Obstacles to Trade with the Baltic Sea Region

Transcription

1 Obstacles to Trade with the Baltic Sea Region An assessment of the most important barriers to increased trade

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3 Obstacles to Trade with the Baltic Sea Region An assessment of the most important barriers to increased trade Focus areas: Trade procedures Technical barriers to trade Intellectual property rights Trade in services

4 2(55) Executive Summary Trade policies in the Baltic Sea region have been dramatically liberalised in the past years. This is the result of several simultaneous processes, the most significant being the dissolution of the Soviet Union and the enlargement of the European Union and its internal market. More major changes are on the way as Russia prepares to join the World Trade Organisation (WTO). On top of these major developments, a range of initiatives and plans for integration has been carried out. Perhaps the region is more integrated than ever before and with a more liberal set of trade policies? We have analysed remaining barriers to imports in the region. Without openness for imports, the current promising economic development can not be sustained and the gaps between the still relatively poor eastern side of the Baltic and the prosperous western side can not be bridged. All the Baltic Sea countries are dependant on imports, although the Baltic States more so than the others. They are all increasing their imports (as well as their exports, which is an important way to raise money to pay for importation), and the emerging country imports grow more rapidly than the others. This is an indication of an at least relatively open trade policy. Much focus has been directed at the internal integration of the region, as it opens up for new trading opportunities with its neighbours. This is important but it is not enough. In order to fully reap the benefits of imports there is a need to open up to the rest of the world as well. Most imports to the region, except to the Baltic States, stem from countries outside the region. However, in our view integration and globalisation can go hand in hand and actually even nurture each other. For example, fewer barriers between Sweden and Poland could also help US firms active in the region. We have focused on four of the main barriers to trade in the region. As regards trade procedures, the problems in the region are limited, with six of the countries being among the most efficient at trade facilitation in the world. The situation is also getting better in most of the other countries concerned. Especially the intra EEA (European Economic Area), trade is smooth. However, concerning Russia, problems reported include corruption and long waiting times at the borders. In our second area of study, technical barriers to trade, the results were broadly similar to those of trade procedures. Due to far reaching harmonisation of various regulations and standards, intra EEA trade is fairly smooth. Also considerable improvements have been noted, as a result of the enlargement of the EU. Remaining complaints from the business community mostly concern time-consuming administrative procedures. The situation in Russia does, however, leave room for improvement. It appears that the country often does not accept international standards, nor does the situation seem to improve.

5 3(55) Our third focus area was intellectual property rights. Overall, these are well protected in the mature market economies, even though Internet piracy is widespread. In the emerging countries, intellectual property is less well protected. This is especially the case in Russia where widespread mass copying of products such as software is common. The final area of the report concerns barriers to services trade. This is an area with a large untapped potential for liberalisation in all the countries concerned. However, for intra EEA trade, barriers are not as high as for extra EEA trade, i.e. trade between the EEA and the rest of the world. Nevertheless, large barriers remain, not least for the construction sector, and to solve the problem the EU has recently adopted a special Services Directive. Unfortunately, it is hard to estimate openness for extra EEA trade and especially for Russia, which is not even member of the WTO and thus not a signatory of the General Agreement on Trade in Services (GATS). A concluded Doha Round and a Russian WTO-membership would probably have the potential to increase openness at least a bit. To conclude, much of trade is liberalised. This is of course especially the case for intra EEA trade but also extra EEA trade is relatively open. Furthermore, most signs are pointing in the right direction. Much work has been carried out and is being carried out in trying to make trade procedures more efficient and dismantling technical barriers. This is not always achieved via grandiose trade policy, but is rather the result of the slow and painstaking work of persistently resolving even the most miniscule details. Positive developments can also be observed as regards intellectual property rights and especially services barriers. Intellectual property laws are mostly acceptable. However, the issue of enforcing them is a task for the judicial authorities in their daily work, which is not guaranteed to always be successful. Services liberalisation with the outside world will come only as a result of an ambitious and successful Doha Round or through new bilateral agreements, but internal liberalisation will follow in the path cleared by the Services Directive. That will also be a gradual process, with many administrative and legal obstacles which must be cleared step by step. In general, the situation in Russia and to some extent Poland is cause for worry. Poland has not been able to transform its economy as quickly as the three Baltic States, nor has Russia yet been able to join the WTO. In some areas it would even appear that the two countries are backsliding. However, there is large room for improvement in the other countries as well, at least in some areas of their trade related policies.

