The Link Between Aid-for-Trade and Contingent Protection
| Published date | 01 November 2024 |
| DOI | http://doi.org/10.1177/00157325231159240 |
| Author | Neha Bhardwaj Upadhayay |
| Date | 01 November 2024 |
The Link Between
Aid-for-Trade and
Contingent Protection
Neha Bhardwaj Upadhayay1
Abstract
Foreign aid, in theory, is expected to mitigate constraints that impede the eco-
nomic development of recipient countries. At the same time that help is commit-
ted, donors are seemingly taking actions that are harmful to developing economies
in obvious ways. An example is the tacit circumvention of the putative rules-based
global trading system through contingent protection activities. In this article, it
is postulated that, on one hand aid-for-trade (AfT) is expected to have positive
impact on the exports of aid recipients by better integration into the global trading
order, on the other hand, aid provider (donor) curtails access to its own markets
by actuating contingent protection against the recipient (exporter). Using contin-
gent protection cases data from 2003 to 2018 (a 15-year period) against 106 recipi-
ent countries of the United States of America’s AfT, this study finds a significant
and positive impact of AfT on the surge in contingent protection activities. This
effect is entirely driven by the aid for economic infrastructure and services, while the
other main category of AfT-production sector, has no discernible effect on the rise
in protection against the recipient. To examine the heterogeneity in donor deci-
sions, this study is expanded to other traditional donors like Australia, Canada, the
European Union (EU) and New Zealand. This article finds that Australia behaves
similar to the USA; however, for Canada and the EU, the relationship between aid
and market access is not statistically significant.
JEL Codes: F1, F35, O19
Keywords
Aid-for-trade, contingent protection, trade policy, foreign aid policy
Original Article
Foreign Trade Review
59(4) 455–500, 2024
© 2023 Indian Institute of
Foreign Trade
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00157325231159240
journals.sagepub.com/home/ftr
1 Associate Researcher at ERUDITE (jointly under Université Paris Est Créteil and Université
Gustave Eiffel), France
Corresponding author:
Neha Bhardwaj Upadhayay, Université Paris Est Créteil (UPEC), ERUDITE 94010 Créteil, France.
E-mail: neha-bhardwaj.upadhayay@u-pec.fr
456 Foreign Trade Review 59(4)
Introduction
USD 4 trillion (2018 constant) has flowed from official donors1 to developing
countries between 1960 and 2018 under the categories of Official Development
Assistance (ODA) and Other Official Flows (OOF) (OECD, 2019f). However,
research is fairly undivided about the partial success of this aid in promoting
growth and reducing poverty (Alesina & Dollar, 2000; Berth´elemy, 2006).
Baldwin (1969) was amongst the first researchers to point out that while there
appeared to be a connection between aid and influence,2 the exact nature of this
connection is unknown. Over the years, a number of researchers as well as poli-
cymakers have continued to question whether there are significant and positive
effects of aid on the recipient’s macroeconomic policies and growth (Alesina &
Dollar, 2000; Kono & Montinola, 2015; Lundsgaarde et al., 2010; Khatkhate,
1972; Cui & Hu, 2023). In a recent reflection on rethinking economic develop-
ment, Nunn (2019) stipulates that there are several reasons to conjecture that the
adverse effects of foreign aid are being underestimated because of the unintended
consequences that foreign aid may give rise to. In summary, if foreign aid is not
an inviolable policy to fix the deficiencies in developing countries, do other feasi-
ble policy interventions exist to tackle underdevelopment?
