Creating Global Value Through Efficient Trade Logistics Warren H. Hausman Hau L. Lee Uma Subramanian

Overview Motivation for logistics indicators research Survey instrument for logistics indicators Assessment of logistics indicators in different countries Logistics indicators as determinants of bilateral trade Supply chain-based logistics index

The Growing Global Economy Global trade grew 10.2% in 2004; constituting 10% of world’s GDP Global economy grew 5% in 2004 Foreign exchange transactions: $10 billion a day in 1970; $10 billion a second today World trade growth has exceeded output growth rate every year since : World trade grew at an annual rate nearly three times higher than world GDP Trade to GDP Ratio: –U.S.: tripled since 1970 –World: doubled since 1970 Source: Gene Long, UPS, 2005

Selling and Sourcing Trends Revenue Generated Outside Home Market Sourcing of Raw, Semi-finished and Finished Goods Outside Home Market Source: Accenture Global Operations Survey, 2005

Growing Global Market Growing global middle class: –95% of consumers live outside of U.S., 60% in Asia –52 developing nations with population of 1.5 billion reaching middle class –China middle class at 300 million, with 1% annual growth –India tripled middle class since 1985 Emergence of BRICs (Brazil, Russia, India, China): –Today their economies constitute 15% of G6. –Economies will be half of G6 by 2025 –Economies will surpass G6 in less than 40 years

What Determines Bilateral Trade?

Propensity to Import Propensity to Export Shipping Cost & Time Logistics Frictions Institution Quality Infrastructure Institution Quality Infrastructure

Past Studies on Bilateral Trade GDP Distance Institution Quality Infrastructure Institution Quality Infrastructure

Our Focus GDP Distance Institutional Quality Infrastructure Institutional Quality Infrastructure Logistics Frictions

Research Opportunities Institutional quality and infrastructure variables have been based on subjective indices or expert assessments. Quantifiable and measurable logistics performance indicators have not been used. Variables used are not operational, i.e., not directly actionable. Best results without using country-specific dummy variables explain 66% of variability in bilateral trade.

Objectives of Research Determine the significance of logistics performance in influencing bilateral trade through the use of measurable and quantifiable logistics indicators. Perform a critical assessment of logistics performance of countries globally. Develop supply-chain logistics index to guide resource allocation and deployment for improving logistics efficiency.

Survey Instrument 2005 Study Textiles Apparel Coffee, tea, cocoa, spices 80 Countries Questionnaire Survey (17 pages) Answers from Panalpina Experts Focus on containerized imports & exports Follow-up Phone Checks by World Bank

Examples of Logistics Indicators Trade procedure Customs clearance Vessel turnaround CSI times Waiting time for berth Container dwell time Time Port & terminal charges Document Processing CSI costs Trade procedure costs Custom clearance incentives Inland freight Cost No. of documents per transaction % of containers inspected Level of inspection No. of signatures for customs clearance Complexity No. of containers unloaded per berth hour Port shutdown days Inland transport speed Frequency of vessel calls at port Efficiency

Days OECDEAPLACMENA SAS ECAAFR Source: World Bank Global Logistics Indicators Survey, 2005 Average Time for a Typical Import Transaction

Germany United States Japan New Zealand Dominican Republic Philippines France Chile Turkey Senegal ArgentinaChina NepalNicaragua Nigeria Zimbabwe Mongolia Kazakhstan Niger Burundi Kyrgyz Republic Days for an Import Transaction GDP per capita (thousands of dollars) Trade Transactions Processing Time and GDP Source: World Bank Global Logistics Indicators Survey, 2005

Total Cost for a Typical Import Transaction Thailand Norway Sweden Spain Ireland Malaysia South Africa Brazil India United States Korea China Kazakhstan Algeria Zambia Cameroon Source: World Bank Global Logistics Indicators Survey, 2005 US $

Cost for a Typical Import Transaction ,0001,5002,000 US Dollars OECD MENA EAP SAS ECA LAC AFR Percent (Cost/Per Capita GDP) OECD LAC MENA ECA EAP SAS AFR Source: World Bank Global Logistics Indicators Survey, 2005.

