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

ERTIFICATION
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, accurate and
are collected from the confident sources of information.
The Author
Nguyen Kim Ngan

ACKNOWLEDGMENTS
In order to complete this thesis, besides the efforts of myself, I have
received the help, encouragement and guidance of my teachers, friends,
colleagues and family throughout the course as well as in the period of the thesis
research.
Special thanks to Assoc. Prof. Ph.D. Tu Thuy Anh, who was
dedicated to guide and help me in the process of researching and writing this
thesis.
I am grateful to the teachers in the Faculty of Postgraduate Education of
Foreign Trade University for interesting and useful lectures, for the
enthusiastic transmission of the valuable knowledge and for the best conditions
offering in the process of the course.
I would like to express sincere thanks to my colleagues working on
Commercial Department who support me with a lot of data and information
related to logistics costs of exporting shipments.
I am grateful to my family for their encouragement and supports during
the course and the period of thesis research.
This thesis studies on the transaction costs of exporting firms is not a new
but a very complicated issues required various knowledge, skills and practical
experiences. Thus, the thesis has the inevitable shortcomings and limitation. I
look forward to receiving valuable comments for improving the thesis.
Sincerely,
Hanoi, 2019
The Author
Nguyen Kim Ngan

TABLE OF CONTENTS
ERTIFICATION.......................................................................................................5
ACKNOWLEDGMENTS ........................................................................................6
TABLE OF CONTENTS..........................................................................................7
LIST OF ABBREVIATIONS...................................................................................9
LIST OF TABLES...................................................................................................10
LIST OF FIGURES.................................................................................................11
ABTRACT ...............................................................................................................12
INTRODUCTION...................................................................................................13
I. The important of the research........................................................................13
II. Object and scope of research........................................................................16
III. Research methods.........................................................................................16
IV. Expected results............................................................................................16
V. Structure of the research...............................................................................17
CHAPTER 1: THEORETICAL BACKGROUND OF TRANSACTION
COSTS......................................................................................................................18
1.1. Definition of transaction costs ....................................................................18
1.1.1 Definition of transaction costs according to economits’s viewpoint. ......18
1.1.2 Definition of transaction cost in export....................................................21
1.2 Transaction cost classification in export.....................................................23
1.3 Elements impact on transaction costs in exporting growth......................31
1.3.1 Impact of trade facilitication on transaction costs movement.................32
1.3.2 Impact of government’s policies on transaction costs. ............................36
1.4 Measurement of transaction costs...............................................................40
1.5 How to evaluate transaction costs level in export......................................41
CHAPTER 2: TRANSACTION COSTS ENCOUNTERED BY VIETNAMESE
EXPORTING FIRMS.............................................................................................49
2.1 The transaction costs of exporting firms in Vietnam ................................49
2.1.1 Overview of exporting activites in Vietnam..............................................49
2.1.2. Current Status of transaction cost in Vietnam........................................53

2.2 Case study in Vietnamese exporting firm...................................................70
CHAPTER 3: RECOMMENDATIONS FOR LOWING TRANSACTION
COST ENCOUNTERED BY VIETNAMESE EXPORTING FIRMS..............78
3.1 Experiences from Singapore’s development ..............................................78
3.2 Recommendations for Vietnam’s reduction transaction costs in export.87
3.2.1 Recommendations for Vietnam’s reduction trade costs in export...........87
3.2.2 Implementing Trade facilitation Agreement. ...........................................89
3.2.3 The role of government in educating and communicating changes.......92
CONCLUSION........................................................................................................95
REFERENCES........................................................................................................96

LIST OF ABBREVIATIONS
ABBREVIATIONS MEANINGS
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 Development
PPP 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 TABLES
Table 1: Structure of transaction cost .......................................................................21
Table 2: Transaction cost classification....................................................................26
Table 3: Figures on importation and exportation of Vietnam (2005-2017) ..............52
Table 4: Descriptions of each indicator ....................................................................56
Table 5: Compare TFI of Vietnam between 2013 and 2017 ....................................60
Table 6: Logistics Performance Index 2018 in ASEAN members ...........................66
Table 7: Logistics cost of developed countries (Donald & Roger, 1998) ................67
Table 8: Estimated Vietnam's import and export cost ..............................................68
Table 9: Export details in Vietnamese company ......................................................72
Table 10: All expenses of Vietnamese export shipment...........................................73
Table 11: Major heading of exports shipment ..........................................................74
Table 12: Ratio of production and transaction cost ..................................................75
Table 13: Singapore’s LPI ranking across 2007-2016..............................................78
Table 14: Vietnam’s LPI ranking across 2007-2016 ................................................79
Table 15: Features and Benefits of Singapore’s TradeNet System ..........................85

LIST OF FIGURES
Figure 1: Internal and external transaction ...............................................................20
Figure 2: A particular source of trade costs is important (goods).............................27
Figure 3: Population living on less than USD 2 per day (2008-12)..........................29
and number of days needed to export .......................................................................29
Figure 4: Doing Business costs to export, USD per container, 2014 .......................30
Figure 5: Average number of days required to export by income group..................31
Figure 6: Types of trade costs in goods markets.......................................................37
Figure 7: Policies affecting trade costs in goods markets.........................................39
at all points in the supply chain.................................................................................39
Figure 8 - What makes up the time and cost to export to an oversea .......................46
Figure 9 - Trading across borders: time and cost to export and import....................47
Figure 10: Import – Export Growth ( 2011-2016)...................................................49
Figure 11: Key export commodities (2017)..............................................................50
Figure 12: Vietnam’s trade facilitation performance: OECD indicators..................59
Figure 13: Trade Facilitation Indicator of Vietnam in 2017.....................................60
Figure 14: Time and costs of Trading Across Borders .............................................62
Figure 15: Time and costs of Trading Across Borders in Vietnam ..........................63
Figure 16: Logistics Performance Scores, Vietnam..................................................65
Figure 17: Vietnam Logistics Performance Index 2007 – 2018...............................67
Figure 18: Overall potential trade cost reductions for...............................................69
ASEAN member countries (%).................................................................................69
Figure 19: Comparison of the trade declaration system before and after the
establishment of TradeNet ........................................................................................81
Figure 20: Factors contributing to the success of Singapore’s Logistics Industry ...83
Figure 21: Economies that offer regular training for customs clearance officials have
shorter customs clearance times than thoses that do not...........................................94

ABTRACT
In trade, transaction costs are components directly into the price of goods
and services and are increasingly focused and paid more attention. Today, the
economy in general and businesses in particular want to compete in the world
market, 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, thereby
increasing their commercial competitiveness.
This paper presents the current status of the transaction costs encountered by
Vietnamese exporting firms. From the collection, analysis shows that transaction
costs of Vietnam tend to decrease but remain high compared to other countries in
the region and the world. This is due to infrastructure traffic in Vietnam has not
yet caught up with the development progress of the logistics industry, transport
infrastructure system is not synchronous, connectivity is still limited between sea,
rail and road transport; lack of national and international logistics centers in key
economic areas to act as a focal point for goods distribution. The main transport
fees, surcharges and taxes constitute a barrier for the logistics industry to develop.
In addition, the policy of many ministries and transport trends makes cost cutting
more difficult… From these studies, the Thesis would like to provide solutions for
Vietnam to reduce transaction costs encountered by Vietnamese exporting firms.

