MASTER THESIS
ANALYSIS OF TRANSACTION COSTS IN INTERNATIONAL TRADE AND PRACTICE IN
VIETNAM
Specialization: International Trade Policy and Law
NGUYEN KIM NGAN
Trang 2MASTER THESIS
ANALYSIS OF TRANSACTION COSTS IN INTERNATIONAL TRADE AND PRACTICE IN
VIETNAM
Major: International Economics
Specialization: International Trade Policy and Law Code: 8310106
Fullname : Nguyen Kim Ngan
Supervisor : Assoc Prof PhD Tu Thuy Anh
Trang 3international trade and practice in Vietnam” is my own research and does not
reproduce any other materials The data indicated in the thesis is clear, accurate and
are collected from the confident sources of information
The Author
Trang 4ACKNOWLEDGMENTS
In order to complete this thesis, besides the efforts of myself, I have
received the help, encouragement and guidance of my teachers, friends, colleagues and family throughout the course as well as in the period of the thesis research
Special thanks to Assoc Prof Ph.D Tu Thuy Anh, who was
dedicated to guide and help me in the process of researching and writing this
thesis
I am grateful to the teachers in the Faculty of Postgraduate Education of Foreign Trade University for interesting and useful lectures, for the
enthusiastic transmission of the valuable knowledge and for the best conditions
offering in the process of the course
I would like to express sincere thanks to my colleagues working on Commercial Department who support me with a lot of data and information related to logistics costs of exporting shipments
I am grateful to my family for their encouragement and supports during
the course and the period of thesis research
This thesis studies on the transaction costs of exporting firms is not a new but a very complicated issues required various knowledge, skills and practical
Trang 5TABLE OF CONTENTS
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1.3 Elements impact on transaction costs in exporting Growth cccssscees 19 1.3.1 Impact of trade facilitication on transaction COStS MOVEMENL 00000000 20 1.3.2 Impact of government’s policies ON transaction COSTS ss.cscerecssssrerseeeees 24 1.4 Measurement Of transaction COStS ccccsscccsscccsscscsescsscescecscssesssccsesseeees 28 1.5 How to evaluate transaction costs level in ©XDOFFÍ cos<sssss<<esese<s 29 CHAPTER 2: TRANSACTION COSTS ENCOUNTERED BY VIETNAMESE EXPORTING EILIRVMS -. - << 5 HH nnn809950.0nn000900.6600000190000009996 37
2.1 The transaction costs of exporfing firms in Vietnam - « 37
Trang 62.2 Case study in Vietnamese exporfing ÍÏrm << << <c se se se, 58 CHAPTER 3: RECOMMENDATIONS FOR LOWING TRANSACTION COST ENCOUNTERED BY VIETNAMESE EXPORTING FIRM 66
3.1 Experiences from Singapore’s dev0DIme€IIÍ so << 5 55s se 66
3.2 Recommendations for Vietnam’s reduction transaction costs in export.75
3.2.1 Recommendations for Vietnam’s reduction trade costs in export 75 3.2.2 Implementing Trade facilitation AQreemMeNt, .sccccccccccssssrssscccssccsscesees 77 3.2.3 The role of government in educating and communicating changes 80
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Trang 7ABBREVIATIONS MEANINGS
ADB Asian Development Bank
APEC Asia-Pacific Economic Cooperation
ASEAN Association of South East Asian Nations
BRI Belt and Road Initiative
FTZs Free Trade Zones
FDI Foreign Direct Investment
GDP Gross Domestic Product
GST Goods and Services Tax
GVCs Global Value Chains
IADB Inter-American Development Bank
LPI Logistics Performance Index by The World Bank
LDCs Least Developing Countries
MTB Marginal benefit
MTC Marginal transaction costs
OECD Organization for Economic Co-operation and Development
PPP Public-Private Partnership
TFA Trade Facilitation Agreement
TFAF Trade Facilitation Agreement Facility
UPU Universal Postal Union
VLA Vietnam Logistics Association
WB World Bank
WCO World Customs Organization
WTO World Trade Organization
Trang 8LIST OF TABLES
Table I: Structure of transaCfIOT'I COSÍ - - SH ng nh 9
I1) ý2byi)ui(0i0vv 0v) 1n 14
Table 3: Figures on importation and exportation of Vietnam (2005-2017) 40 Table 4: Descriptions of each indicator .cccccccssssseccesssseeeeeesseceeeeessseeeeesssseneeeees 44 Table 5: Compare TFI of Vietnam between 2013 and 2017 . -««- 48
Table 6: Logistics Performance Index 2018 in ASEAN members 54 Table 7: Logistics cost of developed countries (Donald & Roger, 1998) 55
Table 8: Estimated Vietnam's import and export COSt .ccccsssssccccesssesccesessseeeeees 56 Table 9: Export deta1ls In Vietnamese cormnpany . -«- s5 ssccsssssssssss 60 Table 10: All expenses of Vietnamese export shiprmer s«« «5s ss++sss 61
Table I1: Major heading of exports shiprmerif . 25s s+sssssssssseeesersss 62 Table 12: Ratio of production and transactfIOf COSỀ . 555 ss+ssssssssssss 63
Table 13: Singapore’s LPI ranking across 2007-2016 :cccccssccssestceeenteesesseeeeens 66
Table 14: Vietnam’s LPI ranking across 2007-20 6 . Ăn ng 67
Trang 9LIST OF FIGURES
Figure 1: Internal and external transaction «5S S3 xi eesrseerrrsere 8
Figure 2: A particular source of trade costs is Important (øoodđ) 15
Figure 3: Population living on less than USD 2 per day (2008-12) - 17
and number of days needed to ©XDOF .- ĂĂ 5 S11 1 ng xếp 17
Figure 4: Doing Business costs to export, USD per container, 2014 18 Figure 5: Average number of days required to export by income eTOup 19
Figure 6: Types of trade costs in goods markets cccssccccsssssscceessssseeeesesseeeeees 25
Figure 7: Policies affecting trade costs in øoods 1maTÌK€fS << << sssss«2 27
2ì: N0 0)))-8108/)1583)1905Jà 09): 0n 27
Figure 8 - What makes up the time and cost to export tO an OV€rSea 34
Figure 9 - Trading across borders: time and cost to export and Import 35 Figure 10: Import — Export Growth ( 2011-2016) 0 ccc ccecessecessreeeenseeeeensneeeens 37 Figure 11: Key export commodities (2017) .cccccssscccssssseceeesssseeeeessseeeessesseeeeeees 38
Figure 12: Vietnam’s trade facilitation performance: OECD indicators 47 Figure 13: Trade Facilitation Indicator of Vietnam 1n 2017 .« «5< «s<+ss<2 48 Figure l4: Time and costs of Trading Across BOrd€rs . «5c c2 50 Figure I5: Time and costs of Trading Across Borders in Vietnam 51
Figure l6: Logistics Performance Scores, Vietnam s sa 53
Figure 17: Vietnam Logistics Performance Index 2007 — 2018 - .-«- 55 Figure 18: Overall potential trade cost reductions fOP ccccesccsssessseessneeeeseeeees 57
ASEAN mernber counitr1€S (Ÿ%9)) - - S311 HH ngà 57
Figure 19: Comparison of the trade declaration system before and after the
