This joint OECD/WTO Aid for Trade at a Glance is a timely publication in a landmark year. From it a strong message emerges about the importance of trade and the multilateral trading system in delivering economic growth and development. It reminds us that high trade costs are a drag on economic development and trade integration, in particular for the poorest. Its call to action should resonate at the WTO’s December 2015 Ministerial Conference in Nairobi, Kenya - the first WTO Ministerial Conference to be held in Africa. It is a message that should also echo in the UN’s Post -2015 Development Agenda and negotiations on its financing.

High trade costs inhibit numerous developing countries from fully exploiting the market access opportunities that the multilateral trading system creates. Cumbersome and time-consuming border procedures, obsolete or ill-adapted infrastructure, limited access to trade finance and the complexity and cost of meeting an ever broader array of standards all serve to price too many countries out of international trade. Comparative advantage remains underexploited. Market access does not always convert into market presence. The potential gains from trade are not always fully realised. The Aid-for-Trade Initiative was launched at the 2005 Hong Kong World Trade Organization (WTO) Ministerial Conference to tackle these kinds of constraints and is making headway. The joint OECD-WTO report, Aid for Trade at a Glance 2015, cites many examples of where obstacles are being overcome and the attendant development benefits. Yet more remains to be done. The report calls for a redoubling of efforts to tackle the issue of trade costs which continues to marginalise many of the world’s poorest and most fragile economies.

Trade can play a powerful role in contributing to productivity, growth, incomes and jobs. The evidence is incontrovertible that openness to trade raises national incomes. Trade can also contribute to new and better jobs and improve overall working conditions. It is essential for the transfer of knowledge, technology and skills – and thus for development. Indeed, trade is in most cases the single most important external source of development financing. Aid for trade helps developing countries maximise the gains from trade by assisting them to analyse, implement and adjust to trade agreements and to build their supply-side capacity and infrastructure they need to compete internationally.

International trade is not a seamless process. “Frictions” abound that give rise to trade costs. High trade costs effectively nullify comparative advantage by rendering exports uncompetitive. High trade costs deny firms access to technology and intermediate inputs, preventing their entry into, or movement up, global value chains. High trade costs also erode consumer welfare narrowing the range of good and services on offer and pushing up prices. While trade costs do not alone explain the development pathways of economies, they are a major factor explaining why some countries are unable to grow and diversify. The range of policies that affect trade costs is broad. Although trade costs are ubiquitous, they are not immutable. Action can, and is, being taken to reduce trade costs. Policy reforms are yielding positive impacts, although these cannot be assumed, with research suggesting that the lowest income countries stand to gain the most from enacting such reforms. Much work remains to be done to reduce trade costs further and integrate countries more completely into the global economy, but there are positive reasons to believe that developing countries and their partners are taking this issue seriously.

Recent advances in trade theory and empirics make it possible to infer trade costs from the observed pattern of trade and production across countries. This chapter uses that insight to provide evidence on recent trends in trade costs, focusing on the developing world. The data show that developing countries, particularly low income countries, suffer from relatively high trade costs. They risk continued marginalisation from the global trading economy. However, empirical research suggests a variety of policies that can be effective in reducing trade costs, such as improving trade facilitation and logistics performance, boosting connectivity and improving the business environment. There is scope to tackle trade costs on a regional basis – and in a way that is strongly compatible with the aims and values of the multilateral trading system. Going forward, it will be important for partner countries and donors to learn from successful examples of on-the-ground projects that have reduced trade costs sustainably.

This chapter looks at the volume of aid-for-trade disbursements and commitments and provides details about the sectoral, geographic and income distribution. In addition, it summarises academic literature that has analysed the links between aid, trade, economic growth and poverty reduction and finds that on average these links are positive, both at the aggregate and country level. These findings are confirmed by the case stories submitted by the public and private sector about aid-for-trade programmes. Finally, the chapter assesses the outlook for aid for trade as moderately positive.

Economic research and field evidence show that removing administrative and regulatory bottlenecks at borders can have powerful effects on reducing trade costs and increasing trade. The purpose of the new WTO Trade Facilitation Agreement is to expedite the movement, release and clearance of goods, including goods in transit. Implementation should help developing and LDC members reduce border inefficiencies, and the resulting costs, so realizing these gains. One particular feature of the Agreement is the implementation flexibility that it accords to WTO members. First, many of the approximately 35 technical trade facilitation measures are written in language that does not mandate but rather requires “best efforts.” Second, the Agreement allows each developing or LDC member to determine when it will implement each trade facilitation measure, and to determine the support needed for its implementation

