ANALYSIS OF TRANSACTION COSTS IN INTERNATIONAL TRADE AND PRACTICE IN VIETNAM

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MIMISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

ANALYSIS OF TRANSACTION COSTS IN INTERNATIONAL TRADE AND PRACTICE IN

VIETNAM

Major: International Economics

NGUYEN KIM NGAN

Hanoi, 2019

MIMISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

ANALYSIS OF TRANSACTION COSTS IN INTERNATIONAL TRADE AND PRACTICE IN

VIETNAM

Major: International Economics

Full name : Nguyen Kim Ngan Supervisor : Assoc Prof PhD Tu Thuy Anh

Hanoi, 2019

I hereby certify that the thesis with the title: “Analysis of transaction costs in

international trade and practice in Vietnam” is my own research and does not

reproduce any other materials The data indicated in the thesis is clear, accurateand are collected from the confident sources of information

The Author

Nguyen Kim Ngan

In order to complete this thesis, besides the efforts of myself, I havereceived the help, encouragement and guidance of my teachers, friends,colleagues and family throughout the course as well as in the period of thethesis research

Special thanks to Assoc Prof Ph.D Tu Thuy Anh, who wasdedicated to guide and help me in the process of researching and writing thisthesis

I am grateful to the teachers in the Faculty of Postgraduate Education ofForeign Trade University for interesting and useful lectures, for theenthusiastic transmission of the valuable knowledge and for the best conditionsoffering in the process of the course

I would like to express sincere thanks to my colleagues working onCommercial Department who support me with a lot of data and informationrelated to logistics costs of exporting shipments

I am grateful to my family for their encouragement and supports duringthe course and the period of thesis research

This thesis studies on the transaction costs of exporting firms is not a newbut a very complicated issues required various knowledge, skills and practicalexperiences Thus, the thesis has the inevitable shortcomings and limitation Ilook forward to receiving valuable comments for improving the thesis

Sincerely,

Hanoi, 2019The Author

Nguyen Kim Ngan

TABLE OF CONTENTS

ERTIFICATION 3

ACKNOWLEDGMENTS 4

TABLE OF CONTENTS 5

LIST OF ABBREVIATIONS 7

LIST OF TABLES 8

LIST OF FIGURES 9

ABTRACT 10

INTRODUCTION 11

I The important of the research 11

II Object and scope of research 14

III Research methods 14

IV Expected results 14

V Structure of the research 15

CHAPTER 1: THEORETICAL BACKGROUND OF TRANSACTION COSTS 16

1.1 Definition of transaction costs 16

1.1.1 Definition of transaction costs according to economits’s viewpoint 16

1.1.2 Definition of transaction cost in export 19

1.2 Transaction cost classification in export 21

1.3 Elements impact on transaction costs in exporting growth 29

1.3.1 Impact of trade facilitication on transaction costs movement 30

1.3.2 Impact of government’s policies on transaction costs 34

1.4 Measurement of transaction costs 38

1.5 How to evaluate transaction costs level in export 39

CHAPTER 2: TRANSACTION COSTS ENCOUNTERED BY VIETNAMESE EXPORTING FIRMS 47

2.1 The transaction costs of exporting firms in Vietnam 47

2.1.1 Overview of exporting activites in Vietnam 47

2.1.2 Current Status of transaction cost in Vietnam 51

2.2 Case study in Vietnamese exporting firm 68

CHAPTER 3: RECOMMENDATIONS FOR LOWING TRANSACTION COST ENCOUNTERED BY VIETNAMESE EXPORTING FIRMS 76

3.1 Experiences from Singapore’s development 76

3.2 Recommendations for Vietnam’s reduction transaction costs in export.85 3.2.1 Recommendations for Vietnam’s reduction trade costs in export 85

3.2.2 Implementing Trade facilitation Agreement 87

3.2.3 The role of government in educating and communicating changes 90

CONCLUSION 93

REFERENCES 94

LIST OF ABBREVIATIONS

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 DevelopmentPPP 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