INTRODUCTION
I. The important of the research
In modern economies transaction costs have become equally (and perhaps
more) important than production costs. This is quite a development considering that
early economic theory (e.g., the perfect market economy model) focused entirely on
production costs assuming that transaction costs did not exist. Implication for
economic research: It has become relatively more sensible to do research in
transaction cost dynamics rather than production cost dynamics. This is perhaps also
contributing to the surge of interest for research in corporate governance that clearly
has more to say about transaction cost dynamics rather than production cost
dynamics. You can’t manage costs effectively without taking into account the
transaction costs. Many economists like to divide costs incurred by a business into
two categories; transaction and production costs. Production costs include costs of
producing as well as distributing a good or service. Everything else is categorized
into 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-known
companies was out of our reach. On the other hand, they didn’t want to buy a
product from some less reputed company. This led to go for a refurbished colored
Doppler.
There were dozens of sellers all around the province. We were touchy about
the model, availability of spare parts and price of the product. Our searches cost us
spending on telephone calls, letters, emails, etc. Similarly, we had to spend a lot of
time 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 of
our deals. They become a detrimental factor in measuring the level of profits. The
profits 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 yielding
opportunities.
In a world without transaction costs but with perfect markets, the penetration
ofinternational markets would be a simple matter of production cost; thus,
comparative advantages would determine which producers penetrate international
markets and when.Yet, despite remarkable technological improvements relevant to
the costs of internationaltransacting, especially with respect to communications and
data storage, and considerablerelaxation of exchange controls and the like, the costs
of international transactions aregenerally far from negligible. In particular, from
around the world there is growingevidence that reforms designed to provide the
right economic environment for the localproduction of exportables and incentives
for exporting are insufficient in themselves togenerate rapid export growth
(Keesing, 1979; Morawetz, 1981; Dean, Desai and Riedel, 1994 and Greenaway
and Morrissey, 1993). In some respects, moreover, the transaction costs of
international marketing may even be increasing over time, preventing otherwise
beneficial transactions from taking place. Unless the high transaction costs in
international marketing 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. It
mainly contributes to GDP of each country, therefore, it has become imperative that
there should be a focus on not only increasing exports base but also improving their
export competitiveness in the world market. A key factor hindering export
competitiveness has been the high transaction cost involved in exports. Transaction
cost related to trade involves a host of regulatory requirements, procedures and
compliance measures; besides infrastructure-related cost- including transport cost to
bring 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 key
determinant of a country's competitiveness in the international market.
High transaction costs effectively nullify comparative advantage by rendering
exports uncompetitive. High transaction costs deny firms access to technology and
intermediate inputs, preventing their entry into, or movement up, global value
chains. High transaction costs also erode consumer welfare narrowing the range of
good and services on offer and pushing up prices. While transaction costs do not
alone explain the development pathways of economies, they are a major factor
explaining why some countries are unable to grow and diversify. The range of
policies that affect transaction costs is broad. Although transaction costs are
ubiquitous, they are not immutable. Action can, and is, being taken to reduce
transaction costs. Policy reforms are yielding positive impacts, although these
cannot 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 to
reduce transaction costs further and integrate countries more completely into the
global economy, but there are positive reasons to believe that developing countries
and their partners are taking this issue seriously. Normally, 95% the foreign trade
(in volume) of country passes through sea ports. The shipping lines provide
transportation service to importers and exporters from one country to another
country. The cargo handling cost and shipping charges determine the economical
viability of export goods. The transaction costs of the import-export shipment are
important factor in the international trade. Therefore, this thesis is important to
understand 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 in
Vietnamese 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 exporter
has to pay cargo handling cost and other charges to concerned service providers.
This high logistics cost impact adversely to business. Therefore, the object of
research is to analysis transaction cost in Vietnamese exporting firms in practice.
The objectives of the thesis are analysis the overview of transaction costs and
the important of transaction costs in trading growth in whole economy, particular in
exportation; the practice of transaction costs in Vietnam exporting firms and give
the 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 which
affect transaction cost in Vietnam trade, from analysis and synthesis, the thesis shall
show that the transaction costs are high for Vietnam exporting firms. From that, the
thesis shall make several recommendations for reduction of transaction costs in
Vietnamese exporting firms.
III. Research methods
The research is conducted based on the methods of collecting, analyzing and
synthesizing information, processing statistical data and evaluating actual situation
of Vietnam in comparison with that of other countries in the world. The thesis also
uses case study method to have a realistic view of the issues by generating the
experience of other countries in transaction cost and analyzing outstanding case in
Vietnamese firm.
IV. Expected results
The research is expected to make several contributions to theoretical and
practical 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 Vietnamese
firms.
V. Structure of the research
A part from the Introduction and the Conclusion, the research is divided into
three chapters as follows:
Chapter 1: Theoretical background of transaction costs
Chapter 2: Transaction costs encountered by Vietnamese exporting firms
Chapter 3: Recommendations for lowing the transaction costs encountered by
Vietnamese 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 different
periods. For example, John R. Commons (1931) came up with a generalized
concept about transaction before Coase’s literature “The Nature of the Firm” has
been published. According to Commons, transactions are just the transfer and obtain
of object future ownership between two persons, and the substance of transaction is
the ownership transfer, not the object itself moves from one to another. A
transaction occurs when a good or a service is transferred across a technologically
separable interface, 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 of buying or selling objects or interests among people; and to a
universal definition, all the activities among enterprises, persons, enterprise and
person can be named as transaction.
Ronald Coase (1937), the economist formulated the first ideas about
transaction costs more than 70 years ago, mentioned “Without the concept of
transaction costs, which is largely absent from current economic theory, it is my
contention 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 determining
policy” [Coase 1988a, p.6].
In economics aspect, transaction costs are as the fees paid by buyers, but not
received by sellers, or the fees paid by sellers, but not received by buyers. In finance
aspect, transaction costs refer to the premium above the current market price
required to attract additional sellers into the market.

According to econimists’s studies, defination of transaction costs are described
and developed through time. There are three economists have been rewarded the
Nobel Prize for Economics for their contribution to the theory of transaction costs
namely Ronald Coase, North, and Williamson.
Firstly, Ronald Coase described transaction costs as unavoidable costs of
doing business, “the cost of using the price mechanism” in “The Nature of the
Firm”. 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 explaining
the emergence of the firm within an exchange economy and also as a way of
understanding the particular structure and governance framework of firms in
different sectors and under different circumstances. He asked: why does a firm
emerge 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 freely
exchanged? If the answer is to do with the nature of entrepreneurialism (specifically
the ability of entrepreneurs to bring together factors of production which would not
easily come together through the market mechanism alone), then why is this type of
coordination achieved in some cases through entrepreneurialism and in other cases
through the price mechanism? Why was it that, in some agricultural systems, bread
would be made as a result of a series of exchanges between wheat farmers, millers
and bakers, whereas, in other systems, all these functions would be vertically
integrated within a single firm?
According to him, there are two main types of transaction costs, internal
transaction costs and external transaction costs, and firm size depends directly on
the nature of the transaction. External costs include the paid costs of getting the
information, the opportunity cost of time taken up in searching…; whereas internal
costs include the mental effort devoted to undertaking the search and sorting the
incoming information… The firms must make a comparison between internal and

external transaction costs and choose the lowest cost which enables it to increase
profits.
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 argued
that 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 are
lower than for exchange through the market, so that the firm size will grow. The
opposite, transaction costs for exchange within internal system are higher than for
exchange through the market, the firm will be downsized.
Douglass C. North, who are the most important and influential economist of
the late 20th
century, argues that institutions (include formal institutions such as
legal rules and regulations… and informal institutions such as mutual trust, the
commercial or mercantile skills of a nation) are key in the determination of
transaction costs. Institutions that make low transaction costs, of course, promote
economic growth.
Finally, Oliver Williamsion, he developed Coase’s study defines transaction
cost as the cost of running the economic system.
a
b
Cost
External
Internal

According to Alston and Gillespie’s approach, transaction costs fall into two
groups: firstly, production factors (physical and finance capital, human capital and
work intensity); secondly, the production process (pre-production, production and
post production). The following table illustrates the structure of transaction costs:
Table 1: Structure of transaction cost
Factors of
production
Production Process
Pre-production Production Post- production
Physical and
financial capital
Asset specialty
Abuse and agency
costs
Measurement of
output and contract
enforcement
Human capital
Information
constraints and
asset specialty
Coordination costs
Work intensity
Shirking and
contract
enforcement
Source: International Journal of Engineering and Management Sciences
The table above shows that (pre-production and post – production) factors are
those 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 transaction
costs borne by the firm. Moreover, without production processes firms need to deal
with 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 sold
directly determines your company’s revenues. Your firm’s market research should
include an evaluation of all variables that may affect the price range for your
product or service. If your company’s price is too high, the product or service will
not sell. If the price is too low, export activities may not be sufficiently profitable or
may actually create a net loss.

