Aid for Trade is necessary for a sustainable global recovery

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This article is part of a series in which OECD experts and thought leaders —from around the world and all parts of society— address the COVID-19 crisis, discussing and developing solutions now and for the future.

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As a result of the COVID-19 crisis, global trade contracted faster than in the global financial crisis of 2008-09, which has far-reaching impacts on the poorest countries. According to the World Trade Organization, travel services declined by 68% in 2020, affecting countries like small island developing states that are heavily reliant on tourism. The International Labour Organization estimates that over 250 million jobs have already been lost. This has been particularly acute for women, who make up a larger share of workers in tourism, and informal sectors that lack unemployment or health coverage.

At the same time, however, trade has also contributed to keep economies going. Global trade in agriculture has increased in the year of 2020 ensuring access to food for populations across the globe. Trade in pharmaceuticals has also increased allowing governments to respond to the health crisis in their countries. Trade will continue to be important as we come out of this pandemic. In order to vaccinate the world population, vials, syringes, needles and vaccines will have to cross borders many times in order to move from producer countries to their destination. With countries emerging at different speeds and in different shapes out of the pandemic, trade can also play an important role in spreading the benefits of recovery across the globe. 

In this context, Aid for Trade, which seeks to boost the trade capacity and infrastructure of poorer nations, is essential to contain and mitigate the effects of the pandemic—not to mention an important means to support recoveries. It should be a focus of our international co-operation and official development assistance (ODA) efforts.

More on the Forum Network: Closing vaccine borders provides a false sense of security. Enabling global flows allows vaccine supply chains to deliver more vaccines to all by Prashant Yadav, Centre for Global Development & Jan C. Fransoo, Tilburg University's School of Economics

More on the Forum Network: Closing vaccine borders provides a false sense of security. Enabling global flows allows vaccine supply chains to deliver more vaccines to all, by Prashant Yadav, Senior Fellow at the Centre for Global Development & Jan C. Fransoo, Professor at Tilburg University's School of EconomicsMore on the Forum Network: Closing vaccine borders provides a false sense of security. Enabling global flows allows vaccine supply chains to deliver more vaccines to all, by Prashant Yadav, Senior Fellow at the Centre for Global Development & Jan C. Fransoo, Professor at Tilburg University's School of Economics

Support to trade facilitation efforts can play a particular role in this context. During the pandemic, countries who could afford to do so digitalised border processes to the extent possible. In many cases, this was a short-term response to the absence of staff during lockdown periods. But it is known that digitalisation of border processes has long-term beneficial effects, in particular for small and medium-sized enterprises. Providing assistance to trade facilitation will therefore not only have the direct effect of facilitating trade of products necessary to tackle the pandemic (like vaccines), it will also benefit trade and growth more generally and increase the resilience of countries with respect to possible future crises.

Aid for Trade can also play a key role assisting the many developing countries suffering from the breakdown in the tourism industry. Before the pandemic, tourism represented around one third of global services exports; in many developing countries, tourism is the main export sector. Until recently, it was a major driver of growth and job creation in these countries. Tourism is considered to have been among the main contributors to Cabo Verde, the Maldives and Samoa graduating from their previous least developed country status.

Nevertheless, tourism has in the past not been a major priority for donor countries. Only 0.09% of total ODA and 0.4% of total Aid for Trade disbursements were allocated for tourism between 2006 and 2013. This has to change in the light of the major shock the sector has experienced, and to help developing countries adjust to new post-COVID-19 sanitary and vaccination requirements.

More generally, Aid for Trade programmes should be revisited to better respond to the ambitions of the 2030 Agenda and to the new imperatives of the post-COVID-19 era: putting prosperity, people and planet at the heart of trade and investment; building the resilience of the global economy; creating quality jobs, including for the most vulnerable; and leaving no one behind. Aid for Trade programmes can help countries implement the necessary measures—particularly those relating to trade facilitation and information sharing that supports resilient trade.

All countries face choices in government spending that will have an impact on global trade and development. Among OECD members—who have access to recovery tools that low-income economies lack—recovery packages account for 16% of GDP. For low-income countries, many already burdened with external debt exacerbated by declining revenues from fuel and mineral exports, the equivalent figure is 2.5%. At the same time, according to UNCTAD the external finance needed by developing economies to help restore investment and trade flows has slowed to a trickle, and access to trade finance—the "grease" in the wheels of trade—has become scarcer and more expensive.

Read OECD Services Trade Restrictiveness Index: Policy Trends up to 2021 and visit the OECD's COVID-19 Hub to browse hundreds of others policy responses

Read OECD Services Trade Restrictiveness Index: Policy Trends up to 2021 and visit the OECD's COVID-19 Hub to browse hundreds of others policy responses

This is why continued ODA support is so important. Aid for Trade has grown steadily since 2006, amounting to USD 46.6 billion in 2019, representing almost one quarter of total ODA in 2019. This represents an average annual increase of 6.6% per year, with support to least developed countries and other low-income countries, and lower middle-income countries growing at a sustained pace at around 8% per year on average. Looking at sectors, economic infrastructure represented the bulk of total disbursements in 2019 (USD 25.3 billion), together with economic capacity building (USD 20.4 billion). However, we are seeing trends towards more loans rather than grants, and regional or unspecified Aid for Trade allocations rather than to one country.