6 4(55) What would happen if the Baltic Sea countries would lower their barriers to trade? This was the question posed in our second report, based on an economic simulation model. The simulation results indicate that the combined effects from services liberalisation and improved trade procedures would lead to national income gains for all the Baltic Sea countries. As was expected, considering the initial low levels, the simulated reductions/elimination of tariffs and export subsidies/taxes did not yield gains of the same magnitude. Technical barriers to trade were part of a group of barriers referred to as Non-Tariff Measures (NTMs) and the separate effects of removing technical barriers to trade could therefore not be simulated. However, the analysis showed that the overall gains from reducing the group of NTMs were considerable. All in all, the results from the main simulation analysis indicated that imports as well as exports would increase and GDP would rise in all countries. The relative gains would be the largest for some of the emerging countries. Especially Russia, with its significant room for improvement in several areas, would have a lot to gain from liberalisation. Since the simulation did not cover all trade barriers, and since the model used for the simulation cannot capture all long term intangible effects of reforms, the potential for further gains are quite considerable. To conclude, the region has seen major achievements which have led to large economic benefits. New important changes will take place in the near future, mainly the pending Russian membership of the WTO but also the implementation of the EU Services Directive. New practical projects and plans for more efficient border procedures, enforcement of intellectual property rights and further harmonisation of technical standards and regulation are under way. In the end, however, success depends on the will of the business community. After all, policies can only constitute a frame for trade relations. If the business community finds a region open for trade with the rest of the world, will it use the opportunities? If trade data is looked at, it would appear that it has taken the opportunities available. The aim of all new policies should be to create new opportunities.

7 5(55) Contents 1. Introduction 6 Background Overview of the region Emergence of new trade policy relations Openness for imports in focus Scope of the report Method and material Outline 2. Trade procedures 17 How do trade procedures affect trade? Opinions from within the region - results from our survey A global perspective - evidence from the World Bank 3. Technical barriers to trade 26 What is a technical trade barrier? Opinions from within the region - results from our survey Opinions from firms in the EEA - complaints reported to SOLVIT Barriers to trade vis a vis third countries 4. Intellectual property rights 34 Why are intellectual property rights trade related? General overview of intellectual property rights in the Baltic Sea region Intellectual property rights legislation Enforcement of intellectual property rights Extent of piracy and counterfeiting 5. Trade in services 42 The kind of obstacles facing services trade Opinions from within the region complaints reported to SOLVIT The Services directive Service trade between the EU and Russia Barriers to trade vis a vis third countries based on GATS Barriers to trade vis a vis third countries reported complaints Red tape facing entrepreneurs evidence from the World Bank 6. Initiatives to reduce trade barriers 52 About the study 55

8 6(55) 1. Introduction Background Between July 2006 and June 2007, Sweden holds the rotating presidency of the Council of Baltic Sea States (CBSS). The CBSS is a political forum for regional cooperation in the Baltic Sea region, consisting of the nine countries bordering the Baltic Sea plus Norway and Iceland. One of the three main priorities of the Swedish presidency is to reduce barriers to trade and investment. As part of this agenda, the Ministry for Foreign Affairs has asked the National Board of Trade to write a report about the need for freer trade with the Baltic Sea region and to arrange a seminar 1 to present and discuss the report. We have written two reports. This report is a qualitative analysis, describing various trade barriers. The added value of this report compared to other reports about trade in the Baltic Sea is that we are independent from official government policies and can more freely express ourselves when we describe the situation. It should also be noted that the report is explicitly focused on trade policies and not on general economic issues. The second report is a quantitative analysis, using an economic model, GTAP 2, to simulate the effects of trade liberalisation in the Baltic Sea region. In easier language, one could say that this report describes the problems and the other report looks at gains expected from decreasing the problems. Overview of the region The Baltic Sea region is not really one region in the sense that it has common characteristics that unites it and sets it apart from other regions. It is obvious to anyone studying the vital socio-economic statistics that very large gaps remain. For the most part these gaps are decreasing but the process will still take decades. Today, the region continues to be very diverse, as will be evident in the report. 1 The seminar is organised in cooperation with the Stockholm Institute of Transition Economics (SITE) and held at the Stockholm School of Economics the 22 nd of May Global Trade Analysis Project (GTAP) is a tool to simulate outcomes of changes in trade policies on trade flows and GDP etc. Please see for more info.

