September 30, 2016

Whither Aid for Trade?

Caricom launched its “Aid for Trade (AfT) strategy 2013-2015” in the same year an important step towards reducing trade costs was taken at the Ninth WTO Ministerial Conference in Bali where Members concluded the Agreement on Trade Facilitation. AfT had been proposed unilaterally by G7 in 2005 in reaction to the growing gap in exploiting the opportunities in trade opened up by globalisation, the AfT regime is intended to assist developing countries with building their trade capabilities in line with their own development plans. The catchphrase was that “market access must be converted into market presence”.

This capacity building is critical since with the freezing of the Doha Round of the WTO, the developed world has focused on creating trading regimes in which the less developed countries are not in a position to benefit from their trade commitments. Since the start of the Aid-for-Trade Initiative, donors have disbursed a total of US$264.5 billion in official development assistance and an additional US$190 billion in other official flows for financing trade-related programmes in developing countries. A review should be conducted to determine whether the AfT has helped or hurt our economies.

As part of the Economic Partnership Agreement (EPA), for instance, the European Union (EU) had made a commitment to proceed with the AfT and to work with both Government and the Private Sector, especially the latter to boost their trade capacity. Very little has actually been done in the Caribbean. WTO has more specifically emphasised that AfT must be deployed to assist developing countries to enter the Global Value Chain (GVC) in which production is spread among any number of countries and value is added at each stage of the transfer. Much of today’s global trade is in intermediate goods which are imported, value added and then exported.

The problem is that most value is captured in the design and conceptual stage of the value chain, as well as in the final sales and marketing end of the GVC. However, this is not where most developing countries are located. They are generally located in the lower value manufacturing section of the GVC, and even then, this is true for some, not all developing countries.

The benefit a country gets from participating in the GVC will depend on where a country is lined up in terms of its technological capacities; the depth of their manufacturing capacities; how developed their services sectors are; the size of their enterprises; their managerial expertise; and their ability to meet the standards of the international markets to name only a few criteria.

Owing to these and other limitations, developing countries could open up, and they could become more integrated, but the quality of their integration may not be of real benefit. Mere liberalisation will not upgrade countries’ technological or services supply side capacities. Nor will Trade Facilitation Agreements – expediting the entry of imports through a range of customs procedures.

So the focus of AfT to increase trade via GVC has to be deepening the production capacities of developing countries so that they can garner a bigger share of the value added. From a decision Caricom made in 2009, the AfT strategy was crafted towards “upgrading key economic infrastructure; enhancing export competitiveness; diversifying economies; retooling the Private Sector; strengthening regional integration; and creating financial and other instruments to encourage and support innovation and research and development”.

We suggest that the impetus must be more directed to engender the movement of our manufacturing capacities beyond being assembly lines, creating a more vibrant agricultural sector – including agro-processing and increased production capacities in a range of services sectors. The latter is crucial because with the entry and exit of intermediate goods between countries, the service component of the GVC has grown exponentially. It now surpasses trade in manufactured goods.

Failure to engage in structural transformation especially of services and deepening of production capacities could mean that our countries will continue supplying raw materials or at best, sites for low value-added manufacturing tasks.

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