A company that has decided to export its products to a new market or to buy
from a new supplier in a different country cannot take for granted that the potential
transaction 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 if
the cost of entering a market is too high, the competition is grueling, or the price the
company 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 costs
associated with the delivery of the goods to the country of destination), the
packaging and the associated expenses.
An exporter must ensure acceptable and timely returns from international
business activities in relationship to the associated costs and risks.
A transaction that cannot be completed at a profit, or one that is not
compatible 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 the
company. For an exporter, the decision to enter a new market may stem from a
marketing plan based on solid market-research or may be the result of a reactive
response to an unsolicited request. In some sectors, notably knowledge-based
industries, exporting may be a competitive imperative undertaken on the first day of
operations.
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 important
aspect of your company’s pricing analysis. There are different non-price factors that
are not related with physical process of production of goods such as administrative
processes, government rules and regulations, infrastructural bottlenecks etc... for
which an exporter employs its own resources either in terms of time in terms of

money before the actual shipments of export items. The multiplicity of rules and
regulations, rule-bound administrative procedures and practices, comprehensive
infrastructural facilities and appropriate institutional support adversely affect the
export promotion efforts. These non-price factors, often referred to as “transaction
costs”, slow down the motivation given to export growth even when other trade
policy issues have been addressed by the Government. In the internationally
competitive world, export promotion is highly price-sensitive and therefore any
addition to it by way of transaction costs has to be addressed by the trade policy
reforms.
These costs usually begin with an individual firm’s imports of inputs required
for exports and stretch till the export remittances are received through the banking
channel. Comprehensive infrastructure is the one of principal sources of the
transaction costs for most export industries in developing countries and
underdeveloped countries. The basic problem with transaction costs is that some of
the factors responsible for such costs are difficult to quantify and warrant more
qualitative than quantitative treatment.
The principal objective of transaction costs analysis is to optimise all such
costs, as beyond a critical level they tend to decrease the volume of transactions.
Increasing costs of transaction costs tend to adversely affect the efficiency of
transaction, partly in terms of resources and partly in terms of suppression of
exchanges.
In the field of importation and exportation, transaction costs arise out of strict
rules and regulations, complex administrative personel. Therefore, in a regime
conducive to exports, efforts need to be taken to reduce the complexities involved in
export transaction processes along with price-related measures, such efforts provide
incentive 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 any
given foreign market (quantities and qualities desired and the prices prevailing of

each different quality), and of course reciprocal costs for agents in foreign countries.
Second, there are the costs of information about government regulations and other
policies in both the foreign market and the home market (including exchange rate
policy, exchange restrictions, tariff and non-tariff barriers, and health and
environmental regulations). Because implementation of these rules and actual
practice can vary substantially from what the laws or rules say, knowledge of the
official documents is far from sufficient. Third are the costs to each potential party
of identifying appropriate trading partners in these markets. Fourth, there are the
costs of negotiating, writing and enforcing contracts between the parties,
includingthose associated with the resolution of disputes. Fifth, because of the
generally long between the placement of an export order and its receipt and final
payment, there are thecosts of financing the transaction and of bearing the risks of
default at subsequent stages.
Among the factors tending to make these costs much higher than those with
respect to domestic transactions are: language, cultural and taste differences,
differences in laws and the way disputes are resolved, differences in income and
information sources, differences in the way markets operate and in the extent and
character of competition, and difficulties of enforcing contracts across countries,
and hence higher risks of payment default. These transaction costs are not merely
static; rather they change substantially overtime as circumstances change. For
example, they may be expected to increase with changes in the identities of the
trading agents, in the environmental conditions which surround them, and in the
character of the respective markets. Even if an exporter has all the right information
about 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 future
conditions in that market. Indeed, for any individual country, over time there are
two important trends tending to raise transaction costs for developing country
exporters: (1) the growing relative importance in developing country exports of
quality-differentiated and increasingly specialized productsfor which it is difficult to
distinguish between contract fulfillment and non-fulfillment (deliberate or

otherwise), and (2) the growing use in developed countries (at both the national and
subnational levels) of various non-tariff barriers to trade, including environmental
regulations, which are subject to more sudden changes over time than tariff barriers.
Another such factor is the asymmetry of information that characterizes many of the
relationships, actual or potential, among the different agents. As is well-known,
asymmetries of information give rise to problems of adverse selection and moral
hazard, and such asymmetries are likely to arise several different components of
transaction costs at the same time.
For example, at the level of the rules and regulations, countries may want the
conditions to look different than they really are, or be unwilling to enforce existing
laws. Likewise, the agents charged with the responsibility of implementing the rules
may have little incentive to do so, and indeed may have the incentive to leave the
interpretation of these rules sufficiently ambiguous as to generate rents for
themselves. Even more relevant and important, each potential trading partner has
better information about his own characteristics and propensities (appropriate to
defining the terms of the contract) than the other party, inducing adverse self-
selection for any given terms. While in principle contracts could be written in
sufficient detail so as to be complete and self-enforcing, in practice because the
costs of doing so are excessive, actual contracts are necessarily incomplete and
hence vulnerable to opportunistic behavior. Moreover, because of the lags between
the time of writing the contract and that of delivering on it, and then again before
payment is received, each party may have the incentive to default insome way on
the terms of the contract (i.e., to practice moral hazard or opportunistic behavior
relative to the other party). These problems are often further compounded by the
fact that many of the information costs and enforcement costs are subject to
economies of scale, economies of scope and externalities. The externalities imply
that the incentives for investing in such information and in adequate enforcement
mechanisms 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 imply
that, although there may well be a role forinter mediaries specializing in the

production of these relevant services, competitive markets for such services may not
exist. Instead, these services may be monopolistically supplied, but thereby creating
the basis for government regulation and intervention.
Transaction costs can be classified into investment related (like taxes, delay
cost), trade costs, and opportunity cost. Trade Cost is the largest subset of
transaction costs, so this thesis shall be focused on analysing trade cost in exporting
firms.
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 freight
costs and time costs), policy barriers (tariffs and non-tariff barriers), information
costs, contract enforcement costs, costs associated with the use of different
currencies, legal and regulatory costs and local distribution costs (wholesale and
retail)” (Anderson and Van Wincoop, 2004). Trading costs interact with economic
Transaction Costs
Investment Costs Trading Costs Opportunity Cost
- Taxes
- Delay Cost
- Commission
- Fees
- Rebates
- Spreads
- Price Appreciation
- Market Impact
- Timing Risk
- Opportunity Cost