establishment of Trade Net - - TH TH ve 69
Figure 20: Factors contributing to the success of Singapore’s Logistics Industry .71
Figure 21: Economies that offer regular training for customs clearance officials have
Trang 10ABTRACT
In trade, transaction costs are components directly into the price of goods
and services and are increasingly focused and paid more attention Today, the economy in general and businesses in particular want to compete in the world
market, it is impossible to ignore the management and control of this type of cost
so that they are as low as possible For developing and underdeveloped countries,
transaction costs are often high due to underdevelopment of infrastructure,
science and technology The international integration, trade barriers, qualifications also challenges them to minimize this type of cost, thereby increasing their commercial competitiveness
This paper presents the current status of the transaction costs encountered by
Vietnamese exporting firms From the collection, analysis shows that transaction costs of Vietnam tend to decrease but remain high compared to other countries in the region and the world This is due to infrastructure traffic in Vietnam has not yet caught up with the development progress of the logistics industry, transport
infrastructure system is not synchronous, connectivity is still limited between sea,
rail and road transport; lack of national and international logistics centers in key economic areas to act as a focal point for goods distribution The main transport fees, surcharges and taxes constitute a barrier for the logistics industry to develop In addition, the policy of many ministries and transport trends makes cost cutting
more difficult From these studies, the Thesis would like to provide solutions for
Trang 11In modern economies transaction costs have become equally (and perhaps
more) important than production costs This is quite a development considering that early economic theory (e.g., the perfect market economy model) focused entirely on production costs assuming that transaction costs did not exist Implication for
economic research: It has become relatively more sensible to do research in transaction cost dynamics rather than production cost dynamics This is perhaps also contributing to the surge of interest for research in corporate governance that clearly
has more to say about transaction cost dynamics rather than production cost
dynamics You can’t manage costs effectively without taking into account the
transaction costs Many economists like to divide costs incurred by a business into
two categories; transaction and production costs Production costs include costs of producing as well as distributing a good or service Everything else is categorized
into the types of costs
The managers can’t make right choices without analyzing transaction costs For examplem, a buyer wanted to purchase a colored Doppler (ultrasound machine)
for their charity hospital However, the price of the device from well-known companies was out of our reach On the other hand, they didn’t want to buy a product from some less reputed company This led to go for a refurbished colored
Doppler
There were dozens of sellers all around the province We were touchy about the model, availability of spare parts and price of the product Our searches cost us
spending on telephone calls, letters, emails, etc Similarly, we had to spend a lot of time which involved an opportunity cost All these expenses were made to purchase
a single product What can be the volume of the cost in case of economies of scale? In fact, without analyzing these costs, we can’t find out the exact turn out of
Trang 12In a world without transaction costs but with perfect markets, the penetration ofinternational markets would be a simple matter of production cost; thus,
comparative advantages would determine which producers penetrate international
markets and when.Yet, despite remarkable technological improvements relevant to the costs of internationaltransacting, especially with respect to communications and data storage, and considerablerelaxation of exchange controls and the like, the costs
of international transactions aregenerally far from negligible In particular, from around the world there is growingevidence that reforms designed to provide the right economic environment for the localproduction of exportables and incentives
for exporting are insufficient in themselves togenerate rapid export growth (Keesing, 1979; Morawetz, 1981; Dean, Desai and Riedel, 1994 and Greenaway
and Morrissey, 1993) In some respects, moreover, the transaction costs of
international marketing may even be increasing over time, preventing otherwise beneficial transactions from taking place Unless the high transaction costs in
international marketing are recognized and appropriate strategies are designed for dealing them, even the best of general macro economic and trade policy reforms may be doomed to failure The costs of reform failures are high-as are the costs of
failing to try
Exports have played a pivotal role in the growth of the each economy It
mainly contributes to GDP of each country, therefore, it has become imperative that there should be a focus on not only increasing exports base but also improving their export competitiveness in the world market A key factor hindering export competitiveness has been the high transaction cost involved in exports Transaction
cost related to trade involves a host of regulatory requirements, procedures and
Trang 13High transaction costs effectively nullify comparative advantage by rendering exports uncompetitive High transaction costs deny firms access to technology and
intermediate inputs, preventing their entry into, or movement up, global value
chains High transaction costs also erode consumer welfare narrowing the range of good and services on offer and pushing up prices While transaction costs do not alone explain the development pathways of economies, they are a major factor
explaining why some countries are unable to grow and diversify The range of policies that affect transaction costs is broad Although transaction costs are
ubiquitous, they are not immutable Action can, and is, being taken to reduce transaction costs Policy reforms are yielding positive impacts, although these cannot be assumed, with research suggesting that the lowest income countries stand
