Objectives+of+TF

In what context does the international supply chain work? What are the demands of the industries that it serves and the companies and customers that are the end users? The way in which production and distribution takes place today can be represented as a network, rather than just a chain. A producer of raw materials sells to many different customers, transports the raw material using different modes of transport, and buys logistical services from different companies. The company that processes the raw materials produces a number of different products of which some can be used as inputs in other industries. These industries, in turn, receive other inputs for their production processes from many different places and then sell their final products to a number of different customers via different distributor and retailer networks in different countries. Moreover, it is conceivable that a company which further processes a product sells it back to the original company that uses it an input in another product manufactured by the company. The result is a network of relations between different companies and their customers with a large number of participants in the intermediary stage – different logistical companies.
 * The International Supply Chain and the Demands of Modern Production**

One example could be the production of a passenger car. The final assembly of the car takes place in an assembly line production process in which a large number of components must arrive in perfect condition and at the right point in time in order that the car can be assembled as quickly as possible. The outermost limits of the supply chain are from rubber to tyres, glass to windows, steel and aluminium to the coachwork etc. Today, few if any car manufacturers take their components from one and the same country – instead the major producers cooperate over the continents of the world with the development and production of products that can be used as inputs in the production process. In turn the cars are then sold internationally.

For financial reasons most modern companies have chosen to minimise stores and stockholdings. Minimising the amount of capital tied up in non-moving stock has provided a way for both industries and consumer goods companies to reduce their costs. Where the manufacturing industry is concerned, this means that large parts of stock are moving in the supply chain in order to be assembled with other components at exactly the right point in time. The same logic applies to many consumer goods: the stock of the clothes shop is on clothes-hangers in the shop. This is one of the explanations of why the supply chain is so sensitive to breakdowns. Even short disruptions in deliveries can involve considerable costs resulting from production stops, delays in deliveries and breaches of contract or dissatisfied customers.

Thus, global supply chains require an enabling environment that facilitates the free movement of goods and services across borders, while still taking into account the necessary regulatory and statutory instruments. This includes an acceptance of the need for speed and agility in the production and flow of goods across borders; an open attitude to information sharing; the need for appropriate legislation to cover the acceptance of digital signatures and certificates; the development of a corporate culture that looks at and takes responsibility for the entire supply chain (as opposed to only one's individual component); and a keen focus on satisfying (and anticipating) the needs and preferences of clients.

From the above it becomes evident that the physical distance to markets is an issue, just as well as the time to market. A World Bank study from 2006 is only one of many that describe this relationship. According to this study an additional day of delay in shipping reduces trade by 1 percent. That is the equivalent to a country getting 70 km further away from its trading partner. [1]
 * Signatures and documents delays border crossing and causes costs for trade**

In time to market border crossing and related export and import formalities play a decisive role. Problems here are for example: This list could surely be longer and the problems described more in depth. However, these are the most commonly described by both traders and academics and every country will have its own special set of issues that can be categorized into one of the above bullet points. In the following we will concentrate on the costs linked to these issues, when goods have to cross international borders.
 * Excessive demands for data and documents – especially in paper
 * Redundant information demands – 100 percent of a category of document is asked for – only a small part is used
 * Uncoordinated inspections by border agencies (border agencies include: Customs, Food safety, licensing authority, etc)
 * Different rules in different countries
 * Difficult to know what rules apply (transparency issues)

The OECD has studied the issue and points out that there is a strong correlation between the number of signatures and documents needed for a trade transaction and the number of days spent at the border. [2] The author of the OECD report, Norbert Wilson, expresses this eloquently in a subsequent paper:

// One way to consider the effect of customs and administrative procedures is to // // say that they “thicken” the borders of countries. Customs and administrative // // procedures are necessary, but requirements beyond what is necessary to move // // a product through the border in a manner consistent with local policy // // objectives may unnecessarily hinder trade by “thickening” the border.**[3]** //

In his OECD paper Wilson continues our line of thought, going from numbers of documents and signatures, to the time spent at the border and its impact on trade. The study uses a gravity model to see how trade flows would be affected by a change in the number of days at borders when importing (estimated elasticity). The result of the study is that a 10 per cent reduction of the importer’s time at the border may, at least in theory, increase trade by 6.3 per cent. [4] The study also shows that this is of high importance to developing countries since agricultural products seem to be more sensitive to this obstacle. Also, as shown in the World Bank doing-business-index, many developing countries are still using more documents and signatures than developed countries. To put it bluntly: If Sub-Saharan Africa were to reduce number of signatures to world average it would mean cutting signatures by 82.5 %, but would also theoretically mean a potential increase in trade flows by 81.5 %. [5]

It is also possible to turn this reasoning the other way. The trade transaction costs were studied by David Hummel in a paper from 2001. He found that for manufactured goods each day in travel is worth an average of 0.8 percent of the value of the good per day, and that each additional day spent in transport would reduce the probability that the US would source from that country by between 1 and 1,5 per cent. One explanation for this is that length transport times imposes inventory holding and depreciation costs. The time spent at the border adds to the time of transport in a similar way. See the reasoning above on the modern supply chain. However, the cost of time at sea is less critical to companies’ decisions than the time spent at the border. This is shown in a study building on to the previous one, published in 2011 by the OECD. It finds that every extra day needed to ready goods for export and import reduces trade by around 4%, but more importantly, the impact of an extra day that goods spend at the border has a greater negative impact on trade flows than an extra day spent at sea delivering a container of goods. [6] This is most likely due to the lack of predictability. To foresee a day extra at sea due to hard weather is normal. To be able to foresee extra days at border crossings due to changed rules, document requirements or rent-seeking is much more difficult.

The academic literature in this field is rich and points in the same direction. It is hoped that the examples above will help the understanding and build the business case for wanting to tackle cumbersome trade procedures.

[1] //Trading on Time//, Djankow, Freund and Pham, 2006, World Bank Policy Research Working Paper 3909, May 2006. [2] Examining the Effect of Certain Customs Procedures on trade, Wilson, OECD Policy Working paper No. 42, 2007. [3] What a Difference a Day Makes: An Estimate of Potential Gains from Trade Facilitation, Wilson, Department of Agricultural Economics and Rural Sociology, Selected Paper # 174227, 2007. [4] OECD 2009 Overcoming Border Bottlenecks. [5] See note 8. [6] OECD Trade Policy Working Paper no. 108, Korinek, Sourdin, 2011