9 7(55) Table 1. Economic development 2005, selected economic indicators for CBSS countries Country GDP per capita GDP per capita Annual % change, GDP Population current $US PPP of GDP share of Millions constant prices world total (PPP) Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden ,7 0,443 9,039 Source: IMF World Economic Outlook Database, September 2006 Table 1 provides a glimpse of the current situation in the eleven countries. As can be seen, the six mature market economies (Germany and the Nordics) all have GDP per capita well above USD, ranging all the way to almost USD in Norway. In comparison, the five emerging market economies (Russia, Poland and the Baltic states) all have GDP per capitas below USD, which is a clear divide in incomes. However, this divide becomes considerably smaller when adjusted for purchasing power, i.e. when taking lower prices in the emerging countries into account. Then the average Swede, for example, is less than twice as well off as the average Estonian. When observing growth, the picture becomes the opposite one. The emerging countries grow quickly and the mature ones grow slowly; in the case of Germany (until recently) the growth is almost stagnating. The growth rates of the mature economies range from 0.9 to 5.5 % and in the emerging markets from 3.4 to 10.2 %. Poland is a laggard in comparison to the Baltic countries. Iceland excels in comparison to the other mature markets. Due to its large population, Russia, despite its low GDP per capita, has the second largest GDP and share of the world economy, after Germany. Consequently, growth in these two big countries matters more in absolute numbers than the impressive figures for small countries like Estonia and Iceland. It is the German and Russian economies that have the potential to grow in a way to affect global trade flows. Taken together, the eleven countries constitute almost one tenth of the world economy (calculated with purchasing power parity) and their trade policies therefore do matter greatly to the rest of the world.

10 8(55) Emergence of new trade policy relations After the fall of the Berlin Wall and the dissolution of the Soviet Union in the beginning of the 1990s, a sea that previously divided nations has increasingly come to unite them instead. As in the Hanseatic ages, the Baltic Sea today has become a sea of trade and commerce. Many of the old trade barriers between the countries in the region have been removed by the process of enlarging the EU to including Poland and the Baltic States and implementing the internal market framework. Today, as ten of the eleven CBSS countries are members of the European Economic Area (EEA), and the Baltic Sea is almost fully within the internal market, trade is perhaps freer than ever before. To get to where we are today has required determined efforts by a range of stakeholders. The CBSS, in existence since 1992, has always had the elimination of trade barriers as one of its main objectives. Trade-related work has been carried out in the Working Group on Economic Cooperation (WGEC). Its work is guided by two basic documents, the Bergen Action Plan (2000) and the Moscow Action Plan (2002). The Bergen action plan focuses on improving conditions for border crossings and reducing technical trade barriers by increased conformity in standards and certification requirements. It also focuses on the fight against corruption and on protecting intellectual property rights. The Moscow action plan concentrates on border crossings and intellectual property rights. Several political declarations and subsequent projects have been carried out over the years. The Baltic Sea customs cooperation, running between 1995 and 2003, is a concrete example of CBSS trade-related activities. It had the aim of improving collection of duties as well as decreasing fraud 3. The Business Advisory Council (BAC), the group of business advisors to the CBSS, has been active and has advocated a range of proposals, including initiatives to fight corruption, facilitate procedures at the EU- Russian border, simplify visa applications and tackling technical barriers to trade by establishing joint best practice procedures in the national administrations. The BAC has also endorsed the Moscow action plan. Policy initiatives aimed at addressing the special regional challenges of the Baltic Sea region also exist. One example is the so called Northern Dimension. Under the Northern Dimension, several themes have been identified for dialogue and co-operation between the EU member states, Norway, Iceland and Russia - economy, business and infrastructure being one such theme. 4 3 CBSS 2000 and European Commission 2003

11 9(55) Newer initiatives include 3T (2003), which stands for Triple Trade in Ten Years 5. It is a project by the chambers of commerce in the Baltic Sea region and aims at promoting free trade. Furthermore, if (or rather when) most of the countries adopt the Euro as their currency, intra regional trade will probably increase. A common currency tends to have this effect as shown in a recent study from the Board 6. Still, despite the impressive progress, trade barriers continue to exist. Many of them, but certainly not all, concern Russia. However, some Russian barriers will soon be dismantled, as Russia is on the verge of becoming a member of the World Trade Organisation (WTO). Russia has now reached bilateral market access agreements with almost all interested WTO members, including the EU and the US. The multilateral part of the accession negotiations is still ongoing. 7 Another important change would occur if the EU and Russia could realise their plan for a free trade agreement. The Partnership and Cooperation Agreement (PCA) has been the framework of the EU-Russian relationship for the last decade. The PCA has, among other areas, been the legal basis for trade relations between the countries. As the agreement soon comes to an end of its initial 10-year period 8, the EU and Russia are currently discussing a new contractual framework. The new agreement is meant to include a comprehensive and deep free trade agreement. However, before any formal negotiations of a free trade agreement can start, Russia must first become a WTO member. 5 Lindberg (2006) 6 Nordström and Flam (2006) 7 Russia must as a prospective new member carry out bilateral negotiations on market access with all interested WTO members. These talks are bilateral because different countries have different trading interests. The commitments made by Russia will later, due to non-discrimination rules, apply equally to all WTO members. The multilateral process involves a special working party, examining the country s trade regime to make sure that the country is complying with the different WTO agreements. When the working party has completed its examination of Russia s trade regime it will finalize the terms of accession. 8 If the parties don t reach a new agreement to replace it, the PCA will be automatically extended beyond 2007 on an annual basis.

