar Assanie, Inbom Choi 2002. "Trade Facilitation: A Development Perspective in the Asia Pacific Region" World Bank Working Paper presented to APEC. World Bank (2002): "East Asia Rebounds, but How Far?" East Asia and Pacific Region. World Bank. - 31 - EASTR Working Papers 1. Road Improvements for Poverty Alleviation in China Hatim Hajj and V. Setty Pendakur (this report was published in 2000 and is not included here) 2. Trends in Trade and Logistics: An East Asian Perspective Robin Carruthers and Jitendra N. Bajpai (this report was published in 2002 and is not included here) 3. Trade and Logistics in East Asia: A Development Agenda David Hummels, Robin Carruthers and Jitendra N. Bajpai 4. China's Lagging Provinces: Logistics Development/Trade Facilitation and its impact on poverty reduction International Trade Institute of Singapore 5. Logistics Development and Trade Facilitation in Lao PDR John Arnold with assistance from Dr. Ruth Banomyong and Nipawis Ritthironk 6. Philippines Logistics Study John Arnold and Theresa Villareal 7. Vietnam: Logistics Development, Trade Facilitation & the Impact on Poverty Reduction Nomura Research Institute, with additions by John Arnold and Jack Stone 8. East Asia Ports in their Urban Context Laurel Rafferty