Aid for trade and its role in promoting trade for poverty reduction

1. Summary of findings

Aid for trade is a long-standing area of development cooperation that helps countries to expand their trade. According to the World Trade Organisation (WTO), aid for trade aims to assist developing countries to increase exports of goods and services, to integrate into the global economy, and to benefit from liberalised trade and increased market access.

What are the main trade constraints facing developing countries?

The research literature identifies a wide range of areas which constrain developing countries’ ability to trade. These include high trade costs due to, for example, excessive trade restrictions and regulations, burdensome customs procedures, poor infrastructure and limited access to important inputs such as finance and skills. In recent official surveys of trade constraints facing developing countries, the WTO and the Organisation for Economic Cooperation and Development (OECD) ranked their top constraints in order of importance as follows:

• Trade facilitation constraints including weak regulations and inefficient border procedures leading to delays and increased costs.
• A lack of export diversification due to limited productive capacity, including low levels of training and skills.
• Weak growth of micro, small and medium enterprises (MSMEs) driven by limited skills, lack of access to finance, weaknesses in local infrastructure, complex trade procedures and challenging product standards.
• Low integration into value chains due to limited access to markets, difficulties in achieving economies of scale, lack of information on potential markets, challenges in supplying large volumes at consistent quality, and difficulty accessing services (such as training and logistics).
• Weaknesses in e-commerce development due to limited access to the required technology, low internet connectivity and poor electricity infrastructure.

What factors determine the distributional impact of trade?

Evidence shows that trade has the potential to help lift households out of poverty, although better-performing firms are initially better positioned to take advantage of new exporting opportunities, and therefore workers in these industries will benefit more. Small and medium enterprises (SMEs) often face considerable difficulties in accessing the benefits from improved trade. Studies also show that when firms are exposed to greater levels of import competition, some can struggle to compete and lose market share, leading to job and revenue losses.

Increased import competition can bring benefits by reducing prices for consumers. Often poorer groups can benefit more from these changes because they spend a higher proportion of their income on consumption. However, the price benefits of improvements in the trading environment are not always passed on to consumers due to barriers related to geography, weak competition in intermediary markets and over-regulation.

A range of household characteristics influence the ability of households to adapt to trade-related changes. For instance, if a household consumes imported goods and services, cheaper imports benefit them as consumers, but if they face increased competition as producers or workers, they may face challenges in maintaining their incomes. Key household characteristics that influence the ability to take advantage of opportunities include demographic characteristics (such as gender and age), assets, mobility and geographical proximity to markets.

What works in aid for trade programming?

Aid is only one element among many that shape trade outcomes. Recent literature has continued to try to unpack the impact of aid on trade and to identify ‘what works’ in improving trade outcomes. For instance, studies looking into the effects of support for strengthening trade policy and administration have noted that these interventions take time to impact on trade outcomes but can help to expand access to regional and international markets through improved outcomes in trade negotiations. Also, product safety and quality standards have been a growing feature of global trade, posing major challenges for developing countries. The research suggests that using aid for trade to help developing countries meet these challenges can help them to integrate into global value chains. Trade facilitation interventions, such as improving customs procedures, can be highly impactful for promoting trade, by reducing the time and cost of trading across borders. Investments in improving trade-related infrastructure (for example, roads, ports, border posts and energy) can achieve very significant returns, also largely through reducing the time and costs of trading.

According to the literature, there are a broad range of measures that need attention to ensure that poorer and marginalised groups can benefit from an expansion in trade. Promoting competition within supply chains and among trade intermediaries can help to ensure that the benefits of trade are passed along supply chains. Enterprises that may struggle to benefit from trade opportunities (such as SMEs and smallholder farmers) can be supported to trade through training and capacity building and improving access to finance. Also, trade-related infrastructure can be particularly beneficial if it reaches more remote, informal and marginalised groups. For example, developing feeder roads can help link smaller and more remote communities to major transport networks.

Evidence suggests that smaller and informal firms struggle to access the networks and inter-firm relationships required to support them to export, due to their lack of social capital networks. The literature also emphasises that small-scale and marginalised producers face the most significant challenges in meeting quality standards necessary to access wider markets, which limits their ability to integrate into global value chains. Aid programmes can support these firms to address such constraints; for example, by bringing together women to collectivise their produce through cooperatives and provide training and services to help them reach the necessary standards, enabling them to reach the quantities and quality required for export.

Relevant contextual factors affecting trade

Since 2015, major contextual changes in the UK and globally have impacted international trade. Global exports showed minimal expansion over the last ten years. Several factors have disrupted global trade, including protectionist policies in many countries, limited progress at the WTO to agree the Doha Development Round, trade tensions between the US and China, the COVID-19 pandemic, the Russian invasion of Ukraine, high energy prices and inflation.

The COVID-19 pandemic demonstrated the vulnerability of global supply chains to shocks and global crises. Poorer producers particularly suffered, given their limited resources for managing shocks. The pandemic contributed to an increase in e-commerce and an increase in sourcing from suppliers who are geographically closer, and is likely to contribute, in the longer term, to greater diversification of suppliers to reduce risks.

In the lead-up to the UK’s formal exit from the European Union (EU), in January 2020, the UK signed deals to roll over existing EU trade agreements and preferences to avoid disruptions to trade with developing countries. This new system of trade preferences – the Developing Countries Trading Scheme (DCTS) – was announced in 2022. It expands the number of countries gaining access to preferences and provides slightly better access than the previous EU agreements.

Beginning in early 2022, Russia’s invasion of Ukraine had significant impacts on trade and prices of key agricultural and energy commodities, given that both countries are major exporters of both. This has contributed to huge increases in prices of basic staple foods and fertiliser in developing countries, impacting production and hampering food security.

According to the latest forecast from the WTO, world trade is expected to remain subdued in 2023 due to multiple shocks. The international trade architecture has also been under duress, with the failure of the Doha Development Round, continued trade tensions between China and the US and rising protectionism throughout the world. These factors all create challenges for developing countries in expanding their trade opportunities globally.

2. Introduction

There is strong evidence in the literature that increased trade contributes to increased economic growth (Krueger, 2019; Bergh and Nilsson, 2014). Developing economies face several constraints to expanding trade, ranging from poor infrastructure to gaps in productive capacities.

There is convincing empirical evidence that trade helps reduce poverty indirectly through its impact on growth, although the direct impact of trade on poverty remains contested. It is widely agreed that trade can have diverse impacts on different groups of people, depending on, for instance, which sectors their livelihoods are linked to and where they live. While advances have been made in using research and analysis to understand who broadly benefits and loses from changes in trade patterns, it has remained difficult to generate micro-level evidence on these distributional outcomes. There is a growing awareness of the need to better understand the impact of trade-related policies and aid for trade interventions on inclusive trade and growth to, in turn, inform the direction of policies and interventions (Gasiorek et al., 2019; WEF, 2021).

The Aid for Trade initiative, launched at the sixth WTO Ministerial Conference in Hong Kong in 2005, aimed to help developing countries to “implement and benefit from WTO agreements and more broadly to expand their trade” (WTO, 2005, section 57). Subsequently, the WTO established the Aid for Trade Task Force with the aim of operationalising the Aid for Trade initiative.

The WTO broadly defined aid for trade as “helping developing countries, in particular the least developed, to build the trade capacity and infrastructure they need to benefit from trade opening” (WTO, n.d.). The task force defined the following aid for trade categories: trade policy and regulations; trade development; trade-related infrastructure; building productive capacity; trade-related adjustment; and other trade-related needs. This review categorises aid for trade as follows, drawing on the WTO, as well as OECD, definitions:

• Trade policy and regulations: Support to help countries develop and implement trade-related policies, regulations (for example, food standards) and trade agreements (for example, WTO, continental and regional agreements).
• Trade facilitation: Support to simplify the process of trading across borders (for example, customs procedures) to reduce the time and cost of trading.
• Building productive capacity: Support to build the capacity of the private sector to export, either directly or via export supply chains, and to benefit from trading opportunities.
• Trade-related infrastructure: Support to develop trade-related infrastructure (such as roads, ports and border posts) to connect domestic markets to regional and international markets.

A common conceptualisation is that all four categories collectively constitute the ‘broad’ definition of aid for trade, with the first two of these categories (trade policy and regulations, and trade facilitation) constituting the ‘narrow’ definition of aid for trade.

