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Future directions in Aid for Trade

Expert Comment

Written by Jodie Keane, Dirk Willem te Velde, Lucy White

Image credit:Trade at the Port of Cartagena, Lucy White

The concept of Aid for Trade (AfT) has developed from a means of trade adjustment towards a co-ordinated and more targeted way in supporting trade and development. Total AfT flows in 2020 amounted to $48.7 billion. In order to retain its relevance, the concept needs to address emerging questions regarding its future relevance for graduating Least Developed Countries (LDCs), environment sustainability and gender, as well as supporting Africa’s integration efforts and private sector development, more generally.

Introduction

At its inception, Aid for Trade considerations responded to developing country needs to help them adjust to multilateral trade liberalisation. Now, the 2030 Agenda and the Sustainable Development Goals (SDGs) Target 8a, ascribe a pivotal role for AfT and call for increased resources, both for LDCs and developing countries more broadly. LDC specific disbursement mechanisms such as the Integrated Framework (IF) followed by the Enhanced Integrated Framework (EIF) covered the analytical needs of LDCs. These mechanisms are currently under review with ongoing debate regarding its next funding window.

The global pandemic has constrained donor resources, but AfT support has traditionally been an effective source of assistance helping countries to reduce trade costs, raise exports and transform their economies. With the 8th Global AfT Review undergone this week, there are pertinent questions regarding the future of AfT, its focus and related institutional structures to enhance its effectiveness. We explore some of these issues sequentially, beginning with some of the themes of the eighth review - sustainability and gender - before providing some final thoughts on the overall future of AfT for developing countries and the LDCs, specifically.

Sustainability, gender and digital concerns

As the sustainability theme of the 2022 review shines a spotlight on environmental issues and climate change concerns, there is an urgency in changing mindsets away from simplistic box ticking exercises towards more comprehensive consideration of the interactions between trade, the environment, and climate change. More action is needed to accelerate adaptation and climate change mitigation efforts, with around 51% of AfT commitments in 2020 related to climate objectives.

Whilst $556 billion of AfT has been disbursed since 2006, the environmental footprint of these flows is unknown. Confronting the climate emergency requires Paris Agreement aligned AfT: trade related support which operates within the climate change commitments and frameworks provided by the Paris Agreement, such as Nationally Determined Contributions (NDCs) and Adaptation Plans.

Greening AfT therefore requires addressing longstanding issues regarding the governance of AfT, additionality to conventional overseas development assistance, and far greater consideration of climate justice and how to work more effectively with climate finance.

With regards to gender equality, in order to understand the significance of the progress made in firmly placing women’s economic empowerment (WEE) on the AfT agenda, it is necessary to take a brief look back. Focusing specifically on LDC disbursement mechanisms, the Integrated Framework (IF) was established in 1997 and transitioned to the Enhanced Integrated Framework (EIF) following recommendations made in 2006. It was only in 2019 that gender indicators were placed on the results framework, along with a greater focus on the environment. There are important links between confronting the climate challenge and women’s economic empowerment, which the EIF has explored. The broader focus of the 2022 Global Review on these issues is therefore welcome, but there remains a lot of catching up to do and a need for better understanding of how all AfT donors are adjusting their practices to address both sustainability and gender concerns. This can be done alongside increased attention towards AfT supporting moves towards a digital and more connected economy.

Dedicated support to LDC transition

AfT is an integral part of SDG 8 – decent work and economic growth – and in particular target 8a, which seeks increasing AfT support for developing countries and LDCs. Analysis suggests AfT may influence the likelihood of LDC graduation- i.e. when a country has developed to the point it is no longer an LDC; for an LDC to graduate, it must have passed any two of the three graduation thresholds set by the United Nations Department of Economic and Social Affairs

It is surprising that the future of an LDC dedicated AfT funding mechanism remains debated, even though all UN members have agreed to support smooth graduation processes by LDCs. The EIF supports LDCs for up to five years after graduation; this is one of the few global mechanisms that continue to provide technical and financial support to graduated countries to facilitate a smooth transition. Whilst there is always room for improved effectiveness, uncertainty regarding its future is potentially damaging for LDCs and contrary to the 2030 Agenda, which has already seen the LDCs fail to achieve their target to double global exports by 2020 given the severe economic effects of the Covid-19 pandemic.

Support for Africa’s integration efforts

The African Continental Free Trade Area (AfCFTA) is a key integration project spearheaded by African countries to transform their economies as part of the AU 2063 agenda. A number of so-called AfCFTA Phase 1 issues, such as tariff negotiations, have concluded (with some outstanding issues around rules of origin). Phase 2 negotiation issues (including investment, competition, intellectual property rights, digital trade, and women and youth) have a real dynamism this year.

Negotiations are due to be finalised in September 2022, and countries need to move towards implementation. Progress has been made, for example, as of this week- 25th July 2022, a range of countries announced that they will officially begin trading under AfCFTA rules with the launch of the Rules of Origin Manual and e-tariff Book. Another example is how some countries, in particular Ghana and Nigeria, have put in place active AfCFTA national implementation committees. Such dynamism around Africa’s trade integration requires focused attention helping African countries to trade, industrialise and build regional value chains through private sector development.

Future directions of Aid for Trade: resourced, focused and aligned 

AfT is discussed by the WTO’s Trade and Development Committee and the OECD monitors donor flows, with AfT amounting to around one third of total assistance. Aid for Trade disbursements increased during the pandemic, reaching an all-time high of USD 48.7 billion in 2020. However, whilst total amounts disbursed and flows have increased since its inception, there are real concerns that this momentum could be lost in 2022 as OECD members struggle with economic recovery.

The focus of AfT flows at a sectoral level has tended to become narrower over time, with shares destined for the energy and transportation sectors accounting for the largest shares particularly for LDCs – in pursuit of the broader objective of productive capacity. But given the synergies between the focus of AfT and NDCs, greater institutional alignment is required with UNFCCC processes and checks for compatibility to support sustainability objectives.

With regards to Africa’s integration efforts, which are seeing some real momentum, a focused effort backing the AfCFTA could see AfT supporting the wider objectives of trade and economic transformation on the African continent. This approach would be in line with the emphasis placed by the WTO Director General at the review on Investment for Trade - to underline the importance of greater public-private sector cooperation and mobilisation of private resources.

Finally, it will be important for AfT initiatives to keep a dedicated focus on addressing the specific needs of the LDC group and its members (many of whom are African) including a smooth graduation process rightly celebrated by some of its members.