INTERNATIONAL TRANSPORT LOGISTICS ESSAY: TRADE FACILITATION EFFORTS IN MEXICO Master in Economics – UJI María del Carmen Dircio Palacios Macedo 12 de julio de 2019 1. Introduction In our days, the nature of foreign trade has gained a lot of importance because of globalization of value chains and outsourcing. Trade involves more goods and services crossing borders than ever before, so fast and efficient customs and port procedures are essential. As argued by OCDE, unduly complex processes and documentation raise costs and cause delays, and ultimately, businesses, economies and consumers bear the cost.1 It becomes very relevant for the decisions of firms to locate processes of their value chain in countries where inputs can be imported, and goods and services can be exported within quick and reliable timeframes. In this context of modern outsourcing and other trade trends, trade facilitation becomes crucial. Trade facilitation can be understood in general terms as the elimination of stumbling blocks to making international trade easier (Enriquez Montes, 2014). More specifically, OCDE defines trade facilitation as a specific set of measures that streamline and simplify the technical and legal procedures for products entering or leaving a country to be traded internationally. As such, trade facilitation covers the full spectrum of border procedures, from the electronic exchange of data about a shipment, to the simplification and harmonization of trade documents, to the possibility to appeal administrative decisions by border agencies.2 According to the World Bank, although tariffs on exports and imports have fallen on average in recent decades, non-tariff measures have gained increasing prominence. Therefore, global trade policies have shifted their focus from tariffs to trade facilitation, including the elimination of traderelated transactions costs. (Doing_Business, 2018) Trade facilitation also means reduced costs and times. According to a study by WTO economists, trade facilitation efforts, such as simplifying required paperwork, modernizing procedures and harmonizing customs requirements, can diminish importantly the costs and time needed to export and import goods (WTO, 2015). This is considered critical as trade costs can be equivalent to a 134% ad valorem tariff on a product in high-income countries and a 219% tariff equivalent in developing countries (WTO, 2015). There is a link between reduced costs, times and trade growth, efficiency, and economic development. In our days, in which foreign trade have won a lot of importance because of globalization of value chains and outsourcing, facilitating the transit of goods becomes especially important for diminishing costs, and making more efficient the international value chain of goods. As pointed out by the World Bank, optimizing time and costs in the trade sector is strongly associated with trade growth, diversification and economic expansion. 1 2 http://www.oecd.org/trade/topics/trade-facilitation/ http://www.oecd.org/trade/topics/trade-facilitation/ A study demonstrates the importance of trade facilitation, showing a positive relation between trade facilitation measures and value added of exports and imports (Moïsé & Sorescu, 2013). 2. The Trade Facilitation Agreement Trade facilitation has its origins with the adoption by the WCO in 1974 of its International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto Convention). This Convention evolved into a more comprehensive instrument, the Revised Kyoto Convention that entered into force in 2006 (Enriquez Montes, 2014). The Trade Facilitation Agreement (TFA) was negotiated by WTO members at the 2013 Bali Ministerial Conference and entered into force on 22 February 2017 following its ratification by twothirds of the WTO membership. The TFA contains provisions for expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. It further contains provisions for technical assistance and capacity building in this area.3 The TFA is the first WTO agreement in which developing countries members can determine their own implementation schedules and in which progress in implementation is explicitly linked to technical and financial capacity. In addition, the Agreement states that assistance and support should be provided to help them achieve that capacity. There is also an instance for assistance to members: the Trade Facilitation Agreement Facility. It was created to support the ultimate goal of full implementation of the new agreement by all WTO members.4 The full implementation of the TFA is estimated to reduce global trade costs by an average of 14.3%. Full implementation has also been found to potentially reduce the average time needed to import by 47%.5 It is considered that cuts in export time will be even more dramatic, where estimates are predicting a 91% reduction