This literature review was produced to inform a review by the Independent Commission for Aid Impact (ICAI) of the UK government’s aid for trade programming, which assessed the relevance and effectiveness of UK aid for trade and its approach to learning, including the extent to which UK aid for trade programmes address binding constraints to trade, promote poverty reduction and inclusion, and have adapted in response to recent political and global challenges.

This literature review focuses on addressing the following themes:

• Identifying evidence in the literature on the most significant constraints to trade for developing countries (Chapter 4) and the main factors influencing whether or not increased trade contributes to poverty reduction and improved inclusivity (Chapter 5).
• Identifying evidence and best practice on ‘what works’ in aid for trade programming to tackle the most significant constraints to trade (Chapter 6) and to support inclusive trade (Chapter 7).
• Identifying evidence in the literature on important trends and contextual changes over the last ten years that may affect the relevance and effectiveness of aid for trade (Chapter 8).

3. Methodology

To address the focus themes of this literature review (see Chapter 2), we undertook a structured search of the literature (Petticrew and Roberts, 2006) using criteria to identify the most relevant literature. This process involved undertaking the following steps sequentially:

• Step 1: A search of registries of academic literature, including University of Sussex Library, Web of Science, and Google Scholar.
• Step 2: A snowball sampling of the literature quoted by the initial studies identified in Step 1.
• Step 3: A search for literature using non-academic search engines (such as Google).

In order to carry out Steps 1 and 3, key terms were identified to inform these searches. We started by using the specific search term “aid for trade”. Further searches were conducted by combining “aid” and “assistance” with variant terms like “trade”, “poverty”, “constraint” and “inclusion”. Other key search strings included: “trade agreement”, “trade negotiation”, “trade policy”, “trade-related adjustment”, “technical assistance”, “trade costs”, “trade development”, “trade productive capacity”, “trade infrastructure” and “export promotion”.

The resources available for this literature review were relatively limited, and therefore not all relevant pieces of literature identified through this search process were reviewed in detail. Instead, we concentrated on reviewing an adequate level of the most relevant literature relating to each focus theme.

The literature that was identified and reviewed through this process included published papers, academic studies, and reports issued by development agencies (for example, WTO and OECD), as well as grey literature (such as blogs, articles and opinion pieces).

4. The most significant constraints to trade for developing countries

This chapter explores the literature identifying the most significant constraints to trade that developing countries face. Section 4.1 explores trade constraints that are identified in the research on the trading context facing developing countries, and Section 4.2 identifies insights from formal international surveys of developing country governments on the trade constraints they encounter. These sections complement each other by bringing together insights from empirical research and statements of perceived needs.

1.1     Insights from the research literature

Trade policy and regulations

Evidence in the literature shows that unfavourable trade regimes – characterised by excessive tariffs (taxes on imports or exports), quotas (limits on the volume or monetary value of imports or exports), regulations and other non-tariff barriers (NTBs – such as product standards) – contribute to high trade costs.

Hallaert et al. (2011) state that trade tariffs and quotas in general are a constraint, but note that the overall magnitude of their impact is small for developing countries, with NTBs more significant barriers to trade. Hallaert et al. (2011) also suggest that a 10% cut in trade tariffs globally would only increase the imports and exports of developing countries by just over 0.1%. However, Hoekman and Nicita (2011) and Orden et al. (2012) note that tariffs are higher for agricultural products than for manufactured goods, with Moïsé et al. (2013) finding that tariffs act as a significant constraint for developing country trade in agriculture. Moïsé et al. (2013) calculate that, on average, a reduction of global agricultural tariffs by 10% would increase the agricultural trade of developing countries by about 3.7%.

There is extensive research exploring the negative effects of NTBs on the time and cost of trading across developing countries. Vanzetti et al. (2018) estimate that by reducing NTBs across Africa, countries could gain $20 billion lost to trade costs – substantially more than they could gain from eliminating tariff barriers. The United Nations Conference on Trade and Development (UNCTAD) also estimates that across the Asia Pacific region the average combined cost of all NTBs is 15.3%, which is almost three times the size of the cost effects of tariff measures (UNCTAD, 2019).

Nicita and Gourdon (2013) analysed the pattern and use of NTBs to trade across 26 developing countries. They found that technical barriers to trade (that is, all product quality standards) affected around 30% of international trade, and sanitary and phyto-sanitary standards (food safety standards) affected over 60% of agricultural products.

International product quality standards – usually justified to address health and environmental risks – can pose significant challenges for expanding exports particularly in resource-constrained developing countries (Clougherty and Grajek, 2012). It has been suggested that, among non-tariff measures, product standards are the most challenging to address and have become a growing feature of global trade (Fugazza, 2013), particularly in agriculture, where these standards can act as a significant constraint to developing country exports (Kareem, 2022). It has also been found that demands of meeting trade standards have often excluded small businesses, small farms, women, and older producers (Kaplinsky and Morris, 2017). Findings do show, however, that efforts to comply with international standards over time can open up lucrative export markets for developing countries (Ferro et al., 2015).

Trade facilitation

Trade facilitation constraints relate to the processes and procedures involved with moving goods across borders. There is a wide range of literature exploring the challenges that developing countries face in these areas.

The World Bank found that, across sub-Saharan Africa, it took an average of 59 days and required the signatures of 18 officials to export a standard container of goods in 2006, compared to 18 days and three signatures for exporting the identical goods from an OECD country (World Bank, 2005). The World Bank also found that the time taken to move goods across borders is higher for poorer and more vulnerable developing countries, as in 2014 a container of goods took 32 days to export from least developed countries (LDCs), 23 days from lower-middle-income countries and 20 days from upper-middle-income countries (World Bank, 2014).

An illustration of the effects that such bureaucratic delays have on trade is provided by Djankov, Freund and Pham (2010), who calculated that each day that goods are delayed at customs is equivalent to a country distancing itself an additional 85 km from its trading partners, and that for every extra day a country requires to move goods across its border, its trade is reduced by 1%. Subramanian et al. (2005) analysed the effect of border clearance times on firm-level productivity for manufacturing firms in China and Brazil, and found that reducing export clearance times in China by a day would result in a 2% increase in firm-level productivity for apparel and leather goods and more than a 6% increase for consumer goods.

In addition to challenges posed by formal trade processes and procedures, there are often significant informal barriers to moving goods, such as demands for bribes or other forms of corruption. De Jong and Udo (2006) found that higher levels of corruption in the management of border institutions in a country reduces its level of trade with other countries, especially where this corruption is chaotic and unpredictable for traders. De Jong and Udo (2006) did, however, note that where a country’s trade institutions are particularly bad, corruption can increase trade levels by helping goods to move quicker than they otherwise would. The problem of corruption is closely linked to excessive trade barriers, as a survey by Transparency International-Kenya (2012) found that corruption is often prompted by the likelihood of delays.

A number of studies estimate the potential gains from improving trade facilitation across developing countries. The OECD estimates that trade facilitation programmes alone could reduce trade costs by 14.5% for low-income countries and 15.5% for lower-middle-income countries (OECD, 2013). Beverilli et al. (2014) calculate that developing countries are likely to experience a substantial increase in the number of destination markets and new export products if they implement the measures in the WTO’s Trade Facilitation Agreement. Francois et al. (2005) estimate that the potential benefits of improving trade facilitation for global trade can be two to three times greater than those derived from removing all tariffs on manufactured goods.

Based on an econometric analysis of firm-level data for a wide variety of developing countries, Hoekman and Shepherd (2015) find that firms of all sizes export more in response to improved trade facilitation, and therefore the benefits do not just accrue to large multinational firms.

Trade infrastructure

According to the literature, weaknesses in trade-related infrastructure – which includes transport, communications, energy and storage – are a major constraint to trade across developing countries. Analysis by the Asian Development Bank found that 40% of firms in India, 45% in Pakistan, 60% in Bangladesh and 75% in Nepal reported that weak infrastructure was a significant constraint to their efforts to grow (Jha and Arao, 2018).

Limao and Venables (2000) found that poor road infrastructure added significantly to the costs of trade, especially for landlocked countries. They estimated that poor road infrastructure contributed 40% of predicted transport costs for coastal countries, but that this increased to 60% for landlocked countries. A survey of trucking companies using international road corridors across Africa found that poor road conditions affected the costs of transporting goods through reducing the lifespan of trucks, increasing vehicle maintenance and increasing fuel costs (Teravaninthorn and Raballand, 2009). It also found that road conditions and facilities at the entrance and exit to ports or major cities were the most significant constraint on trade costs. Hallaert et al. (2011) analysed trade costs and volume data across a large sample of developing countries and found that the trade-related growth constraints posed by poor transport infrastructure were as much as eight times greater than those posed by tariffs. They also found that expanding the quantity of transport services was more relevant for promoting improved trade outcomes than improving their quality.