fundamentals like technology and factor endowments (labour and capital) to
produce 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 economic
development.
The OECD-WTO survey provides some information on the types of trade
costs that are most important in partner countries (Figure 2). The most commonly
identified 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 of
trade facilitation, aid for trade is built into the architectureof the new WTO
Agreement, so there is a strong chance that progress in this area will be possible
with a combination of political will in partner countries and mobilisation of
resources in donor countries. Transport infrastructure is a key component of
traditional aid-for-trade spending. Finally, non-tariff measures like product
standards are frequently the subject of technical assistance programmes run by
donor agencies – either governmental or multilateral organisations – and have real
potential 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 relatively
small part of the total level of trade costs in most countries. Non-tariff measures are
also important, including product standards, as well as other types of regulation that
make it more costly to do business abroad than at home. The business environment
and 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 has
expanded 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% of
world services exports in 1990 to 20% in 2011. As an input into other economic
activities, services are a direct determinant of country’s competitiveness. Services
such as telecommunications, energy, transport and business services are critical
inputs into the production of goods and other services and influence productivity
and competitiveness. Opening up to services imports and Foreign Direct Investment
(FDI) can be an effective mechanism to increase the availability, affordability and
quality of these services, which are crucial for export diversification, economic
growth and poverty reduction. In addition, services can offer dynamic new
opportunities for exports (World Bank, 2015 monitoring exercise).
Services trade also involves transaction costs. Where pure cross-border trade is
possible – for instance, via the internet – issues such as transport costs do not arise.
Nonetheless, there may be issues of regulation or infrastructure investment that
generate friction. Trade in services is governed entirely by domestic regulation. The
regulatory framework governing services trade includes a vast range of domestic
laws and regulations in areas that often include land ownership, establishment of
foreign companies and migration policies. They exist in sectors as diverse as
banking, 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 overseas
markets. For those living at the base of the pyramid, often in extreme poverty, high
prices disproportionately impacts on their consumer welfare. Not surprisingly,
lower trade costs are typically associated with net poverty reductions even though
the distributional impact of trade costs differs across countries. This positive
relationship between trade costs and poverty is illustrated in Figure 3. Developing
countries with higher trade costs – measured by the number of days required to
export in 2005 – tend to have a higher share of the population living on less than
USD 2 per day.
High trade costs price some country regions, countries and companies out of
export markets, thereby limiting their economic development opportunities. Trade
costs 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 to

grow 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 is
essential 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 – the
real 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: as
firms gain access to new goods, they combine them in different ways to make new
products. Indigenous technology development or adaptation is at the core of
economic development over the medium to long term and harnessing the process is
likely an important part of moving up global value chains.High trade costs are a
considerable burden on the poor, undermining economic welfare by pushing up
consumer prices and keeping poor producers out of global markets. Figure 5 below
highlights the average number of days to import. Time is an important parameter for
trade costs. Against this background, it is important to note what happens when
trade costs for a particular country stay at an unnecessarily high level while those of
its partners fall. The country will be less able to take advantage of specialisation by
comparative advantage and thus will feel the gains from trade less fully than its
partners. This point stands for countries that remain relatively marginalised from the
global trading system as a result of high trade costs, for example, landlocked
developing 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 within
countries. 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 to
clear when they try to enter international markets. Sometimes these barriers keep
them 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 to grow and develop, and there are complex interactions among them. But
trade costs stand 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 will
tend to fall as the number of transactions increases. That benefit is related to
differences in production costs. Naturally, the greatest benefits, or production cost
differences should be exploited first, and smaller benefits only later additional
transactions.

Transaction costs can be expected to depend on two main factors: trade
development, 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 economic
history of Germany, example of a relationship between transaction cost and
economic growth. Germany experienced dynamic economic growth around the
middle of the 19th
century. There was physical capital investment in railways, and
human capital investment in education, and improvements in production
technologies, as conventional theory would expect, but also thedevelopment of a
customs union, the Zollverein, from 1818 onwards. As Seidel (1971) notes, at the
end of 18th
century, in the territory of the previous German-speaking Holy Roman
Empire, one could experience about 1800 customs barriers (about 1830 trade
barriers even within Prussia, including the division of Prussia into two separate
parts). Travelling from East Prussia Cologne to West Prussia was associated with
custom borders checks and taxing 18 times. Transportation of goods was slowed
down, and inspections off cargo and custom duties increased final prices. The
Zollverein customs union reduced all these barriers to intra-German trade. The
number of transactions increased, bringing prosperity to all engaged in production
and exchange.
There is also the post-war phenomenon of European Union and attempts
towards a common market for goods and services in the 1990s, with reductions of
transaction costs for the 27 EU member states. Transactions cost can be reduced by
imposing common technical standards for production and by reducing import and
expenditure tax rates, and other barriers to trade within the Union.
Therefore, a reduction in transaction costs or a reduction in resource use per
transaction leads to increase economic growth and economic welfare.
Traders from different Member States of the WTO have long complained that
trade is often subject to excessive and overly-complex regulations on the importing
and exporting of goods. Moreover, the regulations also differ from country to
country (or from Union to Union). Especially for small and medium-sized

companies, this becomes a costly matter, but even for large companies this often
means a heavy administrative burden.
According to one study of Eximbank, the procedural complexities assume to
have 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 other
related parameters concerning the factors list above.
After the necessary ratifications were secured, the Trade Facilitation
Agreement (TFA), a multilateral treaty that was concluded within the World Trade
Organization (WTO), entered into force this past February 22nd. The TFA, which is
designed to allow goods to be imported and exported more quickly and easily, will
now have to be implemented by the various Member States of the WTO, including
every country of the European Union. Because the European Union is already a
customs union, this means concretely that positive consequences will be noticed
primarily 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 the
possibility for goods to be cleared even before all of the customs obligations have
been satisfied. In this way, urgent shipments to other WTO Member States, for
example shipments via air transport or shipments of perishable goods, will no
longer incur 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 their
export and import procedures – and the accompanying costs – in this specific
country and/or that specific Union, while also offering traders a chance to ask
questions 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 of
the TFA immediately, the developing countries are receiving more time to adopt the
provisions. Moreover, the latter group of countries will not only be financially
assisted 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 various
developing 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 that
transaction 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 by
2030.
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, the
average number of days spent by goods in import customs is 5.5 for landlocked
developing countries, and 3.6 for non-landlocked developing countries. The data
also indicates that for over 50 percent of non-landlocked developing countries,
goods spend on average 2 days or less in customs. In landlocked developing
countries, 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 also
holds when the comparison is between landlocked and non-landlocked LDCs.
For exports, the comparisons again reveal that the average number of days
spent 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 suggests
that exporting firms relying on imported inputs in landlocked LDCs face, on
average, 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 all
parcel shipments from the Universal Postal Union (UPU) reported in figure 1
provide an additional source of comparison. The figure shows the distribution of the
time in transit (defined as time between sorting facilities in origin and destination
countries) for packages up to 30 kilograms from a large sample of shipment
covering many countries. Average days spent by parcels in transit are 7.0 for high
income countries, 13.0 for LDCs and 9.7 for other developing countries. Using the
same estimate of 1.3 percent additional costs per extra day in transit would imply
that LDCs face, on average, an extra 4.2 percent trade cost for parcel shipments
compared to other developing countries.
Since the signing of the TFA in December 2013, the OECD has produced and
released a series of 11 Trade Facilitation Indicators (TFI) for 187 countries,
following closely the targets highlighted by the TFA. Currently, this constitutes the
most detailed catalogue of the policies and procedures used in border management
agencies around the world, and arguably the best we have to assess more closely the
trade cost handicaps faced across different group of countries. Comparing LDCs
with non-LDCs and landlocked with non-landlocked countries reveals that the
values for the LDC group are again systematically lower for each indicator than for
the non-LDC group, though not always significantly so. For some important
categories like advance rulings, the differences between the groups is large, a

pattern that is also apparent when comparing landlocked with non-landlocked
countries.
We have estimated, in another article, the reduction in trade costs from
improvements 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 Doing
Business data. Our results suggest that a successful implementation of the TFA
could lead to a percentage reduction in trade costs of 2.4 percent for LDCs, and 4.5
percent for landlocked LDCs. These are not insignificant estimates, and although
they only relate to time in customs for imports, several of the gains would also
apply 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 be
loosely classified under two headings: locational factors and policy-related factors.
Locational factors are exogenous: each country must take them as a given and
cannot 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 and
historical and commercial links with other countries.
Although countries must take geography and history as given, that does not
mean that the trade costs related to those factors are completely impervious to
government action. Geographical remoteness, for example, tends to increase trade
costs substantially and poses particular problems that governments need to work
hard to solve.
Policy makers can limit the effect of remoteness by developing the hard and
soft infrastructure needed to build an economy that is strongly connected to global
trade, transport and production networks. High country connectivity based on
appropriate policies can reduce trade costs and limit economic remoteness, even
though geographical remoteness in the strict sense cannot be changed.