12 10(55) Openness for imports in focus Openness for imports is essential for the economic development of the Baltic Sea region. It provides consumers with choice, value for money and quality goods and services. It also provides inputs to the industry and provides the domestic industry with incentives to constantly be competitive. It is the last aspect that most directly contributes to growth and development. The purpose of exports (and why export is not a loss for the welfare of the society) is to a large degree to finance imports. The imports are the real target; exports are the means to reach it. Thus, in this report we focus solely on openness for imports. Are the Baltic Sea countries open? Figure 1 shows how dependent the countries are on imports for their consumption. The numbers show the imported part of the total consumption of goods. As can be seen, this part has increased in most countries, although only modestly. The Baltic States, especially Estonia, are by far most dependent on imports, whereas Norway and Russia are less so. However, too much should not be read into this, as small countries generally need to import more than larger ones. Figure 1. Import penetration % CBSS Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden Source: OECD. By subtracting exports from GDP and adding imports we get the total consumption of a country as exports are consumed abroad and imports are consumed within the importing country. Then we divide the imports with this total consumption to get the import share of the consumption.

13 11(55) What is the trend? Are the countries in the Baltic Sea region continuing to further open up their economies or not? One way to find out is to observe recent trade flows. They are mainly affected by the economic opportunities on the market. A liberal trade policy can not guarantee increased trade, but the absence of a liberal trade policy can surely prevent trade increasing. Therefore, one can conclude that if trade is growing rapidly then the trade policies can not be too prohibitive. In figure 2, the average annual growth in exports and imports in is presented. As can be seen, trade, especially exports but also imports, increased markedly in all countries. The emerging markets increased more than the mature ones but even in (until recently) economically stagnant Germany imports have increased with 10 %, which indicates that trade is fairly free. Figure 2. Average trade growth since CBSS Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden Average export growth 2005/2001 Average import growth 2005/2001 Source: WITS It is important to keep in mind that trade is not only regional. The EU provides the new members with both the pressure of competition from efficient producers in Western Europe and at the same time, to some extent, protection from cheaper producers in Asia. This last aspect can serve as a way to partly insulate an economy from globalisation, integrating it deeply with the EU and thus less in need to compete globally.

14 12(55) How globalised are the Baltic Sea countries? And how dependent are they on trade with their neighbours in the Baltic Sea region? One way to find out is to look at shares of the trade conducted with countries in the region. This is shown in figure 3 below. It is clear that for the Baltic countries especially, the region is extremely important. For the mature economies, especially for Germany, and also for Russia this is not the case. Consequently, for the region as a whole, less than a quarter of all trade is internal. Nevertheless, for most countries in the region, the main trading partners are their neighbours in the region. Figure 3. Percentage of exports and imports going to/coming from other countries in the Baltic Sea region % CBSS Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden Exports Imports Source: WITS The quantitative study is concerned with issues such as what products (goods and services) are traded. It focuses on present trade flows and how they are potentially altered by various reforms. In this part, however, we are not concerned with trade patterns, but rather with discussions on obstacles to trade. Scope of the report Both internal trade and external trade, with trade partners outside of the region, is important and we will look at both in this report. In any case, the obstacles facing internal and external traders are often the same. If you are a firm within the region and wanting to export to another country in the region or if you are situated outside of the region may not always matter. Efforts to facilitate trade internally can help external traders too once they have entered the regional market. But there are numerous differences too, especially between intra and extra EU/EEA trade.

15 13(55) In this report, four areas have been chosen for study: Trade procedures Technical barriers to trade (TBT) Intellectual property rights (IPR) Trade in services These particular areas have been chosen for several reasons. They have been singled out before as areas of special concern to the business community. Firms and business associations, in our survey (presented below), and other surveys, mention them as key problems. The National Board of Trade has compiled data on trade barriers in the world where we have asked Swedish firms to report barriers they had encountered. This activity has not been prioritised during the last years and the results are not scientific. Nevertheless, they do represent some of the business community s concerns. Regarding the eleven Baltic Sea countries we have received 75 complaints. 30 of them concerned various cases of TBT and this was the largest group of complaints by far cases dealt with trade procedures 10, which was the second largest group of complaints. Trade in services has not been specifically mentioned in any report we have seen. The reason for including it in this report is rather the enormous potential for growth in trade. One reason there are so few complaints in services trade is simply because not very much such trade takes place. We wanted to highlight the barriers preventing the unleashing of this potential. In the quantitative report the effects from liberalisation, on both trade flows and GDP, in three of the four areas mentioned above are simulated. In the quantitative report s main liberalisation scenario, effects from improving trade procedures and reducing services barriers are included. Besides these reforms, the main scenario also estimates the effects of tariff reductions and reduced export subsidies / taxes, two areas not covered in this report. As to the reduction of technical barriers to trade, it is simulated in a separate scenario, as a part of a group of non-tariff measures (NTMs). However, since it is part of a group, the separate effects from reforms of technical barriers to trade cannot be identified. Finally, because of modelling difficulties and lack of data, the area of intellectual property rights is not modelled in the quantitative analysis. 9 In this we included 3 reports on SPS and two on rules of origin. 10 That included reports on customs valuation and inward/outward processing.

