Magazine article International Trade Forum

Towards a New Generation of Aid for Trade

Magazine article International Trade Forum

Towards a New Generation of Aid for Trade

Article excerpt

At the World Trade Organization's (WTO) Fourth Global Review of Aid for Trade held in July 2013, two main messages emerged. The first message is that global value chains and production networks matter and have implications on the effectiveness of Aid for Trade. The second message is that Aid for Trade cannot be seen as separate from a new financing context that involves the leveraging of other capital flows. This can be termed 'third-generation Aid for Trade'.

Aid for Trade was first conceived as a transfer of resources to compensate for the erosion of trade preferences due to multilateral trade liberalization, according to the Hong Kong declaration of 2005. Since then, the focus on the original purpose has been lost and many trade and development experts have begun seeing Aid for Trade as just a standard aid flow. We will see another change in the near future: Third-generation Aid for Trade is expected to help bring together investment finance with trade and investment opportunities. The Ninth WTO Ministerial, which will be held in Bali, Indonesia, in December 2013, will need to recognize this new context in order for Aid for Trade to remain relevant and effective in the future.

Recent discourse among trade experts has highlighted the importance of value chains. Developing countries are increasingly taking part in global value chains--for example, those involving electronics, food products, garments or horticulture--which often require goods to be imported before they are processed and exported. This confirms the idea that import protection is self-defeating because it hurts the build-up of local productive capacity. It also shows the importance of building infrastructure that supports value-chain development, which facilitates trade in global markets. Another key point is that trade within value chains depends on the identification of an appropriate niche and good communication among firms in the chain. Therefore, finding the right institutional setting for effective industrial policy is more important than ever. Aid for Trade can promote opportunities for SMEs to take part in value chains and shift the focus from general trade rules to problem-addressing policies, which will be even more effective in the context of good relations between states and businesses.

Aid for Trade also needs to keep pace with rapid changes in the flow of international finance directed at developing countries. It has helped secure significant aid spending (see figure) and now accounts for one-third of official development-assistance spending, chiefly as a result of increased spending on infrastructure. Still, in 2011, overall funding for Aid for Trade (now at US$ 33 billion annually) declined--a fall that likely continued in 2012. Whereas aid prospects from the countries belonging to the Organisation for Economic Co-operation and Development (OECD) are faltering, aid from other regions looks more promising.

As countries grow and structurally transform themselves, they rely less on external aid and more on other capital flows (in addition to domestic sources). Hence, the key question is, how can Aid for Trade leverage ether capital flows for capacity building, especially when aid flows are under pressure? For example, Cambodia's aid-to-gross domestic product (GDP) ratio decreased from 11.2% in 2000 to 6.9% in 2010, while the foreign direct investment (FDI)to-GDP ratio increased from 4.1% in 2000 to 7% in 2010. …

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