Aid-for-trade facilitation
The increasingly important constellation of issues surrounding trade, aid, and development policies, as well as the increased attention to aid effectiveness and aid for trade in negotiations and other multilateral forums is the motivation for this research. The linkages between trade facilitation, trade, and development are relatively simple in theory. Development is enhanced through income growth, which comes from the expansion of trade, investment, and production opportunities. Trade facilitation initiatives, with the aim of lowering trade transactions costs, can enhance trade competitiveness and expand trade flows, while at the same time playing an important role in supporting a positive business climate. But, in practice, implementing trade facilitation initiatives involves the domestic reform agenda, private sector priorities, and national development strategies. Trade facilitation reform requires self-assessment, technical assistance, and capacity building. In summary, trade facilitation enhances trade, but are difficult to do and cost money.
Empirical research on trade facilitation has largely focused on the question: What is trade facilitation and how does it work to enhance trade? A number of studies provide strong evidence that improvements in trade facilitation—for example improvement in port and information infrastructures, more rapid customs clearance time, or regulatory reform to remove duplicative technical requirements on imports—have a positive impact on trade performance. In bringing together the strands of the literature on trade facilitation and trade, and on aid and trade, our research in this paper finds strong empirical evidence that aid directed to the trade facilitation reform agenda has a small, but significant and positive relationship to trade flows, particularly exports of the recipient countries. The bulk of the relationship between aid and trade appears to come from a narrow set of aid flows directed toward trade policy and regulatory reform, within the overall flow of aid for trade directed toward sectoral development or infrastructure.
The majority of econometric empirical studies on the topic of trade facilitation conclude that improvements in trade facilitation measures are associated with reductions in trade costs and increases in trade flows. The various trade facilitation measures examined—streamlining customs procedures, improving port efficiency, harmonizing to international standards, and other reforms—work through different channels to lower trade costs for importers and exporters and not surprisingly, a country’s trade flows may be more strongly responsive to one set of reforms less so to others. Case studies of trade facilitation reforms in specific countries are valuable as they can explicitly address and estimate the costs of engaging in detailed reform and also consider the benefits of specific reform measures. Endogeneity could run the other direction—from trade to aid—in that some donors allocate aid to those countries with whom they have the strongest trade ties.
Recent surveys conclude that the econometric estimates of whether aid induces a ‘‘Dutch disease’’ phenomenon can vary widely. We link aid-for-trade facilitation flows to trade flows through the black box that relates aid to trade facilitation reform: Certain types of aid flows promote certain reforms or change certain infrastructures which reduce trade transaction costs and thus enhance trade flows. The issue of aid-induced Dutch disease, while relevant in a broader context, is not likely to be an issue in our analysis. This is due to the fact that aid delivered for the trade facilitation goals examined here, in contrast to other aid objectives, is numerically small and therefore unlikely to precipitate any real exchange rate appreciation. With respect to the effectiveness of export promotion agencies, Lederman et al. (2006) find that EPAs, on average, have a positive and statistically significant impact on exports. Nevertheless, they find that the impact is heterogeneous across regions: larger effects were found in Latin American and Asian agencies, while agencies in sub-Saharan African, the Middle East and North Africa lag behind. Cali and te Velde (2011) also focus on exporting only and use more aggregated aid flows.
The OECD-CRS reporting system map data into three categories that match the aid-for-trade agenda：
Trade policy and regulation (US$ 296 million in 2005): Comprises aid flows to facilitate the participation in multilateral trade negotiations and to improve the implementation of multilateral trade agreements. Furthermore, it contains all support to mainstream trade policy, including technical standards, customs regimes, and tariff structure.
Trade development (US$ 2,910 million in 2005): This category covers business development and activities aimed at improving the business climate, access to trade finance, and trade promotion in the sectors of agriculture, forestry, fishing, industry, mining, tourism, and services.
Economic infrastructure (US$ 5,586 million in 2005): All aid flows directed toward the improvement of the infrastructure for transport, storage, communications and energy.
The gravity equation approach that we use requires some additional variables. For the main analysis, our data set combines information from the World Integrated Trade Solution (WITS) database for trade flows and Trade Analysis and Information System (TRAINS) database for tariffs, the World Development Indicators (WDI) data set for GDP data, and the OECD-CRS for aid flows. For robustness checks, we use additional country-specific data, including distances between trading partners, and other country-specific data, such as a country’s area and language from the Centre d’Etudes Prospectives et d’Informations Internationales, and population data from the WDI.
From basic microeconomic principles, they derive a gravity-like model of exports from country i to country j in sector :
The data requirements for the multilateral resistance terms exceed what is generally available; a common solution is to use some variant on fixed-effects estimation. Fixed effects could be country-specific (for each importer and exporter) or bilateral fixed effects (for each bilateral country pair in the sample). Bilateral fixed effects capture many of the standard variables included in gravity equations, such as distance, language, colonial ties, which are then dropped. Bilateral fixed effects also imply that the multilateral resistance terms are unchanging over time. Our research exploits the time-series variation in the trade and aid data to investigate their relationships but we recognize that the donor–recipient relationship can vary over time and there can be global factors affecting trade values. So, we incorporate both time fixed effects as well as bilateral fixed effects that are time- varying (e.g., we allow the Anderson and van Wincoop resistance term to vary over time). The time-varying bilateral fixed effects are calculated as 5-year averages since annual time-varying bilateral fixed effects are not feasible given the bilateral pairing of both trade and aid data.