to gain the most from enacting such reforms Much work remains to be done to
reduce transaction costs further and integrate countries more completely into the global economy, but there are positive reasons to believe that developing countries and their partners are taking this issue seriously Normally, 95% the foreign trade (in volume) of country passes through sea ports The shipping lines provide
transportation service to importers and exporters from one country to another
country The cargo handling cost and shipping charges determine the economical viability of export goods The transaction costs of the import-export shipment are
important factor in the international trade Therefore, this thesis is important to
understand economical impact of foreign trade of various countries
From the above mentioned reasons, the author chooses the topic “Analysis of transaction costs of international trade and practice in Vietnam” for research
Strating from theoretical basis and actual situation of transaction costs in
Trang 14has to pay cargo handling cost and other charges to concerned service providers
This high logistics cost impact adversely to business Therefore, the object of
research is to analysis transaction cost in Vietnamese exporting firms in practice
The objectives of the thesis are analysis the overview of transaction costs and
the important of transaction costs in trading growth in whole economy, particular in exportation; the practice of transaction costs in Vietnam exporting firms and give the reasons why the transaction costs are high in Vietnam exporting firms
Transaction costs are analysed through one case study of Vietnamese company (due to no genaral dates of transaction costs) After determining all factors which affect transaction cost in Vietnam trade, from analysis and synthesis, the thesis shall show that the transaction costs are high for Vietnam exporting firms From that, the
thesis shall make several recommendations for reduction of transaction costs in Vietnamese exporting firms
Ill Research methods
The research is conducted based on the methods of collecting, analyzing and
synthesizing information, processing statistical data and evaluating actual situation of Vietnam in comparison with that of other countries in the world The thesis also uses case study method to have a realistic view of the issues by generating the
experience of other countries in transaction cost and analyzing outstanding case in Vietnamese firm
IV Expected results
The research is expected to make several contributions to theoretical and
practical basis as follows:
- Generating theorical base for the transaction costs
- Determining factors impact on the transaction cost
Trang 15V Structure of the research
A part from the Introduction and the Conclusion, the research is divided into three chapters as follows:
Chapter 1: Theoretical background of transaction costs
Chapter 2: Transaction costs encountered by Vietnamese exporting firms
Chapter 3: Recommendations for lowing the transaction costs encountered by
Trang 161.1 Definition of transaction costs
1.1.1 Definition of transaction costs according to economits’s viewpoint What are the transactions and what are the transaction costs?
Scholars have different ideas about the definition of transaction in different
periods For example, John R Commons (1931) came up with a generalized
concept about transaction before Coase’s literature “The Nature of the Firm” has
been published According to Commons, transactions are just the transfer and obtain
of object future ownership between two persons, and the substance of transaction is the ownership transfer, not the object itself moves from one to another A
transaction occurs when a good or a service is transferred across a technologically
separable interface, one stage of activity terminates and another begins (Oliver E Williamson, 1981) It is generally stated that, transaction is just the exchange of goods or service by the medium of currency But to a narrow definition, transaction is an activity of buying or selling objects or interests among people; and to a universal definition, all the activities among enterprises, persons, enterprise and person can be named as transaction
Ronald Coase (1937), the economist formulated the first ideas about transaction costs more than 70 years ago, mentioned “Without the concept of
transaction costs, which is largely absent from current economic theory, it is my
contention that it is imposible to understand the working of the economic systems, to analyze many of its problems in a useful way, or to have a basis for determining policy” [Coase 1988a, p.6]
In economics aspect, transaction costs are as the fees paid by buyers, but not received by sellers, or the fees paid by sellers, but not received by buyers In finance
Trang 17Nobel Prize for Economics for their contribution to the theory of transaction costs namely Ronald Coase, North, and Williamson
Firstly, Ronald Coase described transaction costs as unavoidable costs of
doing business, “the cost of using the price mechanism” in “The Nature of the Firm’ Coase used the term “transaction costs” to refer to costs of communicating, encompassing all of the impediments in bargaining Given this definition,
bargaining necessarily succeeds when transaction costs are zero
Ronald Coase developed the notion of transaction costs as a way of explaining
the emergence of the firm within an exchange economy and also as a way of understanding the particular structure and governance framework of firms in
different sectors and under different circumstances He asked: why does a firm emerge at all within an exchange economy, where the different factors of production
(land, labour and capital) necessary to make goods or provide services can be freely
exchanged? If the answer is to do with the nature of entrepreneurialism (specifically
the ability of entrepreneurs to bring together factors of production which would not
easily come together through the market mechanism alone), then why is this type of coordination achieved in some cases through entrepreneurialism and in other cases
through the price mechanism? Why was it that, in some agricultural systems, bread would be made as a result of a series of exchanges between wheat farmers, millers and bakers, whereas, in other systems, all these functions would be vertically
integrated within a single firm?