LIST OF TABLE

Table 1: Structure of transaction cost 19

Table 2: Transaction cost classification 24

Table 3: Figures on importation and exportation of Vietnam (2005-2017) 50

Table 4: Descriptions of each indicator 54

Table 5: Compare TFI of Vietnam between 2013 and 2017 58

Table 6: Logistics Performance Index 2018 in ASEAN members 64

Table 7: Logistics cost of developed countries (Donald & Roger, 1998) 65

Table 8: Estimated Vietnam's import and export cost 66

Table 9: Export details in Vietnamese company 70

Table 10: All expenses of Vietnamese export shipment 71

Table 11: Major heading of exports shipment 72

Table 12: Ratio of production and transaction cost 73

Table 13: Singapore’s LPI ranking across 2007-2016 76

Table 14: Vietnam’s LPI ranking across 2007-2016 77

Table 15: Features and Benefits of Singapore’s TradeNet System 83

LIST OF FIGURES

Figure 1: Internal and external transaction 18

Figure 2: A particular source of trade costs is important (goods) 25

Figure 3: Population living on less than USD 2 per day (2008-12) 27

and number of days needed to export 27

Figure 4: Doing Business costs to export, USD per container, 2014 28

Figure 5: Average number of days required to export by income group 29

Figure 6: Types of trade costs in goods markets 35

Figure 7: Policies affecting trade costs in goods markets 37

at all points in the supply chain 37

Figure 8 - What makes up the time and cost to export to an oversea 44

Figure 9 - Trading across borders: time and cost to export and import 45

Figure 10: Import – Export Growth ( 2011-2016) 47

Figure 11: Key export commodities (2017) 48

Figure 12: Vietnam’s trade facilitation performance: OECD indicators 57

Figure 13: Trade Facilitation Indicator of Vietnam in 2017 58

Figure 14: Time and costs of Trading Across Borders 60

Figure 15: Time and costs of Trading Across Borders in Vietnam 61

Figure 16: Logistics Performance Scores, Vietnam 63

Figure 17: Vietnam Logistics Performance Index 2007 – 2018 65

Figure 18: Overall potential trade cost reductions for 67

ASEAN member countries (%) 67

Figure 19: Comparison of the trade declaration system before and after the establishment of TradeNet 79

Figure 20: Factors contributing to the success of Singapore’s Logistics Industry .81

Figure 21: Economies that offer regular training for customs clearance officials have shorter customs clearance times than thoses that do not 92

In trade, transaction costs are components directly into the price of goodsand services and are increasingly focused and paid more attention Today, theeconomy in general and businesses in particular want to compete in the worldmarket, 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, therebyincreasing their commercial competitiveness

This paper presents the current status of the transaction costs encountered byVietnamese exporting firms From the collection, analysis shows that transactioncosts of Vietnam tend to decrease but remain high compared to other countries inthe region and the world This is due to infrastructure traffic in Vietnam has notyet caught up with the development progress of the logistics industry, transportinfrastructure system is not synchronous, connectivity is still limited between sea,rail and road transport; lack of national and international logistics centers in keyeconomic areas to act as a focal point for goods distribution The main transportfees, surcharges and taxes constitute a barrier for the logistics industry to develop

In addition, the policy of many ministries and transport trends makes cost cuttingmore difficult…From these studies, the Thesis would like to provide solutions forVietnam to reduce transaction costs encountered by Vietnamese exporting firms

I The important of the research

In modern economies transaction costs have become equally (and perhapsmore) important than production costs This is quite a development considering thatearly economic theory (e.g., the perfect market economy model) focused entirely onproduction costs assuming that transaction costs did not exist Implication foreconomic research: It has become relatively more sensible to do research intransaction cost dynamics rather than production cost dynamics This is perhaps alsocontributing to the surge of interest for research in corporate governance that clearlyhas more to say about transaction cost dynamics rather than production costdynamics You can’t manage costs effectively without taking into account thetransaction costs Many economists like to divide costs incurred by a business intotwo categories; transaction and production costs Production costs include costs ofproducing as well as distributing a good or service Everything else is categorizedinto 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-knowncompanies was out of our reach On the other hand, they didn’t want to buy aproduct from some less reputed company This led to go for a refurbished coloredDoppler

There were dozens of sellers all around the province We were touchy aboutthe model, availability of spare parts and price of the product Our searches cost usspending on telephone calls, letters, emails, etc Similarly, we had to spend a lot oftime 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 ofour deals They become a detrimental factor in measuring the level of profits Theprofits of a business decrease with increase in transaction costs They also reduce

the volume of our reserved capital which we can invest in specific profit yieldingopportunities.

