Supply chains are backbone of international trade

Improving only two key components of trade facilitation — border administration and transport and communications infrastructure — would lead to an increase of some $2.6 trillion (4.7 per cent) in global GDP and $1.6 trillion (14.5 per cent) in global trade, according to The World Bank. The UN international financial institution made the assertion in the fourth edition of ‘Connecting to Compete: Trade Logistics in the Global Economy’. The recently published report features the Logistics Performance Index (LPI), which the World Bank has produced every two years since 2007. The LPI measures the on-the-ground efficiency of trade supply chains, or logistics performance.

Oman is ranked 59th among 160 countries surveyed in the Logistics Performance Index (LPI) for the year 2014. Germany was ranked first, followed by the Netherlands, Belgium, United Kingdom, Singapore, Sweden, Norway, Luxembourg, United States and Japan.

According to The World Bank study, a complete worldwide tariff elimination would only add a further $400 billion (0.7 per cent) to global GDP, or $1.1 trillion (10.1 per cent) to global trade. The figure illustrates that reducing supply chain barriers has a larger effect than removing tariffs. This holds even in the scenario of a more modest improvement in trade facilitation, in which all countries raised their performance halfway to regional best practice (as opposed to halfway to international best practice—that is, Singapore in the first scenario).

“What lies at the heart of the large increases in GDP after trade facilitation reforms? Reductions in supply chain trade barriers improve the efficiency of the movement of goods, thus recovering resources otherwise wasted. By contrast, most tariff reductions reallocate resources, capturing only the more modest inefficiency created by the tax,” the report stresses.

A joint foreword by Jeffrey D Lewis [Director Economic Policy, Debt and Trade Department — Poverty Reduction and Economic Management Network (PREM), The World Bank Group] and Jose Luis Irigoyen [Director for the Transport, Water, Information and Communications Technologies, and Infrastructure Finance Department Sustainable Development Network (SDN), The World Bank Group] stated: “Supply chains are the backbone of international trade and commerce.

Their logistics encompasses freight transportation, warehousing, border clearance, payment systems, and increasingly many other functions outsourced by producers and merchants to dedicated service providers. The importance of good logistics performance for economic growth, diversification, and poverty reduction is now firmly established.

“Although logistics is performed mainly by private operators, it has become a public policy concern of national governments and regional and international organisations. Supply chains are a complex sequence of coordinated activities. The performance of the whole depends on such government interventions as infrastructure, logistics services provision, and cross-border trade facilitation,” they noted.

According to the report, gains in GDP associated with trade facilitation would occur in all regions of the globe, though concentrated in those with the greatest improvements. In the more ambitious scenario, these include Sub-Saharan Africa, South Asia, and parts of Central and West Asia. Gains from tariff elimination would accrue disproportionately to the Russian Federation, China, and a few other countries.

Improving logistics performance is at the core of the economic growth and competitiveness agenda, says The World Bank. Policymakers globally recognise the logistics sector as one of their key pillars for development. Trade powerhouses in Europe like the Netherlands1 or in developing countries like Vietnam or Indonesia2 see seamless and sustainable logistics as an engine of growth and of integration with global value chains.

Indeed, inefficient logistics raises the costs of trading and reduces the potential for global integration. This is a hefty burden for developing countries trying to compete in the global marketplace. Since 2007, the Logistics Performance Index (LPI) has been informing the debate on the role of logistics for growth and the policies to support it in such areas as infrastructure, service provision, and cross-border trade facilitation.

The results of Connecting to Compete 2014 point to Germany as the best performing country with an LPI score of 4.12, and Somalia as the worst with 1.77 (on a scale of 1 to 5). (Germany was also the best performer over 2007–14) A slightly converging trend from previous LPI surveys in 2007, 2010 and 2012 is also found in 2014, with lower performing countries improving their overall LPI scores more than higher performing countries.

The modest convergence since 2007 is explained by a perceived improvement in trade supporting infrastructure in low- and middle income countries — and to a lesser extent in their logistics services and customs and border management. This perceived improvement attests to the success of developing countries in closing the transport infrastructure gap with high-income countries.


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