According to him, there are two main types of transaction costs, internal transaction costs and external transaction costs, and firm size depends directly on the nature of the transaction External costs include the paid costs of getting the
information, the opportunity cost of time taken up in searching ; whereas internal costs include the mental effort devoted to undertaking the search and sorting the
Trang 18Figure 1: Internal and external transaction Cost External b Internal
Source: International Journal of Engineering and Management Sciences
The horizontal line (a) is the cost of doing any transaction within a firm and it is the fix cost, so any internal transaction costs are in effect the same Coase argued that the firm will want to do all the work internally where line ( a) is below line (b),
or in other words, the transaction costs for exchange within the internal firm are lower than for exchange through the market, so that the firm size will grow The opposite, transaction costs for exchange within internal system are higher than for
exchange through the market, the firm will be downsized
Douglass C North, who are the most important and influential economist of
the late 20" century, argues that institutions (include formal institutions such as legal rules and regulations and informal institutions such as mutual trust, the
commercial or mercantile skills of a nation) are key in the determination of transaction costs Institutions that make low transaction costs, of course, promote economic growth
Finally, Oliver Williamsion, he developed Coase’s study defines transaction
Trang 19work intensity); secondly, the production process (pre-production, production and post production) The following table illustrates the structure of transaction costs:
Table 1: Structure of transaction cost
Factors of Production Process
production Pre-production Production Post- production
Physical and Abuse and agency
Asset specialty
financial capital costs
Information
Measurement of
Human capital constraints and | Coordination costs
output and contract asset specialty enforcement Shirking and Work intensity contract enforcement
Source: International Journal of Engineering and Management Sciences The table above shows that (pre-production and post — production) factors are
those which encourage the firm to produce, and in their absence it is better to rely
on market transaction Production processes within the firm affect the transaction costs borne by the firm Moreover, without production processes firms need to deal
with other parties, which mean rising market transaction costs
1.1.2 Definition of transaction cost in export
As in the domestic market, the price at which a product or service is sold directly determines your company’s revenues Your firm’s market research should
include an evaluation of all variables that may affect the price range for your
product or service If your company’s price is too high, the product or service will not sell If the price is too low, export activities may not be sufficiently profitable or
Trang 20A company that has decided to export its products to a new market or to buy
from a new supplier in a different country cannot take for granted that the potential transaction will be viable, profitable or provide goods at a price and quality that are
competitive From a financial point of view, a transaction may prove unrealistic if the cost of entering a market is too high, the competition is grueling, or the price the
company needs to charge in the new market is not competitive
An importer needs to be sure that the product remains of interest to themselves
or their potential customers after factoring in all the landing costs (all costs
associated with the delivery of the goods to the country of destination), the packaging and the associated expenses
An exporter must ensure acceptable and timely returns from international business activities in relationship to the associated costs and risks
A transaction that cannot be completed at a profit, or one that is not
compatible with the criteria and objectives of both the exporter and the importer,
could harm domestic operations and may even threaten the long-term survival of the company For an exporter, the decision to enter a new market may stem from a
marketing plan based on solid market-research or may be the result of a reactive
response to an unsolicited request In some sectors, notably knowledge-based
industries, exporting may be a competitive imperative undertaken on the first day of
operations
Once a company has decided to export, and before shipping any goods, it must do the following:
e ensure that the transaction is viable; e determine the export costs;
e determine the optimum sales price
Trang 21money before the actual shipments of export items The multiplicity of rules and
regulations, rule-bound administrative procedures and practices, comprehensive
infrastructural facilities and appropriate institutional support adversely affect the
export promotion efforts These non-price factors, often referred to as “transaction costs”, slow down the motivation given to export growth even when other trade
policy issues have been addressed by the Government In the internationally competitive world, export promotion is highly price-sensitive and therefore any addition to it by way of transaction costs has to be addressed by the trade policy reforms
These costs usually begin with an individual firm’s imports of inputs required
for exports and stretch till the export remittances are received through the banking channel Comprehensive infrastructure is the one of principal sources of the
transaction costs for most export industries in developing countries and underdeveloped countries The basic problem with transaction costs is that some of
the factors responsible for such costs are difficult to quantify and warrant more qualitative than quantitative treatment
The principal objective of transaction costs analysis is to optimise all such
costs, as beyond a critical level they tend to decrease the volume of transactions
Increasing costs of transaction costs tend to adversely affect the efficiency of
transaction, partly in terms of resources and partly in terms of suppression of exchanges
In the field of importation and exportation, transaction costs arise out of strict rules and regulations, complex administrative personel Therefore, in a regime
conducive to exports, efforts need to be taken to reduce the complexities involved in
export transaction processes along with price-related measures, such efforts provide
incentive to exporters to improve the export supply 1.2 Transaction cost classification in export
In import-export, several different types of transaction costs can be identified First, there are the costs of obtaining information about market conditions in any
Trang 22each different quality), and of course reciprocal costs for agents in foreign countries Second, there are the costs of information about government regulations and other
policies in both the foreign market and the home market (including exchange rate
policy, exchange restrictions, tariff and non-tariff barriers, and health and environmental regulations) Because implementation of these rules and actual
practice can vary substantially from what the laws or rules say, knowledge of the official documents is far from sufficient Third are the costs to each potential party
of identifying appropriate trading partners in these markets Fourth, there are the
costs of negotiating, writing and enforcing contracts between the parties,
includingthose associated with the resolution of disputes Fifth, because of the
generally long between the placement of an export order and its receipt and final payment, there are thecosts of financing the transaction and of bearing the risks of default at subsequent stages
Among the factors tending to make these costs much higher than those with
respect to domestic transactions are: language, cultural and taste differences, differences in laws and the way disputes are resolved, differences in income and information sources, differences in the way markets operate and in the extent and
character of competition, and difficulties of enforcing contracts across countries, and hence higher risks of payment default These transaction costs are not merely
static; rather they change substantially overtime as circumstances change For
example, they may be expected to increase with changes in the identities of the