Ports are a critical element of transport infrastructure for trade, as most imported and exported goods are transported by boat. It is estimated that ports contribute between 8 and 12% of total transport costs globally and are an important component of transit times (TradeMark East Africa, 2012). Abe and Wilson (2009) show that cutting port congestion by 10% could result in a reduction in transport costs of up to 3% in East Asia. Haddad et al. (2010) found large efficiency gains and a positive impact on regional trade as a result of port improvements in Brazil.

Hallaert et al. (2011) found that the reliability of electricity supply is a more significant binding constraint to trade than road infrastructure. They also found that the quality of electricity services is more relevant to trade outcomes than the quantity of such services. Constraints in access to electricity across developing countries are also a major factor limiting the development of e-commerce (Mbise et al., 2018; OECD and WTO, 2019), which has become a more significant component of international trade since the COVID-19 pandemic (UNCTAD, 2022b).

A range of studies have identified the significance of the quality of information and communications technology (ICT) infrastructure for trade across developing countries. Ochieng et al. (2020) found that, looking across data from 11 East African countries between 2000 and 2018, ICT constraints had a more significant effect on limiting regional trade than transport infrastructure. Portugal-Perez and Wilson (2012) analysed data across 101 developing countries between 2004 and 2007 and found that weaknesses in ICT infrastructure become more significant constraints to trade as a country’s income increases.

In a survey of the needs of women traders and SMEs in South Asia (Raihan et al., 2016), a critical reason for not engaging in value chains and trade was the lack of proper access to trade-related infrastructure, including warehouses.

Access to finance and skills

Credit constraints and underdeveloped financial institutions have been shown to affect aggregate trade flows and to restrict firms’ participation in international trade (Manova, 2010). Access to finance was found to be the second most significant binding constraint after the quality of electricity supply according to Hallaert et al. (2011). The importance of finance to trade development is driven in part by the fact that international trade increases the costs to firms, with the global trade finance gap over $1.5 trillion and developing economies accounting for the vast majority of the gap (ADB, 2019). Access to finance has been found to be a constraint particularly for the role of SMEs in trade. The Asian Development Bank (2019) found that over 40% of SMEs’ applications for trade finance were rejected, due to weaknesses related to their anti-money laundering protections, low credit ratings and internal capital requirements.

Skills and human capital have been identified as vital to the ability of countries to diversify their exports into new products (Elhiraika and Mbate, 2014), to develop manufacturing export capabilities (Edwards and Alves, 2006) and to ensure that SMEs are able to access international markets (Paul et al., 2017).

1.2     Insights on priorities identified in global surveys of aid for trade needs

Since 2007 the OECD and WTO have conducted biennial surveys of aid for trade needs across developing countries, and of aid for trade priorities of donors. This section presents some insights from a review of the results of these surveys, especially the most recent one in 2022.

Based on responses to the most recent OECD-WTO survey, developing countries ranked their top five aid for trade priorities in the following order of importance: trade facilitation; export diversification; MSME growth and development; connecting to value chains; and e-commerce development (see Table 1).

Table 1: Top five priorities for aid for trade interventions, 2013-22

Source: 2013-2022 OECD/WTO global review of aid for trade surveys

Additional insights emerging from these surveys on each of the five main priority areas identified in the most recent OECD-WTO aid for trade survey are presented below.

(i) Trade facilitation: Trade facilitation is the most frequently cited aid for trade priority, according to several global surveys by OECD and WTO over the last ten years (see Table 1). Aid for trade recipients and donors are also often well-aligned on the importance of resolving trade facilitation constraints (OECD and WTO, 2022; Gero et al., 2016).

(ii) Export diversification: Difficulties in being able to diversify the goods they export and to trade in a wider range of sectors have been consistently cited as one of the key challenges faced by developing countries (OECD and WTO, 2019 and 2022 – see also Table 1). The most significant impediment to diversification identified by developing countries in Asia and Africa was a lack of industrial or manufacturing capacity. Access to trade finance was identified as the most significant constraint in Latin America and the second-highest ranking constraint in Asia. In 64% of LDCs, high trade costs were regarded as one of the top three obstacles to economic diversification, with the size of the local/national market and distance to external markets also highlighted (OECD and WTO, 2019). For example, Mauritius identified its remoteness from major markets, along with limited natural resources, as a barrier to diversifying its economy (OECD and WTO, 2019).

(iii) Micro, small and medium enterprises’ growth and development: MSMEs suffer significant obstacles to trade, and promoting their development is a growing priority for aid for trade (OECD and WTO, 2019 and 2022; ADB, 2019). Aid for trade can help MSMEs to overcome supply-side capacity constraints preventing them from participating in supply chains. Since the Aid for Trade initiative’s inception in 2005, donors and recipient countries have devoted greater attention to MSMEs (OECD and WTO, 2019).

(iv) Value chains: Developing country enterprises encounter significant capacity, expertise and resource constraints which limit their participation in global value chains – networks of production and trade that operate across countries. Aid for trade is increasingly being prioritised to address these constraints (OECD and WTO, 2015).

(v) E-commerce: E-commerce emerged as a top aid for trade priority for developing countries only in the most recent OECD and WTO survey of aid for trade needs (see Table 1), seemingly because of the significant role that this form of trade has played in sustaining trade during COVID-19 restrictions (OECD and WTO, 2022). E-commerce is, though, also predicted to be a more significant part of global trade in the future. Reflecting these challenges and opportunities, aid for trade support is increasingly prioritising e-commerce, including improving ICT connections and alleviating capacity bottlenecks for digitalisation (OECD and WTO, 2022, 2019 and 2015).

An analysis of the trade constraints faced by developing countries across OECD-WTO surveys also makes clear that these constraints differ across countries. For the sample of countries in Table 2 it is clear that, while weaknesses in border processes and infrastructure were a common challenge across all of these countries in the 2010s, trade constraints were diverse and included: weak competition in the transport sector (Cambodia and Malawi); informal payments (Cambodia and Laos); logistics weaknesses (Cambodia); outdated technical requirements applied at borders (Malawi); weak road networks (Burundi); and weak logistics (Cambodia and Laos).

Table 2: Diversity of trade constraints in least developed countries (2010s)

Source: OECD-WTO (2019, 2017, 2015, 2013, 2011)

5. What works in aid for trade programming to promote trade?

The fact that aid for trade spending is only one element among many that shape trade outcomes makes it difficult to assess the impact of different forms of aid for trade on addressing trade constraints and promoting trade (Melo and Wagner, 2015; Gnangnon, 2020; Sardar et al., 2022; Alonso, 2016). Despite these empirical difficulties, a diverse literature has developed exploring the impact of aid for trade on countries’ trade outcomes.

At the aggregate level, a range of studies support the conclusion that aid for trade broadly has a positive impact in promoting trade. It has been estimated that an extra $1 invested in aid for trade generates nearly an additional $8 of exports on average from developing countries (OECD and WTO, 2019). Research by Lee and Park (2018) on the historical role of aid for trade in trade development in Korea found that aid for trade is positively associated with higher export levels. Brazys and Elkink (2021) found that aid for trade has been effective in promoting improved export outcomes at the firm level in Nepal, using micro-level evidence and geo-referenced data on aid for trade projects.

In contrast, a range of other studies find weaker or no correlation between aid for trade flows and trade outcomes. Using data on aid for trade flows from 1996 to 2013, Kim (2019) found a negative correlation between total aid for trade flows and export concentration levels in the short term, with no significant effects on export structures in the long term. Cirera and Winters (2019) found that aid for trade flows did not have any statistically significant impact in assisting the process of structural economic transformation across Africa, although they noted evidence that aid for trade had reduced the time required to move goods across borders.

The section that follows looks beyond these studies exploring the impacts of general aid for trade flows, and synthesises available evidence on the impacts of specific categories and types of aid for trade, and on the channels through which this assistance has supported improved trade performance.

Trade policy and administration

Most studies of the effects of support for strengthening trade policy and administration assess the impact of such interventions alongside others focusing on trade facilitation challenges. As a result, there are few studies that look specifically at ‘what works’ in relation to trade policy and administration.