of the current average.6 With this reduced costs and average times, it is expected that TFA increase exports from existing traders while also enabling new firms to export for the first time. There are forecasts that TFA would add up to 2.7% a year to world export growth over the 2015-30 horizon. Developing countries are expected to enjoy larger gains than the global average.7 Developed countries have committed to immediately implement the Agreement upon its entry into force. It is established that developing countries, meanwhile, will only apply those substantive provisions of the TFA which they have indicated they are in a position to do so from the date of the TFA’s entry into force. Least-developed countries were given an additional year to do so (Ayoki, 2017). 3 https://www.wto.org/english/tratop_e/tradfa_e/tradfa_introduction_e.htm 4 https://www.wto.org/english/tratop_e/tradfa_e/tradfa_introduction_e.htm 5 https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=1998 6 https://www.wto.org/english/tratop_e/tradfa_e/tradfa_introduction_e.htm 7 http://www.tfafacility.org/sites/default/files/case-studies/tfa-economic-revenue.pdf Ratification of Mexico of the Trade Facilitation Agreement (TFA) The Trade Facilitation Agreement (TFA) was approved by the Senate of the Republic in April 2016, and in July of that year Mexico notified its ratification of that Agreement to the WTO. Mexico made a notification to the WTO Preparatory Committee on Trade Facilitation on Category A commitments, which means that Mexico will implement all provisions of the TFA upon its entry into force. (WTO, 2017a) 3. Mexico´s trade policy Before addressing recent trade facilitation initiatives in Mexico, some characteristics of foreign trade and trade policy of Mexico will be summarized. Mexico’s main trading partners Mexico's export markets are highly concentrated. In 2015, exports to the United States accounted for 81.2% of the total, while imports from the United States accounted for 47.4% of the total. The growth of merchandise trade was slow during the period of review, between 2012 and 2015, exports grew by just 2.7% in US dollar terms, while imports expanded by just 6.6% (WTO, 2017b). Besides the USA, other countries to which Mexico directs it exports are Canada 2.8%, Germany 1.7% and China 1.6%. With respect to imports, besides USA, 16.6% come from China, 4.3% from Japan, 3.9% from Germany, and 3.7% with South Korea. (data from 2017) Mexico's exports are dominated by manufactures, which represented 85% of the total in 2015, while agricultural products accounted for less than 8%, and products of the oil and extractive industries 7.2%, compared to 15.5% in 2012. This change mainly reflects the lower value of petroleum exports, owing to the fall in oil prices. The principal manufactures exported are still electrical machinery and appliances, and transport equipment, which jointly represented 57.6% of total exports in 2015. (WTO, 2017b) Mexico’s Foreign Trade Objectives The foreign trade objectives are set out in the National Development Plan for 2013-2018. In general terms, in regard to international trade, two strategies have been formulated: furthering and deepening the policy of trade liberalization and promoting Mexico's integration in the region by establishing strategic economic partnerships and deepening existing ones. The importance of strengthening Mexico's presence in regional and multilateral forums and bodies, including the WTO is also emphasized. These goals and strategies are developed in the sectoral program of the Ministry of the Economy for 2013-2018, being this Ministry responsible for formulating and implementing the measures needed to meet the trade-related aims. Regulatory policy as a State policy Mexico has embarked in recent years in a broad regulatory reform, comprising several policies and 11 different sectors: energy, labor, financial, education, among others. Regulatory reform in trade is part of this broad aim tending to efficiency. On 2016 the President of the Republic forwarded to the Chamber of Deputies a Draft Decree supplementing Articles 25 and 73 of the Constitution and proposing to make it compulsory for the three tiers of government to implement a public policy of regulatory improvement in the aim of embedding it into the institutional fabric and developing it into a State policy (WTO, 2017a). The regulatory improvement includes policies to review, simplify and streamline national and subnational, optimization of external trade transactions within a framework for trade facilitation, and transparency and accountability. 