trading agents, in the environmental conditions which surround them, and in the
character of the respective markets Even if an exporter has all the right information
about all the relevant factors in a particular market at one point in time, the rapidity of change undermines the adequacy of his information about relevant future
conditions in that market Indeed, for any individual country, over time there are two important trends tending to raise transaction costs for developing country
exporters: (1) the growing relative importance in developing country exports of quality-differentiated and increasingly specialized productsfor which it is difficult to
Trang 23otherwise), and (2) the growing use in developed countries (at both the national and
subnational levels) of various non-tariff barriers to trade, including environmental
regulations, which are subject to more sudden changes over time than tariff barriers Another such factor is the asymmetry of information that characterizes many of the
relationships, actual or potential, among the different agents As is well-known,
asymmetries of information give rise to problems of adverse selection and moral hazard, and such asymmetries are likely to arise several different components of transaction costs at the same time
For example, at the level of the rules and regulations, countries may want the
conditions to look different than they really are, or be unwilling to enforce existing
laws Likewise, the agents charged with the responsibility of implementing the rules
may have little incentive to do so, and indeed may have the incentive to leave the
interpretation of these rules sufficiently ambiguous as to generate rents for
themselves Even more relevant and important, each potential trading partner has
better information about his own characteristics and propensities (appropriate to defining the terms of the contract) than the other party, inducing adverse self-
selection for any given terms While in principle contracts could be written in
sufficient detail so as to be complete and self-enforcing, in practice because the
costs of doing so are excessive, actual contracts are necessarily incomplete and
hence vulnerable to opportunistic behavior Moreover, because of the lags between the time of writing the contract and that of delivering on it, and then again before payment is received, each party may have the incentive to default insome way on the terms of the contract (i.e., to practice moral hazard or opportunistic behavior relative to the other party) These problems are often further compounded by the
fact that many of the information costs and enforcement costs are subject to
economies of scale, economies of scope and externalities The externalities imply
that the incentives for investing in such information and in adequate enforcement mechanisms and insurance may well be insufficient (because their benefits leak out
to others in the form of externalities) The economies of scale and of scope imply
Trang 24production of these relevant services, competitive markets for such services may not
exist Instead, these services may be monopolistically supplied, but thereby creating
the basis for government regulation and intervention
Transaction costs can be classified into investment related (like taxes, delay cost), trade costs, and opportunity cost Trade Cost is the largest subset of
transaction costs, so this thesis shall be focused on analysing trade cost in exporting firms Table 2: Transaction cost classification Transaction Costs
Investment Costs Trading Costs Opportunity Cost
- Taxes - Commission - Opportunity Cost - Delay Cost - Fees - Rebates - Spreads - Price Appreciation - Market Impact - Timing Risk
Trade costs are defined as: “all costs incurred in getting a good to a final user other than the cost of producing the good itself: transportation costs (both freight
costs and time costs), policy barriers (tariffs and non-tariff barriers), information costs, contract enforcement costs, costs associated with the use of different
currencies, legal and regulatory costs and local distribution costs (wholesale and
Trang 25fundamentals like technology and factor endowments (labour and capital) to
produce the pattern of trade and production we observe around the world As such,
they have a great potential to influence the trajectory of a country’s economic development
The OECD-WTO survey provides some information on the types of trade
costs that are most important in partner countries (Figure 2) The most commonly identified are trade facilitation (in the sense of customs and border procedures), transport infrastructure and non-tariff measures, including product standards Each of these areas is one in which aid for trade can play an important role In the case of trade facilitation, aid for trade is built into the architectureof the new WTO Agreement, so there is a strong chance that progress in this area will be possible with a combination of political will in partner countries and mobilisation of
resources in donor countries Transport infrastructure is a key component of traditional aid-for-trade spending Finally, non-tariff measures like product
standards are frequently the subject of technical assistance programmes run by donor agencies — either governmental or multilateral organisations — and have real potential to reduce the trade cost burden on partner country exporters
Figure 2: A particular source of trade costs is important (goods)
Iransport infrastructure i 51
Border procedures (trade facilitation) ee 50 Non-lariff Measures (including standards) | 48
Accesso rade finance i 36
Network infrastructure (ICT, power, telecoms) — 34 Tanffs, fees and other charges | 29 |
0 10 20 0 40 50 60
NUMBER OF RESPONSES
Source: OECD/WTOAid for Trade monitoring exercise (2015) Tariffs are one well-known component, but they only account for a relatively
small part of the total level of trade costs in most countries Non-tariff measures are also important, including product standards, as well as other types of regulation that
Trang 26of doing business for foreign firms Over the last two decades, trade in services has
expanded rapidly to reach more than a fifth of global trade flows The participation of developing countries in this trade has increased dramatically, rising from 11% of world services exports in 1990 to 20% in 2011 As an input into other economic activities, services are a direct determinant of country’s competitiveness Services
such as telecommunications, energy, transport and business services are critical inputs into the production of goods and other services and influence productivity and competitiveness Opening up to services imports and Foreign Direct Investment
(FDI) can be an effective mechanism to increase the availability, affordability and quality of these services, which are crucial for export diversification, economic
growth and poverty reduction In addition, services can offer dynamic new opportunities for exports (World Bank, 2015 monitoring exercise)
Services trade also involves transaction costs Where pure cross-border trade is
possible — for instance, via the internet — issues such as transport costs do not arise
Nonetheless, there may be issues of regulation or infrastructure investment that generate friction Trade in services is governed entirely by domestic regulation The
regulatory framework governing services trade includes a vast range of domestic laws and regulations in areas that often include land ownership, establishment of foreign companies and migration policies They exist in sectors as diverse as
Trang 27Figure 3: Population living on less than USD 2 per day (2008-12) and number of days needed to export PERCENT 100 o HN = 8 2s mm = 8 v we a "- A E a -7_ mm " m5 m” -" a 50 moet n mm mã a Meee "mg .- = m ” a _ —= a E EI eae a ũ a 8 " mg » " aoe a " 1 | L 25 3.0 35 40 45 DAYS 10 EXPORI (2005) — LOGARITHMIC SCALE
95% Confidence interval «+++: Fitted values HE pov200
Note: The number of days required to export in 2005 is in natural logarithms High income countries are not included in the figure
Source: World Bank World Development Indicator High trade costs effectively isolate countries from world markets: consumers
in these countries cannot take advantage of competitively priced goods from abroad, and their firms cannot access high quality foreign inputs or export to overseas