Figure 6: Types of trade costs in goods markets
Source: Shepherd 2015.
For example, policy measures affecting trade costs come in three types: at the
border, between borders and behind the border. (Figure 6)
Recognition of the importance of trade costs needs to be distinguished from
action by governments to reduce trade costs. For example, while 87% of the 62
developing and least-developed country respondents to the 2015 monitoring
exercise recognised the importance of trade costs, only 62% of respondents
indicated that trade costs were addressed in their national development strategies,
60% in their national trade strategies and 53% in sector-specific strategies.
Interestingly, the percentage is less for infrastructure strategy (35%), although this
sector is one that has considerable potential to influence trade costs and
performance.The picture at the regional level is similar: 80% of respondents
indicate that the regional development strategy addresses trade costs, 60% in the
case of the regional infrastructure and trade strategies and 50% for sector- and
corridor-specific strategies. While there is clear recognition of the importance of
trade costs, there are difficulties capturing this insight at a policy level, both
nationally and regionally. This is especially true on the side of donor partners.
One set of border policies that affect trade costs in a very direct way relates to
trade facilitation, i.e. customs and other border procedures. When those procedures
are 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 for
moving forward in this area. The OECD has estimated full implementation of the
new WTO agreement could reduce developing countries’ trade costs by 14% for
low income countries, 15% for lower middle income countries and 13% for upper
middle 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, at
Attari-Wagah. In 2012-13, 54% of India’s imports from Pakistan and 25% of
India’s total exports to Pakistan passed through this crossing, even though only a
restricted list of products is allowed to be traded. Historically, this border crossing
has been well known as a chokepoint for traders. However, recent trade facilitation
measures appear to have improved performance somewhat. India has introduced an
Integrated Check Post, with a dedicated cargo building, an export warehouse and
truck parking facilities. Similar facilities are being developed in Pakistan. Border
crossing hours have been increased from eight hours per day to 12, and truck
capacity 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 goods
markets, namely customs and other border procedures. However, many other
policies are also at play. As already mentioned, transport plays a key role. On the
one hand, goods have to be moved internationally, so policies governing the
development and operation of maritime and air gateways have the potential to affect
trade costs. Similarly, policies governing air and maritime transport are also
relevant. Countries that sign liberal bilateral air services agreements can expect to
see their trade costs go down for goods transported by air, such as parts and
components that circulate through global value chains (GVCs) or horticultural
products and new agricultural productions. Some countries limit competition in
some aspects of their maritime services sectors, such as cabotage (movement
between 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: Moïsé and Le Bris (2013)
So far, the analysis has focused on policies at and between borders. But
behind-the-border policies are also relevant (e.g. Moïsé and Le Bris, 2013).
Wholesale and retail distribution, as well as transport and logistics, determine the
ability of producers to get their goods to market in a cost-effective way. Countries
with poorly performing distribution and logistics networks tend to suffer from high
trade costs and can become insulated from world markets. In some countries in
West Africa, for example, completion of national markets – not just the interface
between national and international markets – is an issue.
Conclusion, trade costs come in a variety of different forms. However, each
country 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 micro
aspect, on the macro aspect it refers measuring the costs of economics system
operation or institution transformation, on the micro aspect, and it refers measuring
the costs of some industry or field executing a transaction (Zhang 2010). According
to Steven N.S. Cheung (1998), the measurement includes accurate measuring and
margin contrast analysis. The former means adopting statistics data or model to
calculating 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 is
higher in Situation A than in Situation B, and that different individuals consistently
specify the same ranking whenever the two situations are observed, it would follow
that transaction costs are measurable, at least at the margin (Cheung, 1998).
On the macro aspect, most of the works on macro aspect are concentrated on
the measuring economy transaction costs and studying interaction between
transaction costs and economic growth. The methods are widely adopted. One is
directly measuring, just as Wallis &North have done in 1986. They partition the
nation economic sections. The other is to build measuring model referred to Wallis
&North’s direct measuring method. In addition, researches based on the view of
institution evolution also constitute a potential direction of studying. There are three
measurements 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.

This thesis applies measurement of data statistic method. Many scholars
directly use government statistics data or field survey statistics to conduct research
although this way needed to cost a large number of manpower, material resources
and time, but it contributes to remarkable and persuasive achievement. Government
institutions documents researching can be regarded as a means of measuring public
policy transaction costs. Katherine Falconer & Caroline Saunders (2002) have
studied communication, documents, contract agreement, telephone, conference, web
access and other information from the government departments. They have
estimated the transaction costs of agricultural environment management agreement
negotiation process. Kuperan, Nik, Robert, Genio & Salamance (2008) have studied
the transaction costs of the Philippines San Salvador Island under two fishing
models common management and centralized management, according to the data
from 1988-1996.
1.5 How to evaluate transaction costs level in export
Transaction costs are not only related to distance, transportation costs or
tariffs, but include many other factors, some of them not directly measurable, such
as uncertainty. Those transaction costs, which result from a mix of policy decisions
(tariffs and non-tariff measures, customs and other cross-border administrative
requirements) and structural conditions (distance from main markets, situation of
the transport infrastructure) act as a nominal protection by shielding domestic
producers from the competitions of imported products. But they also increase
production costs, and reducetheir competitiveness.
Among all cross-border transaction costs, nominal tariffs are certainly the
most visible. Tariff duties increase the domestic price of tradable goods by adding a
tax to their international or free market price. When duties are specific (in particular
for agricultural products), analysts compute ad-valorem equivalents. When it comes
to non-tariff trade costs, the situation is more complex. International economics has
overwhelmingly relied on Samuelson's (1954) hypothesis that they are proportional
to value and distance (ad-valorem “iceberg transport cost”). Yet this remains an
over-simplification.

For example, transportation costs depend on (i) the nature of the good (e.g.,
perishable or not; bulky or not, etc.) (ii) the distance between producers and
consumers and (iii) the mode of transport. Besides freight costs, Lewis (1994)
identifies various additional factors contributing to logistics costs, among them:
interest charges on goods awaiting shipment, on goods in transit and on goods held
as safety stock; loss, damage or decay of goods between manufacture and sale.
Because tariffs have become a less frequent barrier to trade, the contribution of
transportation to total trade costs —shipping plus tariffs—has become not only
more evident, but also relatively more important. Hummels (2007) records that
median transport expenditures were half as much as tariff duties for U.S. imports in
1958, equal to tariff duties in 1965 and three times higher than aggregate tariff
duties paid in 2004.
There are several ways for estimating trade costs (for a review, see Fortanier
and Miao, 2016). Instead of a direct measure of trade margin, such as the FOB/CIF
difference, we opted for an indirect estimate made on trade in value-added data
taken from Duval, Saggu and Utoktham (2015). The non-tariff trade costs by Duval
et al. are derived from an application of the “Gravity Model” on the OECD-WTO
TiVAdatabase. Those trade costs have a monetary dimension (e.g., transportation,
insurance and other fees) but also a more subjective dimension: information costs;
non-monetary barriers (regulation, licensing, etc.); consumer taste differences;
insecure contracts and weakness in trade governance leading to uncertainty. Trade
costs measured through the indirect gravity model approach have two main
components. The first one is mainly bilateral. It reflects the geographicaland
economic separation between the exporter and the importerand covers the
geographical distance, freight and insurance costs, but also the trade
friction/facilitation effect of features such as language, common history, common
border and/or regional trade agreement participation. The second component of
trade costs is proper to the exporter or the importer, irrespective of the bilateral trade
aspects. They represent theadministrative and economic costs of crossing the border
either at export or at import stage. These costs are often referred as