In a world without transaction costs but with perfect markets, the penetrationofinternational markets would be a simple matter of production cost; thus,comparative advantages would determine which producers penetrate internationalmarkets and when.Yet, despite remarkable technological improvements relevant tothe costs of internationaltransacting, especially with respect to communications anddata storage, and considerablerelaxation of exchange controls and the like, the costs

of international transactions aregenerally far from negligible In particular, fromaround the world there is growingevidence that reforms designed to provide theright economic environment for the localproduction of exportables and incentivesfor exporting are insufficient in themselves togenerate rapid export growth(Keesing, 1979; Morawetz, 1981; Dean, Desai and Riedel, 1994 and Greenaway andMorrissey, 1993) In some respects, moreover, the transaction costs of internationalmarketing may even be increasing over time, preventing otherwise beneficialtransactions from taking place Unless the high transaction costs in internationalmarketing 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 Itmainly contributes to GDP of each country, therefore, it has become imperative thatthere should be a focus on not only increasing exports base but also improving theirexport competitiveness in the world market A key factor hindering exportcompetitiveness has been the high transaction cost involved in exports Transactioncost related to trade involves a host of regulatory requirements, procedures andcompliance measures; besides infrastructure-related cost- including transport cost tobring product to the border, time and money spent in ports on border procedures,international transportation costs and communication costs Along with this,documentation has become an additional burden Transaction cost is a keydeterminant of a country's competitiveness in the international market

High transaction costs effectively nullify comparative advantage by renderingexports uncompetitive High transaction costs deny firms access to technology andintermediate inputs, preventing their entry into, or movement up, global valuechains High transaction costs also erode consumer welfare narrowing the range ofgood and services on offer and pushing up prices While transaction costs do notalone explain the development pathways of economies, they are a major factorexplaining why some countries are unable to grow and diversify The range ofpolicies that affect transaction costs is broad Although transaction costs areubiquitous, they are not immutable Action can, and is, being taken to reducetransaction costs Policy reforms are yielding positive impacts, although thesecannot 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 toreduce transaction costs further and integrate countries more completely into theglobal economy, but there are positive reasons to believe that developing countriesand their partners are taking this issue seriously Normally, 95% the foreign trade(in volume) of country passes through sea ports The shipping lines providetransportation service to importers and exporters from one country to anothercountry The cargo handling cost and shipping charges determine the economicalviability of export goods The transaction costs of the import-export shipment areimportant factor in the international trade Therefore, this thesis is important tounderstand 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 inVietnamese exporting firms, the author shall make some necessary recommendation

on policy and practical action in order to reduce the transaction costs, contributing

to sustainable development of the country

II Object and scope of research

Export is one of the important economic activities of the country The exporterhas to pay cargo handling cost and other charges to concerned service providers.This high logistics cost impact adversely to business Therefore, the object ofresearch is to analysis transaction cost in Vietnamese exporting firms in practice.The objectives of the thesis are analysis the overview of transaction costs andthe important of transaction costs in trading growth in whole economy, particular inexportation; the practice of transaction costs in Vietnam exporting firms and givethe 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 whichaffect transaction cost in Vietnam trade, from analysis and synthesis, the thesis shallshow that the transaction costs are high for Vietnam exporting firms From that, thethesis shall make several recommendations for reduction of transaction costs inVietnamese exporting firms

III Research methods

The research is conducted based on the methods of collecting, analyzing andsynthesizing information, processing statistical data and evaluating actual situation

of Vietnam in comparison with that of other countries in the world The thesis alsouses case study method to have a realistic view of the issues by generating theexperience of other countries in transaction cost and analyzing outstanding case inVietnamese firm

IV Expected results

The research is expected to make several contributions to theoretical andpractical basis as follows:

- Generating theorical base for the transaction costs

- Determining factors impact on the transaction cost

- Analyzing and evaluating the transaction costs in Vietnam trading firms

- Making recommendations on improving transaction costs of Vietnamesefirms.

V Structure of the research

A part from the Introduction and the Conclusion, the research is divided intothree chapters as follows:

Chapter 1: Theoretical background of transaction costs

Chapter 2: Transaction costs encountered by Vietnamese exporting firmsChapter 3: Recommendations for lowing the transaction costs encountered byVietnamese exporting firms

CHAPTER 1: THEORETICAL BACKGROUND OF TRANSACTION COSTS

1.1 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 differentperiods For example, John R Commons (1931) came up with a generalized conceptabout transaction before Coase’s literature “The Nature of the Firm” has beenpublished According to Commons, transactions are just the transfer and obtain ofobject future ownership between two persons, and the substance of transaction is theownership transfer, not the object itself moves from one to another A transactionoccurs when a good or a service is transferred across a technologically separableinterface, 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 ofbuying or selling objects or interests among people; and to a universal definition, allthe activities among enterprises, persons, enterprise and person can be named astransaction

Ronald Coase (1937), the economist formulated the first ideas abouttransaction costs more than 70 years ago, mentioned “Without the concept oftransaction costs, which is largely absent from current economic theory, it is mycontention 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 determiningpolicy” [Coase 1988a, p.6]