16 14(55) Compared to other barriers to trade in our survey, corruption is pointed out as the major reason why companies refrain from starting or continuing to trade in the Baltic Sea Region. Nevertheless, we have chosen not to focus on corruption because it is by its nature very hard to measure. We do, however, mention it briefly in the trade procedures chapter, since the connection between trade and corruption is extra visible there. An area which is very easy to measure but which, on the other hand, is generally not very important anymore is tariffs 11. However, this is only the case for non-agricultural goods. The effectively applied tariff rates 12 for industrial goods in the EU is 1.5 % and for Norway and Iceland it is 0.1 % and 0.9 % respectively. In pre-wto accession Russia, the applied tariff rate stands at 8.3 % but that is likely to come down markedly as a result of WTO membership. Also, neither Norway nor Iceland have any tariff peaks whereas the EU has a few. To conclude, with the exception of a few areas like textiles and aluminium, tariffs for non-agricultural goods only constitute a small trade barrier nowadays. 13 Other areas excluded from our report are agriculture and investments. Agriculture only constitutes a small part of all trade but the barriers in this area are so many that it is easy to get caught in a discussion on them 14. Investments are crucial as a complement to and a substitute for trade, but it is an area in which we are only currently building up our expertise. Method and material This report is to a large extent a literature study where the Board s experts in the fields discussed have analysed recent reports in their areas. Data from organisations such as the World Bank, the OECD, the WTO, USTR and the European Commission has been used. 11 However, tariffs and especially so for agricultural goods still do affect trade and constitute a barrier to trade. In our quantitative report we analyse the effects of a unilateral removal of the last tariffs. 12 The term refers to weighted tariffs rates, taking preferences into account. It does not include trade within the EEA. 13 Source: WITS 14 In our quantitative report we analyse the effects of a removal of the agricultural tariffs as well as abolishing the export subsidies for agricultural goods.

17 15(55) However, in January 2007 we also invited government authorities, companies, chambers of commerce and embassies in the Baltic Sea Region to participate in a survey. The survey was sent to 192 addressees; 172 in Sweden and 20 in other countries in the Baltic Sea Region. The frequency of responses was 25 per cent. The reliability of this survey is obviously affected by the limited number of addressees and respondents and also by the fact that most respondents were Swedish. One should therefore be very careful to rely too much on exact percentages in the tables where we present the results of the survey. The results should only be seen as an indication rather than an exact figure. Nevertheless, a large share of the addressees is made up of organisations representing business communities or industries, thus representing the view of their members. The over-representation of Swedish respondents does not have to be a great problem as trade barriers encountered by Swedish firms are not likely to be uniquely Swedish. The findings from this survey also match the results of other recent surveys relatively well. Furthermore, we have used the SOLVIT database. Citizens and companies in the EU and the EEA that experience obstacles to trade and free movement between the member states may turn to the SOLVIT network to remove the obstacles. Each country has a SOLVIT centre to address the concerns. The database contains all reported cases. It is not in any way representative of the full trade situation facing firms in Europe today, but it acts as an indication as to where there are grave problems that firms find worthwhile to report. Outline The report consists of four main chapters, one for each of the four trade policy areas discussed above. The sixth and final chapter presents some ideas on how to continue with reforms to liberalise trade. Apart from all main chapters, which start with a background, the internal structure of the chapters varies. This has to do with the fact that the topics are very different and they can not all be analysed in a uniform manner. However, all chapters include both intra- and extra EEA trade, i.e. both regional trade and trade with the rest of the world.

18 16(55) References Agreement on Partnership and Cooperation (EU-Russia), European Commission Web address: Bergen Action Plan (2000), CBSS. Web address: tml Business Advisory Council of the CBSS. Web address: Council of the Baltic Sea States. Web adress: Lindberg, Pontus (2006) Mer handel i Östersjöregionen!, Sydsvenskt näringsliv, no , Malmö Moscow Action Plan (2002), CBSS. Web address: 302/ Nordström, Håkan and Flam, Harry (2006) Euro effects on the intensive and extensive margins of trade, Stockholm. OECD: (import penetration) 1_1_1,00.html World Economic Outlook Database, September 2006, IMF. Web address: World Integrated Trade System (WITS) database. Hosted by the World Bank. Web address:

