Policies to promote trade (International cooperation and multilateral mechanisms)

SDG indicators

SDG target 8.a: Increase Aid for Trade support for developing countries, in particular least developed countries, including through the Enhanced Integrated Framework for Trade-related Technical Assistance to Least Developed Countries.
SDG indicator 8.a.1:
for Trade commitments and disbursements (Tier I)

What is Aid for Trade?

The Aid for Trade initiative was launched at the 2005 WTO Ministerial Conference in China, Hong Kong (SAR) (WTO, 2015). It is aimed at helping developing countries, particularly LDCs, build the supply-side capacity and trade-related infrastructure that they need to assist them to implement and benefit from WTO Agreements and, more broadly, to engage in international trade. The assistance is targeted at enhancing national trade policy and regulations, developing infrastructure and building productive capacity (UNCTAD, 2016, Target 8.a).

The 2019 joint OECD-WTO Aid for Trade monitoring and evaluation exercise highlighted the importance of diversification, with a focus on promoting growth in the manufacturing sector for African countries. Export diversification is an indispensable part of economic growth and structural transformation, and remains an important development objective for many developing countries (OECD and WTO, 2019). Export demand for manufactured products facilitates growth of the manufacturing sector, thus giving an impetus for structural transformation (see Sustainable industrialization and technology). Industrialization is also paramount for LLDCs as “a thriving labour-intensive manufacturing base is best at generating productive employment” (Bolesta, 2019).

Academic research and donor evaluation programmes provide evidence of the positive impact of Aid for Trade (OECD and WTO, 2019). Such evaluation can be limited by scarcity of useful data and methodological challenges (Razzaque and te Velde, 2013). According to OECD and WTO (2013), for every dollar of Aid for Trade, on average eight dollars in exports is generated; this reaches up to twenty dollars for the poorest countries. A recent study on the effectiveness of Aid for Trade suggests that a one per cent increase in Aid for Trade for policies and regulations (as a percentage of GDP) induces a 0.15 per cent decline in tariff volatility (Gnangnon, 2019). The latter study supports the finding that Aid for Trade has a more positive impact on countries with higher economic and political stability (OECD and WTO, 2013).

Increase in Aid for Trade levelled off in the last few years

Aid for Trade commitments and Aid for Trade disbursements have increased by 50 and 81 per cent, respectively, during the last ten years. In 2018, Aid for Trade commitments totalled US$57.8 billion and disbursements US$45.4 billion in constant 2018 prices. The corresponding figures in 2008 were US$38.7 billion and US$25.1 billion. While there has been a positive trend in annual Aid for Trade commitments, their volatility has increased somewhat in recent years, mitigating that growth. In 2016, Aid for Trade commitments declined by 7.7 per cent from the previous year and in 2018 by 3.7 per cent, while they grew in 2015 and 2017 by about 12 per cent. Realised disbursements remained more stable (see figure 1).

Figure 1. Aid for Trade flows to developing economies, 2002-2018
(Billions of US$ in constant 2018 prices)
Source: UNCTAD calculations based on data from OECD (2020b).

The disbursements to LDCs almost doubled in ten years from US$7.1 billion in 2008 to US$13.4 billion in 2018 (OECD, 2020b). LDCs’ share of Aid for Trade peaked at just over 30 per cent of the total in 2009, after which it gradually declined to 25 per cent in 2016. In 2017 and 2018, this share ticked back up to 30 per cent (see figure 2).

Figure 2. Aid for Trade disbursements by recipient, 2002-2018
(Billions of US$ in constant 2018 prices)
Source: UNCTAD calculations based on data from OECD (2020b).

Asia and Africa remain the primary recipients of Aid for Trade

Asia and Africa received most of the global Aid for Trade disbursements in 2018, US$16.1 billion (36 per cent) and US$17.0 billion (38 per cent), respectively. Figure 3 shows the largest Aid for Trade recipient countries.

The top ten Aid for Trade recipients shared about 35 per cent of total country-specific disbursements in 2018. They comprise five Asian and five African countries (Egypt, Ethiopia, Kenya, Tanzania and Morocco). Of these countries, Bangladesh, Ethiopia and Tanzania are LDCs. To put the 35 per cent in perspective, it should be noted that the total population of these top ten recipients accounts for 37 per cent of the total population of developing economies.

Figure 3. Top 10 recipients of total Aid for Trade disbursements, 2018
(Billions of US$ in constant 2018 prices)
Source: UNCTAD calculations based on data from OECD (2020b).