Wang and Xu (2018) show that, compared to other categories of aid for trade, support to trade policy (including support for trade facilitation) has the largest positive effect on the quality of exports, and the effect increases when aid for trade is cumulated over time, implying that the impact takes time to come into full effect. In particular, a 50% increase in the value of aid for trade received from a donor on trade policy increases the recipient’s export product quality by 0.5 to 1% for exports to both donor and other OECD markets. About half of this observed quality upgrading effect is driven by the fact that these interventions raise the quality of existing products in existing markets (intensive margin), with the other half coming from higher-quality products being added to the continued markets and higher-quality continued products being exported to new markets (extensive margin).

Vijil (2014) explored the impact of aid for trade on regional integration across developing countries. The study concluded that, when combined with economic integration policies, aid for trade was effective in increasing trade flows. It found that assistance provided to build the capacity of trade-related institutions generated the strongest complementarities with economic integration efforts.

Lee and Oh (2022) found that aid for trade interventions relating to policy and regulation have helped transition economies in the Greater Mekong Subregion by improving their trade performance and regional integration, although less substantive positive results were found for other South and South-East Asian countries.

There is extensive research exploring how aid for trade can support developing country exporters to meet international product standards. Unnevehr and Ronchi (2014) reviewed seven empirical studies assessing the impact of donor technical assistance related to production standards, and found positive impacts across these studies, although in two cases sustainability was judged to be limited. Redden (2017) also presents a range of successful donor support programmes providing support to producers to meet international production standards and export to global markets. For example, in Bangladesh’s shrimp sector, support by the EU and Norway for developing systems to trace quality standards and risks across the supply chain, improving the reliability and validity of testing systems, and setting up a vocational centre and laboratory for business operators, helped to successfully introduce traceability systems in over 190,000 farms and to support the sector to address the challenges posed by an EU export ban resulting from antibiotic contamination. Also, in Tonga’s watermelon sector, support by the EU and Australia for reviewing production methods, assisting with post-harvest handling and export procedures, and delivering training on standards compliance, helped the sector to increase exports of watermelons to New Zealand from 86 tonnes in 2010 to 271 tonnes in 2013 (Redden, 2017).

The Standards and Trade Development Facility (STDF) (2018) has provided technical assistance to businesses across the developing world to help them meet the production standards required for exporting to global markets. STDF has conducted several evaluations of its support which provide insights into ‘what works’ in providing this type of assistance. These evaluations find that, although impact varies by country, sector and project, support for standards compliance by producers can have significant positive impacts. The types of aid for trade interventions that were reported as effective included support for developing manuals setting out product safety and quality standards (Nigeria and Uganda), setting up systems for tracing quality and risks across supply chains (Nigeria, Thailand and Vietnam), and upgrading of processing facilities (Sri Lanka).

Trade facilitation

The research literature suggests that trade facilitation interventions can be highly impactful for promoting trade, although most studies explore the impact of a broad package of measures.

Using trade cost and flow data on a large subset of developing countries, Cali and te Velde (2010) found that for every additional $1 million in aid to support trade facilitation, there is an associated 6% reduction in the cost of packing, loading and transporting goods. Similarly, Helbe et al. (2009) found that a 1% increase in aid supporting trade facilitation (approximately $88 million in 2005) would yield an increase of global trade of approximately $415 million.

Cantens et al. (2011) analysed a pilot programme for customs reform in Cameroon that involved the introduction of contracts with performance indicators for frontline customs inspectors in two of the country’s customs bureaus. The performance contracts were found to reduce clearance times and the number of disputes over checks, and resulted in a decline in more costly physical inspections.

A review of impact evaluations of ICT projects within customs services (to improve trade facilitation) indicates a significant reduction in processing times and documents used for exports and imports, which can be linked to lowering trade costs (TradeMark East Africa 2012). It also indicates significant increases in the volume of imports and substantial increases in government revenue and collection efficiency following the introduction of ICT programmes (TradeMark East Africa, 2012).

Improving the regulatory environment and competition around trade-related infrastructure can also be important for facilitating trade. Teravaninthorn and Raballand (2009) reported that the deregulation of the trucking sector in Rwanda led to significantly lower costs for customers, due to the resulting competition within an expanded domestic trucking fleet. Hummels et al. (2009) estimated that eliminating monopolies and other structures that limit competition in shipping would boost trade volumes by 5.9% for the US and 15.2% for Latin America. In the aviation sector, Borchert et al. (2012) found that moving from an intermediate level of restrictiveness to an open regime could lead to a 25% increase in flight connections per airline, which could make trade easier.

Trade infrastructure

The research literature suggests that investments in improving trade infrastructure can achieve very significant returns, although it is unclear which areas of trade infrastructure are most valuable, and needs vary across sectors.

Cali and te Velde’s (2010) analysis of trade data across a large subset of developing countries found that, among the various categories of aid for trade, aid for economic infrastructure has the strongest correlation with increases in exports, with the effects felt most significantly in the mining and manufacturing sectors.

Buys et al. (2010) explored the returns on a pan-African programme of road infrastructure development on inter-city corridors. They found that the costs savings generated by the roads would equal the construction costs after just over a year. They also estimated that $254 billion of additional trade would be generated over the project’s lifetime at a cost of about $32 billion.

Moïsé et al. (2013) illustrated that developing agricultural exports are highly responsive to the quality of transport and trade-related infrastructure. They calculated that a 10% improvement in the quality of transport and trade-related infrastructure has the potential to increase developing country agricultural exports by 30% (Moïsé et al., 2013). This finding illustrates the importance of exploring these issues at a sectoral level.

Expanding access to energy infrastructure seems to be particularly important for promoting trade in manufactured goods. Ferro et al. (2012) found that a 10% increase in aid to energy is associated with an increase of 6.8% in manufactured exports from recipient countries.

Digital technologies can help alleviate barriers that make it difficult for small businesses to participate in international markets (Kim and Khan, 2020; Cusolito et al., 2016). For example, in rural China, the rapid expansion of e-commerce for agriculture has resulted in much higher demand for value-added niche agricultural items such as organic food. Access to information for farmers in countries such as India is addressing information asymmetries, a major source of trade-related expenses, while the internet is being used to cut physical logistical costs in East Africa, lowering transaction costs for producers (Bartley et al., 2018).

Export promotion agencies

The research suggests that when export-related information is scarce, export promotion agencies (EPAs) can help provide information. These institutions can help firms in non-traditional sectors fill information gaps, even if they are not yet exporters (Teh et al., 2016). EPAs help existing and potential exporters overcome informational barriers by assisting them with market prospection and promotion, as well as providing technical assistance when necessary (De Melo and Cadot, 2014). Álvarez and Crespi (2000) evaluated a Chilean EPA and discovered that its activities had an impact on the supported firms’ number of export destinations but not on their number of export products.

Several firm-level studies have found that export promotion appears to be more effective at influencing the performance of established exporters than it is at encouraging non-exporting firms to begin exporting, thus limiting the effectiveness of EPAs for new entrants (Bernard and Jensen, 2004; Görg et al., 2008). EPA assistance is also likely to be more effective in assisting firms in overcoming barriers to entering new markets – be it new products or new export destinations – than in increasing export volumes (De Melo and Cadot, 2014; Martincus and Carballo, 2008).

Lederman et al. (2010) found a large return to additional funding in a cross-country study using a survey of EPAs. Studies show that EPAs contributed to successful export promotion (OECD and WTO, 2019; De Melo and Cadot, 2014; Lederman et al., 2010) in the following cases: where EPAs work in policy environments with no strong anti-export bias, such as an overvalued exchange rate, high tariffs that provide nominal and effective protection, or high trade costs; where special procedures, such as export processing zones or special export finance facilities, are in place and can protect exporters from adverse trade policies; where EPAs operate autonomously, flexibly, and maintain open channels of communication with private actors to support a demand-driven strategy; and where it is preferable to fund export promotion activities through general revenues rather than export taxes.

In some developing countries, however, EPAs have had a limited impact on export performance. Underfunding, government interference in management, a lack of private sector involvement, and policy environments that were sometimes biased against exports all contributed to their low effectiveness (De Melo and Cadot, 2014).

6. The distributional impact of trade and the factors relevant to inclusion

The research literature indicates that changes in the trading environment (such as new trade policies, export opportunities or import flows) affect different groups in society in different ways, and that these varied distributional impacts are shaped by the diverse socio-economic context facing each of these groups. The literature therefore suggests that this socio-economic context needs to be factored into understanding how changes in the trading environment, including the effects of aid for trade, have affected/will affect various groups in society.