In economics aspect, transaction costs are as the fees paid by buyers, but notreceived by sellers, or the fees paid by sellers, but not received by buyers In financeaspect, transaction costs refer to the premium above the current market pricerequired to attract additional sellers into the market

According to econimists’s studies, defination of transaction costs are describedand developed through time There are three economists have been rewarded theNobel Prize for Economics for their contribution to the theory of transaction costsnamely Ronald Coase, North, and Williamson

Firstly, Ronald Coase described transaction costs as unavoidable costs ofdoing business, “the cost of using the price mechanism” in “The Nature of theFirm” 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 explainingthe emergence of the firm within an exchange economy and also as a way ofunderstanding the particular structure and governance framework of firms indifferent sectors and under different circumstances He asked: why does a firmemerge 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 freelyexchanged? If the answer is to do with the nature of entrepreneurialism (specificallythe ability of entrepreneurs to bring together factors of production which would noteasily come together through the market mechanism alone), then why is this type ofcoordination achieved in some cases through entrepreneurialism and in other casesthrough the price mechanism? Why was it that, in some agricultural systems, breadwould be made as a result of a series of exchanges between wheat farmers, millersand bakers, whereas, in other systems, all these functions would be verticallyintegrated within a single firm?

According to him, there are two main types of transaction costs, internaltransaction costs and external transaction costs, and firm size depends directly onthe nature of the transaction External costs include the paid costs of getting theinformation, the opportunity cost of time taken up in searching…; whereas internalcosts include the mental effort devoted to undertaking the search and sorting theincoming information… The firms must make a comparison between internal and

Figure 1: Internal and external transaction

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 arguedthat 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 arelower than for exchange through the market, so that the firm size will grow Theopposite, transaction costs for exchange within internal system are higher than forexchange through the market, the firm will be downsized

Douglass C North, who are the most important and influential economist ofthe late 20th century, argues that institutions (include formal institutions such aslegal rules and regulations… and informal institutions such as mutual trust, thecommercial or mercantile skills of a nation) are key in the determination oftransaction costs Institutions that make low transaction costs, of course, promoteeconomic growth

Finally, Oliver Williamsion, he developed Coase’s study defines transactioncost as the cost of running the economic system

According to Alston and Gillespie’s approach, transaction costs fall into twogroups: firstly, production factors (physical and finance capital, human capital andwork intensity); secondly, the production process (pre-production, production andpost production) The following table illustrates the structure of transaction costs:

Table 1: Structure of transaction cost

Factors of

production

Production ProcessPre-production Production Post- productionPhysical and

financial capital Asset specialty

Abuse and agency

costs

Measurement ofoutput and contractenforcementHuman capital

Informationconstraints andasset specialty

Coordination costs

Work intensity

Shirking andcontractenforcement

Source: International Journal of Engineering and Management Sciences

The table above shows that (pre-production and post – production) factors arethose 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 transactioncosts borne by the firm Moreover, without production processes firms need to dealwith 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 solddirectly determines your company’s revenues Your firm’s market research shouldinclude an evaluation of all variables that may affect the price range for yourproduct or service If your company’s price is too high, the product or service willnot sell If the price is too low, export activities may not be sufficiently profitable ormay actually create a net loss

A company that has decided to export its products to a new market or to buyfrom a new supplier in a different country cannot take for granted that the potentialtransaction 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 ifthe cost of entering a market is too high, the competition is grueling, or the price thecompany 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 costsassociated with the delivery of the goods to the country of destination), thepackaging and the associated expenses

An exporter must ensure acceptable and timely returns from internationalbusiness activities in relationship to the associated costs and risks

A transaction that cannot be completed at a profit, or one that is notcompatible 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 thecompany For an exporter, the decision to enter a new market may stem from amarketing plan based on solid market-research or may be the result of a reactiveresponse to an unsolicited request In some sectors, notably knowledge-basedindustries, exporting may be a competitive imperative undertaken on the first day ofoperations

Once a company has decided to export, and before shipping any goods, it must

do the following:

ensure that the transaction is viable;

determine the export costs;

determine the optimum sales price

Transaction costs in export, or in other words the export costs, are importantaspect of your company’s pricing analysis There are different non-price factors thatare not related with physical process of production of goods such as administrativeprocesses, government rules and regulations, infrastructural bottlenecks etc forwhich an exporter employs its own resources either in terms of time in terms ofmoney before the actual shipments of export items The multiplicity of rules andregulations, rule-bound administrative procedures and practices, comprehensiveinfrastructural facilities and appropriate institutional support adversely affect the

export promotion efforts These non-price factors, often referred to as “transactioncosts”, slow down the motivation given to export growth even when other tradepolicy issues have been addressed by the Government In the internationallycompetitive world, export promotion is highly price-sensitive and therefore anyaddition to it by way of transaction costs has to be addressed by the trade policyreforms.

