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.