4. Trade facilitation reforms in Mexico In the last decade, Mexico has undertaken reform efforts to simplify customs procedures and promote trade. Some key reforms were: 1) The establishment of the Mexican Digital Window for Foreign Trade (VUCEM for its acronym in Spanish) which became operational since 2011 and has been improved thereafter. The Digital Window has provided access to the procedures required by nine federal government agencies and two regulatory bodies. It has comprised an effort of the regulators to simplify, streamline and automate various external trade processes. 2) The abolition of the requirement to use the services of a customs broker, so that customs clearance can be done directly by the exporter or a customs broker. 3) Exporters certified as "authorized economic operators" may use the "FAST" tracks available in certain customs offices. 4) Changes to the strategic in-bond facility procedure. Under this procedure set out in the Customs Law, businesses operating within the facility may admit foreign, domestic or inward cleared goods into these facilities for a limited time for the purpose of handling, storage, safekeeping, exhibition, sale, distribution, processing, transformation or repair. Previously the facilities had to be within the boundaries of an authorized customs or in-bond area (whether located within the country, at the border, in a port or an airport), now they may be established throughout the national territory (WTO, 2017a). 5) The use of new technologies for inspecting goods has been boosted and it is now possible to rectify the import declaration at any stage of customs clearance. Furthermore, the commitment of Mexico on trade facilitation measures have been embodied in bilateral and multilateral agreements of trade that Mexico has signed recently, comprising also technical assistance in this respect and aiming at harmonizing procedures between trading partners. 5. VUCEM In this section I will briefly describe the experience, obstacles and improvements brought by the Mexican Single Window for Trade (VUCEM for its acronym in Spanish), mainly following (Schwaiger Calvo & Campos, 2017). VUCEM is an online platform created in 2012 that facilitates the exchange of information between the trading community and government by allowing parties involved in trade to submit standardized information and documents with a single entry point to fulfill all trade-related regulatory requirements. VUCEM is an important example of a trade facilitation initiative worldwide. It required an important effort because it involved 12 government agencies, and the technical complexity of the electronic platform and the significant investments, the latter adding up to USD$62 million. There were some previous initiatives that paved the way to VUCEM. Mexico’s national digital strategy and in particular initiatives such as the legal status for electronic procedures and the Advanced Electronic Signature (FIEL). VUCEM electronic platform allows businesses to fulfill all import, export, and transit-related regulatory requirements by submitting and handling data on-line only once and through one single online portal. Such regulatory documents include application for import or export permits and other supporting documents. It can be accessed via www.ventanillaunica.gob.mx. The documents processed in VUCEM are sent electronically to several authorities for approval and stored on the portal for five years. They include all of the information exchanged by traders, government departments (including customs), and a range of other participants in the trade process, including freight forwarders, customs brokers, shipping agents, banks and insurance companies. VUCEM is a complex system encompassing 198 formal procedures, which businesses select depending on the product they want to export/import. According to the most recent data VUCEM managed approximately 400,000 transactions from September 2013 to June 2014. It has approximately 103 million subscribed users, of which 73 million represent all trade related businesses in Mexico. It was designed and implemented by the Tax Administration Service (SAT), through the Customs General Administration, in conjunction with 12 entities, 11 government agencies and one business organization that deal with cross-border trade authorizations. According to (Schwaiger Calvo & Campos, 2017), VUCEM’s has been very effective in the reducing time, cost and documents needed for trade transactions. These authors consider that with respect to its implementation, the analysis of obstacles and drivers provides evidence that a combination of elements made VUCEM successful. These included political commitment, guaranteed funding and addressing technological challenges with training and stakeholder involvement. The legal status of electronic procedures and the Advanced Electronic Signature were important regulatory building blocks. VUCEM achieved a 100% service adoption among businesses. One reason for achieving this was the mandatory nature of the platform, decided