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Customs Streamlining Moving to the Top of the World’s Trade Agenda

by Carol West

Suppose I’m the lucky owner of a toll bridge to an island you want to go to. If I charge you two dollars, I cannot only cover my expenses, but benefit with one dollar left over in profit. You might grumble but, hey, it’s my bridge.

Now suppose I tell you that, in order to pay your two dollar fee, you have to use the Acme Payment Services system – and Acme will charge you $100 to process the transaction. You wouldn’t just grumble. The transaction charge so exceeds the benefit you receive from the transaction, you’d say I was nuts – and take your toll business elsewhere.

According to the United Nations Council on Trade and Development, the cost of complying with customs formalities in many countries can similarly exceed the cost of duties paid on a shipment of goods. This points to a basic problem with complex customs procedures that importers and exporters have complained about for years.

The good news is that high-level trade negotiators are starting to catch on.

Despite appearances of universal discord, there is a surprising level of agreement among World Trade Organization (WTO) members on this issue.

WTO trade ministers going to Seattle last year packed long lists of policy issues to disagree about, like labor rights, environmental protection, agricultural subsidies, health and social development priorities. The question was whether any or all of these issues should be tied into new world trade negotiations and, if so, how.

The ministers left with their lists intact and the question unresolved, having agreed to disagree by suspending talks. But the real story to emerge from this is about growing demands to move procedural matters – trade facilitation – to the top of the agenda.

Before the December meeting, a strong consensus existed among WTO members to get customs procedures and facilitation on the agenda. Canada, the United States, the European Union and at least a dozen other WTO members asked for trade facilitation to be included in the next round of negotiations. Some countries, such as India, have reservations about including customs procedures in trade talks due the potential cost burden of administrative reform rather than with trade facilitation in principle.

In Canada, the Canadian Society of Customs Brokers began working with importers and government to modernize the customs process years ago – and today Canada has one of the best customs systems anywhere. Internationally, the WTO has worked for decades to develop simplified customs procedure.

What’s new is the increasing pressure to move these efforts up a notch in terms of visibility and political commitment. In the past, customs matters have often been treated separately from trade negotiations. Now, the demand is to make a commitment to harmonized, transparent, streamlined customs procedures an integral part of bilateral and multilateral trade agreements.

Why do procedural matters matter?

What makes this focus on trade facilitation and procedural matters so attractive? Where is this renewed pressure coming from?

Partly from political expediency. When almost every policy issue has become bogged down in controversy, it makes sense to shift the focus of international efforts to areas where there is substantial agreement, where real, visible progress is possible, and where demonstrable benefits can be achieved for all parties. Customs procedures fit the bill nicely.

First, while progress has already been achieved in many countries, there is room for concerted action amongst trading partners. According to a UN study, an average customs transaction today still involves 20–30 different parties, 40 documents, 200 data elements (30 of which are repeated at least 30 times) and the re-keying of 60–70 percent of all data at least once. Automated systems to manage this process are still not commonplace.

While Canada, the United States and Australia – to name just three– have moved towards modernized customs administrations, there is a need to share this expertise and to develop consistent standards for processing customs transactions.

Second, efforts to make customs procedures more efficient are the closest you’ll come to a true “win-win” proposition in trade negotiations. The WTO Goods Council began assessing the possibility of WTO rules concerning trade procedures in 1996, after the Singapore Ministerial Conference. Delegations to the council have unanimously agreed that simplified trade procedures can result in big savings – in time, money and human resources for every member economy. That view is backed by the Asia Pacific Economic Cooperation forum, which estimates that the gains to the region’s combined GDP through trade facilitation programs will be double the gains expected from trade liberalization.

For developing economies, inefficiencies in areas such as customs administration are major roadblocks to integration into the global economy.

The business community in general – manufacturers, importers and exporters, carriers, brokers and logistics providers – have lobbied for more efficient customs procedures. The benefits are especially attractive to small and medium size enterprises, who account for up to 60 percent of GDP creation in many countries. Studies suggest that the reason many stay away from international trade is often related to the costs and inconvenience of procedural red tape.

The promised benefits of free trade are difficult to realize in practice, if customs procedures are not modernized.

Trade negotiators may approach each other with grand visions and leave the table with sensible, well-intentioned agreements. But the vision will quickly fade if they ignore the practical business of procedure.

John Raven, director general of the Brussels-based International Express Carriers Conference, once said, “Trade diplomats liberalize trade, but leave the goods in handcuffs.” It’s a problem whereby even the most hard core free traders – including the International Chamber of Commerce – are demanding that negotiators look beyond traditional free trade measures, like tariff reductions, and start setting rules for customs procedures and administration.

So far, the WTO has no specific provisions for customs and border-crossing procedures, except in the Agreement on Customs Valuation. Last November in Toronto, the Free Trade Area of the Americas (FTAA) Ministers adopted a comprehensive facilitation package designed to reduce customs transaction costs and create a more consistent and predictable customs process for business. It has been passed on to the WTO.

World Customs Organization Secretary General Michel Danet has described the changes in customs procedures which will result from trade negotiations as “a veritable cultural revolution” for Customs administrative systems and officials. The revolution entails, in part, a move beyond traditional domestic customs priorities such as control, security and revenue collection to respond to the requirements of international trading systems.

It means that trade facilitation must become a major priority. As Danet explained to the Symposium of the Americas last fall, customs organizations must become “a major player in international trade,” because trade facilitation is a basic corollary of globalization.

Countries not attending to trade facilitation will, Danet adds, miss out on the benefits they hope to achieve through free trade.

The policy objectives of free trade negotiators may remain the same. But from now on, procedural reform has to be part of the game plan.