Among the groups of people whose socio-economic context and experience of trade dynamics has been of growing interest to trade policymakers and researchers are the poor and the marginalised (Higgins and Prowse, 2010; World Bank and WTO, 2015; Engel et al., 2021). By ‘the poor’ we refer broadly to those who live below various (national or international) income poverty lines, and by ‘the marginalised’ we refer broadly to those who face some form of marginalisation, whether due to their gender, age, location, caste, religion, disability or sexual identity (DFID, 2015).

This chapter presents an overview of the emerging research literature which supports an understanding of the relevant socio-economic contextual factors and transmission mechanisms that shape the distributional impact of trade and how the poor and marginalised are affected by aid for trade. The structure of this chapter is informed by the main categories of factors and transmission mechanisms identified by Engel et al. (2021) that determine the distributional impact of trade – labour markets and consumer prices. However, it also reflects insights presented by McCulloch et al. (2001), who emphasise that trade impacts are ultimately multi-dimensional and are driven by diverse household characteristics, and these are also explored.

Although this literature review is concerned with aid for trade, this chapter also draws on evidence from the broader literature on the distributional effects of trade policy reforms, for two reasons. First, aid for trade can and does elicit changes to the changing environment that are similar to trade policy reforms. Second, the literature on the distributional impact of trade policy reforms is far more developed than that relating to the distributional impact of aid for trade.

Labour market factors and channels

Evidence from around the world shows that export opportunities help lift households out of poverty through employment and the labour market channel, contributing to the structural transformation of economies (Pavcnik, 2017; Engel et al., 2021). At the same time, these studies illustrate that those people living in geographic areas more exposed to import competition can be made worse off from trade through the same channel.

Overall, there is clear evidence that export sectors which gain from trade generate incentives for informal workers to enter formal employment, thereby gaining better rewarded and more secure employment (Engel et al., 2021). On the other hand, the informal sector remains a buffer in the short and medium term for negative trade shocks, by providing employment for workers who have lost formal sector jobs (Pavcnik, 2017).

There are documented cases where developing countries have faced increased income inequality after trade policy changes due to frictions related to labour and capital mobility, particularly for marginalised groups (Attanasio et al., 2004; Goldberg and Pavcnik, 2007). Importantly, these frictions are related to geographical barriers, policy distortions (such as regulations to promote a flexible labour market) and the fact that skills often are not transferable across sectors (Engel et al., 2021). As such, labour mobility frictions and distributional effects of trade are deeply connected (Artuc, 2021). The costs of moving between regions can be high for certain groups of people and this lowers the economic benefits they might gain from trade. This is relevant as export- and import-competing industries are often clustered in different locations (Artuc, 2021).

A study in Brazil shows that the medium-term effect of liberalisation-induced foreign competition on unemployment was larger in microregions where labour market regulations were more strictly enforced, making labour shifts harder (Ponczek and Ulyssea, 2018). In India, evidence shows that mobility across districts is particularly low for individuals living in the poorest households, reducing their income and consumption levels after negative trade shocks more than richer counterparts (Topalova, 2010). A study in Indonesia suggests that workers in more remote regions, particularly further away from Java, face such high mobility costs that they are unable to adjust to trade shocks and become unemployed, with the highest impact driven by imports of consumption goods (Cali et al., 2019). A study in South Africa found that workers displaced by import competition found it difficult to move into other sectors (Erten et al., 2019). This was particularly strong among relatively less educated workers and non-white workers. On the other hand, there was no evidence of significant differences with respect to gender, age or location. The research emphasised that these employment changes persisted over a long period for these affected groups, suggesting that adjustment costs do not fade over time for specific groups of people.

Trade theory also suggests that initially better-performing firms are better positioned to take advantage of new exporting opportunities, as these types of firms are more likely to be able to engage in the competition required to successfully trade locally and internationally (De Loecker and Goldberg, 2014; Melitz and Redding, 2014).

Firm size may also make a difference to who benefits from the opportunities arising from domestic and international trade. Although smaller firms can be more agile to take advantage of trade opportunities, they still struggle the most to improve profits and productivity in the medium-to-long term (Quak et al., 2022). In general, research shows that larger firms are mainly involved directly in international trade, while smaller firms seek forward and backward links with these firms (WTO, 2022c). It also shows that smaller firms and small-scale producers struggle more to access inputs and outputs, finance and other services, where markets are often poorly developed (Poulton et al., 2006). Small businesses – which are often informal and employ workers on lower incomes – also face considerable difficulties acquiring the skills (Moïsé et al., 2013) and social capital resources (Paul et al., 2017) required to engage in trade.

The implication of this analysis in terms of aid for trade is that the impact of support provided directly or indirectly to firms to improve their trade performance will be mediated by any negative competition effects on other firms, and by whether the firm supported is well placed to take advantage of trade opportunities.

Consumption channels

There is evidence that where improvements to the trading environment lead to cheaper imports and lower prices there is a pro-poor impact, because the poorest households use a greater share of their income to consume tradable goods. As a result, a small decline in consumer prices because of trade improvements can have a disproportionately positive impact on the poor (Fajgelbaum and Khandelwal, 2016).

However, it is also recognised in the research that the gains from improvements to the trading environment are not always passed on to consumers and households, due to various factors. Engel et al. (2001) identify three main barriers to the transmission of price benefits of gains in trade: geographical barriers, which are relevant in areas more remote from borders and in rural areas; barriers related to limited competition among intermediaries (such as transporters, aggregators and marketers); and barriers related to the structure of markets, as price transmission effects can be stronger where markets are less regulated and the private sector is more dominant.

Despite the general positive evidence on the consumption benefits resulting from improvements in the trading environment, there is evidence that these gains can be dwarfed by larger negative income effects – through employment, wages and firm performance channels – on specific groups, leading to overall net welfare losses mainly for the poorest and most vulnerable groups (Engel et al., 2021).

Furthermore, there is an understanding that if exportable goods become more attractive due to higher demand and prices in international markets, this could affect the availability and affordability of these goods in domestic consumer markets (Engel et al., 2021).

The implication of this analysis in terms of aid for trade is that if this support is focused on interventions to improve the functioning and efficiency of cross-border supply chains, there are opportunities for significant price benefits across poor and marginalised groups, but these effects may be mediated by any related impacts on labour markets and the geographical location of these groups.

Household characteristics

A range of characteristics influence the ability of households to adapt to trade-related changes by responding to opportunities and coping with adverse impacts. Household factors typically influence outcomes at the micro level, and the key factors mentioned in the literature can be categorised as mobility, the assets the household holds and the demographic characteristics of the household.

Mobility: There is evidence from the literature that labour adjustment costs and the time needed to adjust to changes in trade outcomes depend on where a household is located (Topalova, 2010; Dix-Carneiro and Kovak, 2017; Cali et al., 2019). Often urban and better-connected regions have more opportunities to adapt to changes in trade because adjustment costs there are lower and adjustment time shorter. The opposite is often true in more rural and remote regions that are less connected to markets. The consumption benefits for households are also more concentrated in urban and better-connected regions, because there are fewer barriers there for passing on any tariff cuts for imported goods (Engel et al., 2021). The net welfare gains of trade policy changes and trade shocks in the short, medium and longer term therefore vary a lot depending on the location of households.

Assets: Another critical household factor relates to assets, in other words human capital (such as levels of education, skills and health); physical capital (such as legally owned land or other property); social capital (the social networks that support individuals during hard times and give opportunities) and financial capital (such as savings and access to credit). A study of Tanzania, Mozambique and Jamaica illustrated that, because of restricted access to land and credit, and complex power relations over the control of resources, it was highly unlikely that the majority of vulnerable women would be able to take advantage of new opportunities resulting from trade (Fontana, 2009). Hence, gender is critical for understanding how households benefit (or do not benefit) from trade. Although they may have good opportunities in certain export sectors, women are typically more vulnerable because of gender differences in the distribution of income, and lack of access to productive assets such as credit and land, and this may limit the extent to which women can access trade-related opportunities (Higgins and Prowse, 2010).

Demographic and gender structures: The demographic characteristics of the household are also factors that affect the ability of both the consumption and the employment channels to benefit from trade. In Brazil it was found that adjustment costs of switching across industrial sectors was particularly high for less educated and older individuals (Dix-Carneiro, 2014). In India, young rural women were the ones that moved away to urban areas, resulting in increased mobility and labour force participation (Jensen 2012). In general, in most developing countries, women working in manufacturing are heavily concentrated in labour-intensive export industries, such as garments (for example, Bangladesh) and food processing (for example, Kenya), usually in low-skilled positions and with limited opportunities for training and promotion (ILO, 2018). Empirical analysis of 69 countries found that, between 1980 and 2011, trade openness, particularly because this was measured as exports as a share of GDP, increased occupational gender-based segregation and had a negligible impact on sectoral segregation (Borrowman and Klasen, 2020). Women are also less likely to benefit over time through employment with the introduction of technology to manufacturing processes – the so-called defeminisation of manufacturing – irrespective of the sector (Tejani and Kucera, 2021).