and implemented by the government. Although businesses are still able to submit their filings for trade procedures personally at the corresponding governmental agency, the latter simply manually input their information into the VUCEM database. (Schwaiger Calvo & Campos, 2017) consider that VUCEM clearly contributes to the goal of improving competitiveness. Nevertheless, they argue that given that VUCEM has only been launched in 2012, it is too early to reach a final conclusion on its success from a cost-benefit-analysis point of view. It has also to be assessed quantitatively in some way the impact of this initiative in measures of trade facilitation. Some indicators of trade facilitation estimated by international agencies are presented in the next section. 6. Mexico’s trade facilitation indicators There are several estimations and indicators that reflect the effort made by Mexico in trade facilitation. Some indicators are global, issued by international bodies, as the World Bank, the WEF, and OCDE, that aim at quantifying and ranking trade facilitation in countries worldwide. To begin with, the Report of Mexico to WTO estimates the savings that the Digital Window have brought in terms of costs of the shift to paperless procedures for the various import and export formalities(WTO, 2017a): 1) Savings equivalent to the cost of felling 27,000 trees per year. 2) Savings from no longer having to forward documents from the 49 customs posts to the central offices, at an annual cost of Mex$7 million. In terms of time: 1) Import clearance time was cut by 40%, from 5 to 3 days. 2) Time is no longer spent waiting for validation of permits annexed to the declaration because they are available for consultation at the Digital Window. The capacity of customs and other agencies within the system to deal with users was expanded by 900%. Additionally, according to Schwaiger Calvo & Campos (2017), findings based on answers of the Ministry of Economy of Mexico to an OECD questionnaire found an overall 60% elimination of the number of formalities related to trade (from 54 to 22), 41% reduction of requirements (from 104 to 61), and a 44% decrease in registered data (from 770 to 435) in 2012. The authors consider that this evidence indicates that VUCEM’s outcomes did in fact reinforced trade facilitation and competitiveness of the Mexican Economy. Furthermore, the Federal Regulatory Improvement Commission (COFEMER), conducted a preliminary impact assessment of VUCEM. According to their study, in the case of the Ministry of Economy’s procedures, their streamlining and automation accounted for estimated benefits of 166 million pesos, equivalent to 13.8 million USD dollars. Roughly 70 % of the value of these benefits resulted from reduced deadlines and 30 % from fewer requirements. Even though this important advances and savings, several indicators of trade facilitation show that there is wide room for improvement for Mexico. The indicators of some world agencies are presented in the next section. World Bank Doing Business 2019 collects data in order to measure trading across borders, and rank countries in this respect.8 Specifically, Doing Business records the time and cost associated with the logistical process of exporting and importing goods (excluding tariffs) associated with three sets of procedures—documentary compliance, border compliance and domestic transport—within the overall process of exporting or importing a shipment of goods (Doing Business, 2018). In this respect, the scores, rank and specific costs and times on trade of Mexico and its main trading partners are presented below: 8 https://www.doingbusiness.org/en/data/exploretopics/trading-across-borders Table 1. Doing Business 2019. Trading across borders. Mexico and Mexico’s trading partners Economy Tradin g across Borde rs Score Tradin g across Borde rs rank Time to export: Border complia nce (hours) Cost to export: Border complia nce (USD) Time to export: Documen tary complianc e (hours) Cost to export: Documen tary complianc e (USD) Time to import: Border complia nce (hours) Cost to import: Border complia nce (USD) Time to import: Documen tary complianc e (hours) Cost to import: Documen tary complianc e (USD) OECD high income Mexico 94.21 26 12.5 139.1 2.4 35.2 8.5 100.2 3.4 24.9 82.09 66 20.4 400 8 60 44.2 450 17.6 100 United States Canada 92.01 36 1.5 175 1.5 60 1.5 175 7.5 100 88.36 50 2 167 1 156 2 172 1 163 China 82.59 65 25.9 314 8.6 73.6 48 326 24 122.3 Japan 86.51 56 22.6 264.9 2.4 54 39.6 299.2 3.4 107 Germany 91.77 40 36 345 1 45 0 0 1 0 Source: https://www.doingbusiness.org/en/data/exploretopics/trading-across-borders From the table above we can see that the indicators of Mexico lag behind those of its main trading partner, USA. While in Mexico 20.4 hours are required for border compliance, with a cost