OECD Trade Policy Papers
This series is designed to make available to a wider readership selected trade policy studies prepared for use within the OECD.
NB. No. 1 to No. 139 were released under the previous series title OECD Trade Policy Working Papers.
- ISSN: 18166873 (online)
- https://doi.org/10.1787/18166873
Binding Constraints to Trade Expansion
Aid for Trade Objectives and Diagnostics Tools
Trade can be a powerful engine for economic growth, poverty reduction, and development. However, harnessing the power of trade is often difficult for developing countries, particularly the least developed
countries, because of supply-side domestic constraints (lack of trade-related infrastructure and capacity).
The Aid for Trade Initiative was launched to address these constraints. This paper sets forth strategies to identify the most binding constraints to trade expansion so countries and donors can channel resources toward reforms and projects that have the largest effect. It shows that the four most common objectives of
aid-for-trade projects (increasing trade, diversifying exports, maximizing the linkages with the domestic
economy, and increasing adjustment capacity) have the potential to boost growth and reduce poverty in
developing countries. However, the potential of trade may not be realized as developing countries often
face binding constraints that prevent them from turning trade opportunities into trade, and trade into
growth. First, they face difficulties turning trade opportunities into trade flows because of capacity
constraints and lack of adequate trade-related infrastructure. Second, some domestic constraints choke the
impact of trade expansion on economic growth. The paper focuses on the first set of constraints and
presents various diagnostic tools available to identify them. These tools often pinpoint a long list of
constraints. As all constraints cannot be addressed simultaneously, there is a need to identify the most
binding ones in order to prioritize reforms. The paper suggests combining the different diagnostic tools in
an appropriate framework to achieve this prioritization. An adaptation of the growth diagnostics—
originally developed by Hausmann et al. (2005) for guiding growth strategies—can be such a framework.
By shifting the focus from growth to trade, this framework can be readily adapted by local authorities and
development practitioners.
Keywords: trade expansion, trade and growth, supply-side constraints, infrastructure, trade reform, binding constraints to trade, export diversification, diagnostic tools, trade capacities, aid for trade
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