The way forward

We know the prescription for a healthy population and economy: ensure an equitable rollout of vaccines; keep trade flowing and global value chains functioning; enhance co-operation to remove regulatory barriers to trade in essential goods; improve access to trade finance for low-income countries; and help countries implement the "win-win" provisions under the WTO's Trade Facilitation Agreement. Digital trade can play an important role, but this depends on countries addressing existing digital divides to ensure that the gains from digitalisation can be realised and more widely shared across countries and societies. And governments should seize current opportunities to incorporate climate friendly trade policies into their recovery plans, creating opportunities for environmental technologies, goods and services, and improving supply of inputs key to clean energy transitions.  

The COVID-19 crisis re-shuffled the cards of trade. It is unclear how many of these new ways of trading will continue as the “new normal”. The poorest developing countries will need more support than ever to adjust and make trade work for all. As the economic recovery continues its asymmetric path and trade rebounds faster in some parts of the world, the world's biggest economies must take the lead and reaffirm their commitment to Aid for Trade so no one is left behind.

Related Topics

Tackling COVID-19 Digitalisation Trade Competition International Co-operation

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Marion Jansen & Jorge Moreira da Silva

Director of the Trade and Agriculture Directorate & Director of the Development and Co-operation Directorate, OECD

Marion Jansen leads OECD efforts to develop and communicate evidence-based advice to governments, with the aim at helping them improve the domestic and international performance of their policies in the areas of trade, food, agriculture and fisheries. Prior to becoming OECD Director of Trade and Agriculture in 2020, she held senior positions at the International Trade Centre (ITC), the World Trade Organization (WTO) and the International Labor Organization (ILO). Marion Jansen holds a PhD in economics from the Universitat Pompeu Fabra (Barcelona, Spain) and undergraduate degrees from the Université de Toulouse (France) and the University of Konstanz (Germany).// Mr. Moreira da Silva is since 1st November 2016 the Director of the Development Co-operation Directorate (DCD) at OECD. As Director of the Development Co-operation Directorate (DCD), Mr. Moreira da Silva plays a key role in positioning the OECD’s work on development co-operation at the leading edge. He supports the work of the Development Assistance Committee (DAC) and collaborates closely with other components of the OECD's Development Cluster to strengthen the Organisation’s contribution to the international governance architecture, as well as to OECD-wide initiatives such as NAEC, Inclusive Growth, and work in support of the Sustainable Development Goals (SDGs). Before joining OECD, Mr. Moreira da Silva held senior political roles as Portugal’s Minister of Environment, Energy and Spatial Planning; Secretary of State for Science and Higher Education; Secretary of State for Environment and Spatial Planning; Member of the Portuguese Parliament; and Member of the European Parliament (where he authored the Report and the political agreement on the EU GHG Emissions Trading Directive in 2003). He also served as Senior Environmental Finance Advisor at UNDP.


Go to the profile of Peter Kraneveld
10 months ago

At least since David Ricardo, there can be no question that trade and investment are an important, even vital wealth generator. At least since Adam Smith, it is clear that, where the financial effects are more important than the external effects, it is more efficiently conducted by private enterprise than by governments. The exception of external effects is important and goes for other sectors of the economy also.

The upshot of the above is that transactions with large externalities are best regulated, executed and financially supported (including development aid) by governments, while the rest (including mainstream trade) needs a looser set of regulations for smooth operations only. Government's financial support will often be needed to finance the value of the externalities, since classical, transaction-based economic and financial measuring and statistics are unable to measure them, let alone well-being.

ODA is the prime tool to apply a correction for externalities, even if they are negative, such as arms, privacy infringement or tourism. OECD could work on that. There is low-hanging fruit in this area. Trade is a tool for development, but development is not a goal of private companies. Their overwhelming goal is profit or return on investment. Their prime restriction is risk. They do not need much support beyond the incidental education effort to find profit or return on investment. OECD should concentrate on risk.

The poorer the country, the higher the risk. Traders should be able to rely on a system of rule of law, with clear property rules. They need a reliable and fair payment system. They rightly consider corruption as a considerable risk. They consider weak or no consideration of ESG as risk.

More and more, they see non-activity (including no net zero targets, net zero targets after 2050, targets without credibility and targets linked to impossible demands) on climate change as very risky indeed in particular as it is clear already that laggard countries will eventually face prohibitive border controls for their goods and services. These risks, in particular climate change risks, are more important as the trade or investment project is longer term. Yet, longer term trade relations and long-term investments are exactly what most effectively drives development.

Taking risk mitigation as the central factor to stimulate trade and investment in the poorer countries would make OECD action significantly more effective. Such a policy would be an important argument towards the private actors in trade and investment and an impetus for co-operation between private and public parties.

Go to the profile of Kieran Jones
9 months ago

Hi Peter,

As always, thank you very much for your insightful comment. From the OECD’s perspective, it’s important to note that Aid for Trade’s emphasis on trade facilitation plays a key role in reducing the risks traders face due to institutional shortcomings. With respect to risks linked to corruption, our research indicates a strong correlation between integrity and streamlined and transparent border processes.

We also agree that risk mitigation should be an important objective of Aid for Trade, as well as aid at large. The COVID-19 crisis has improved the perception of risk and how it affects the long-term value of assets, including in OECD countries. This should help promote better risk management and alignment of finance with the SDGs—the best roadmap to resilience.

Specifically on Aid for Trade, significant efforts are made to build the resilience of global or regional value chains, and mitigate the effects of external shocks. Innovative finance, for example, is a preferred tool for risk-mitigation, and blended finance contributes to de-risking investment in order to mobilise private finance in developing countries. Risk is also addressed through Aid for Trade with the improvement of the investment and business environments—this includes programmes in support of SME-upgrading or regulatory reforms in the services sector, which contribute to increased predictability of transactions and to securing the quality of local production and sourcing.