Better logistics for better supply chain connectivity
Mia Mikic, is a trade economist, board member of the Friends of Multilateralism Group, Advisor at Large for the Asia-Pacific Research and Training Network on Trade (ARTNeT).
Sherry M. Stephenson, is a trade economist, member of the Pacific Economic Cooperation (PECC) Services Network, and a board member of the Friends of Multilateralism Group.
It is hard to find anyone who has not experienced supply chain disruptions during the pandemic, be it an exercise bike or a computer sitting in a container on the ship waiting to be transferred onshore for distribution; construction materials on the dock waiting to be loaded onto the ship, or a car sitting on a factory conveyor belt waiting for a chip needed for final assembly. Hopefully, you were not the one in need of a vaccine, medicine or other health essentials waiting for customs clearance, delayed due to staff shortages. But you are likely among those whose carefully chosen gifts for family members and friends were not dropped at their front doors on time as couriers were overwhelmed. One day we will be watching a comedy, or a drama (or both) based on these experiences. Movies are enjoyable, but we do not want to see such scenes repeated in real life. It turns out that we have the means and tools at our disposal to - if not prevent - then minimize the problems described. These means and tools come under the broad name of logistics. The APEC region took the lead in 2022 in pushing forward a better understanding of these important but often underappreciated logistics activities to examine their role in moving essential goods across borders. A major outcome of this work has been the agreement by APEC economies on a common definition of a group of 10 logistics activities labelled as “logistics related services”.
What are logistics?
From the perspective of late 2022 asking this question may appear ridiculous. The term has been used so much in all aspects of our lives for the last three years that we feel we can intimately relate to it. But do we know what it actually is? Let us invoke an anecdote about how the first encyclopedia in the Polish language from 1745 defined a horse by stating “Everyone knows what a horse is.” The logistics’ equivalent to this today would be to say, “Everyone knows what logistics is.” Obviously, this is not adequate from a policy or business perspective, and so over time those needing to have a more exact understanding of the term have crafted definitions fit for their purpose: from military to various civilian uses. With the advent of supply chains, from vertical national ones to more complex international ones, logistics finally found a perfect home. Logistics became most often explained through its purpose of making supply chains function. And function they did, almost without problems despite supply chains becoming increasingly long and complex with huge volumes passing through them (readers are referred to some of the literature on rise of globalization and global value chain trade). By following a well-known proverb “if it ain't broke, don't fix it” logistics continued to carry out their role in supply chain connectivity pretty well without much improvement for decades, until the pandemic clearly showed a fragility in supply chains and inadequacies in several aspects of logistics services. Nowhere was this so obvious or consequential as with the supply of essential goods for the health sector.
One could also wonder about the reasons why logistics – being a set of services – did not feature as one of the sectors in the WTO’s General Agreement on Trade in Services (GATS) from 1995. There were some limited attempts by several WTO Members to open a conversation on logistics in the context of continuing negotiations on GATS, but there were no concrete results (as explained in more detail in our paper). However, WTO Members sent signals early on in the pandemic that there was a need to hasten and broaden the organization’s work on logistics services, making this also one of the ways WTO would ensure that it was fit for purpose.
Efforts of the Asia Pacific Economic Cooperation (APEC) to promote supply chain connectivity for essential goods
APEC is a grouping of 21 economies on both sides of the Pacific Ocean which in 2020 together accounted for 38% of the world’s population, around half of world trade in goods and services, 61% of world GDP, 68% of the FDI inflows and 52% of FDI stocks. In addition to a significant economic contribution to the world economy, APEC has held a unique position as a promoter of regional economic cooperation as well as an effective incubator of ideas for improved policies and institutional frameworks. A number of these ideas have not remained within the borders of APEC but have been taken up subsequently by the WTO or other multilateral organizations. Already in the early months of the pandemic, APEC members realized that open trade channels and cooperation would be a more effective approach to addressing supply chain issues than inward looking policies preferred by some others. True to this legacy, APEC Leaders and Ministers adopted several declarations committing the region to action to facilitate trade and the movement of essential goods and people, along with the critical operation of supply chains.