The implication of this analysis in terms of aid for trade is that the degree to which these interventions will benefit poor and marginalised groups will likely be mediated by factors such as how far they live from economic sectors, their levels of education and skills, their social capital, their access to financial assets, their level of economic empowerment, and social and cultural attitudes to their economic role. The analysis also suggests that aid for trade can play a valuable role in reinforcing the positive trade effects of certain household characteristics, and reducing the negative trade effects of other household characteristics.

7. What works in aid for trade programming to support inclusive trade?

There is a relatively limited body of literature directly exploring what forms of aid for trade are most effective in achieving inclusive trade outcomes – such as reducing poverty and tackling the economic and social marginalisation faced by groups such as women, ethnic, sexual or other minorities, and remote communities. This chapter therefore focuses mainly on presenting insights from the research literature which illustrate the type of specific constraints and challenges that the poor and marginalised face in benefitting from trade opportunities, and that aid for trade interventions can help to address. This literature is given further illustration by examples of inclusive aid for trade programmes, and of the inclusive impacts of aid for trade where these are available.

Diagnosing the trade constraints facing the poor and marginalised

As illustrated in Chapter 6, the constraints to trade faced by poor and marginalised groups are shaped by the specific socio-economic conditions they face in their communities and countries. As the WTO and OECD (2015) emphasise, the role of a country in international trade will be shaped by an understanding of trade costs at ports, for example, but the trade costs faced by the poor further down supply chains in rural areas and the informal sector will be very different.

Aid for trade can be used to support the diagnostic work that is required to better understand these specific constraints, so that other aid for trade interventions can help to tackle them and facilitate trade for the poor and marginalised. Over the last 10 to 15 years a range of initiatives and methodologies for diagnosing trade constraints have emerged, most notably diagnostic trade integration studies (DTISs) carried out by the Enhanced Integrated Framework (EIF, 2016), which have focused on LDCs. DTISs are among the earliest methodologies to explicitly focus on identifying gender-related constraints to trade (Higgins, 2012). However, a common weakness of these types of diagnostic studies is that they have focused significant attention on identifying constraints facing large-scale formal sector trade, but limited attention on experiences faced by SMEs and informal traders (Turner and Higgins, 2010), most of whom are women. Also, sectors such as agriculture (especially food crops) and small-scale rural infrastructure (such as feeder roads) have often been neglected by these studies (Rabinowitz, 2008).

Trade facilitation and inclusion

Aid for trade has focused extensively on trade facilitation interventions, such as improving customs procedures to expand cross-border trade. However, analysis suggests that these efforts have focused more intensively on border management issues facing larger and more formal traders than on those facing small and informal traders (Brenton et al., 2013). As a result of this focus, the specific trade facilitation needs of marginalised traders – such as informal traders and women – are not necessarily addressed.

The literature suggests that small-scale and poor traders are more vulnerable to having to pay bribes for getting their goods across borders, and the negative impact of paying these bribes can often be worse for these traders (Tyson, 2015). For example, research in Zambia found that, despite efforts to improve the functioning of formal border crossings, many small traders faced notable hostility and demands for bribes when using these borders (Brenton et al., 2013). There is also an extensive body of literature around the challenges that women traders face in relation to harassment and violence in using border crossings (Jacobson and Joekes, 2019). A study in Liberia of women cross-border traders provides an illustration of these challenges, as it found that 37% of respondents had experienced sexual violence in crossing borders (UNECA et al., 2010).

Higgins (2012) notes that women are disproportionately represented among informal traders, which means that mainstream trade policies and institutions can all too often fail to address the needs and challenges of these traders. This guidance note also quotes research by Dejene (2001) in West Africa which illustrated how women were not aware of trade reforms implemented in the Economic Community of West African States and the West African Economic and Monetary Union, and they had therefore failed to benefit from these reforms. Similar experiences have also been reported for women traders in eastern and southern Africa (Higgins, 2012).

Small traders also often face disproportionately high costs resulting from complying with requirements for moving goods across borders (Brenton et al., 2013). Research in Zambia found that the costs for informal traders of moving a ton of goods across the border at Kasumbalesa were three times higher than for large formal traders (World Bank, 2013). These experiences highlight the need to adapt border requirements to the needs of these traders. For example, the One Stop Border Post at Busia – on the border between Kenya and Uganda – has a policy to apply exemptions from formal border fees to goods valued at less than $2,000, the implementation of which would allow smaller-scale traders to trade more cost-effectively (Akaezuwa et al., 2020). The World Bank has also been working with the governments of Malawi and Zambia to introduce a ‘Charter for cross-border traders’, which will set standards for how cross-border traders should be treated and propose mechanisms for them to report abuses (Brenton et al., 2013).

The issue of how trade facilitation efforts can better promote the role of women in trade has also been gaining traction in research and policy debates in the last few years. Recent analysis has highlighted that bureaucracy and other barriers to trade can be especially harmful for women, given that women-owned businesses are generally smaller and therefore face disproportionately high trade costs, and women are often more time-constrained than men, so that bureaucratic delays are particularly challenging (ITC, 2015). Technical barriers to trade can also be particularly burdensome for women-owned firms due to the fact that women generally have more limited access to the education, training and literacy that would help them manage the challenges of meeting trade regulations (ITC, 2015).

In response to the increased focus on these issues, a range of policy approaches have been discussed and pursued. A recently published UNCTAD policy brief (2022) recommends several gender-specific actions, including: promoting gender mainstreaming in National Trade Facilitation Committees; proactively informing vulnerable and excluded groups by translating trade regulations and legislation into local languages and making them available in many ways and at key trade locations; making customs services women-friendly environments, with enough lights, safe spaces, internet connections and more female customs workers; and introducing new forms of automated online processes, which can help to reduce the risk of intimidation, abuse of power, bribery and corruption. Mackay (2008) also identifies a range of interventions that can be important for improving the safety and experience of women at borders when undertaking trade, including creating more representative border management institutions, a key element of which is employing more women; enhancing civil society oversight of border management; and having stronger training processes and codes of conduct in place to promote appropriate behaviour by border staff.

An example of a more inclusive trade facilitation programme is the South Asian Regional Trade Facilitation Programme, a joint Australian and World Bank initiative. This programme aims to integrate gender equality outcomes into activities implemented to improve trade between Bhutan, Bangladesh, India and Nepal. The programme has improved the transportation services that women traders use most often, conducted public information campaigns on safety issues for women traders, and developed training for female traders on legal protections and their rights. A report by Australia Aid and World Vision (2019) states that the programme has achieved significant outcomes on trade facilitation and gender equality through engaging at the micro level to improve the experience of women at cross-border markets. At the outset of the programme a diagnostic tool was used to identify gendered constraints at three levels: customs policies and procedures; border operations; and stakeholder relations (Taneja et al., 2018).

Complementary reforms and support

The literature suggests that aid for trade can provide support to address policy areas and interventions beyond those directly related to trade, which can help to ensure that poorer and marginalised groups can benefit from an expansion in trade.

First, there is recognition that competition in markets plays a fundamental role in determining the distributional impacts of trade interventions. Where competition is limited among intermediaries that are involved in trade (such as aggregators and transporters of goods), the benefits that traders gain from improved efficiency at borders might be captured by these intermediary actors, thereby limiting price effects for consumers (Engel et al., 2021). Likewise, where competition is limited among the providers of inputs that are required to produce goods and the traders that help get goods to market, the producers of goods will struggle to receive improved prices for their products (WTO and OECD, 2015).

Among producers, smallholder farmers and other small-scale producers have the least market power and are therefore most vulnerable to restrictions on competition in markets. For example, in the cotton sector in Burkina Faso and Zambia there are only a small number of tobacco buyers who facilitate the export trade, which limits the benefits that smallholders receive from improvements in trade facilitation. A simulation of the effects of increased competition among these buyers suggested that this would lead to an increase in the prices paid to farmers and the volumes of tobacco they produce (Porto et al., 2011).

