Aid for Trade: Helping to end poverty and realise sustainable development

AfTToday’s post is from OECD Secretary-General Angel Gurría

One dollar in aid for trade generates eight dollars in extra trade for all developing countries and 20 dollars for low-income countries according to OECD calculations. These are impressive returns on investment. But these numbers do not tell the uplifting stories about the lives of men and women that have been bettered by Aid for Trade programmes, the employment generated because of trade creation and diversification, or the additional domestic and foreign investment that countries attracted.

What these stories also show is that removing the obstacles to trade and reducing trade costs allows firms in low-income countries to link up to Global Value Chains (GVCs). On the one hand, the fragmentation of production has created new opportunities for SMEs to enter global markets as components or services suppliers, without having to build a product’s entire value chain. On the other hand, SMEs participation and upgrading in GVCs is far from automatic. Opportunities for SMEs are large, but so are the barriers they must overcome.

The fifth Global Review of Aid for Trade takes place at a watershed moment. Before the end of the year we need to define and agree on the post-2015 development agenda. The scope and ambition of the emerging Sustainable Development Goals (SDGs) offer a unique opportunity for ending poverty, protecting our environment, and realising sustainable development for all.

Trade costs matter for development

International trade is an important enabler to achieve the SDGs, but high trade costs prevent a large number of developing countries from fully exploiting the opportunities that the global market offers. Consequently, they fall short of realising the employment, development and growth potential from trade.

The joint OECD/WTO report Aid for Trade at a Glance 2015 presented today at the Global Review of Aid for Trade clearly shows that while producers in low-income countries are often competitive at the farm and factory gate, they are priced out of the international market because of cumbersome border procedures, poor infrastructure, lack of finance and complex standards. High trade costs have detrimental effects on comparative advantage, especially for small and medium-sized enterprises in general and those in low-income developing countries in particular.

Facilitating trade

The WTO Trade Facilitation Agreement creates a significant opportunity to reduce trade costs and enhance participation in the global value chains that increasingly characterise international trade today. Improvements in trade facilitation is one of the policy areas with the highest estimated impact on foreign input sourcing decisions.

We calculated that the implementation of the Trade Facilitation Agreement (TFA) could reduce worldwide trade costs by between 12.5% and 17.5%. And for those that do more, the benefits are even greater: countries which implement the TFA in full will reduce their trade costs by between 1.4 and 3.9 percentage points more than those that do only the minimum that the TFA requires. The opportunities for the biggest cost reductions are greatest for low and lower middle-income countries.

What is needed now is the ratification of the Agreement to ensure that these potential benefits become a reality. The OECD has put in place a tool that allows countries to monitor and benchmark their trade facilitation performance, prioritise areas for action and mobilise technical assistance and capacity building in a targeted way.

Development finance for building trade capacities

Furthermore, substantial resources are available to assist countries implement the TFA. Donors that report to the OECD have already disbursed some $1.9 billion in Aid for trade facilitation since 2005. Commitments now stand at $668 million, an eight-fold increase in donor support. According to an OECD/WTO survey, even more is support is forthcoming. At today’s meeting the OECD will present more country-specific data on the benefits of Trade Facilitation as well as on transparency of donor support.

More generally, since the start of the Initiative, donors have disbursed $264.5 billion for financing Aid for Trade programmes, with commitments doubling and now standing at $55 billion. In addition, $190 billion in trade-related other official flows was disbursed. Furthermore, providers of South-South trade-related support are also helping developing countries reduce high trade costs.

Joining forces to achieve more

Designing effective solutions for cutting trade costs requires close collaboration between the public and the private sector, including to identify the most distorting trade costs, how best to reduce them, and how to use the different development finance instruments offered by a wide range of providers effectively.

Reducing trade costs for inclusive, sustainable growth is an agenda where the private sector has much to offer and the development community much to learn. Collaboration between the public and the private sector in developed and developing countries will maximise the contribution of trade in delivering the sustainable development outcomes that are envisaged in the emerging SDGs.

Well-designed Aid for Trade interventions can be effective in reducing trade costs in areas that partner countries and donors prioritise, such as infrastructure, trade facilitation and non-tariff measures like product standards. Furthermore, this need not contradict overarching green growth objectives; on the contrary aid for trade may actually promote these objectives.

Developing countries and their partners are taking the reduction of trade costs seriously. Action in this area builds on solid practical and theoretical foundations and, most importantly, will help achieve the proposed SDGs.

Download the 30 page pocket edition of Aid for Trade at a Glance 2015: Reducing Trade Costs for Inclusive, Sustainable Growth.

OECD work on Aid for Trade

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