Official Development Assistance targets trade more often

The share of Aid for Trade in ODA has increased from 20.5 per cent in 2008 to 27.3 per cent in 2018. The share peaked in 2012 at 27.8 per cent but has plateaued since then (see figure 4). Aid for Trade is particularly important for countries whose trade depends on a narrow export basket. For example, in 2018, LDCs depend, on average, on only two1 products for almost 70 per cent of their exports (UNCTAD, 2020).

Figure 4. Aid for Trade, share of net ODA disbursements
(Percent)
Source: UNCTAD calculations based on data from OECD (2020b).

Transport, energy and agriculture receive the majority of Aid for Trade

Aid for Trade provides support to economic infrastructure (56 per cent in 2018), productive capacity building (41 per cent) and trade policies (3 per cent). Economic infrastructure (transport, communication and energy) has consistently received over 50 per cent of Aid for Trade since 2010 (see figure 5). From 2008 to 2018, the share dedicated to transport and storage has remained rather constant at around 29 per cent of all Aid for Trade, whereas the share targeting energy has increased from 21 to 25 per cent.

Aid for productive capacity targets economic activities that produce goods and services for trade. Agriculture, forestry and fishing together account for almost half of the support for productive capacity, while aid targeting banking and financial services constitute about 27 per cent. Aid for banking increased between 2008 and 2018 from US$3.4 billion to US$4.2 billion.

Figure 5. Distribution between sectors of total Aid for Trade disbursements
(Proportion of total)
Source: UNCTAD calculations based on data from OECD (2020b).

Energy and transport overtake agriculture as a target of Aid for Trade in Africa

The sectors receiving Aid for Trade disbursements vary across regions. About 41 per cent of the Aid for Trade disbursements to Asia and Oceania go to transport, and together with energy these account for over 71 per cent of Aid for Trade to this region. At nearly 25 per cent, energy, and transport at 24 per cent, overtook agriculture, forestry and fishing (23.6 per cent) as the largest recipient sector of Aid for Trade in Africa. In Europe, on the other hand, banking and financial services receive the second largest share of Aid for Trade disbursements (26 per cent) after transport (32 per cent), while in America the largest sectors are transport (30 per cent) and energy (27 per cent).

Figure 6. Aid for trade disbursements by sector and recipient region, 2018
(Proportion of total)
Source: UNCTAD calculations based on data from OECD (2020b).

The COVID-19 related disruptions to global value chains - a major risk to LDCs

As noted earlier, LDCs often rely on a small set of export goods and, depending on the product mix, risk losing a significant portion of export revenues due to a sharp fall in demand caused by the COVID-19 pandemic and falls in prices (for commodity exporters). Global markets are severely impacted by the pandemic, which significantly increases the need for Aid for Trade to LDCs and other vulnerable countries. The disruptions to trade in LDCs relate to shortages of raw materials from China and other large economies, for example in the garment industry, and to widespread business closures in many countries affecting LDCs in sectors where they are involved as sub-contractors. Many LDCs also depend on services, which contribute a large share to their export revenue, GDP and employment, especially tourism and transport, which are badly hit by the pandemic.

According to WTO (2020), 80 countries and customs territories have introduced mostly temporary export prohibitions or restrictions as a result of the COVID-19 pandemic as of 23 April 2020. Most of these focus on medical supplies (e.g. facemasks and shields), pharmaceuticals and medical equipment (e.g. ventilators), but also additional products, such as foodstuffs and toilet paper.

Although it is too early to predict the impact of COVID-19 on Aid for Trade flows, they will be critical for the most vulnerable countries, such as LDCs and LLDCs, in helping a swift recovery from the economic impacts of the pandemic. There could be a temporary decline in Aid for Trade due to resources being channeled toward COVID-19 response efforts in donor countries (figure 7). Since Aid for Trade, as part of ODA (see Official support for sustainable development), is linked to the GNI of each donor country, a reduction in global economic activity will generally mean decreased Aid for Trade flows unless special efforts are undertaken.

Figure 7. Possible impact of Covid-19 on 2021 ODA levels
(Billions of US$ in constant 2019 prices)

Several developed and some developing countries have announced stimulus packages, such as additional funding to businesses or fiscal policy measures to support their economies, which may not be feasible for LDCs. Global collaboration is needed to pool financial support – including a recent Call to Action (IMF, 2020) to suspend debt payments for IDA countries. Analyses by the World Bank warns that COVID-19 could push up to an additional 60 million people into extreme poverty (the share of the world’s population living on less than $1.90 per day) (CCSA, 2020).

Notes

  1. These two products refers to product ”Live animals other than animals of division 03” and product ”Meat of bovine animals, fresh, chilled or frozen”.

References

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