markets For those living at the base of the pyramid, often in extreme poverty, high prices disproportionately impacts on their consumer welfare Not surprisingly,
lower trade costs are typically associated with net poverty reductions even though the distributional impact of trade costs differs across countries This positive
relationship between trade costs and poverty is illustrated in Figure 3 Developing countries with higher trade costs — measured by the number of days required to
export in 2005 — tend to have a higher share of the population living on less than USD 2 per day
High trade costs price some country regions, countries and companies out of
export markets, thereby limiting their economic development opportunities Trade costs may not explain why some countries are low income or least developed, but,
Trang 28grow and exploit their comparative advantages (see figure 4) Keeping trade costs at reasonable levels and reducing them as far as possible in some key areas is essential to enjoying comparative advantage and the gains from trade
Figure 4: Doing Business costs to export, USD per container, 2014
INCOME GROUP Low income Lower middle income
Upper middle income
High income: OLKCD
High income: non OECD
0 500 1000 1500 2000 2500
USD PER CONTAINER
Source: World Development Indicators In a static sense, economic welfare can increase from lower trade costs — the
real economic cost of doing business is reduced and GDP correspondingly increases as new transactions take place Dynamic gains are also possible In particular,
access to foreign inputs has been found to be associated with innovation activity: as
firms gain access to new goods, they combine them in different ways to make new
products Indigenous technology development or adaptation is at the core of
economic development over the medium to long term and harnessing the process is
likely an important part of moving up global value chains.High trade costs are a considerable burden on the poor, undermining economic welfare by pushing up consumer prices and keeping poor producers out of global markets Figure 5 below highlights the average number of days to import Time is an important parameter for
trade costs Against this background, it is important to note what happens when
trade costs for a particular country stay at an unnecessarily high level while those of its partners fall The country will be less able to take advantage of specialisation by
comparative advantage and thus will feel the gains from trade less fully than its partners This point stands for countries that remain relatively marginalised from the global trading system as a result of high trade costs, for example, landlocked
Trang 29Figure 5: Average number of days required to export by income group DAYS 60 50 — m—— A0 _ — LDC —— LLDC ¬ _———_ Low income 30 sAAnewowetSSsecscceeeccs
999999999009999999999996696600000000000000009696696666e Lower middle mcome
20 Upper middle income
"tS Oe ee ee eee eneneeeeeee ee ee eeeeecenececscscsesssesesesececscsceseseeseseteeeencs High income
° 5005 2006 200 A008 200 2010 201 2012 013 20M
Note: Figures calculated based on simple averages across 44 LDCs, 16 LLDCs, 30 LICs, 48 LMICs, 49 UMICs and 46 HICs
Source: World Development Indicator Not only do trade costs matter between countries, they also matter within countries Firms that face high costs of moving their goods from the factory gate to
an international gateway, like a port or airport, effectively have an extra hurdle to
clear when they try to enter international markets Sometimes these barriers keep
them out of business altogether, so Policy makers may not even realise the harm
that is being done Regions with high trade costs are often economically deprived
and lie at the low end of income distribution (Inter-American Development Bank [IADB], 2013) Of course, many factors are at play in determining the ability of a
country to grow and develop, and there are complex interactions among them But trade costs stand out as one important source of disadvantage for countries
1.3 Elements impact on transaction costs in exporting growth
In the context of a whole economy, the benefit of an individual transaction will tend to fall as the number of transactions increases That benefit is related to differences in production costs Naturally, the greatest benefits, or production cost
differences should be exploited first, and smaller benefits only later additional
Trang 30Transaction costs can be expected to depend on two main factors: trade
development, and government’s policies
1.3.1 Impact of trade facilitication on transaction costs movement
We can be seen from this brief historical review, in the 19" century economic
history of Germany, example of a relationship between transaction cost and
economic growth Germany experienced dynamic economic growth around the
middle of the 19" century There was physical capital investment in railways, and
human capital investment in education, and improvements in production technologies, as conventional theory would expect, but also thedevelopment of a customs union, the Zollverein, from 1818 onwards As Seidel (1971) notes, at the
end of 18" century, in the territory of the previous German-speaking Holy Roman Empire, one could experience about 1800 customs barriers (about 1830 trade
barriers even within Prussia, including the division of Prussia into two separate parts) Travelling from East Prussia Cologne to West Prussia was associated with custom borders checks and taxing 18 times Transportation of goods was slowed down, and inspections off cargo and custom duties increased final prices The
Zollverein customs union reduced all these barriers to intra-German trade The
number of transactions increased, bringing prosperity to all engaged in production and exchange
There is also the post-war phenomenon of European Union and attempts
towards a common market for goods and services in the 1990s, with reductions of transaction costs for the 27 EU member states Transactions cost can be reduced by imposing common technical standards for production and by reducing import and
expenditure tax rates, and other barriers to trade within the Union
Therefore, a reduction in transaction costs or a reduction in resource use per
transaction leads to increase economic growth and economic welfare
Traders from different Member States of the WTO have long complained that
trade is often subject to excessive and overly-complex regulations on the importing and exporting of goods Moreover, the regulations also differ from country to
Trang 31companies, this becomes a costly matter, but even for large companies this often means a heavy administrative burden
According to one study of Eximbank, the procedural complexities assume to
have been started from the following qualitative factors:
a Complex administrative processes;
b Bureaucratic approach of public agents;
c Procedural delays in clearing imported inputs for exports at the customs;
d Multiplicity of rule and regulations; e Stringent but inefficient implementation;
f Information constraints regarding credit availability and export remiitances;
g Infrastructural bottlenecks related to transportation and communication; h Institutional factors which intensify rent-seeking activities in an economy; i Political environment as it affects any change in policy stances and other
related parameters concerning the factors list above
After the necessary ratifications were secured, the Trade Facilitation
Agreement (TFA), a multilateral treaty that was concluded within the World Trade Organization (WTO), entered into force this past February 22nd The TFA, which is
designed to allow goods to be imported and exported more quickly and easily, will
now have to be implemented by the various Member States of the WTO, including
every country of the European Union Because the European Union is already a customs union, this means concretely that positive consequences will be noticed
primarily when trading with a Member State of the WTO that is not a Member State of the European Union
With the entry into force of the TFA, one is seeking to allow the trading,
release and clearance of goods to take place more quickly by providing the
Trang 32In addition, the TFA addresses the necessity of providing clear regulations, which moreover will be identical in the different WTO Member States Concretely,
this entails that Member States must set up websites which clearly explain their
export and import procedures — and the accompanying costs — in this specific