19 17(55) 2. Trade procedures Trade procedures are the rules and document requirements that companies need to follow when importing and exporting goods, from ordering through to payment and delivery. Controls and inspection by agencies at the border, such as customs, are also included in the term. Cumbersome trade procedures hamper trade and increase the transaction cost of trading internationally. Corruptive behaviour is also more common in countries where trading procedures are complex and there is a lack of information on which rules that apply. Put in a global perspective, the problem of cumbersome trade procedures in the Baltic Sea region is fairly small. Six of the countries are among the top ten with most efficient trade procedures in the world. According to our survey, there has been a positive development in most of the region during the last five years. Institutional changes, like the EU enlargement and Russia s WTO-negotiations, as well as numerous projects and forums, have helped making trade procedures in the region smoother. However, companies trading with Russia, and to some extent Poland, still encounter large problems. Problems in Russia include long waiting times at the border and excessive documentation. No change for the better has been noticed by our respondents. Despite the fact that the EU is a customs union with uniform procedures, some of the EU s trading partners complain about differing borders procedures between the EU countries. There are few indications of problems with corruption at the borders in the mature market economies of the region. The Baltic States have made improvements in this respect, whereas the situation in Poland and especially Russia might be stagnating or even deteriorating. How do trade procedures affect trade? Trading goods across international borders involves a large number of actors and activities. The process, from placing an order to transportation of the goods through to the final payment, requires a wide range of transactions, administrative work and information flows. This chain of actors and activities constitutes a trade chain. See figure 4. Any obstacles associated with official or private measures that hamper activities of any part of the trade chain cost money for the individual trader and eventually for the consumer. Such obstacles might also restrain economic development in the countries involved.

20 18(55) Barriers affecting the trade chain are often associated with cumbersome trade procedures. These barriers primarily occur in relation to the actual border-crossing process and more specifically in relation to the custom authorities import or export formalities. An OECD study reports that trade transaction costs related to trade procedures constitute between 1 % and 15 % of traded goods value 15. Figure 4) the Trade Chain 16 Long waiting times at the border, unclear legislation or extensive documentation requirements slow down the process of international trade. This means that traders lose money. Some companies might even refrain from doing business in a specific country due to these extra costs. What is worse, according to the World Bank, countries with time consuming border procedures in customs and other authorities and complicated administrative requirements (many documents and signatures), tend to have higher levels of corruption 17. Opportunities for corrupt behaviour abound where the public and private sectors intersect, especially where state employees are directly responsible for providing services or issuing regulations, which is the case in almost all parts of the trade chain. Problems with trade procedures are often part of a bigger problem and reflect the country s level of liberalisation and economic development, as well as the political will to facilitate international trade. 15 OECD (2003) 16 SWEPRO (Swedish Trade Procedures Council) 17 World Bank (2006)

21 19(55) Opinions from within the region results from our survey In order to assess the business view on trade procedures in the Baltic Sea region, the National Board of Trade carried out a survey 18 among traders in the region and consulted a number of other sources of information 19. According to the survey, which should be read with caution as it is based on a limited number of responses, operators in the region are generally positive towards the trading climate regarding trade procedures. The majority of the respondents faces no problems or finds that the problems only have a minor impact on trade. As the majority of the countries in the region are members of the EU or the EEA, this is not surprising regarding intra-eea trade. The problems that do occur are often related to the new member states adjustment to EU regulations and to areas where national regulation still prevails, such as the tax system. In extra-eu trade on the other hand, cumbersome trade and customs procedures have long been known to be a major barrier to trade in the region. Figure 5) To what extent are trade procedures a problem when trading with the following countries? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden Source: Our survey. some or serious problems any problems can be solved no problems 18 Nearly 70% of the survey s respondents answered the question on to what extent trade procedures is a problem in the Baltic Sea region. Throughout the survey, the respondents were given the option of answering do not know if they have no experience trading with a specific country. The results presented in theses tables are excluding the number of do not know answers. For more info on the survey, please see the methods part of the Introduction chapter. 19 Dansk Industri (2003); Eurochambres (2006); Finnish Ministry for Foreign Affairs et alt (2005); Stockholms Handelskammare, (2004); Stockholms Handelskammare,(2000).

22 20(55) As shown in figure 5, around 20 % or more of the respondents find serious problems in trading with Estonia, Latvia, Lithuania, Norway, Poland and Russia. The largest amount of serious problems occurs in Russia, where 95% of the respondents experienced some or serious problems. Not surprisingly, few serious problems have been reported for trade that takes place within the EU. One company mentioned that when transit is done through Germany there are more documentary requirements than in other EU countries. In trade with Finland, the case of Åland is particularly mentioned as problematic. As Åland is not part of EU's common VAT system, which means that customs declarations have to be filed when trading with Åland. This is often seen as too bureaucratic as it complicates trade compared to other member states. The survey also shows that in the countries where around 20% or more of the respondents face serious problems, there has been a positive change over the last five years. This is especially true for the new EU member states Estonia, Latvia, Lithuania and Poland. In all of the four new EU member states, nearly 90% of the respondents have seen an improvement in trade procedures. In Norway and Russia on the other hand, the majority has experienced no change over the last five years. In Russia, over 20% of the respondents have actually experienced a change for the worse, which is a larger number than those who have experienced a positive change. Also in Norway, 10% of the respondents have experienced a negative development. Figure 6) Change over last five years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden Worse No change Better Source: Our survey

