Trade facilitation bolsters export competitiveness

Trade facilitation bolsters export competitiveness

Vincent Lingga, Senior Editor, The Jakarta Post, Jakarta

The United Nations Conference on Trade and Development has
emphasized the importance of easier access to imported input
through trade facilitation measures as a precondition to
enhancing export competitiveness.

"Such efforts are important as the competitiveness of export-
oriented activities often depends, to a large extent, on imported
input," says UNCTAD in its 350-page World Investment Report 2002.

The report cites several factors that made easy access to
imported input increasingly crucial.

One factor is the fundamental change in global trade
composition whereby the shares of primary commodities and
resource-based manufactures have steadily declined to as low as
28 percent in 2000 from 50 percent in 1984.

Another striking trend is that exports grow faster the more
advanced the level of technology and having less reliance on
natural resources as high-tech products are now the most dynamic
export category for both developed countries and even developing
economies, which have traditionally depended on resource-based
exports and labor-intensive manufacturing.

Moreover, as the result of a steadily expanding international
production system, the share of parts and components in global
trade has been rising.

The increasingly cheaper cost of international transportation
has enabled parts and components to undergo numerous cross-border
trade operations before being incorporated into final products.

Easier access to imported input has also been in such demand
from Indonesian businesspeople over the last few weeks that the
government has reintroduced Preshipment Inspection of Imports
(PSI) to minimize dealing with what they see as the largely
incompetent and corrupt customs service.

Even though 80 percent of Indonesian exports already consist
of industrial goods, the manufacturing industry still relies
largely on imported input, parts and components.

Export-oriented manufacturers have complained that inefficient
and corrupt customs officials have sharply increased import costs
and consequently impaired the competitiveness of their products.

Even industrial firms who depend mainly on the domestic market
have also been protesting against unfair import competition
caused by allegedly corrupt customs officials who allow traders
to under-invoice their manufacture imports, thereby paying duties
and taxes way below the official rates.

Greatly concerned about the debilitated competitiveness of the
manufacturing industry and huge losses in duty and tax receipts,
then president Soeharto stripped the corrupt customs service of
its import inspection authority in 1985 and introduced PSI to
ensure smoother import flows.

Trade and Industry Minister Rini Soewandi has recommended a
similar contingency measure to President Megawati Soekarnoputri.

William F. Miller from the Graduate School of Management,
Stanford University, also stressed the crucial importance of
eased import flows at a meeting with some 50 corporate chief
executive officers in Jakarta early last week, pointing out that
the strongest competitive advantage was built on the combination
of comparative advantages.

It is the convergence of comparative advantages from several
countries that usually builds the strongest competitive
advantage, as reflected in the steadily expanding international
production system, Miller told the CEO briefing meeting organized
by the Bali-based Executive Center for Global Leadership.

UNCTAD says trade facilitation aims at developing a
consistent, transparent and predictable environment for
international transactions, based on internationally accepted
customs and practices that simplify procedures, standardize
physical facilities and harmonize trade and transport laws and
regulations.

"The introduction of electronic customs clearance systems,
risk-assessment techniques and pre-arrival customs processing all
cut time and other costs (of imports) and reduce the scope for
error," the report points out.

It cites Chile's success in the electronic automation of its
customs service for risk assessment of imports, saying that the
system has saved that country US$1 million a month.

"The experience of Chile and others has shown that the costs
(of automation) can be recovered over time through efficiency and
increased duty and tax collection," the report adds.

UNCTAD sees the importance of eased import flows in relation
to the crucial role of transnational corporations (TNCs) in
enhancing the export competitiveness of developing countries,
pointing out that TNCs now account for substantial shares of
exports from many developing economies.

UNCTAD also says that with the spread of global value chains
in many low and medium-technology activities, TNCs are now active
across the entire spectrum of manufacture exports.

"The most dynamic products in world trade are found mainly in
non--resource based manufacturing -- particularly in electronics
-- apparel and automotive. TNCs have played an important role in
the export expansion of these products."

This development has apparently been made possible by smoother
global trade that allows TNCs to locate different parts of their
production process, including various service functions, across
the globe in order to take advantage of differences in costs,
resources, logistics and markets.

TNCs or their affiliates, according to the report, can
contribute to a country's competitiveness either by investing in
higher value-added industries in which they have not invested
before or by shifting within an industry, from low-productivity,
low-technology and labor intensive activities to high-
productivity, high-technology and knowledge-based industries.

However, UNCTAD warns against attracting TNCs which may focus
only on the static comparative advantage of a host country
because these companies may not commit themselves to the local
economy by building links to the domestic entrepreneurial
community, or by further developing labor skills and introducing
complex technologies.

Experience in many countries has shown that it is these links
with foreign affiliates of TNCs that are a key channel for the
transfer of skills, knowledge and technology to domestic
companies.

The message here is that countries need to find the most
effective ways of making their economies more conducive to the
specific kinds of export activities they desire to foster. This
requires enhanced, aggressive investor targeting in investment
promotion programs.

Promotional programs to attract Foreign Direct Investment
(FDI) should therefore focus on attracting a defined sub-set of
FDI flows, rather than FDI in general. This targeted approach can
help countries achieve strategic objectives related to aspects
such as employment, technology transfer, exports, the development
of industrial clusters, that are in synchronization with their
overall development strategies.

However, investor targeting promotion should be based on the
correct selection of industries a country wants to attract FDI
and on the correct assessment of comparative advantages it
possesses in the target industries.

UNCTAD cites Singapore's success in its program of targeting
export-oriented FDI and in the timely changing of the target in
anticipation of economic developments and technological changes
over the past four decades.

Thailand's Board of Investment also has set five target
industries for FDI, namely the agro-industry, automotive
industry, fashion, electronics and high-value added services in
software, printing and long-stay tourism.

Malaysia has continuously revised the structure and nature of
its incentives to accommodate FDI in light of evolving national
development objectives and the target industries it wants to
develop. For example, the latest changes in its incentive
structure offer incentives and facilities for investment in human
resource development, including skills development and research
and development.

Egypt not only has developed an investor targeting program but
also trained its diplomats -- notably those assigned to countries
that are the largest sources of FDI -- in investment promotion
through a series of workshops.

South Korea not only works harder to attract more FDI but also
has set up a mechanism that provides aftercare services to
foreign affiliates of TNCs already in operation in that country.

The Office of Investment Ombudsman was established in October,
1999 under the Korean Foreign Direct Investment Promotion Act of
1998 to address grievances of foreign investors in numerous areas
such as customs, taxation, labor, licensing procedures etc.

The office is quite powerful because the Ombudsman is
appointed directly by the president and is staffed by more than
20 highly-competent professionals. The law requires government
offices to respond to a request from the Ombudsman within seven
days. Between late 1999 and the end of 2001, the office received
more than 1,805 grievance cases from foreign investors.