border“thickness” (G-20, 2016) and include tariffsand nontariff measures, logistic
and trade facilitation performances at the ports of origin or destination, but also
trade policy uncertaintywhich may increase the perceived cost of doing business.
In terms of trade facilitation, according to Wilson et al. (2005) define trade
facilitation using four indicators: port efficiency, customs, regulations and use of e-
commerce, analysing their statistical significance with a gravity model for a sample
of 75 countries. However, other studies have used one specific indicator to estimate
trade facilitation and ascertain its impact on exports (UNDP, 2001; OECD, 2003;
Dennis, 2006; Decreux and Fontagne, 2006; Behar and Manners, 2008).
 The Logistic Performance Index (LPI)
The LPI is built on the basis of a worldwide survey carried out on companies
responsible for the transport of goods and for the facilitation of trade globally.
Specifically, it was developed with the assistance of over 800 professionals
involved across the different areas of the sector’s lines of activity1
. Each respondent
to the survey was asked for data pertaining to the eight countries they most traded
with at international level, and over 5,000 assessments were obtained for each
country.
The aggregate index is calculated by analysing six main components, being the
indicators the following: customs, infrastructure, international shipments,
competence, tracking and timeliness.2
. None of these independently guarantee a
good level of logistics performance, and their inclusion is conditioned to empirical
studies and extensive interviews carried out with specialists on international freight
transport. Each component is defined as follows:
 Customs: measures the efficiency and effectiveness of the customs
despatch procedure (speed, simplicity and predictability of customs agencies). All
of this is configured through a series of administrative tasks that allow the existing
Customs: measures the efficiency and effectiveness of the customs despatch
procedure (speed, simplicity and predictability of customs agencies). All of this is
1
The questionnaire is available at www.worldbank.org/lpi
2
The LPI published in 2010 and 2012 only take six indicators into consideration (they exclude the domestic
logistics costs included in 2007.)

configured through a series of administrative tasks that allow the existing legislation
on international trade to be implemented and taxes on the import/export of goods
and services to be collected.
 Infrastructure: measures the quality of the country’s transport and
telecommunications infrastructure. It is related to the procedure used for moving the
goods to the final consumer, and is not totally controlled by companies due to
external factors. However, it is important to measure how organizations cope with
the available facilities, being either an advantage or an obstacle that prevents them
from being competitive.
 International shipments: measures how easy it is to arrange shipments at
competitive prices.
 Logistics quality and competence: measures the competence and quality of
logistics services. It shows how certain parties within the organizational structure
behave, representing the quality of service to the customer and optimizing the
relationship between organizations and consumers.
 Tracking and tracing: measures the tracking and tracing of shipments. It is
important to identify the exact location and the route of each consignment up to its
delivery to the end customer. All parties in the good’s supply chain are involved in
this component, and consequently traceability is the result of the activity of the
sector as a whole.
 Timeliness: measures the punctuality of shipment delivery times. This is an
important factor for consideration, because with the existing high level of
competition, failure to comply with delivery schedules is unacceptable. This has
influenced the need for increasingly sophisticated computerization processes.
These components cover the various areas that define LPI and it has been
proved that they have a greater impact than distance and transport costs (Korinek
and Sourdin, 2011). Specifically, they include elements of essential logistical value,
such as the transparency of processes and their quality, as well as the predictability
and reliability of services.

The indicators have been added and properly weighted, receiving a score of 1
to 5 where the higher value represents better logistics. In practice, the LPI usually
sits between the maximum of 4.2 in Singapore to the low of 1.2 corresponding to
Afghanistan in 2005. The countries that occupy the top positions have large
distribution platforms and industries specialised in logistics services, which tend to
benefit from economies of scale, and are the source of major technological
innovations.
 Trading Across Border Indicator ( TAB)
An alternative trade and transport facilitation index used was the Trading
Across Borders (TAB) indicator, produced by the World Bank as part of its "Doing
Business" project. This indicator records the time and cost associated with the
logistical process of exporting and importinggoods and is based on the time and cost
(excluding tariffs) associated with three sets of procedures—documentary
compliance, border compliance and domestic transport—within the overall process
of exporting or importing a shipment of goods.
Doing Business records the time and cost associated with the logistical process
of exporting and importing goods. Doing Business measures the time and cost
(excluding tariffs) associated with three sets of procedures—documentary
compliance, border compliance and domestic transport—within the overall process
of exporting or importing a shipment of goods. Figure 1, using the example of
Brazil (as exporter) and China (as importer), shows the process of exporting a
shipment from a warehouse in the origin economy to a warehouse in an overseas
trading partner through a port. Figure 8, using the example of Kenya (as exporter)
and Uganda (as importer), shows the process of exporting a shipment from a
warehouse in the origin economy to a warehouse in a regional trading partner
through a land border.

Figure 8 - What makes up the time and cost to export to an oversea
Source: Doing Business database
The ranking of economies on the ease of trading across borders is determined
by sorting their scores for trading across borders. These scores are the simple
average of the scores for the time and cost for documentary compliance and border
compliance to export and import (Figure 9).
Although Doing Business collects and publishes data on the time and cost for
domestic transport, it does not use these data in calculating the score for trading
across borders or the ranking on the ease of trading across borders. The main reason
for this is that the time and cost for domestic transport are affected by many external
factors such as the geography and topography of the transit territory, road capacity
and general infrastructure, proximity to the nearest port or border, and the location
of warehouses where the traded goods are stored and so are not directly influenced
by an economy’s trade policies and reforms.

Figure 9 - Trading across borders: time and cost to export and import
Source: Doing Business
The data on trading across borders are gathered through a questionnaire
administered to local freight forwarders, customs brokers, port authorities and
traders.
If an economy has no formal, large-scale, private sector cross-border trade
taking place as a result of government restrictions, armed conflict or a natural
disaster, it is considered a “no practice” economy. A “no practice” economy
receives a score of 0 for all the trading across borders indicators.
 Other indicators
The Organization for Economic Cooperation and Development (OECD) has
developed Trade Facilitation Indicators (TFIs), which cover the full spectrum of
Customs' and other border procedures that are addressed by the World Trade
Organization (WTO)’s Agreement on Trade Facilitation (TFA). One of the
objectives of the TFIs is to inform countries of ‘the state of implementation of
various policy areas and measures’ included in the TFA, thereby allowing them ‘to
monitor their progress since 2012 and to make comparisons with other countries or

groups of countries of interest’3
. To date, 133 countries have been assessed across
11 procedural categories: information availability; consultations; advance rulings;
appeal procedures; fees and charges; documentation requirements; automation of
border procedures; streamlining of border processes; domestic border agency co-
operation; cross-border agency co-operation; governance and impartiality4
.
The World Economic Forum’s Enabling Trade Index (ETI), the 2016 edition
of which covers 136 economies collectively accounting for more than 98 percent of
global trade, ‘assesses the extent to which economies have in place institutions,
policies, infrastructures and services facilitating the free flow of goods over borders
and to their destination’. The ETI is made up of a substantial number of indicators
measuring different trade-enabling factors, which are organized into 4 different sub-
indexes: market access; border administration; infrastructure; and operating
environment.5
For ‘border administration’ which is the most pertinent sub-index, the
following indicators are provided (13 in total): Customs services index (1 indicator);
efficiency of the clearancem process (1); border compliance: time and cost to
export/import (4); documentary compliance: time and cost to export/import (4);
irregular payments and bribes: imports/exports (1); time predictability of import
procedures (1); and Customs transparency index (1)6
.
As such, the ETI has incorporated the Trading across Borders indicators which
were originally used for Doing Business, with a view to revealing the full extent of
the trade facilitation efforts for each of the countries concerned.
3
http://www.oecd.org/tad/facilitation/TFIs-overview-available-tools-september-2015.pdf.
4
ESCAP-OECD (2017), 18.
5
WEF-GATF (2016), 13-15.
6
ESCAP-OECD (2017), 36.

