US Trade Policy Stinks; So Now What?

Two days ago, I lamented the "startling incoherence" of current US trade and economic policy, concluding:

The President and his economic team speak of expanding exports, particularly SME exports, yet they pursue policies that expressly thwart those goals.  Their USTR inaugurates a bridge between the US and Mexico, while expressly preventing Mexican trucks from traveling over it.

And American small business owners (and the rest of us) are left wondering, "what the....?"

This loud "harumpf" prompted a thought-provoking response over at my Facebook page from a friend/colleague who said, and I paraphrase, that because it's becoming increasingly clear that US businesses cannot count on the current administration for top-down, traditional leadership on trade (i.e., FTAs, WTO negotiations, etc.), "we should be looking for alternative ways of pursuing... economic engagement, particularly with trading partners in the developing world where economic growth is continuing."

I couldn't agree more, but this alternative approach, of course, begs the question: "how can businesses enhance economic engagement without the aggressive, and economically rational, support of the White House and Congress?"  Afterall, it's the White House that negotiates trade agreements, and it's the Congress that approves them.  So what's a private sector guy (or gal) to do?

It's a great question, and obvious answers are hard to come by.  But fortunately for me, the World Bank just released a new study that provides one good response: logistics (aka "trade facilitation").  The Bank's Logistics Performance Index (LPI) measures the ease of shipping and trade logistics on a national basis, and thus provides a way for us to evaluate countries' performance in trade logistics as well as to identify areas for future improvement (the big winner: Germany).  The study defines logistics as "an array of essential activities—from transport, warehousing, cargo consolidation, and border clearance to incountry distribution and payment systems—involving a variety of public and private agents," and finds that:

A competitive network of global logistics is the backbone of international trade. Unfortunately, many developing countries have not yet benefited from the productivity gains of logistics modernization and internationalization implemented over the last 20 years by advanced economies.

Improving logistics performance has become an important development policy objective in recent years because logistics have a major impact on economic activity.  Evidence from the 2007 and 2010 LPIs indicates that, for countries at the same level of per capita income, those with the best logistics performance experience additional growth: 1 percent in gross domestic product and 2 percent in trade.

In other words, logistics improvements alone can help poorer countries develop faster and also dramatically increase trade.  Even shorter: richer customers and quicker routes to them.  Indeed, in announcing the 2010 LPI, World Bank Trade Department Director Bernard Hoekman stated, “Our research shows that increasing logistics performance in low-income countries to the middle-income average could boost trade by around 15 per cent and benefit all firms and consumers through lower prices and better quality services.”   

Impressive.  And not an FTA, WTO or international bureaucrat in sight!

Obviously, the Bank intends its report to herald a call for greater government investment in logistics, and the World Bank's own Trade Facilitation Facility, launched in April 2009, was created for this very purpose.  But there's no reason why private business groups can't get into the act by, for example--

1. volunteering to help develop logistics best practices (including those based on and incorporating the Revised Kyoto Convention on the simplification and harmonization of global customs procedures);
2. providing private capital for basic logistics improvements like customs software and equipment or port/road construction; or 
3. establishing private logistics services companies in developing countries that lack them. 

Indeed, given some of the Bank's less-than-stellar results and the US government's newfound aversion to realistic free trade policies, a private approach is probably preferable to a Bank-directed or government one.  And if the LPI's findings are even remotely correct, the potential returns on private logistics investment - significant improvements in economic development and trade - could be worth the costs to US and other companies with a big stake in increased economic engagement with the developing world, i.e., trade in their goods and services.  (It might even attract some smart entrepreneurs interested in organizing and guiding those companies' investments.)  These private parties could use the LPI and other studies on trade facilitation as a roadmap for their work.  Many of the countries that jumped in the LPI rankings are developing nations that introduced reforms based on the 2007 LPI report findings, and the report's authors found that other developing countries that improve their trade logistics systems stand to make similar gains.  So we have already tangible benchmarks and real results, not just theory.

And again, the US government's involvement is completely unnecessary (at least until the new "logistics investment fund" is nationalized, of course - I kid, I kid.).

So maybe instead of paying lobbyists millions (and millions) of dollars to advocate the negotiation and passage of trade agreements before a totally disinterested Obama administration and US Congress, US (and foreign) companies should pool those millions and spend them on targeted logistics investments in developing countries desperately in need of - and willing to accept - them.

At this point, it's not like the return on their investment could be any worse than it's been on FTA/Doha advocacy, now could it?

(Note: I'm not the first guy to suggest logistics reforms as an alternative to "traditional" free trade moves.  Cato's Dan Ikenson advocated trade facilitation instead of the WTO's Doha Round back in 2007.  But he didn't focus on how the private sector could get involved, and, of course, had a US president far more interested in expanding trade than our current White House resident.  The 2010 LPI, however, does provide more support for Dan's original conclusions.)