country and/or that specific Union, while also offering traders a chance to ask
questions if anything is unclear
Obviously, the ratification of the TFA is a first step in the right direction
Before one will truly be able to enjoy the benefits of the TFA, the treaty must first
be implemented in each of the WTO Member States In this regard, the TFA makes a distinction between developed and developing countries
While the developed countries have undertaken to implement the provisions of
the TFA immediately, the developing countries are receiving more time to adopt the provisions Moreover, the latter group of countries will not only be financially
assisted by several partners of the WTO, they will also be constructively supported
by the so-called TFAF (Trade Facilitation Agreement Facility) This body was set
up in order to pinpoint the specific needs and requirements of the various developing countries and help these countries achieve the objectives of the TFA
The TFA makes a further distinction between "developing countries" and LDCs
(least developed countries)
According to the WTO, one result of full implementation of the TFA is that transaction costs or trade costs can be scaled back by 14.3% Moreover, implementation should lead to global export growth increasing by 2.7% per year by
2030
Principal focus of the TFA is to reduce the time it takes to cross borders, that is time spent in customs According to the World Bank’s Doing Business data, the
average number of days spent by goods in import customs is 5.5 for landlocked
Trang 33of them, goods spend on average 10 days or more in customs This pattern also
holds when the comparison is between landlocked and non-landlocked LDCs
For exports, the comparisons again reveal that the average number of days spent by goods in import customs is higher for LDCs (4.8) than for non-LDCs (3.7)
Using an estimate of 1.3 percent additional costs per extra day in transit suggests
that exporting firms relying on imported inputs in landlocked LDCs face, on
average, an additional trade cost of 3.9 percent
Because Doing Business data is collected every two years from only a handful of freight forwarders in each country, who are asked to report the time and cost for a
20 foot full container weighing 10 tons to cross the border Estimates covering all
parcel shipments from the Universal Postal Union (UPU) reported in figure 1 provide an additional source of comparison The figure shows the distribution of the time in transit (defined as time between sorting facilities in origin and destination
countries) for packages up to 30 kilograms from a large sample of shipment
covering many countries Average days spent by parcels in transit are 7.0 for high income countries, 13.0 for LDCs and 9.7 for other developing countries Using the
same estimate of 1.3 percent additional costs per extra day in transit would imply that LDCs face, on average, an extra 4.2 percent trade cost for parcel shipments compared to other developing countries
Since the signing of the TFA in December 2013, the OECD has produced and released a series of 11 Trade Facilitation Indicators (TFI) for 187 countries,
following closely the targets highlighted by the TFA Currently, this constitutes the
most detailed catalogue of the policies and procedures used in border management agencies around the world, and arguably the best we have to assess more closely the
trade cost handicaps faced across different group of countries Comparing LDCs with non-LDCs and landlocked with non-landlocked countries reveals that the
Trang 34pattern that is also apparent when comparing landlocked with non-landlocked countries
We have estimated, in another article, the reduction in trade costs from
improvements in values of the TFI that might result from implementing the TFA — on the basis of the time spent in customs for a 20’ foot container from the Doing
Business data Our results suggest that a successful implementation of the TFA could lead to a percentage reduction in trade costs of 2.4 percent for LDCs, and 4.5 percent for landlocked LDCs These are not insignificant estimates, and although
they only relate to time in customs for imports, several of the gains would also apply for time in customs for exports
1.3.2 Impact of government’s policies on transaction costs
In import-export, transaction costs in goods and services markets can be
loosely classified under two headings: locational factors and policy-related factors Locational factors are exogenous: each country must take them as a given and cannot change them They include issues such as sharing a common land border, geographical distance and remoteness, being landlocked or a small island state,
having a population that speaks one of the main international languages and
historical and commercial links with other countries
Although countries must take geography and history as given, that does not mean that the trade costs related to those factors are completely impervious to government action Geographical remoteness, for example, tends to increase trade costs substantially and poses particular problems that governments need to work hard to solve
Policy makers can limit the effect of remoteness by developing the hard and
soft infrastructure needed to build an economy that is strongly connected to global
trade, transport and production networks High country connectivity based on
appropriate policies can reduce trade costs and limit economic remoteness, even
Trang 35Figure 6: Types of trade costs in goods markets
Between the border measures (e.g., transport) Behind the border measures (e.g., product standards) At-the-border measures
(e.q tariffs and customs and border procedures) TRADE COSTS dài GOODS MARKETS Source: Shepherd 2015 For example, policy measures affecting trade costs come in three types: at the border, between borders and behind the border (Figure 6)
Recognition of the importance of trade costs needs to be distinguished from
action by governments to reduce trade costs For example, while 87% of the 62
developing and least-developed country respondents to the 2015 monitoring exercise recognised the importance of trade costs, only 62% of respondents
indicated that trade costs were addressed in their national development strategies,
60% in their national trade strategies and 53% in sector-specific strategies
Interestingly, the percentage is less for infrastructure strategy (35%), although this sector is one that has considerable potential to influence trade costs and
performance.The picture at the regional level is similar: 80% of respondents
indicate that the regional development strategy addresses trade costs, 60% in the case of the regional infrastructure and trade strategies and 50% for sector- and
corridor-specific strategies While there is clear recognition of the importance of
trade costs, there are difficulties capturing this insight at a policy level, both nationally and regionally This is especially true on the side of donor partners
One set of border policies that affect trade costs in a very direct way relates to
Trang 36and the WTO agreement on Trade Facilitation (TFA) provides one framework for
moving forward in this area The OECD has estimated full implementation of the
new WTO agreement could reduce developing countries’ trade costs by 14% for
low income countries, 15% for lower middle income countries and 13% for upper middle income countries (OECD, 2014)
Trade facilitation in this sense is of particular importance in some contexts For example, India and Pakistan have only one permitted land border crossing, at
Attari-Wagah In 2012-13, 54% of India’s imports from Pakistan and 25% of India’s total exports to Pakistan passed through this crossing, even though only a restricted list of products is allowed to be traded Historically, this border crossing
has been well known as a chokepoint for traders However, recent trade facilitation measures appear to have improved performance somewhat India has introduced an Integrated Check Post, with a dedicated cargo building, an export warehouse and
truck parking facilities Similar facilities are being developed in Pakistan Border
crossing hours have been increased from eight hours per day to 12, and truck capacity has been increased tenfold Trade facilitation has brought concrete benefits to the trading community in the form of lower trade costs and higher volumes
The TFA deals with one set of factors that determine trade costs in goods