These costs usually begin with an individual firm’s imports of inputs requiredfor exports and stretch till the export remittances are received through the bankingchannel Comprehensive infrastructure is the one of principal sources of thetransaction costs for most export industries in developing countries andunderdeveloped countries The basic problem with transaction costs is that some ofthe factors responsible for such costs are difficult to quantify and warrant morequalitative than quantitative treatment

The principal objective of transaction costs analysis is to optimise all suchcosts, as beyond a critical level they tend to decrease the volume of transactions.Increasing costs of transaction costs tend to adversely affect the efficiency oftransaction, partly in terms of resources and partly in terms of suppression ofexchanges

In the field of importation and exportation, transaction costs arise out of strictrules and regulations, complex administrative personel Therefore, in a regimeconducive to exports, efforts need to be taken to reduce the complexities involved inexport transaction processes along with price-related measures, such efforts provideincentive 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 anygiven foreign market (quantities and qualities desired and the prices prevailing ofeach different quality), and of course reciprocal costs for agents in foreign countries.Second, there are the costs of information about government regulations and otherpolicies in both the foreign market and the home market (including exchange rate

policy, exchange restrictions, tariff and non-tariff barriers, and health andenvironmental regulations) Because implementation of these rules and actualpractice can vary substantially from what the laws or rules say, knowledge of theofficial documents is far from sufficient Third are the costs to each potential party

of identifying appropriate trading partners in these markets Fourth, there are thecosts of negotiating, writing and enforcing contracts between the parties,includingthose associated with the resolution of disputes Fifth, because of thegenerally long between the placement of an export order and its receipt and finalpayment, there are thecosts of financing the transaction and of bearing the risks ofdefault at subsequent stages

Among the factors tending to make these costs much higher than those withrespect to domestic transactions are: language, cultural and taste differences,differences in laws and the way disputes are resolved, differences in income andinformation sources, differences in the way markets operate and in the extent andcharacter of competition, and difficulties of enforcing contracts across countries,and hence higher risks of payment default These transaction costs are not merelystatic; rather they change substantially overtime as circumstances change Forexample, they may be expected to increase with changes in the identities of thetrading agents, in the environmental conditions which surround them, and in thecharacter of the respective markets Even if an exporter has all the right informationabout 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 futureconditions in that market Indeed, for any individual country, over time there aretwo important trends tending to raise transaction costs for developing countryexporters: (1) the growing relative importance in developing country exports ofquality-differentiated and increasingly specialized productsfor which it is difficult todistinguish between contract fulfillment and non-fulfillment (deliberate orotherwise), and (2) the growing use in developed countries (at both the national andsubnational levels) of various non-tariff barriers to trade, including environmentalregulations, which are subject to more sudden changes over time than tariff barriers

Another such factor is the asymmetry of information that characterizes many of therelationships, actual or potential, among the different agents As is well-known,asymmetries of information give rise to problems of adverse selection and moralhazard, and such asymmetries are likely to arise several different components oftransaction costs at the same time

For example, at the level of the rules and regulations, countries may want theconditions to look different than they really are, or be unwilling to enforce existinglaws Likewise, the agents charged with the responsibility of implementing the rulesmay have little incentive to do so, and indeed may have the incentive to leave theinterpretation of these rules sufficiently ambiguous as to generate rents forthemselves Even more relevant and important, each potential trading partner hasbetter information about his own characteristics and propensities (appropriate todefining the terms of the contract) than the other party, inducing adverse self-selection for any given terms While in principle contracts could be written insufficient detail so as to be complete and self-enforcing, in practice because thecosts of doing so are excessive, actual contracts are necessarily incomplete andhence vulnerable to opportunistic behavior Moreover, because of the lags betweenthe time of writing the contract and that of delivering on it, and then again beforepayment is received, each party may have the incentive to default insome way onthe terms of the contract (i.e., to practice moral hazard or opportunistic behaviorrelative to the other party) These problems are often further compounded by thefact that many of the information costs and enforcement costs are subject toeconomies of scale, economies of scope and externalities The externalities implythat the incentives for investing in such information and in adequate enforcementmechanisms 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 implythat, although there may well be a role forinter mediaries specializing in theproduction of these relevant services, competitive markets for such services may notexist Instead, these services may be monopolistically supplied, but thereby creatingthe basis for government regulation and intervention

Table 2: Transaction cost classification

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 freightcosts and time costs), policy barriers (tariffs and non-tariff barriers), informationcosts, contract enforcement costs, costs associated with the use of differentcurrencies, legal and regulatory costs and local distribution costs (wholesale andretail)” (Anderson and Van Wincoop, 2004) Trading costs interact with economicfundamentals like technology and factor endowments (labour and capital) toproduce 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 economicdevelopment.