A possible answer to this question may be that, in addition to foreign aid, inter-
national trade policies are significant instruments for generating and reallocating
wealth in the world economy and represent important ways through which devel-
oped economies can contribute to the development of disadvantaged nations
(Lundsgaarde et al., 2010; Nunn, 2019). In the context of aid, specifically, aid-
for-trade (AfT)3 programmes have received swelling interest from researchers and
policymakers alike in the past decade, subsequent to the formal revival of the
programme in 20054. There is evidence that AfT has a negative impact on the cost
of trading and boosts export activity (Cali & Te Velde, 2011); increases trade
(both imports and exports) between donor and recipient (Nunnenkamp & Thiele,
2006; Pettersson & Johansson, 2013); is strongly linked with bilateral greenfield
investment; and boosts investment in infrastructure (Lee & Ries, 2016).
This article is an attempt to answer the following question: whether the afore-
said (and purported) benefits of Af T have really provided a ‘level playing field’ to
developing economies. In other words, this article investigates whether the donor
countries assist in the Af T objectives by not only providing aid, but also by open-
ing up their markets to the new export potential that the recipient countries develop
as a result of Af T. This article raises an important (and overlooked) issue about
the motives of developed nations to provide Af T and concurrently engage in cur-
tailing market access to recipient nations.
This article also undertakes a systematic evaluation of specific types of
Af T—that is aid to economic infrastructure and services and aid to productive
capacity—on rise in contingent protection against the recipient by the donor. We
believe that the virtuous effects of AfT for economic infrastructure and services in
terms of increased exports from the recipient could be linked to the increase in
contingent protection against the recipient. One may question: if a donor would
eventually like to curb imports from a recipient, why give aid (to enhance trade
Upadhayay 457
facilitating infrastructure) in the first place? Here, we argue that through the over-
arching goal of trade facilitation, donors’ actions may tilt towards their own inter-
est of improving donor imports to recipients.5
We use data pertaining to the United States of America (USA/US) as the donor
of interest and, with empirical analysis, examine whether the USA has opened or
closed its markets to its Af T recipients. This article finds considerable evidence
that the proceedings of aid allocation are followed by a surge in protectionist
activities. One could think, given the complexities of government systems, the
decisions to give aid or initiate contingent protection may not be conditional on
each other. We have reason to believe that they are linked because of the great
overlap between the congressional committees that take decisions on foreign
policy (including aid) and trade policy. Additionally, as a testament to this link-
age, in this article, we include case studies on US shrimp, cotton and honey
markets. These case studies (presented in Box 1, 2 and 3 in the Appendix) are
corroborated by our empirical findings.
This article is organised as follows: The second section discusses the marked
results of available literature on foreign aid, aid effectiveness, Af T and protection,
as well as highlights the relationship between aid and protection. Within third sec-
tion, which is the empirical framework, we provide reasons for the choice of
donor, following it with the data source, variable construction and remedy of
potential endogeneity. The fourth section provides baseline results and instrumen-
tal variable (IV) approach results. The fifth section is an extension of the base
work by disaggregating aid into aid for ‘economic infrastructure and services’
(sector 200) and ‘production sector’ (sector 300). The sixth section provides
a battery of sensitivity and robustness checks along with results for other signifi-
cant donors of interest (Australia, Canada, the European Union (EU) and
New Zealand); and the seventh section concludes.
Literature and Policy Overview
Foreign Aid
The literature on foreign aid has two distinct strands: one on the ‘determinants of
foreign aid’, that is, why do donors give and to whom; and the second on the
‘effects of foreign aid’ on the recipient countries in terms of impact. There are
numerous studies trying to evaluate the relationship between aid, growth, invest-
ment and development; however, the findings have been divided, with no consen-
sus on either direction or size.
On the many motives of foreign aid allocation, Apodaca (2017) explains that the
official government rhetoric endorsing disbursement of aid is: to assist in development
and poverty reduction. Amongst the global guiding principles of donors are also ame-
lioration in global security by tackling threats to human security, which arise due to
poverty and growth in extreme inequalities between rich and poor. Among developed
nations, the allocation of foreign aid to developing countries has become a ‘norm’
(Lancaster, 2008). However, amongst the many motives of foreign aid by developed
To continue reading
Request your trial