Second, aid for trade can be used to provide support to particular categories of firms that struggle to benefit from trade opportunities, such as SMEs. Aid for trade can be used to provide direct training and capacity building to these firms to help them develop their skills, capacity and expertise, so that they can operate more efficiently (McKenzie and Woodruff, 2015). Another key element of this support is ensuring these firms are able to access the finance they need to pursue trade opportunities, because all too often they struggle to find affordable financing to invest in expanding their trade. This can include resourcing financing facilities targeted at these firms, so that they can invest in new technologies, new business models and other ways of improving productivity (IMF, World Bank and WTO, 2017). Aid for trade can also be used to introduce improvements to the overall business climate facing smaller firms (Engel et al., 2021). The Asian Development Bank surveyed SMEs on 19 areas of policy reform and support that could facilitate their participation in global value chains. The five most commonly referenced areas of policy included tax incentives for small suppliers, trade facilitation measures, simplification of trade procedures, improving domestic infrastructure, and reforms in ICT and transport (ADB, 2015).

Finally, the degree to which poor and marginalised groups benefit from trade opportunities is also often dependent on the existence of reforms and adjustments in the wider policy context that help to manage any negative effects these groups experience from changes in trade conditions. Aid for trade can be used to support or compensate those disadvantaged by changing trade conditions, so that they can respond to the more challenging trade context they face (Higgins and Prowse, 2010).

This support can take a range of forms. Aid for trade can support those in uncompetitive sectors to retrain to find alternative employment. In Mauritius, for example, aid for trade was used to provide vocational training to support workers displaced by a strategic effort by the government to evolve the economy towards high-value industries and away from traditional sectors (OECD, 2009). Aid for trade can also provide support – for instance through social protection programmes – to households dealing with vulnerability resulting from the volatility in prices that can occur as a result of greater openness to trade (Higgins and Prowse, 2010).

At the macro level, aid for trade can provide adjustment support to governments which lose revenue as a result of reducing tariffs. This can in turn ensure that public spending on safety nets, vital services and other forms of support for marginalised groups is not undermined by trade reforms (Stiglitz and Charlton, 2006). Aid for trade can also support labour market and other public policy reforms that can help marginalised workers adjust to the impacts of trade reforms (Francois et al., 2011). Empirical evidence suggests that it is the smaller, more marginalised developing countries that face the most significant challenges in dealing with the effects of trade reforms, given that their economies are the least diversified, their trade is mainly in sectors with significant trade distortions and their financial sectors are the least developed (Stiglitz and Charlton, 2006).

Trade infrastructure and inclusion

Research suggests that trade-related transport infrastructure interventions can be particularly beneficial for more remote, informal and marginalised groups.

Traders in rural and more remote regions often face higher costs in transporting goods for trade. This is due to a range of factors, including weaknesses in local roads and other transport infrastructure; the higher unit costs often charged to transport small volumes of goods; and the fact that in remote regions there are more limited transport services, which in turn makes these services more expensive (Higgins, 2012; World Bank and WTO, 2015). Due to the combination of these factors, the costs (on a per ton/km basis) of transporting goods between smaller and less developed local markets can be a multiple of the costs involved in transporting goods between major economic centres in a country or even international transport routes (World Bank and WTO, 2015).

Women, particularly in rural areas, can face not only these high costs, but also exposure to violence and other threats as transport options are limited and infrastructure hubs are often not safe (Brenton et al., 2013). These challenges facing women are all the more important given that research has suggested that women spend nearly three times as much time as men in transport activities, and they transport about four times as much in volume (Fontana, 2009). Weak road and transport networks have been identified as especially critical to women’s economic opportunities (Barrientos, 2002; World Bank, 2012). Investments in gender-responsive transport infrastructure and logistics services can thus provide a valuable stimulus to women’s ability to trade, export competitively and access vertical supply chains (Gupta et al., 2017). It is therefore important to undertake gender-sensitive analysis of infrastructure services, to understand how infrastructure planning and implementation can create facilities that better address the needs of women in poor communities (IFC, 2013).

However, a range of studies suggest that trade infrastructure programmes are often not designed and implemented in a gender- and poverty-sensitive way. Quak and Flynn (2019) found that most trade-related infrastructure interventions focus on the needs of larger firms and are not tailored to the demands of smaller and more informal enterprises where poorer and more marginalised groups may work. An analysis of the first phase of trade diagnostic studies carried out by the Enhanced Integrated Framework identified that these studies focus disproportionately on transport infrastructure linking major economic centres and pay much more limited attention to feeder roads that link smaller and more remote communities to major transport networks (Rabinowitz, 2008). Research by the Africa Development Bank Group on its portfolio of agriculture value chain programmes found that, although most interventions applied some design elements relating to women, youth and/or vulnerable groups, these were most commonly quotas for securing their participation in design and delivery (AfDB, 2018).

Trade networks and inclusion

Paul et al. (2017) identify the challenge of SMEs accessing the networks and inter-firm relationships required to support them to export, due to their lack of social capital and international links. Another study illustrates that the overall economic performance of small traders is greatly affected by their access to commercial networks and trade routes (Kuepie et al., 2014; Walther et al., 2015).

Gaining access to social networks that assist trade is also a key challenge commonly facing women-owned businesses. Research suggests that women often face obstacles due to being excluded from traditional, male-dominated distribution networks, as male-owned firms are more likely to find customers through traditional networks of contacts, whereas women-owned firms have to use other channels for securing trade links (Bossuroy et al., 2013). Fontana (2006) also highlights how more limited access to commercial networks is a factor leading to the exclusion of women from global value chains for processed goods. Research on efforts to bring women together to collectivise their production and trade suggests that efforts to promote these forms of collaboration could help women traders to network and gain access to trade opportunities (Jones et al., 2012).

Trade standards and inclusion

Research has emphasised the challenges small-scale and often marginalised producers face in meeting health and other production quality standards, which are often necessary for participating in global value chains. For example, Henson (2018) has highlighted the case of the shrimp value chain in South Asia, in which women producers lost market access due to the fact that the cost and complexity of meeting new standards was an insurmountable obstacle to them. Case studies of cocoa value chains in Ghana and India have illustrated that support programmes on food standards targeted at women can help them to maintain the levels of quality required to remain within these value chains (Barrientos, 2013).

An example of a programme which effectively supported women to meet the production standards required to access global value chains is the joint initiative of the World Bank and the WTO in support of the company Mango So in Burkina Faso (Australia Aid and World Vision, 2019). Mango So specialises in the processing and export of fruit and vegetables, and its managers and employees are mainly women. As the company lacked the appropriate processing equipment to meet environmental, food safety and import requirements, certification accreditation was very expensive and complex. The programme provided training to the workforce on how to meet hygiene and safety regulations, upgraded the company’s equipment and funded the certification. As a result, Mango So increased production from 32 tons in 2014 to 120 tons in 2017 and doubled its exports to the EU (Australia Aid and World Vision, 2019).

8. Recent contextual factors affecting trade

Over the period covered by the ICAI review of UK aid for trade (2015 to present), a range of major contextual changes relating to the UK and the global trading system have affected the evolving nature of UK aid for trade. These include a series of major global shocks such as the failure to conclude the Doha Development Round of the WTO, the great trade slowdown of 2015-16, uncertainty over the Brexit referendum (2016-20), the US-China trade war, the COVID-19 pandemic and post-COVID supply chain crisis, rising trade protectionism, and the ongoing Russian war in Ukraine that has dampened trade forecasts for 2023 due to extremely high energy prices and broad-based inflation.

This chapter presents an overview of the literature exploring the extent of these changes and how they have affected the distributional channels of international trade.

The COVID-19 pandemic

Initially, the pandemic saw huge supply-side shocks due to lockdowns, travel restrictions and logistical constraints. These disrupted supply chains including raw materials and commodities, intermediary inputs, and manufactured goods (Ali et al., 2022; UNCTAD, 2022b). Immediate demand-side shocks were felt mainly in international tourism because of travel restrictions. Companies in developing countries had problems exporting goods due to the closure of borders, reductions in international flights and a sudden increase in shipping, which collectively increased transportation costs and the time required to move goods (Arriola et al., 2021; Djankov and Panizza, 2020; IFC, 2020). Companies dependent on imports of intermediary or other goods also faced insecure delivery of inputs, and often higher input prices, which disrupted their production schedules, even if they were less affected by the direct responses to contain the virus (Hayakawa and Mukunoki, 2021).

Another implication of the pandemic was the increased use of digital tools to continue trading without the need to travel. E-commerce accelerated worldwide in domestic trading, but also gave rise to opportunities to expand to new markets (UNCTAD, 2022b). With e-commerce on the rise, companies and workers became more tech-savvy by implementing new ways of doing business and trading. However, governance systems and legislation are changing less quickly, which means that benefitting from these opportunities can be a challenge (ADB, 2022).