The OECD-WTO survey provides some information on the types of tradecosts that are most important in partner countries (Figure 2) The most commonlyidentified 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 oftrade facilitation, aid for trade is built into the architectureof the new WTOAgreement, so there is a strong chance that progress in this area will be possiblewith a combination of political will in partner countries and mobilisation ofresources in donor countries Transport infrastructure is a key component oftraditional aid-for-trade spending Finally, non-tariff measures like productstandards are frequently the subject of technical assistance programmes run bydonor agencies – either governmental or multilateral organisations – and have realpotential to reduce the trade cost burden on partner country exporters

Figure 2: A particular source of trade costs is important (goods)

Source: OECD/WTOAid for Trade monitoring exercise (2015)

Tariffs are one well-known component, but they only account for a relativelysmall part of the total level of trade costs in most countries Non-tariff measures arealso important, including product standards, as well as other types of regulation thatmake it more costly to do business abroad than at home The business environmentand commercial and governance institutions also matter because they affect the cost

of doing business for foreign firms Over the last two decades, trade in services hasexpanded 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% ofworld services exports in 1990 to 20% in 2011 As an input into other economicactivities, services are a direct determinant of country’s competitiveness Servicessuch as telecommunications, energy, transport and business services are criticalinputs into the production of goods and other services and influence productivityand competitiveness Opening up to services imports and Foreign Direct Investment(FDI) can be an effective mechanism to increase the availability, affordability andquality of these services, which are crucial for export diversification, economicgrowth and poverty reduction In addition, services can offer dynamic newopportunities for exports (World Bank, 2015 monitoring exercise).

Services trade also involves transaction costs Where pure cross-border trade ispossible – for instance, via the internet – issues such as transport costs do not arise.Nonetheless, there may be issues of regulation or infrastructure investment thatgenerate friction Trade in services is governed entirely by domestic regulation Theregulatory framework governing services trade includes a vast range of domesticlaws and regulations in areas that often include land ownership, establishment offoreign companies and migration policies They exist in sectors as diverse asbanking, professional services, transport, education and tourism

Figure 3: Population living on less than USD 2 per day (2008-12)

and number of days needed to export

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 overseasmarkets For those living at the base of the pyramid, often in extreme poverty, highprices disproportionately impacts on their consumer welfare Not surprisingly, lowertrade costs are typically associated with net poverty reductions even though thedistributional impact of trade costs differs across countries This positiverelationship between trade costs and poverty is illustrated in Figure 3 Developingcountries with higher trade costs – measured by the number of days required toexport in 2005 – tend to have a higher share of the population living on less thanUSD 2 per day

High trade costs price some country regions, countries and companies out ofexport markets, thereby limiting their economic development opportunities Tradecosts may not explain why some countries are low income or least developed, but,

in combination with other factors, they do explain why some countries struggle togrow 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 isessential to enjoying comparative advantage and the gains from trade

Figure 4: Doing Business costs to export, USD per container, 2014

Source: World Development Indicators

In a static sense, economic welfare can increase from lower trade costs – thereal 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: asfirms gain access to new goods, they combine them in different ways to make newproducts Indigenous technology development or adaptation is at the core ofeconomic development over the medium to long term and harnessing the process islikely an important part of moving up global value chains.High trade costs are aconsiderable burden on the poor, undermining economic welfare by pushing upconsumer prices and keeping poor producers out of global markets Figure 5 belowhighlights the average number of days to import Time is an important parameter fortrade costs Against this background, it is important to note what happens whentrade costs for a particular country stay at an unnecessarily high level while those ofits partners fall The country will be less able to take advantage of specialisation bycomparative advantage and thus will feel the gains from trade less fully than itspartners This point stands for countries that remain relatively marginalised from the

global trading system as a result of high trade costs, for example, landlockeddeveloping countries and small island developing states.

Figure 5: Average number of days required to export by income group

Source: World Development Indicator

Not only do trade costs matter between countries, they also matter withincountries 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 toclear when they try to enter international markets Sometimes these barriers keepthem 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 togrow and develop, and there are complex interactions among them But trade costsstand 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 willtend to fall as the number of transactions increases That benefit is related todifferences in production costs Naturally, the greatest benefits, or production cost

differences should be exploited first, and smaller benefits only later additionaltransactions.