23 21(55) However, problems to trade across the border are often two-sided. In other studies, for example, Russia has reported problems when trading with the EU member states in the region. Such problems are related to high costs, lack of conformity along EU borders and the risk of more cumbersome practice due to EU enlargement. 20 Among the serious problems in the new EU member states Estonia, Latvia, Lithuania and Poland, it is evident that cumbersome documentation requirements and customs procedures are the main obstacles to trade. In Russia and Norway, being the main trading non-eu countries in the survey, customs procedures are reported as the most troublesome trade procedure. Unacceptable waiting times at the border, difficulties with documents, bureaucracy, corruption and frequent changes of customs rules and regulations as well as frequent changes of customs duties are problems related to customs procedures that have been specifically mentioned in the case of Russia. Figure 7) The most troublesome problems related to trade procedures 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Estonia Latvia Lithuania Norway Poland Russia Document and information requirements Lack of information on trade rules Other Customs procedures Controls and inspection Source: Our survey 20 Eurochambres (2003)

24 22(55) Lack of information on trade rules is also a major concern in the region. Frequent controls and inspections are seen as a large problem primarily in Russia where customs controls can take up to a week, but the problem also occurs in Poland and in the three Baltic States. Other problems referred to in figure 7 include waiting times or corruption. Many of the problems in the new EU member states seem to relate to the fact that these countries have not yet fully implemented the EU regulations. The results from the survey correspond well with earlier analyses and reports on the subject. Over time, the most positive aspect is an encouraging development of fewer barriers in many of the countries, even though some problems still exist. Our survey also included questions about corruption encountered in trade relations. The results are presented in figure 8. It only includes the answers from the respondents with an opinion. Problems with corruption in public authorities were reported from Russia, Latvia, Poland, Lithuania and Estonia, some of them serious. With regard to Sweden and Germany problems were brought up. However, they were of a solvable character. In connection to Denmark, Finland, Iceland and Norway, the respondents did not experience any problems at all related to corruption. Figure 8. To what extent is corruption in public authorities a problem when trading with the following countries? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden some or serious problems no problems or problems can be solved Source: our survey: In answer to the question of how companies assess the level of corruption today compared to five years ago, companies unanimously indicated that there are fewer problems with corruption. Thus the survey confirms that there is a falling trend in corruption in the Baltic Sea Region, in particular with respect to the new EU member countries. In Russia, however, large problems with corruption remain. Some of the respondents even noticed more corruption today compared to five years ago.

25 23(55) A global perspective evidence from the World Bank Many of the problems discussed above not only affect firms trading within the Baltic Sea region. They also present problems for firms in the rest of the world wishing to trade with the region. Industry in countries such as the US, has pointed at the problem that the EU does not operate as a single customs administration, i.e. member states do not administer customs law in a uniform manner. The US brought this case to WTO dispute settlement in By 2006, the WTO Appellate Body found that the US had failed to bring forward any evidence that the EU system of customs administration is inconsistent with WTO obligations. To get a global perspective on the trading climate in the Baltic Sea Region it is useful to consult the World Bank database, Doing Business. The database contains indicators comparable across 175 economies 21. The indicators can be used when benchmarking how business friendly an economy is. One of the indicators used by the Bank is Trading across borders 22. The indicator looks at all official procedures for exporting and importing a standardised cargo of goods. It is comprised of six parts; time needed to fulfil the procedural requirements for import and export, number of documents needed to import and export and the cost to export and import a standardised cargo item. The World Bank also constructs a trading index, ranking the 175 economies from the country with which trading is the easiest (no 1) to the country where trading across borders is most difficult (no 175). Table 2. Trading across borders in the Baltic Sea Region. Source: World Bank, Doing Business (April 2007) Economy Documents for export (number) Time for export (days) Cost to export (US$ per container) Documents for import (number) Time for import (days) Cost to import (US$ per container) World Bank ranking "trading across borders" Denmark Estonia Finland Germany Iceland Latvia Lithuania Norway Poland Russia Sweden Source: World Bank, Doing Business (April 2007) 21 See and World Bank (2006) 22 The other indicators are: Starting a business, Dealing with licenses, Employing workers, Registering property, Getting credit, Protecting investors, Paying taxes, Enforcing a contract and Closing a business.