We are now able to postulate that bilateral imports are a function of the country-specific variables and our baseline empirical specification therefore takes the following form:
In this section, we consider several different permutations of our main specification. The first step is simply to establish whether aid-for-trade facilitation flows are related to trade flows. The second step considers whether this relationship is different for different country groups, in particular focusing on the tied-aid issue. The third question relates to lagged effects of aid. Finally, we consider how the relationship between aid-for-trade facilitation and trade flows might vary with the type of aid flow (narrow, broad, or hard, soft).
Table 1 shows estimation results using the all positive trade flows for 167 importers (reporters) and 172 exporters (partners) for the years 1990 to 2005 in column 1 and 2 and then in subsequent columns several different permutations of countries receiving aid-for-trade facilitation. In the first two columns, the common gravity variables, such as GDP and tariff, have the expected signs and magnitude. The significance level of our variables of interest changes only slightly, the magnitude of the import coefficient is a bit lower, but the sum of the coefficient estimates is about the same.
There are several additional ways to cut the data to examine the relationship between aid-for-trade facilitation and trade flows. Column 3 considers just the aid recipients and all their trading partners. Both of the aid-for-trade coefficients are larger than for the baseline specification of all countries, suggesting that trade flows between aid-for-trade facilitation recipients and their trading partners have a relatively higher elasticity with respect to aid than non-recipients. The coefficient for aid-for-trade facilitation for the exporter is statistically larger than that for aid-for-trade facilitation for the importer, suggesting that aid-for-trade facilitation is balance-of-payments enhancing.
With regard to Other Aid, it remains positively associated with imports, but is negatively associated with exports within the ‘south–south’ trading group. On balance, whereas ‘south–south’ trade appears to be greater with aid-for-trade facilitation flow, Other Aid may work against such trade. When intra-donor trade is completely removed from the sample, the coefficient for aid-for-trade facilitation for importers continues to be insignificant; unlike the previous column where donors were not included, this permutation makes clear that tied aid is not likely associated with aid-for-trade facilitation. Moreover, the magnitude of the coefficient aid-for-trade facilitation for exporters remains at the baseline value. Column 6 investigates whether time lags affect the relationship between aid and trade. Aid may not become effective immediately, but only after a certain period of time. Introducing time lags reduces the sample size due to several gaps in the aid flow data. Running the same regression specification on this smaller sample, yields coefficient magnitudes similar in profile to columns 1 and 2. The sum of the two coefficients is about the same as the sample without lags.
All told, the evidence suggests that controlling for Other Aid, aid-for-trade facilitation is associated with both more exports and more imports by recipient countries; the magnitude of this relation is higher for exports. When considering trade between recipients and donors, excluding intra-donor trade, the relationship between aid and exports is a bit larger than just considering trade among the aid recipients, whereas the statistical significance of any relationship between aid-for- trade facilitation and imports disappears. This suggests an important role for aid-for-trade facilitation to enable exports to both the developed and developing world.
The Trade Policy and Regulations, our ‘narrow’ type of aid assistance, is targeted explicitly toward enhancing the trade policy system in countries—their ability to navigate TBT, SPS, and TRIPS. These types of aid flows are focused on customs, transparency, and government procurement. Aid is directed toward learning to negotiate market access, implement RTAs, address dispute settlement, and accession issues. Thus, this type of aid-for-trade facilitation is narrowly focused on the country as it directly interacts with the trading system itself. Therefore, this aid might have a relatively stronger relationship to trade flows because it is targeted directly to trading system issues.
If we assume that the estimated coefficients apply to aid and trade in the year 2008, we can simulate the relationship between a 1% increase in aid-for-trade facilitation (in USD terms) to recipient countries’ exports. Using the trade flows and amount of aid-for-trade facilitation for the year 2008 and applying them to our elasticities of ln_EAFT, we obtain simulation results which can be summarized as follows:
In 2008, aid-for-trade facilitation amounted to about US$ 21.9 billion. Our simulations suggest that a 1% increase in aid (US$ 219 million) can be associated with about US$ 291 million of additional exports for aid-receiving countries. This means that US$ 1 of aid for trade can be associated with US$1.33 of additional exports for recipient countries.
Consider the narrow definition of aid-for-trade facilitation, that is consider only aid-for-trade policy reform and regulatory reform which amounted to US$ 486 million in 2008. According to our simulations, a 1% increase in this type of aid (US$ 4.86 million) can be associated with an increase in exports of aid-receiving countries of about US$ 347 million.
Targeted aid-for-trade facilitation appears to be particularly well suited to raising exports, even as it raises imports too—making this kind of aid balance-of-payments enhancing. Aid-for-trade facilitation appears to be more strongly related to trade, particularly exports, of the recipient countries compared to global trade, which means that such aid is hitting the target. Simulations suggest that US$ 1 of aid-for-trade facilitation can be associated with US$ 1.33 of additional exports for recipient countries. In contrast, general aid flows appear to be more strongly correlated with imports relative to exports—and being larger in magnitude, this suggests that overall aid may not enhance the balance of payments. Ongoing dialogue to address coordination and monitoring of trade-related aid and overall aid should consider our results, particularly in regards to targeting aid to promote its greatest relationship to trade.