Transaction costs can be expected to depend on two main factors: tradedevelopment, 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 19th century economichistory of Germany, example of a relationship between transaction cost andeconomic growth Germany experienced dynamic economic growth around themiddle of the 19th century There was physical capital investment in railways, andhuman capital investment in education, and improvements in productiontechnologies, as conventional theory would expect, but also thedevelopment of acustoms union, the Zollverein, from 1818 onwards As Seidel (1971) notes, at theend of 18th century, in the territory of the previous German-speaking Holy RomanEmpire, one could experience about 1800 customs barriers (about 1830 tradebarriers even within Prussia, including the division of Prussia into two separateparts) Travelling from East Prussia Cologne to West Prussia was associated withcustom borders checks and taxing 18 times Transportation of goods was sloweddown, and inspections off cargo and custom duties increased final prices TheZollverein customs union reduced all these barriers to intra-German trade Thenumber of transactions increased, bringing prosperity to all engaged in productionand exchange

There is also the post-war phenomenon of European Union and attemptstowards a common market for goods and services in the 1990s, with reductions oftransaction costs for the 27 EU member states Transactions cost can be reduced byimposing common technical standards for production and by reducing import andexpenditure tax rates, and other barriers to trade within the Union

Therefore, a reduction in transaction costs or a reduction in resource use pertransaction leads to increase economic growth and economic welfare

Traders from different Member States of the WTO have long complained thattrade is often subject to excessive and overly-complex regulations on the importing

and exporting of goods Moreover, the regulations also differ from country tocountry (or from Union to Union) Especially for small and medium-sizedcompanies, this becomes a costly matter, but even for large companies this oftenmeans a heavy administrative burden.

According to one study of Eximbank, the procedural complexities assume tohave 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 otherrelated parameters concerning the factors list above

After the necessary ratifications were secured, the Trade FacilitationAgreement (TFA), a multilateral treaty that was concluded within the World TradeOrganization (WTO), entered into force this past February 22nd The TFA, which isdesigned to allow goods to be imported and exported more quickly and easily, willnow have to be implemented by the various Member States of the WTO, includingevery country of the European Union Because the European Union is already acustoms union, this means concretely that positive consequences will be noticedprimarily 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 thepossibility for goods to be cleared even before all of the customs obligations havebeen satisfied In this way, urgent shipments to other WTO Member States, for

example shipments via air transport or shipments of perishable goods, will no longerincur unnecessary delays.

In 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 theirexport and import procedures – and the accompanying costs – in this specificcountry and/or that specific Union, while also offering traders a chance to askquestions 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 ofthe TFA immediately, the developing countries are receiving more time to adopt theprovisions Moreover, the latter group of countries will not only be financiallyassisted 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 variousdeveloping 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 thattransaction 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 by2030

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, theaverage number of days spent by goods in import customs is 5.5 for landlockeddeveloping countries, and 3.6 for non-landlocked developing countries The dataalso indicates that for over 50 percent of non-landlocked developing countries,

goods spend on average 2 days or less in customs In landlocked developingcountries, the corresponding figure is less than 5 percent, and for almost 10 percent

of them, goods spend on average 10 days or more in customs This pattern alsoholds when the comparison is between landlocked and non-landlocked LDCs

For exports, the comparisons again reveal that the average number of daysspent 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 suggeststhat exporting firms relying on imported inputs in landlocked LDCs face, onaverage, 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 allparcel shipments from the Universal Postal Union (UPU) reported in figure 1provide an additional source of comparison The figure shows the distribution of thetime in transit (defined as time between sorting facilities in origin and destinationcountries) for packages up to 30 kilograms from a large sample of shipmentcovering many countries Average days spent by parcels in transit are 7.0 for highincome countries, 13.0 for LDCs and 9.7 for other developing countries Using thesame estimate of 1.3 percent additional costs per extra day in transit would implythat LDCs face, on average, an extra 4.2 percent trade cost for parcel shipmentscompared to other developing countries

Since the signing of the TFA in December 2013, the OECD has produced andreleased a series of 11 Trade Facilitation Indicators (TFI) for 187 countries,following closely the targets highlighted by the TFA Currently, this constitutes themost detailed catalogue of the policies and procedures used in border managementagencies around the world, and arguably the best we have to assess more closely thetrade cost handicaps faced across different group of countries Comparing LDCswith non-LDCs and landlocked with non-landlocked countries reveals that thevalues for the LDC group are again systematically lower for each indicator than forthe non-LDC group, though not always significantly so For some important

categories like advance rulings, the differences between the groups is large, apattern that is also apparent when comparing landlocked with non-landlockedcountries.