26 24(55) Table 2 clearly shows that the Baltic Sea Region as a whole enjoys a good trading climate in terms of trade procedures. Six of the Baltic Sea countries are on the global top ten list of countries with simple trade procedures. They have quick lead times and demand few documents for import and export. This means that these countries all have efficient border procedures. However, Poland and to an even greater extent Russia, are ranked very low. The costs of exporting or importing a cargo of goods into any of these two countries is more than double the costs in any of the other Baltic Sea countries. When it comes to import documentation Lithuania seems to stand out. It is obvious that the EU, with such discrepancies between the member countries, still does not operate as a customs union with uniform customs procedures. In the World Bank indicator, the quality of border procedures are estimated by the time needed for exporting and importing goods 23. These so called lead times vary quite a lot between the different countries in the region. The lead time for exports from as well as for imports to Russia is quite long in comparison to the other countries. Poland has problems in this regard and surprisingly, Iceland also has long lead times. Lead times are important for traders and the variation between the countries is likely to affect the region s competitiveness. A goal set up for the Baltic Sea region is that border-crossing should not take more than two hours 24. A CBSS working group on Customs Co-operation and Border Crossing Aspects are dedicated to achieving this objective inter alia. According to an OECD study 25, excessive lead time has a severe impact on trade volumes as well as to trade value. The study implies that for every 10 % increase in time for export, trade value is reduced by 5-25%, depending on sector and export destination. It is also important to note that manufactured exports contain a considerable amount of imported sub-parts. This means that lead time is vital for both exports and imports. 23 In the World Bank methodology time for import and export include the time necessary for every official procedure for exporting and importing. For exporting goods, procedure ranges from packing the goods at the factory to their departure from the port of exit. For importing goods, procedures range from the vessel's arrival at the port of entry to the cargo's delivery at the factory warehouse. Shipping is thus not included. 24 See the Bergen Declaration and the Moscow Action Plan. 25 The study focuses on developing countries, but parts of the analyses are applicable to a global perspective. OECD (2006)

27 25(55) References Dansk Industri (2003), A Brave New Region? Removing Barriers to Business in the Baltic Sea Region Eurochambres (2003), Survey EU-Russia Trade and Investment: Practical Barriers Finnish Ministry for Foreign Affairs (2005), Trade Barriers Encountered by Finnish Business in 2005 and Means to Tackle Them OECD (2003), Quantitative Assessment of the Benefits of Trade Facilitation, TD/TC/WP(2003)31/FINAL OECD (2006), Logisitics and Time as a Trade Barrier, TD/TC/WP(2006) 3/FINAL Stockholms Handelskammare (2000), Undersökning av svenska företags ryska och baltiska etableringar Stockholms Handelskammare (2004), Hinder vid handel Exemplet Norge Wilson, John S., Xubei Luo, and Harry G. Broadman (2006), Entering the Union, European Accession and Capacity Building Priorities World Bank (2006) Doing Business in 2006, Creating Jobs.

28 26(55) 3. Technical Barriers to Trade The purpose of technical rules (product characteristics, testing, labelling etc) is to ensure objectives such as safety, environment, health etc. If countries share the same rules it can facilitate trade but otherwise there is a risk that a technical barrier to trade (TBT) is created. TBTs can result in costly and time-consuming adaptations of goods, sometimes for no legitimate reason. Within the EU/EEA harmonisation and mutual recognition of each others standards have created a common market where the problems of TBTs have greatly been reduced. According to our survey no great problems are encountered in the EEA Baltic Sea region today. Problems that still exist often concern different classifications of goods in different countries. Our respondents indicate that improvements in the Baltic States are markedly more significant than in Poland in the last five years. Despite this, almost a third of the reported cases to the internal market SOLVIT database concerns TBTs. Most of them concern time consuming administrative processes and not the regulations themselves. Our respondents indicate that most TBTs can either be solved by adapting goods to national requirements or by contacting the relevant authorities. Nevertheless, it is not unusual that trade is stopped as a result of them. The greatest amount of problems reported in our survey concerned Russia. Approval processes take a long time and the country often does not accept international standards. Unfortunately, the respondents do not see any improvements in Russia. Regarding opinions from countries outside the region, criticism towards the EU because of its application of the precautionary principle is common. The case against Russia mostly regards its non compliance with international standards. What is a technical trade barrier? Technical rules are either technical regulations or standards. Such rules include requirements e.g. in the form of product characteristics, testing and certification procedures, marking and labelling requirements. Normally technical rules are introduced to fulfil legitimate objectives, such as human health or safety, animal or plant life or health, the environment, or prevention of deceptive practice. Compliance with a technical regulation is mandatory whereas compliance with a standard is not mandatory. Different national technical rules might result in barriers to trade. When countries do not align or recognise each others technical rules this will result in so called Technical Barriers to Trade (TBTs). Such barriers