of $400; in the USA only 1.5, with a cost of $175. The times and costs of Canada are similar to those of the USA. In the case of China and Japan, the costs and times are rather similar to those of Mexico. Therefore, these indicators show us that even though efforts have been made by Mexico in trade facilitation, there is also opportunity to improve towards reaching similar times with its trading partners. Besides, the World Bank also estimates the logistic performance index9. For Mexico, with data of 2016, the ease of making international shipments at competitive prices and punctuality are the items with the worst position in 160 analyzed economies, ranking in positions 61 and 68, correspondingly. For Torres García, this situation is explained by the lack of use of the logistics infrastructure, the decrease in investment in telecommunications (Torres García, 2018). He also considers the simplification of customs procedures rather incipient, in contrast to the view of the government. OECD OECD has developed a set of Trade Facilitation Indicators (TFIs) that identify areas for action and enable the potential impact of reforms to be assessed. The aim of OECD is that the indicators provide a basis for governments to prioritize trade facilitation actions and mobilize technical assistance and capacity-building efforts for developing countries in a more targeted way.10 The OECD indicators cover the full spectrum of border procedures for 163 countries. The TFIs take values from 0 to 2, where 2 represents the best performance that can be achieved. They are calculated on the basis of information in the TFIs database. 9 https://data.worldbank.org/indicator/LP.LPI.LOGS.XQ?end=2016&locations=MX&start=2016&view=bar http://www.oecd.org/trade/topics/trade-facilitation/ 10 Table 2. Trade facilitation performance. TFIs of Mexico as compared to the USA. Mexico Information availability 1.14 Involvement of the trade community 1.50 Advance rulings 1.40 Appeal procedures 0.92 Fees and charges 1.69 Formalities - documents 1.56 Formalities - automation 1.77 Formalities - procedures 1.48 Internal border agency co-operation 1.45 External border agency co-operation 1.55 Governance and impartiality 1.89 Average trade facilitation performance 1.49 EUA 1.95 2.00 1.71 1.80 1.79 1.88 1.92 1.66 1.90 1.45 2.00 1.82 Source: OECD Compare your country tool, in http://www.oecd.org/trade/topics/trade-facilitation/ Graph 1 TIFs Mexico and USA Mexico Governance and impartiality External border agency co-operation Internal border agency co-operation Information availability 2,00 1,80 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 0,00 EUA Involvement of the trade community Advance rulings Appeal procedures Formalities procedures Formalities automation Fees and charges Formalities documents Source: OECD Compare your country tool, in http://www.oecd.org/trade/topics/trade-facilitation/ According to OECD, Mexico exceeds or is closest to the best performance across the sample in all areas except information availability and appeal procedures. Performance has improved between 2015 and 2017 in the areas of fees and charges, documents, and governance and impartiality. 11 The TFIs evaluate countries performance in several areas, being 2 the best performance that can be achieved. OECD considers some areas for action. For the group of OECD economies to which Mexico belongs, it is considered that the assessment of the impact of trade facilitation measures, both on bilateral trade flows and on trade costs, shows that reforms with the greatest benefit are information availability, advance rulings, fees and charges, automation and streamlining of procedures. OECD considers the areas where Mexico has not yet reached best performance and could benefit from improvements as the ones cited in the following table. Table 3. OECD. Trade facilitation indicators to improve in Mexico Information availability: Improve the operation of Customs hotlines Improve the availability of comprehensive information on import and export procedures; advance rulings; applicable legislation; penalties; and appeal procedures Provide access to examples of Customs classification and judicial decisions Advance rulings: Encourage a more extensive use of advance rulings Fees and charges: Improve the availability of comprehensive information on applicable fees and charges Reduce the fees charged for services during normal working hours Formalities – procedures: Publish the average clearance time consistently and on a periodic basis, for major Customs offices Source: OECD Compare your country tool, in http://www.oecd.org/trade/topics/trade-facilitation/ TFI definitions: Information availability: Enquiry points; publication of trade information, including on Internet Advance rulings: Prior statements by the administration to requesting traders