Number of Signatures Singapore Finland France Indonesia Korea Ireland Italy United States Venezuela China Colombia Senegal Bangladesh Lao PDR Mongolia Nigeria Azerbaijan Congo, Dem.Rep. Number of Signatures for Typical Export Transaction Source: World Bank Global Logistics Indicators Survey, 2005

Number of Signatures for Imports High incomeUpper middle incomeLower middle incomeLow income Process Inefficiencies and Wealth TotalFor Customs Source: World Bank Global Logistics Indicators Survey, 2005

Percentage of Import Containers Inspected Malaysia Germany USA Japan South Africa Mexico Jordan Bangladesh Columbia Dominican Rep. Turkey Pakistan Sri Lanka Nigeria Source: World Bank Global Logistics Indicators Survey, 2005

Percent of Import Containers Inspected High income Upper middle income Lower middle income Low income Logistics Impediments and Income Source: World Bank Global Logistics Indicators Survey, 2005

Augmented Gravity Model Basic Attraction Logistics Indicators Institutional Quality Exporter GDP Importer GDP Distance Bilateral Trade Time Cost Variability Exporter’s corruption index Importer’s corruption index Regional trade agreement dummy

Critical Global Logistics Indicators Time Cost Variability Exporter’s average time for all procedures Importer’s average time for all procedures Importer’s total costs for import-related procedures Exporter’s Max Time – Average Time for all procedures Importer’s Max Time – Average time for all procedures

Augmented Gravity Model Results Log GDP exporter Log GDP importer Log distance Log Exporter’s Avg Time for Procedures Log Importer’s Avg Time for Procedures Log of Importer’s Total Cost for Procedures Log Exporter’s Max Time – Avg Time Log Importer’s Max Time – Avg Time Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistics Coefficient t-Statistic

Observations Measurable and quantifiable logistics indicators improve explanatory power of gravity model for bilateral trade. Logistics indicators results show efficient logistics in time and cost can contribute to increased trade. Variability matters – higher variability in processing time can be a deterrent to bilateral trade.

Supply-Chain Based Logistics Index A single metric to evaluate and measure logistics efficiencies Weights of each variable in the Logistics Index show relative benefits Use weights to guide resource allocation and deployment of logistics improvements A single measure enables quick and easy benchmarking

Supply Chain-Based Logistics Index Distance Total Cost of Processing Total Time (Freight + Ports) Shipping Cost Trade-Related Costs Inventory cost (In-Transit) Total Landed Cost Coeff of Var of Total Time Inventory cost (Safety Stock) Product Cost

Three-Stage Logistic Index Estimation Log Exporter GDP Log Importer GDP Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Stage 1 Stage 2 Bilateral Trade Stage 1 variables plus Logistics Index Stage 3 Bilateral Trade Residual from Stage 1 Log Distance Total Total Processing Cost Total Time Coeff of Variation of Total Time Logistics Index

Stage 1 Logistics Index Model Results Log GDP exporter Log GDP importer Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Stage 2 Logistics Index Model Results Log Distance Log of Total Processing Costs Total Time (Fright + Ports) Coeff of Var for Total Time Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Stage 3 Logistics Index Model Results Log GDP exporter Log GDP importer Exporter’s Corruption Perception Index Importer’s Corruption Perception Index Regional Trade Agreement Dummy Logistics Index Adjusted R-Squared Observations F-Statistic Coefficient t-Statistic

Model Comparisons Number of Variables Adjusted R-Squared F-Statistic Augmented Gravity Model Logistics Index Model

Logistics Index Observations It is possible to derive a single logistics index that captures all the explanatory power of all the logistics indicators. The logistics index is a significant determinant of bilateral trade. The logistics index is derived from distance, time, cost and variability measures.

Summary Logistics indicators are a significant determinant of bilateral trade. A single Logistics Index has equal explanatory power to the set of logistics indicators. Countries and enterprises should collaborate to improve logistics performance and reduce logistics friction in order to foster trade. The Logistics Index can be used to guide resource allocation and deployment for such improvement projects.