CHAPTER 2: TRANSACTION COSTS ENCOUNTERED BY
VIETNAMESE EXPORTING FIRMS
2.1 The transaction costs of exporting firms in Vietnam
2.1.1 Overview of exporting activites in Vietnam
Vietnam has one of the fastest-growing economies in Southeast Asia, and has
prioritized becoming a developed nation by 2020. Vietnam’s GDP per capita has
increased by 350% since 1991, second only to China, and boasts the fastest-growing
middle-class in South Asia.
Figure 10: Import – Export Growth ( 2011-2016)
(Source: Vietnam trade statistics)
As of 2017, Vietnam is the largest ASEAN supplier to the U.S. with a net
export value of US$48.43 billion. In fact, Vietnam is likely to become the wealthiest
Southeast Asian country in terms of trade. Additional statistics indicate that bilateral
trade with the U.S. will surge to US$57 billion by 2020, cementing Vietnam’s
prominence as a valuable hub for foreign investment.

Figure 11: Key export commodities (2017)
( Source: Vietnam trade statistics)
Textiles and Garments
Textiles consistently rank among Vietnam’s leading export industries, with
over 6000 textiles and garments manufacturing companies, employing upwards of
2.5 million workers. The growth of the garment industry has been impressive. In Q1
2018, Vietnamese garment exports rose by 15.4 percent, with a projected growth
rate for the first six months in Q2 to go up 14 percent. China is the only nation that
surpasses Vietnam in terms of net garment exports to the U.S. However,
manufacturers and investors are pivoting towards Vietnam; the conditions for
setting up shop are more economically convenient than doing so in China.
Within ASEAN, Vietnam is the strongest competitor for inheriting low value-
added textiles and apparel manufacturing from China. In contrast to other leading
textile exporters in the region (Indonesia, Thailand, Malaysia), the share of
Vietnam’s textile exports against its total exports has grown in recent years.
Electronics
Vietnam has emerged as an important electronics exporter, with electrical and
electronic products overtaking coffee, textiles, and rice to become the country’s top
export item. Samsung is Vietnam’s largest exporter and has helped the country
achieve a trade surplus for the first time in many years. Exports of smartphones and
computer parts now account for more in export earnings than oil and garments.
Samsung has turned Vietnam into a global manufacturing base for its products,

producing almost a third of the firm’s output. Samsung has invested over US$17
billion into the country.
Samsung has also agreed to cooperate with the Vietnamese government in
order to help develop the country’s domestic support industries. This represents a
key business opportunity for foreign technology companies to set up operations in
Vietnam and sell their components to companies like Samsung.
Pharmaceuticals
The future looks to be very interesting for the pharmaceutical industry in
Vietnam. Vietnam’s pharmaceutical market has grown to US$5.2 billion in value in
2018 so far and is estimated to reach US$6.6 billion by 2020. Driving this market
growth is the Vietnamese government’s goal of achieving Universal Health
Coverage, combined with a growing market of consumers who want accessible
healthcare.
Automotive
Vietnam is becoming an important market for auto sales: the Vietnamese
automobile market is expected to sell 1.7-1.85 million units by 2035. In the
foreseeable future, an estimated 750,000-800,000 units are expected to be sold by
2025. Although there was a recent decline in car sales, the government has
introduced several new regulations to address the issue and boost production.
Despite an increasingly competitive auto market throughout the ASEAN
region, Vietnam has stated that it intends to work aggressively to build up its own
domestic auto industry. Among the key reasons for this goal is that the auto industry
has the potential to create thousands of jobs for locals and create a strong system of
supporting industries.
Coffee
Vietnam is poised to become the world’s largest producer and exporter of
coffee. Currently, the country is the world’s second largest coffee exporter, behind
only Brazil. However, many experts believe that Vietnam has the potential to
overtake Brazil due to its favorable climate conditions and lower cost production.
E-commerce

Vietnam is quickly becoming a prime market for foreign investment in e-
commerce activities. The country’s rapidly growing economy and middle class are,
in turn, spawning a strong consumer culture and increasing levels of disposable
income. Electronic retail is fast becoming the preferred method of shopping—
particularly among the country’s youth.
Table 3: Figures on importation and exportation of Vietnam (2005-2017)
Unit: Billion USD
Year Total Export Import
2005 69.21 32.44 36.76
2006 84.72 39.83 44.89
2007 111.32 48.56 62.76
2008 143.40 62.68 80.71
2009 127.04 57.09 69.95
2010 157.08 72.23 84.84
2011 203.66 96.91 106.75
2012 228.31 114.52 113.78
2013 264.06 132.03 132.03
2014 298.06 150.28 147.85
2015 327.79 162.02 165.77
2016 351.38 176.58 174.80
2017 425.12 214.02 211.11
Source: General Statistics Office of Vietnam
So far in 2018, the e-commerce market has reached US$6.2 billion and is
expected to hit US$10 billion by 2020, with an average spending of US$350 per
capita. In 2017, internet penetration in Vietnam reached 53.86 million people and is
estimated to have 59.48 million internet users by 2022.

2.1.2. Current Status of transaction cost in Vietnam.
Some of the countries do not have good facility in port and shipping industry.
The importer and exporter of such countries have faces problems of high transaction
cost due to poor infrastructure. Its export business becomes costly affair. In
addition, the reduction of other types of barriers has brought bordercrossing costs to
business, such as waiting time and customs procedures into new focus. Therefore,
reduction in transaction cost through trade facilitation can bring enormous gains to
trade, and as such are necessary and important for development of global trade. The
need for trade facilitation is underlined further by the surplus of the procedures that
have to be gone through while importing or exporting.
Modern supply chain management techniques and the rapid spread of
information technologies and e-commerce have progressively increased the use of
just-in-time techniques by manufacturing industry and encouraged the growth of
integrated global supply, production and distribution systems. In this environment
rely on the uninterrupted reception of the necessary components to meet production
contingencies, business can not afford to have imported or exported goods tied up
for long periods because of unnecessary or over – complicated trade procedures and
requirements.
The rules and regulations that govern tariffs and non-tariffs measure have
become increasingly complicatied over time. Preferential trade agreements have
added to this complexity a profileration of rules of origin. Threats to national
security have also increased in recent times. All these factors add up to make the
process of exports and imports far more difficult than they used be half a century
ago.
In view of the above, it is imperative that this challenge be met, i.e. to make
trade as transparent and quick as possible to harmonize global supply chains and
production process while ensuring that Governments are able to efficiently
administer customs and safeguard national health and security.
The scope of facilitation is very broad and touches upon several areas. While
some of these falls directly under initiatives that need to be taken by the

Government, others involve a partnership between private stakeholders and
Government initiatives.
The main indicators of trade facilitation and the areas of reform required in
them have been identified as:
● Port Logistic
- Cargo Dwell time
- Warehousing facilities (including refrigerated warehouses for perishables)
- Rail and road links from hinterland to ports.
● Customs Procedures
- Electronic Date Interface (EDI)
- Signature less, Internet based process for filing customs related documents
- Trust based systems
- Post clearance audit
- Pre-shipment Inspection Agreements (PSI)
- Risk analysis and assessment
● Standard harmonization
- Reform of domestic Standards setting and monitoring authorities
- Moving towards regional and global convergence on standards
- Muatual Recognitions Agreements on standards.
● Business Mobility
- Movement of Professionals and transparent visa systems.
- Adequate Financial systems inclulding banking, Insurance, and Clearance
mechanism
● Trade information and E-business facilities
- Proper chanels and access to market information, legal systems and standards
and regulations
- Availability of information electronically through the internet
- E-business infrastructure to enable to business – to – business contacts
● Administrative transparency and Professionalism
- Simple and transparent procedures for export and import