concerning the classification, origin, valuation method, etc., applied to specific goods at the time of importation; the rules and process applied to such statements Fees & charges: Disciplines on the fees and charges imposed on imports and exports; disciplines on penalties Formalities (Procedures): Streamlining of border controls; single submission points for all required documentation (single windows); pre-arrival processing; release of goods separated from final determination and payment of Customs duties; treatment of perishable goods; post-clearance audits; authorized operators 7. Conclusions In the context of globalization of value chains, outsourcing and increasing importance of foreign trade, trade facilitation measures are crucial. Trade facilitation efforts can have better effects in a 11 OECD Compare your country tool, in http://www.oecd.org/trade/topics/trade-facilitation/ multilateral context with commitments, technical assistance and harmonization. In this regard the Trade Facilitation Agreement that entered into force on 2017 contains provisions for expediting the movement, release and clearance of goods, including goods in transit. It also sets out measures for effective cooperation between customs and other appropriate authorities; and it further contains provisions for technical assistance and capacity building. Mexico ratified the Trade Facilitation Agreement in 2016, committing to implement all provisions of the TFA upon its entry into force. Mexico has undergone several initiatives aiming at trade facilitation. Among them the most important has been the establishment of the Mexican Digital Window for Foreign Trade (VUCEM for its acronym in Spanish) which became operational since 2011. VUCEM is an online platform created in 2012 that allows parties involved in trade to submit standardized information and documents with a single entry point to fulfill all trade-related regulatory requirements. According to (Schwaiger Calvo & Campos, 2017), VUCEM’s has been very effective in the reducing time, cost and documents needed for trade transactions. VUCEM can be considered as successful because of political commitment, guaranteed funding and addressing technological challenges with training and stakeholder involvement. Furthermore, VUCEM achieved a 100% service adoption among businesses, one reason for achieving this was the mandatory nature of the platform. There are some estimations of savings in costs and times that the Digital Window have brought, for example import clearance time was cut by 40%. Other estimations, from the Cofemer, in the case of the Ministry of Economy’s procedures, their streamlining and automation accounted for estimated benefits of 166 million pesos, equivalent to 13.8 million USD dollars. Roughly 70 % of the value of these benefits resulted from reduced deadlines and 30 % from fewer requirements. Even though this important advances and savings, several indicators of trade facilitation show that there is wide room for improvement for Mexico. For example, from Doing Business we can see that the indicators of México lag behind those of its main trading partner, USA, in hours and costs of border compliance. Taking into account OECD indicators, Mexico ranks low in information availability and appeal procedures. References Ayoki, M. (2017). The Development Dimension of the WTO Agreement on Trade Facilitation. Retrieved from https://EconPapers.repec.org/RePEc:pra:mprapa:87299 Doing_Business. (2018). Doing Business 2019. Training for Reform. Retrieved from https://www.doingbusiness.org/en/reports/global-reports/doing-business-2019 Enriquez Montes, C. G. (2014). WTO Trade Facilitation Agreement: a potential catalyst for equality of opportunity. WCO news. WTO Trade Facilitation Agreement Customs takes centre stage, ( n° 74 ), pp.12-15. Retrieved from www.wcoomd.org Moïsé, E., & Sorescu, S. (2013). Trade Facilitation Indicators: The Potential Impact of Trade Facilitation on Developing Countries' Trade. OECD Trade Policy Papers. Schwaiger Calvo, A., & Campos, C. (2017). Mexico: Single Window for Foreign Trade. . In R. A. Falk S., Silverman M. (Ed.), Digital Government. : Springer, Cham. Torres García, A. F. (2018). El fortalecimiento de la facilitación comercial en México a partir del Tratado Integral y Progresista de Asociación Transpacífico. México y la cuenca del pacífico, 7, 145-176. WTO. (2015). Speeding up trade: benefits and challenges of implementing the WTO Trade Facilitation Agreement. Retrieved from Geneve: WTO. (2017a). Trade Policy Review. Report by Mexico. World Trade Organization Retrieved from https://www.wto.org/english/tratop_e/tpr_e/s352_e.pdf. WTO. (2017b). Trade Policy Review. Report by Mexico. Executive Summary. World Trade Organization Retrieved from https://www.wto.org/english/tratop_e/tpr_e/s352_sum_e.pdf.