Concept Paper – Draft - 1 - “Aid for Trade” Increasing Support for Trade Adjustment and Integration – a Proposal Prepared by Susan Prowse1 3 June, 2005 Abstract This paper looks at the case for additional support for adjustment to trade reform and integration. It reviews both the economic and political rationale for increased support. Moving ahead multilaterally on a non-discriminatory basis will do most to help development. Therefore a successful outcome to the Doha trade round remains important. However, the consequent trade reforms will, for some, require adjustment both to the economic and social costs and concomitant policy reforms. Taking advantage of improvements in market access will entail additional domestic policy reform to facilitate trade as well as trade-related capacity building. To date, promoting trade and investment within a country’s national development strategy has been found to be “weak”. In a “constrained environment for aid resources”, trade-related issues have justifiably had to compete with priority sectors such as health and education. Securing a successful DDA will generate significant aggregate gains and relative to GDP both developed and developing countries stand to gain equally. A successful Doha round represents a powerful Global Public Good. In absolute terms developed country gains will be considerable. Seen in this context, against the potentially huge benefits arising, increasing support (representing a tiny increment of the likely gains) to facilitate trade, sustainable growth, and convergence of poor countries is a highly desirable win-win policy prescription. The paper considers various options for providing increased support and for improving aid effectiveness. In terms of the operational structure, this paper does not propose a new fund or mechanism but recommends building on existing structures and notably in line with the basic principles of the Integrated Framework (IF). The main purpose of the IF is to generate a broad-based policy agenda for trade and growth consistent with a country’s development strategy, and to prioritise capacity building needs to which bilateral and multilateral donors respond. Increased resources should be provided either as project finance or budget support, and in both cases should be considered and disbursed in the context of a country’s macroeconomic and development strategy. As such, issues relating to the absorptive capacity and likely exchange rate and competitiveness impact of larger aid flows can be taken into account - essential to any consideration to increase aid. A consortium of development partners, the IF links the IFIs with the UN system (trade development) and the WTO (trade rules). The basic principles of the Integrated Framework promote the “emerging new aid framework” which calls for greater donor “harmonisation” (both bilateral and multilateral) and for additional aid to be provided in the context of a country’s overall development strategy and to support poverty reduction objectives. The Integrated Framework is also working to bring in other key stakeholders – notably the private sector. 1 The author is with the International Trade Department of the UK’s Department for International Development. The views expressed in this concept paper are personal and should not be attributed to DFID. The author is grateful to Lynne Charles, Eleanor Fuller, Adair Heuchan, Bernard Hoekman, Alan Hudson, Faizel Ismael, Hans-Peter Lankes, Patrick Messerlin, Jan-Peter Mout, Anne Simmons-Benton, and Peter van den Heuvel for useful discussions, and suggestions and also to comments received from participants at the second meeting of the Steering Group, March 21, 2005 on “Economic Development and Global Trade Architecture” chair Ernesto Zedillo.Concept Paper – Draft - 2 - CONTENTS Page(s) Summary and Conclusions 4 I. Introduction 7 II. The Case for Support for Trade Adjustment and Integration 8 a. The Economic Case for Support 8 i) Impact of preference erosion 8 ii) Net food importers 9 iii) Macroeconomic trade-offs and adjustment 10 iv) Trade reform necessary yet not sufficient 11 b. The Political Economy Case for Support 13 III. “Aid for Trade” – A “Win-Win” Policy Prescription 14 a. The potential gains from further multilateral trade liberalisation 14 b. Promoting trade and investment in national development strategies 15 c. “Aid for Trade” – A “win-win” policy prescription 16 IV. Options for Additional 18 a. Direct yet additional contributions 19 b. Leveraging future aid commitments (an IFF mechanism) 19 c. Private sector partnership/Involvement 20 d. Asymmetric trade levy – “giving back revenue to those that we should not be taxing and in return we all agree to tax each other less” 21 e. Additional resources arising from the consumer gain 22 f. Budget reallocation 23 g. Aid-effectiveness – getting more from existing resources 24 V. Operational Structure of Fund 26 a. Guiding criteria (the “New Aid Framework”) 27 b. Building on the basic principles of the Integrated Framework 28 VI. Summary 30Concept Paper – Draft - 3 - VII Tables, Graphs and Boxes 31-46 Table 1 Percentage decrease in average export unit values following a 40% cut in preference margins as a result of multilateral tariff reduction (estimate) 31 Table 2 Comparative static estimates of economic welfare gains from full and from a 50% (successful Doha) global liberalization of goods and services trade 32 Table 3 Summary of benefits and costs of liberalizing subsidies and trade barriers 33 Table 4 Change in real income from full liberalization of goods trade 34 Table 5 Tariff revenue generated on minimal import duty 36 Table 6 Total import duties for selective OECD countries 38 Table 7 Change in real consumer prices from full liberalization of goods trade 39 Table 8 Proposed EU sugar sector price changes 40 Table 9 Price premium in the EU agricultural sector 40 Graph 1 Schematic: Capturing an Increment on Tariff Revenue 42 Box 1 Integrated framework – current status 43 Box 2 “Aid for Trade” – Increased support for trade adjustment and integration building on the basic principles of the Integrated Framework 44 Box 3 “Aid for Trade” – Increased support for trade adjustment and integration building on