Strategy for Customs Modernization

Author:Luc de Wulf

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Research undertaken in recent years by the World Bank and others shows that participation in world trade tends to boost growth, and that countries that have integrated rapidly into the world economy also tended to record the highest growth rates.1 This outcome should not come as a surprise. Integration brings with it exposure to new technologies, designs, and products. It also enhances competition. With world trade growth expanding more than twice as rapidly as growth of world gross domestic product (GDP) over the past decade, the potential rewards from participating in world trade are evident. Such participation is predicated on the availability of good quality products offered at competitive prices. In this regard, a trade regime that tenders low protection to domestic producers contributes to the enhancement Page 4 of an economy's competitiveness because it forces domestic producers to align their costs with those in the rest of the world. Nevertheless, an open trade regime will only foster competitiveness when other accompanying policies are in place.

Over the past 20 years, average tariffs have been cut by half in developing countries and nontariff import barriers have been sharply reduced (World Bank 1996). Yet, for many developing countries, this has not necessarily led to substantial trade integration. Worse still, the poorest countries in the world, particularly those of Sub-Saharan Africa, lost market share during the 1990s. Such events were in part brought about by the failure of developing countries to produce the types of goods that would generate the most rapid export growth. Another impediment was the maintenance by other countries of a range of import barriers to products that Sub-Saharan African countries produce, including agricultural and textile goods. Import barriers include export subsidies, high tariffs, and stringent rules of origin (see chapter 9). The issues of the cotton export subsidy granted by the United States and other agricultural export subsidies of the European Union (EU) and United States were a significant reason for the disappointing results of the World Trade Organization (WTO) Ministerial Conference in Cancun in 2003. A poorly functioning trade logistics environment, as well as the combination of factors that make up the transaction costs-the cost of clearing customs, transport costs, noncustoms trade documentation requirements, and unenforceability of legal trade documents (World Bank 2003)-also contributed to the failure of many developing countries to integrate successfully into the world economy. High transaction costs, of which customs clearance costs are often an important element, may thus nullify the cost-reducing impact of trade liberalization. Few customs services have managed to provide exporters with the duty-free inputs needed to keep export prices competitive.2

The realization that customs services could be improved has prompted many governments to devote substantial energy and resources to modernization. They have also mobilized external assistance in this endeavor. In response, bilateral and multilateral development agencies have supported many customs reform initiatives. International donors or financial institutions such as the European Union (EU), the International Monetary Fund (IMF), the Inter-American Development Bank (IDB), the African Development Bank (AfDB), the Asian Development Bank (AsDB), the United Nations Conference on Trade and Development (UNCTAD), and the World Bank (WB), have all been engaged in customs strengthening operations. Bilateral donors, such as France, the United Kingdom, Japan, and the United States have also been active in providing such support. In addition, the World Customs Organization (WCO) has made technical assistance (TA) available. A number of customs administrations have improved their operations by taking advantage of this support. Yet, too many still operate inefficiently, adding considerable costs to trading activities while, at the same time, undermining the growth potential of their economies.

This chapter outlines the main features of a customs reform strategy and provides operational guidelines that are likely to contribute to the success of such initiatives. It has been inspired by the knowledge of good practices; the World Bank's own TA and project experiences (summarized in chapter 8); the approaches presented in a number of TA reports that have been produced by diverse customs experts and institutions, many of which remain inaccessible to the general public; lessons learned from several customs modernization initiatives (chapter 7); and consultations with many customs officials and consultants who have assisted in customs modernization initiatives. The first section reviews the key objectives of customs modernization initiatives. The second section spells out a number of contextual factors that need to be adequately addressed at the outset of a reform process to enhance its chances for success. The third section defines the key steps in preparing a customs modernization strategy. The next section elaborates on implementing key issues of the strategy. The final section provides some operational conclusions.

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Objectives of Customs Operations

Customs administrations are expected to raise substantial revenue, provide domestic producers with protection, provide supply chain security, prevent the importation of prohibited or unsafe imports (for example, illegal weapons or out-of-date medicines), and combat the trade of narcotics through the implementation of laws and regulations that are in line with WTO commitments. Customs administrations are expected to accomplish these objectives both effectively (by achieving them) and efficiently (at the lowest possible cost to the budget and to the trading community) without compromising trade facilitation.

Evolution of Customs Role

The responsibilities of customs continue to evolve. Customs administrations are now increasingly regarded as "the key border agencies" responsible for all transactions related to issues arising from the border crossings of goods and people. Some of these functions are undertaken in close cooperation with other national agencies.3 The operational guidelines of customs cannot give equal weight to all functions constantly; choices and priorities are inevitable in light of changing circumstances:

* Raising revenue has traditionally been high on the agenda of governments, represented by the Ministry of Finance (MOF), because of the critical importance of import duties as a source of budget revenue for many developing countries. Revenues from import duties for a sample of African countries accounted for just under 30 percent of total tax revenue, on average. In comparison, this share averaged 22 percent for countries in the Middle East, 13 percent for Latin American countries, and 15 percent for Asian countries (see annex 1.A). While import tariffs are widely recognized as more distortionary sources of revenue than general sales and income taxes, they remain important for historic reasons, and because they are relatively easy to collect. Collection of VAT on imports constitutes another major source of budget revenue. Therefore, a control mentality that ensures that all duties are assessed and paid has permeated customs, irrespective of whether this causes delays in the release of imports. With tariff rates declining over time, customs revenues as a share of the total budget revenues have also tended to decline in most countries; but customs revenues are still a major concern of MOF officials. This priority has been reflected in many past customs reforms and TA initiatives.

* Import tariffs are meant to protect domestic producers, who expect customs administrations to ensure that all importers pay the official import taxes to ensure a level playing field. On average, customs duties amount to 17 percent of the total import value in a sample of African countries, 12 percent in the Middle East, 10 percent in Asia and the Pacific, and 7 percent in the Western Hemisphere (see annex 1.B).4 Increasingly, import tariffs are being seen as an instrument of protection rather than of raising...

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