We have estimated, in another article, the reduction in trade costs fromimprovements 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 DoingBusiness data Our results suggest that a successful implementation of the TFAcould lead to a percentage reduction in trade costs of 2.4 percent for LDCs, and 4.5percent for landlocked LDCs These are not insignificant estimates, and althoughthey only relate to time in customs for imports, several of the gains would alsoapply 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 beloosely classified under two headings: locational factors and policy-related factors.Locational factors are exogenous: each country must take them as a given andcannot 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 andhistorical and commercial links with other countries

Although countries must take geography and history as given, that does notmean that the trade costs related to those factors are completely impervious togovernment action Geographical remoteness, for example, tends to increase tradecosts substantially and poses particular problems that governments need to workhard to solve

Policy makers can limit the effect of remoteness by developing the hard andsoft infrastructure needed to build an economy that is strongly connected to globaltrade, transport and production networks High country connectivity based onappropriate policies can reduce trade costs and limit economic remoteness, eventhough geographical remoteness in the strict sense cannot be changed

Figure 6: Types of trade costs in goods markets

One set of border policies that affect trade costs in a very direct way relates totrade facilitation, i.e customs and other border procedures When those proceduresare slow, expensive or unreliable, costs to business increase – with a resulting

impact on trade costs Trade facilitation reforms can therefore reduce trade costs,and the WTO agreement on Trade Facilitation (TFA) provides one framework formoving forward in this area The OECD has estimated full implementation of thenew WTO agreement could reduce developing countries’ trade costs by 14% forlow income countries, 15% for lower middle income countries and 13% for uppermiddle 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, atAttari-Wagah In 2012-13, 54% of India’s imports from Pakistan and 25% ofIndia’s total exports to Pakistan passed through this crossing, even though only arestricted list of products is allowed to be traded Historically, this border crossinghas been well known as a chokepoint for traders However, recent trade facilitationmeasures appear to have improved performance somewhat India has introduced anIntegrated Check Post, with a dedicated cargo building, an export warehouse andtruck parking facilities Similar facilities are being developed in Pakistan Bordercrossing hours have been increased from eight hours per day to 12, and truckcapacity 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 goodsmarkets, namely customs and other border procedures However, many otherpolicies are also at play As already mentioned, transport plays a key role On theone hand, goods have to be moved internationally, so policies governing thedevelopment and operation of maritime and air gateways have the potential to affecttrade costs Similarly, policies governing air and maritime transport are alsorelevant Countries that sign liberal bilateral air services agreements can expect tosee their trade costs go down for goods transported by air, such as parts andcomponents that circulate through global value chains (GVCs) or horticulturalproducts and new agricultural productions Some countries limit competition insome aspects of their maritime services sectors, such as cabotage (movementbetween domestic ports), with resulting increases in trade costs

Figure 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

Source: Mọsé and Le Bris (2013)

So far, the analysis has focused on policies at and between borders Butbehind-the-border policies are also relevant (e.g Mọsé and Le Bris, 2013).Wholesale and retail distribution, as well as transport and logistics, determine theability of producers to get their goods to market in a cost-effective way Countrieswith poorly performing distribution and logistics networks tend to suffer from hightrade costs and can become insulated from world markets In some countries inWest Africa, for example, completion of national markets – not just the interfacebetween national and international markets – is an issue

Conclusion, trade costs come in a variety of different forms However, eachcountry has its own particular circumstances A particular constraint may be binding

in one country in the sense that it represents the main source of trade costs that

prevents 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 microaspect, on the macro aspect it refers measuring the costs of economics systemoperation or institution transformation, on the micro aspect, and it refers measuringthe costs of some industry or field executing a transaction (Zhang 2010) According

to Steven N.S Cheung (1998), the measurement includes accurate measuring andmargin contrast analysis The former means adopting statistics data or model tocalculating 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 ishigher in Situation A than in Situation B, and that different individuals consistentlyspecify the same ranking whenever the two situations are observed, it would followthat transaction costs are measurable, at least at the margin (Cheung, 1998)

On the macro aspect, most of the works on macro aspect are concentrated onthe measuring economy transaction costs and studying interaction betweentransaction costs and economic growth The methods are widely adopted One isdirectly measuring, just as Wallis &North have done in 1986 They partition thenation economic sections The other is to build measuring model referred to Wallis

&North’s direct measuring method In addition, researches based on the view ofinstitution evolution also constitute a potential direction of studying There are threemeasurements according to macro aspect:

 Direct measurement;

 Building Measurement Model;

 Institution Evolution Margin Analysis

On the micro aspect, there are four measurements:

 Buy- sell price margin method;

 Typical reference quantities method;

 Investigating method;

 Data Statistic method