For the LDCs reducing trade is doubly important because since they start from a lower base, they can potentially derive disproportionately higher benefits compared to other countries. Thus LDCs are taking necessary measures aimed at lowering trade costs either on their own or with the support of the private sector, and some have achieved considerable success. However, they are unable to make a transformative shift because of limited institutional capacity and resource constraints. This is where aid for trade can help, as evidenced by the success achieved by various multilateral, regional and bilateral aid-fortrade initiatives. The paper shows that the impact of aid-for-trade intervention on reducing trade costs in LDCs tends to be higher when they include a robust and credible analytical work, a high level of country ownership, institutional capacity building on a sustained basis, continuous support for a sufficiently long period, resource leveraging and a co-ordinated response from donors. Moreover, such intervention can be successful if political economy challenges are appreciated, mainstreamed and mitigated.

This chapter highlights the importance of trade costs for the participation of developing countries in Global and Regional Value Chains. It considers in particular the role of different trade facilitation aspects such as border procedures and quality of infrastructure and shows how developing countries can reduce trade costs through those two specific areas. It discusses then how regional co-operation can be an effective strategy to promote integration into value chains by addressing regional bottlenecks. In addition it reviews multi-country and regional aid for trade initiatives highlighting some of the projects which are yielding good results and others which have not seen as much progress.

Small and medium-sized enterprises (SMEs) represent the backbone of economic activity in both developed and developing country economies. SMEs tend to be less productive than large firms, and the productivity gap is particularly pronounced in developing countries. Evidence shows that SMEs that are integrated in global markets – whether directly or indirectly – are more productive than those that do not participate in trade. Integration into global and regional markets is thus likely to contribute to closing the productivity gap between SMEs and large enterprises, with positive repercussions on the inclusiveness of growth. SMEs suffer disproportionally from trade-related fixed costs, which create a bias in favour of large firms that find it easier to overcome fixed costs. A reduction of fixed costs to trade can therefore contribute to making trade more inclusive. Survey evidence reported in this chapter shows that costs related to access to information, access to trade finance or regulatory burdens are particularly important for private sector activity. In order to design effective solutions to reduce relevant costs, in particular those occurring at the border, collaboration between the public and the private sector is useful.

This chapter looks at the engagement of the private sector in aid for trade and in particular the role donor agencies have played in promoting this through supporting an enabling environment for the private sector and addressing market failures in terms of information asymmetries and access to finance. After discussing the various models of public-private co-operation, the chapter concludes that engagement of the private sector in development offers opportunities but also challenges in terms of expectations, costs and benefits and time frames.

“Sustainable development must be an integrated agenda for economic, environmental and social solutions. Its strength lies in the interweaving of its dimensions. This integration provides the basis for economic models that benefit people and the environment; for environmental solutions that contribute to progress; for social approaches that add to economic dynamism and allow for the preservation and sustainable use of the environmental common; and for reinforcing human rights, equality, and sustainability. Responding to all goals as a cohesive and integrated whole will be critical to ensuring the transformation needed at scale.” (Paragraph 84 of the UN Secretary-General’s Synthesis Report on the Post-2015 Agenda).

Business is a strong proponent of reducing frictional barriers to trade and investment. Partnership between the public and private sectors is needed to ensure that efforts in implementation address value chain needs and reach tipping points for growth. To that end, it is important to integrate the private sector at the beginning of aid-for-trade planning. Constant dialogue between government and the private sector can help adapt reforms to meet the needs of users and enhance impact. While the first priority of business is implementing the Trade Facilitation Agreement, measures to streamline border administration should not stop there. A comprehensive and co-ordinated approach beyond encouraging trade is also required. For example, enabling trade should go hand in hand with facilitating investment. This chapter addresses these issues from the business viewpoint, reviews ongoing efforts and suggests options for enhanced collaboration between business and donors in driving and implementing trade facilitation.

Much has been achieved since the Aid for Trade Initiative became operational in 2006. The initiative has succeeded in raising awareness among developing countries and donor agencies about the positive role that trade can play in promoting economic growth and development. Since 2006, a total of USD 246.5 billion in official development assistance and USD 190.7 billion in trade-related other official flows has been disbursed to contribute to financing aid-for-trade programmes. There is now ample empirical evidence suggesting that aid for trade is broadly correlated with increases in trade. Despite these achievements, a number of challenges loom as the Aid-for-Trade Initiative needs to adapt to the 2015 development agenda, with its focus on Sustainable Development Goals, such as maintaining focus, scaling up, ensuring poverty impact, enhancing effectiveness, ensuring sustainability, expanding partnerships. Embedding a trade cost perspective at the centre of the Aid-for-Trade Initiative would provide an operational focal point for action among a broad collation of stakeholders.