The overall impact of the COVID-19 pandemic was that trade volumes remained lower and the cost to transport higher, with more uncertainties attached to it (Barbero et al., 2021). There is discussion among scholars about how these disruptions will change international supply chains over the long term (Quak, 2020). Some foresee decisions to supply closer to home and relocate suppliers closer to the main markets. There is more consensus that companies will look into diversification in suppliers, being less dependent on one supplier in one country and making the supply chain more resilient (Bachetta et al., 2021). Some scholars highlight that these trends were already visible before the pandemic, and that the effect of COVID-19 may accelerate these decisions by companies that operate in global value chains (Verbeke, 2020; Quak, 2020). The search for new suppliers in other countries and the relocation of suppliers to new regions will create winners and losers in developing countries (Bachetta et al., 2021).

The impact of the COVID-19 disruptions on poor and marginalised groups was that many lost their jobs in tradeable sectors, including formal and informal workers (Saha et al., 2021). Producers lost incomes as they were restricted in selling their exportable goods (Castañeda-Navarrete et al., 2021; Tejani and Fukuda-Parr, 2021). Although the trade shocks were felt by all, poor and marginalised groups have fewer resources to fall back on due to limited assets. They also have limited access to finance, to low-interest emergency loans issued by governments and international institutions, or other support measures issued to businesses and households during the pandemic, such as cash transfers (Quak et al., 2022). A greater focus has therefore been placed on trade-related adjustment assistance (ADB, 2022).

In the latest global survey of aid for trade needs, over 70% of developing countries said aid for trade had grown in importance since 2019, primarily due to the economic and trade impact of the COVID-19 pandemic (WTO and OECD, 2022).

The UK’s exit from the European Union

The most important issue arising from the UK’s exit from the EU for developing countries is that their access to the UK market had to be transitioned away from EU trade agreements and towards UK-specific trade agreements. This included transitioning from: EU preferential trade agreements with LDCs, that is the Everything But Arms (EBA) agreement; EU preferences for low- and middle-income countries (LMICs), that is the Generalised System of Preferences (GSP and GSP+); and all existing EU trade agreements with developing countries (Mendez-Parra, 2022; Razzaque, 2023). The UK government avoided major trade disruption resulting from these changes by signing deals to roll over existing EU trade agreements and to launch an intermediary UK GSP scheme. These arrangements were then replaced by UK-specific agreements and a new UK system of preferences – the Developing Countries Trading Scheme (DCTS) – which was launched in 2022. The implication is that in general terms LDCs and LMICs are not worse off as a result of Brexit, but neither have they gained significantly improved access to the UK, which was a UK policy promise (Mendez-Parra, 2022; Di Ubaldo and Winters, 2021; Razzaque, 2023). The DCTS has, however, expanded the number of countries gaining access to preferences, made graduation processes more gradual, and relaxed rules of origin compared to previous EU agreements (Mendez-Parra, 2022).

The UK has also established a UK Global Tariff (UKGT) on goods for all countries that do not have a trade agreement with the UK. Tariffs in the UKGT scheme are set slightly lower than equivalent EU tariffs. The implication is that this benefits the countries which trade in products that did not attract some form of tariff concessions. However, the countries which accessed EU trade preferences will therefore face more competition from other countries because the UKGT implies lower tariffs for competitors (Winters et al., 2020). Among the exports most affected by these changes are those from the poorest countries, whose exports qualify for zero tariffs as part of the EBA component of the GSP (41 countries), which include agricultural products. From this perspective, it is higher-income countries that see an overall increase in their exports to the UK while the different groups of developing countries will see very small or even negative impacts (Winters et al., 2020).

Another issue is that before Brexit, developing countries could enter the EU market at one trade hub to distribute their products without trade restrictions within all member states, including the UK. Being out of the single market means that any products that first enter the EU as an input before being traded to the UK (in their original form or as new products) now face higher trading costs. Estimations show that these ‘indirect effects’ on exports should not be underestimated and can be material for certain specific industries, but also that their economic effects will be small in aggregate because the poorest countries supply only small amounts of inputs into the products involved in UK-EU trade (Montalbano et al., 2020). The Rules of Origin in the UK-EU trade agreement also seem to have low impact on important inputs such as cocoa from countries that benefit from Economic Partnership Agreements with the EU (Montalbano et al., 2020).

Russia’s invasion of Ukraine

While Ukraine and Russia are responsible for relatively small volumes of global trade overall – both countries collectively contributed 2.5% to world merchandise trade in 2021 – they are responsible for very significant volumes of trade in key agricultural commodities and in supplies of energy. Both countries collectively contributed around 25% of wheat, 15% of barley and 45% of sunflower product exports in 2019, and in the same year Russia contributed 9.4% of world trade in fuels, including 20% of global natural gas exports (WTO, 2022a).

There have been very significant negative consequences for developing countries due to disruptions to trade in these key agricultural and energy products precipitated by Russia’s invasion of Ukraine. In the summer of 2022, reports claimed that the prices of basic staple foods in developing countries had increased dramatically, with vegetable oil and sugar up by more than 50% and cereals up by 60% since the beginning of 2020. Fertiliser prices had also increased significantly (Relief Web, 2022). These price increases will have had significant impacts on the production and trade of goods into which these foods and other products were inputs.

Analysis carried out by the United Nations Development Programme (UNDP) suggested that the combination of these effects had led to the number of people in poverty increasing by 71 million during March-June 2022, a more dramatic impact than the effects of the COVID-19 pandemic. The most affected regions were the Balkans, countries in the Caspian Sea region and sub-Saharan Africa (in particular the Sahel region) (UNDP, 2022).

Trade slowdown and trade architecture

According to the latest forecast from the WTO, world trade is expected to lose momentum in the second half of 2022 and remain subdued in 2023 as these multiple shocks continue to weigh on the global economy. Global merchandise trade volumes grew by 2.7% in 2022. For 2023, however, the WTO foresees only a 1.7% increase – down sharply from the previous estimate of 3.4% (WTO, 2023). Import demand is expected to soften as growth slows in major economies as a result of high manufacturing costs and weak household spending in Europe due to high energy prices stemming from the Russian war in Ukraine; the effects of monetary policy tightening in the US on interest-sensitive spending; weak global demand and production disruptions in China due to continuing challenges with COVID-19; and the growing import bills for fuels, food and fertilisers in developing countries, which are contributing to food insecurity and debt distress (WTO, 2022b). Notably, the deteriorating trade relations between China and the US threaten to cause what Aiyar et al. (2023) call geo-economic fragmentation, the policy-driven reversal of global economic integration that could result in a contraction of between 2% and 7% of global GDP, based on different econometric modelling scenarios. This would have particularly adverse effects for developing countries and less well-off consumers in advanced economies, through lower knowledge and skills transfer, and slower income growth and an increase in consumer prices, respectively (Aiyar et al., 2023). The proposed alternatives for multilateral cooperation are all suboptimal, but may be the only way forward when countries are simply unlikely to agree, based on the new geopolitical realities (Aiyar et al., 2023).

The international trade architecture has also been under duress. With the failure of the Doha Development Round, the global economy and notably developing countries lost the potential trade gains from a successful treaty. Between 2011 and 2020, global merchandise exports showed minimal expansion, whereas in the previous decade (2001-11), these expanded from around $6 trillion to over $18 trillion. This change due to a number of factors, including an economic slowdown in China, a severe recession in Brazil, falling prices for oil and other commodities, and exchange rate volatility. Some progress was, however, made recently on the establishment of common trade rules, notably around fisheries at the recent WTO 12th Ministerial Conference in June 2022.

Several risks and challenges continue to cloud the multilateral trading system’s outlook. These include the continuing trade tensions between China and the US, rising protectionism, broad inflation, and debt pressures on developing countries, as well as the continuing war in Ukraine. These trends will continue to pose threats to the economic and trade recovery following the COVID-19 pandemic, particularly for developing countries. LDCs account for around 2% of total trade in goods and services and experience a slower growth rate than the rest of the world and other developing countries. An estimated 84 million people moved back into extreme poverty in 2020 as a result of COVID-19, with women disproportionately affected by the pandemic (Gay, 2021). The International Monetary Fund believes that low-income countries cannot cope with the current crisis on their own and risk losing a decade of progress (Gurara et al., 2020). Major reallocations and reductions in aid to developing countries may exacerbate the risks faced by these economies.

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