How can supply chains drive growth?

From Doha to Singapore – how can supply chain focus on trade help drive economic growth?

As part of the World Economic Forum’s Enabling Trade programme, a report published today reveals that reducing supply chain barriers could increase global GDP up to six times more than removing all import tariffs. The report, Enabling Trade: Valuing Growth Opportunities, culminates a year of research led by a team from the Forum, the World Bank and Bain & Company.

For the past three years, Singapore has ranked first on the Forum’s Enabling Trade Index, which measures the ease of cross-border trade for 132 countries. Our study asked what if every country in the world were to improve two key supply chain barriers – border administration and transport, and communications infrastructure – halfway to the level of Singapore.

The result? Global GDP would increase by nearly 5% and global exports would increase by nearly 15%. For comparison, if we completely eliminated all import tariffs, then global GDP would grow by around 0.7%.

Improving border administration processes and investing in better transport infrastructure does come at a cost, but our analysis shows that the return on investment in terms of global welfare can be measured in the trillions – yes trillions – of dollars. Even if we were to improve border administration and transport infrastructure halfway to the regional best practice (e.g. halfway to Chile for Latin American countries) – a far more modest goal – we would still increase global GDP by an estimated 2.6%.

This is a rather startling finding when we consider that the primary focus of the Doha round of multilateral trade negotiations has been further reduction of import tariffs. One of the reasons that Doha failed was that several developing economies felt that the benefits of the agreement were biased toward developed countries. One of the key findings of our analysis is that the supply chain approach to trade actually benefits developing nations – particularly in sub-Saharan Africa and South-East Asia – proportionally more than developed nations.

The Forum-Bain-World Bank team recommends that national governments take an integrated supply chain approach to trade. This means that the multitude of national policies that affect global supply chains – from food safety standards to narcotics protection to customs duties collection – need to be better coordinated at the national level.

The team complements the top-down macroeconomic findings with a series of 18 bottom-up case studies that explain the benefits of the supply chain approach from the firm perspective. The case studies reveal that companies frequently were not aware of the supply chain costs and barriers that they would encounter in certain countries.

A company importing computers into Russia now expects border processing times of up to six weeks. A global healthcare company holds nine days’ worth of inventory for shipment to China due to delays on drug inspections. A cellphone manufacturer incurs extra costs for a security detail to protect against theft during overland shipments from Mexico.

SMEs tend to face proportionally higher supply chain barriers and costs than large multinationals – many small companies simply don’t have the resources to navigate the complexity and friction in the global trade system. Fixing bureaucracy and inefficiencies at the border and investing in better transport and communications infrastructure will drive growth among SMEs, many of whom currently choose to bow out of the global marketplace.

The bottom line is that we live in a world with a huge amount of friction built into the global trade system. Perhaps we could afford this friction when the global economy was in more prosperous days. Today, with very high levels of unemployment in nations around the world, we cannot. Ultimately, the growth that would be driven by reducing this friction in the global trade system will benefit all of us – from the farmer in Kenya to the electronics engineer in South Korea.

Moving forward, all nations should have a closer look at what Singapore is doing right, rather than why the Doha negotiations went wrong.

A more integrated approach should also be pursued on the multi-lateral level rather than addressing the related policy areas in separate silos as is currently the practice in WTO negotiations (e.g. Trade Facilitation, Services, etc.).

Author: John Moavenzadeh is Senior Director, Head of Mobility Industries, at the World Economic Forum. With the collaboration of Bernard Hoekman, Director, International Trade Department, at the World Bank and Chair of the Global Agenda Council on Logistics & Supply Chains and Mark Gottfredson, Partner at Bain & Company. 

Image: Containers are seen in a port in Singapore REUTERS/Edgar Su