- Non-discriminatory approach to enforcement based on risk assessment
techniques
- Public – privite cooperation and information sharing to improve enforcement
and compliance.
To help governments improve their border procedures, reduce trade costs,
boost trade flows and reap greater benefits from international trade, OECD has
developed a set of Trade Facilitation Indicators (TFIs), while the UN Survey on
Trade Facilitation and Paperless Trade Implementation also provides information on
the state of implementation of various paperless trade measures. Indicators (TFIs)
cover the full spectrum of Customs and other regulatory trade procedures at the
border included in the WTO Trade Facilitation Agreement (TFA). They were first
launched in 2013 with 133 variables, organized by 11 policy dimensions:
Information, availability; Consultations; Advance rulings; Appeal procedures; Fees
and charges; Documentation requirements; Automation of border procedures;
Streamlining of border processes; Domestic border agency cooperation; Cross-
border agency cooperation; Governance and Impartiality.
According to updates every two years, the current (2019) dataset covers 163
countries. The data on the OECD TFIs are gathered through a questionnaire replied
by the relevant administrations and by carriers with worldwide presence, and cross-
checked against publicly available sources. They are then verified through each
concerned country’s WTO and Customs administrations. Variables follow a scoring
from 0 (lowest performance) to 2 (highest performance).

Table 4: Descriptions of each indicator
Indicator Description
(a) Information
Availability
Enquiry points; publication of trade information,
including on Internet; transparency of required
documentation; user manuals; available legislation
(b) Involvement of the
Trade Community
Structures for consultations; established guidelines for
consultations; publications of drafts; existence of notice-
and-comment frameworks
(c) Advance Rulings
Prior statements by the administration to requesting
traders concerning the classification, origin, valuation
method, etc., applied to specific goods at the time of
importation; the rules and process applied to such
statements
(d) Appeal Procedures
The possibility and modalities to appeal administrative
decisions by border agencies
(e) Fees and Charges
Disciplines on the fees and charges imposed on
importsand exports; transparency and regular review of
fees and charges; disciplines on transparency and
implementation of penalties systems
(f) Formalities-
Documents
Acceptance of copies, simplification of trade
documents;harmonisation in accordance with
international standards
(g) Formalities –
Automation
Electronic exchange of data; use of automated risk
management; automated border procedures; electronic
payments; automated pre-arrival processing; digital
signatures
(h) Formalities –
Procedures
Streamlining of border controls; single submission
points for all required documentation); post-clearance
audits; authorized operators; measures on perishable
goods; risk management systems; expedited shipments

(i) Internal Co-operation
Control delegation to Customs authorities; co-operation
between various border agencies of the country
(j) External Co-operation Co-operation with neighboring and third countries
(k) Governance and
Impartiality
Customs structures and functions; accountability; ethics
policy
(Source: OECD website, 2017)
The OECD trade facilitation indicators provide a detailed view of the extent of
implementation of WTO TFA measures. They can be used for assessing the impact
of specific trade facilitation measures on trade flows, trade costs, resource allocation
and welfare because they are based on factual information, not perception. OECD
TFIs identify areas for action and enable the potential impact of reforms to be
assessed. Estimates based on the indicators provide a basis for governments to
priorities trade facilitation actions and mobilize technical assistance and capacity
building efforts for developing countries in a more targeted way.
Because of all that reasons we choose to suggest some recommendations based
on the OECD TFIs for trade facilitation implement of Vietnam.
Vietnam ratified Trade Facilitation Agreement in December, 2015, which
considerably brings the pros and cons when honoring commitments of FTA for
Vietnam economy in general, and for enterprises in particular. Therefore, Vietnam
trading firms as well as Government get more benefits from implementing TFA,
thereby decreasing their transaction costs for enterprises.
In details, the implementation of modernization reform has created a team of
staff, experts at different levels and areas to ensure that they can meet the
requirements of these commitments. Vietnam is also given support, technical
assistance, training of foreign staffs: from international organizations such as
WCO, WTO, WB, ADB, ASEAN, APEC… from the Customs Japan, South Korea,
France, USA… especially in the context of enjoying special and differential
treatment in FTA. In Decemer 2014, Vietnam Trade Facilitation Alliance was
estalished as collaboration between US Agency for International Development, the
American Chamber of Commerce in Vietnam and the Vietnam Chamber of

Commerce and Industry. The private sector-led alliance supports TFA
implementation, as well as next generation of free trade agreements such as the
Trans- Pacific partnership. The Alliance also aims to improve competitiveness of
Vietnam’s domestic and foreign companies through a more predictable and
transparent business enabling environment. There is special emphasis on helping
Vietnam achieve the target it established in Rresolution No. 19/NQ-CP to improve
its performance trading across borders by significantly reducing the time and cost
of importing and exporting to regional averages.
The legal system concerned has been relatively progressed and gradually
complete after being a member of WTO and in particular when implementing
WTO commitments. The results have been well examined and evaluated by the
WTO following the first Review of Trade Policy in Vietnam after 6 years of WTO
paticipation (9/2013). Particularly with the modification and implementation of
customs law revised 2015 will become a full legal basis for the implementation of
the commotments of the FTA.
Following the issuance of Decision 1969, Vietnam has formulated plas to
implement Categories A, B and C. The Prime Minister also signed the decision to
formally establish on the National Steering Committee on ASEAN Single Window
and the National Single Window regime on trade facilitation. National single
window is a supreme effort to provide merchants and companies with a unique
electronic portal in each country so they can submit documents and data requests
for import or export, transit goods. Implementing single window mechanism by
using e-customs as a tool to connect others government administrative agencies
with customs department will help enterprises cut down on almost costs and time
spent on goods clearance, promote goods circulation and competitivenss in the
world market. On 06 February 2017, the Government also issued Resolution No.
19/2017/NQ-CP on improving the business environment and national
competitiveness. The Prime Minister once said: “It is not acceptable to take 4 days
to complete customs procedures for exports which take 2 times higher than the
regional average, and 4 days for imports while the regional average is only 3

days.” Following the Government’s directive and strong momntum for reforming
customs procedures caused by the TFA implementation, Vietnam has been
reviewing thousands of customs procedures and revising several legal documents to
bring them into conformity with its commitments in the TFA.
According to the World Bank study, the implementation of the TFA will
help reduce the transaction costs for businesses in Vietnam by 20 percent, boosting
investment and creating employment for Vietnamese human resources.
Figure 12: Vietnam’s trade facilitation performance: OECD indicators
Source: OECD, 2013
From this chart, we can see that:
• Vietnam performs better than the averages of Asian and lower middle
income countries in the areas of involvement of trade community, appeal
procedures, and governance and impartiality, according to OECD trade facilitation
indicators.

Figure 13: Trade Facilitation Indicator of Vietnam in 2017
Source: OECD, 2017
• Vietnam’s performance for advance rulings, fees and charges, automation,
streamlining of procedures and internal border agency co-operation is below the
averages of Asian and lower middle income countries. And, this is the last TF
Indicator of Vietnam in 2017.
Table 5: Compare TFI of Vietnam between 2013 and 2017
Source: OECD, 2017
We can see that almost of indicator are increase compare with itself in 2013.
These results express the efforts of Vietnam Government performing in this time.
Viet Nam is closest to the best performance across the sample as regards
information availability, advance rulings, fees and charges, formalities, internal
border agency co-operation, and governance and impartiality. Viet Nam matches or
exceeds the average performance of lower middle income countries in all TFI areas.
Performance has improved between 2013 and 2017 in the areas of information

ANALYSIS OF TRANSACTION COSTS IN INTERNATIONAL TRADE AND PRACTICE IN VIETNAM

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