markets, namely customs and other border procedures However, many other
policies are also at play As already mentioned, transport plays a key role On the
one hand, goods have to be moved internationally, so policies governing the
development and operation of maritime and air gateways have the potential to affect trade costs Similarly, policies governing air and maritime transport are also relevant Countries that sign liberal bilateral air services agreements can expect to
see their trade costs go down for goods transported by air, such as parts and
Trang 37Figure 7 summarises the above discussion by means of reference to a broad set
of trade cost factors that are of relevance to many countries
Figure 7: Policies affecting trade costs in goods markets at all points in the supply chain
GETTING TO THE BORDER đC—— AT THE BORDER «< -> BEYOND THE BORDER | \ Y \ re * Trade finance / \ | | Export = tions D0 strictions larifÍ a s - Regulations (NTMs) Institutional structure » 4 | \ f / \ | \ Access Forejqn \ Direct costs ý * | \y tocredit currency = J \ Quotas Standards | Business
& exchange isti ii ` oo TBTs, SPS ! environment
rate oe Logistics services Supplying info Supplying info ý uamen - \ & docs & docs Transparency
j *
| Private sector : ¥
j participation f _ Services, trade Competition / \
policy Indirect costs v À v ri \ Direct barriers; ICI Hard infrastructure Opportunity costs inventory holding foreign ownership, R&D
/ \ MA restrictions ¥
4 Smuggling Implicit barriers; and info trade i ¢ Inland transit Seaports, aeroports licensing, recognition Hidden costs \
Corruption & bribery
HRRNSEONE TRADE CHAIN
ÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔÔ r r r r6 RẺ
Lr ¬—c— nr EXPORTING COUNTRY IMPORTING COUNTRY
Source: Moisé and Le Bris (2013) So far, the analysis has focused on policies at and between borders But
behind-the-border policies are also relevant (e.g Moisé and Le Bris, 2013)
Wholesale and retail distribution, as well as transport and logistics, determine the
ability of producers to get their goods to market in a cost-effective way Countries with poorly performing distribution and logistics networks tend to suffer from high
trade costs and can become insulated from world markets In some countries in
West Africa, for example, completion of national markets — not just the interface between national and international markets — is an issue
Conclusion, trade costs come in a variety of different forms However, each country has its own particular circumstances A particular constraint may be binding
Trang 38prevents businesses from engaging with the world economy The critical policy may be something quite different in another developmental or regional setting
1.4 Measurement of transaction costs
Available researches all divide the measurement into macro aspect and micro aspect, on the macro aspect it refers measuring the costs of economics system
operation or institution transformation, on the micro aspect, and it refers measuring the costs of some industry or field executing a transaction (Zhang 2010) According
to Steven N.S Cheung (1998), the measurement includes accurate measuring and margin contrast analysis The former means adopting statistics data or model to calculating the costs, and the latter means non-accurate but comparable analysis If we are able to say ceteris paribus, that’s a particular type of transaction cost is
higher in Situation A than in Situation B, and that different individuals consistently
specify the same ranking whenever the two situations are observed, it would follow that transaction costs are measurable, at least at the margin (Cheung, 1998)
On the macro aspect, most of the works on macro aspect are concentrated on the measuring economy transaction costs and studying interaction between transaction costs and economic growth The methods are widely adopted One is
directly measuring, just as Wallis &North have done in 1986 They partition the
nation economic sections The other is to build measuring model referred to Wallis
&North’s direct measuring method In addition, researches based on the view of institution evolution also constitute a potential direction of studying There are three
measurements according to macro aspect:
e Direct measurement;
e Building Measurement Model;
e Institution Evolution Margin Analysis
On the micro aspect, there are four measurements:
e Buy- sell price margin method;
e Typical reference quantities method; e Investigating method;
Trang 39This thesis applies measurement of data statistic method Many scholars
directly use government statistics data or field survey statistics to conduct research although this way needed to cost a large number of manpower, material resources
and time, but it contributes to remarkable and persuasive achievement Government
institutions documents researching can be regarded as a means of measuring public
policy transaction costs Katherine Falconer & Caroline Saunders (2002) have studied communication, documents, contract agreement, telephone, conference, web access and other information from the government departments They have
estimated the transaction costs of agricultural environment management agreement negotiation process Kuperan, Nik, Robert, Genio & Salamance (2008) have studied
the transaction costs of the Philippines San Salvador Island under two fishing models common management and centralized management, according to the data from 1988-1996
1.5 How to evaluate transaction costs level in export
Transaction costs are not only related to distance, transportation costs or tariffs, but include many other factors, some of them not directly measurable, such
as uncertainty Those transaction costs, which result from a mix of policy decisions
(tariffs and non-tariff measures, customs and other cross-border administrative
requirements) and structural conditions (distance from main markets, situation of
the transport infrastructure) act as a nominal protection by shielding domestic producers from the competitions of imported products But they also increase production costs, and reducetheir competitiveness
Among all cross-border transaction costs, nominal tariffs are certainly the most visible Tariff duties increase the domestic price of tradable goods by adding a tax to their international or free market price When duties are specific (in particular for agricultural products), analysts compute ad-valorem equivalents When it comes
to non-tariff trade costs, the situation is more complex International economics has overwhelmingly relied on Samuelson's (1954) hypothesis that they are proportional
to value and distance (ad-valorem “iceberg transport cost”) Yet this remains an
Trang 40For example, transportation costs depend on (i) the nature of the good (e.g.,
perishable or not; bulky or not, etc.) (ii) the distance between producers and
consumers and (iii) the mode of transport Besides freight costs, Lewis (1994) identifies various additional factors contributing to logistics costs, among them:
interest charges on goods awaiting shipment, on goods in transit and on goods held
as safety stock; loss, damage or decay of goods between manufacture and sale Because tariffs have become a less frequent barrier to trade, the contribution of transportation to total trade costs —shipping plus tariffs—has become not only more evident, but also relatively more important Hummels (2007) records that
median transport expenditures were half as much as tariff duties for U.S imports in
1958, equal to tariff duties in 1965 and three times higher than aggregate tariff duties paid in 2004
There are several ways for estimating trade costs (for a review, see Fortanier
and Miao, 2016) Instead of a direct measure of trade margin, such as the FOB/CIF
difference, we opted for an indirect estimate made on trade in value-added data taken from Duval, Saggu and Utoktham (2015) The non-tariff trade costs by Duval
et al are derived from an application of the “Gravity Model” on the OECD-WTO
TiVAdatabase Those trade costs have a monetary dimension (e.g., transportation,
insurance and other fees) but also a more subjective dimension: information costs;
non-monetary barriers (regulation, licensing, etc.); consumer taste differences; insecure contracts and weakness in trade governance leading to uncertainty Trade costs measured through the indirect gravity model approach have two main
components The first one is mainly bilateral It reflects the geographicaland