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December 9, 2013

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Reducing supply chain barriers benefits global economy

By Mark Gottfredson and Gerry Mattios | December 9, 2013, Monday | Print Edition

If every country improved just two key supply chain barriers — border administration and transport and communications infrastructure and related services — even halfway to the world’s best practices, global GDP could increase by US$2.6 trillion (4.7 percent) and exports by US$1.6 trillion (14.5 percent).

For comparison, completely eliminating tariffs could increase global GDP by US$0.4 trillion (0.7 percent) and exports by US$1.1 trillion (10.1 percent). The estimates of the impact of barrier reduction are conservative; they reflect improvements in only two of four major supply chain categories.

Why is lowering barriers so effective? The reason is that it eliminates resource waste, whereas abolishing tariffs mainly reallocates resources. Moreover, the gains from reducing barriers are more evenly distributed among nations than the gains from eliminating tariffs.

Of course, reducing supply chain barriers requires investment, while tariff reductions require only the stroke of a pen. However, many barriers can be traced to regulation. Detailed analysis can enable policymakers to prioritize the investments that are most critical and cost-efficient.

The welfare gains from a trade increase would be substantial, though not every individual or company would benefit.

Reducing supply chain barriers lowers costs and hence lowers prices, both to consumers and to firms that import production inputs. Consumers gain access to a wider variety of goods.

Workers benefit as well, as the boost to GDP is likely to stimulate employment growth. In the long run, trade facilitation promotes a shift in resources to more productive industries and firms, thereby increasing productivity and wages.

The effect of supply chain barriers on companies differs from one industry to another; it depends on product characteristics such as time sensitivity, exposure to regulation, and value-to-bulk ratios, as well as supply chain complexity. Companies commonly respond to delays and unreliability by holding additional inventory. Individual companies must balance the cost of higher inventory levels against the opportunity costs of lost revenue or reputational damage if barriers leave them under stocked.

Supply chain barriers make it particularly difficult for smaller businesses to enter foreign markets. Small- and medium-sized enterprises have been largely excluded from export markets. Overcoming supply chain barriers often requires significant upfront investment. SMEs are also unable to realize the economies of scale associated with international shipping. A survey of eBay’s small German merchants shows that one-third of the significant barriers to exporting outside the European Union have to do with the number of regulatory regimes or with difficulties in international shipping.

One key element of supply chain barriers is heterogeneity in country policies, and even among agencies within any one country. A lack of uniform customs rules, for example, makes it significantly more costly for a company to operate in multiple foreign markets.

The variation requires companies to invest in understanding many different regulations, and to complete far more paperwork than would be required under uniform standards. In extreme cases, companies must alter product specifications or reorganize their supply chain to deal with conflicting requirements. Coordination can also be lacking within nations, particularly when an industry falls under the jurisdiction of multiple government agencies.

For example, when importing chemical products into the US, a chemical firm must, on average, comply with regulations from five different agencies that often fail to coordinate and communicate effectively with one another. The company’s shipments of acetyl products, for example, are delayed a staggering 30 percent of the time.

Mark Gottfredson is Partner with Bain & Co. Gerry Mattios is Principal with Bain & Co. The article was the executive summary of a World Economic Forum report jointly issued by Bain & Co and the World Bank.

 

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