Among those was a request from Ministers to initiate work examining services crucial for the movement of essential goods. A two-year project began in late 2021 aiming first to enhance understanding of the role of logistics services in the movement of essential goods and ultimately to establish a go-to place for policy and problem-solving work on logistics and supply chains. The major achievement of the project so far is that it has created a better understanding of logistics and their importance in supply chain connectivity which enabled the adoption of a common definition of logistics-related services by APEC economies in May 2022. Specifically, APEC members agreed on a grouping of 10 Logistics-Related Services described as “…..a series of essential economic activities that enable the operation of efficient, sustainable, secure and resilient supply chains and allow for the predictable transport, storage, and delivery of goods and services for businesses”. These 10 services are customs brokerage services; cargo handling; storage and warehousing; freight forwarding; courier services; distribution services; and air-, maritime-, rail-, and road transport services. This was notable as the first time a multilateral economic grouping had agreed to a common definition of logistics services.
Insights from the private sector
The views of the private sector have not been lost in the context of APEC’s work to explore and develop a better understanding of logistics services. An APEC dialogue with representatives from the private sector and the responses to survey questions for the Pacific Economic Cooperation Council (PECC) State of the Region Report 2022 provide further clarity on the challenges and possible solutions for ways to improve the resilience of supply chains through improved logistics policy and performance. In addition to supporting further efforts towards liberalization and opening of markets for logistics-related services, the views of the private sector and other actors can be grouped into four buckets:
1. Use the advantages of modern information technology to improve transparency and communication around logistics operations so that both firms and governments can access the information necessary to get greater visibility over supply-chains, bottlenecks or choke points, as well as changes in demand and supply.
2. Adopt a holistic approach towards policies across all logistic-related service activities since they are interlinked, both within and across borders and their contribution to supply chain connectivity can only be as strong as the weakest link.
3. Agree on a common set of guidelines or principles (albeit non-binding “a la APEC style”) for the treatment of logistics-related services during a crisis such as the Covid-19 pandemic. Such guidelines would ensure that autonomous trade restrictive measures undertaken in crisis will be targeted, proportionate, transparent, and temporary. They may also cover trade facilitation measures, non-tariff measures, transparency and information sharing, movements of providers of essential services.
4. Support pandemic recovery by removing as many sources of uncertainty, instability and volatility as possible including through increasing public sector readiness to deal with crises (for example, securing access to essential goods by building stock or through the international arrangements on shared supply).
Where to next?
What we can say with certainty is that the future shape, routes and design of supply chains will be different. We do not know exactly in what ways or to what extent this will be the case, except for the certainty of a greater digital content in production, supply and consumption of goods and services, which will also apply to logistics. TradeExperettes’ Ten Quick Wins for Digital Trade have outlined many ways in which digitalization can make trade more efficient, inclusive and greener. The application of digitized processes to port operations, warehousing, distribution and transport across the APEC and other regions will lead to smoother and more timely trade flows of essential and other goods. To manage the process of adaptation, more and different information will be needed, both from public and privately owned sources. Governments will need to better understand the effectiveness of their policies and the link between policy and performance in the logistics area.
Unfortunately, there is currently a big void in terms of availability of data on logistics operations, particularly performance by sector. While there is a relatively comprehensive tracking of policy reforms in the 10 logistics-related services via the APEC index (based on the OECD Services Trade Restrictiveness Index, STRI), there are still no well-defined indicators of performance of these services, apart from some anecdotal and mostly fragmented datasets. In our view, the best proxy to fill this important gap would be to have some sense of the linkage between policy change and performance for each logistics service sector (for example, cargo handling) through examining its impact on the trade costs of moving goods. This would allow for the modelling of scenarios of possible changes in regulation related to these services and the estimation of the impact on trade costs and the ability to move goods more efficiently or not.
In the meantime, while waiting for the generation of more detailed data on these services, APEC is moving ahead to deepen its work on logistics. It will continue to build in 2023 on the progress made in reaching a common definition of these activities in 2022 and hopefully move to adopt a set of non-binding policy guidelines for APEC governments to follow towards logistics services in time of a crisis. If successful, these policy advances could generate similar momentum in other regions, as well as at the WTO where a common understanding of logistics services and how to treat them in times of crisis would be beneficial to an even larger set of countries. Because the next crisis will certainly come and we must be better prepared.
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