Aid for trade and international transactions in goods and services

• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/roie.12452
• Author: Anirudh Shingal,Bernard Hoekman
• Date: 01 May 2020

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wileyonlinelibrary.com/journal/roie Rev Int Econ. 2020;28:320–340.

© 2019 John Wiley & Sons Ltd

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INTRODUCTION

Trade in services is important for many low-income countries, especially small economies which

often derive a significant share of their foreign exchange revenues from services exports. During the

2000s, the group of least developed countries (LDCs) taken together expanded their services exports

more rapidly than the world as a whole. LDCs increased their share of global trade in services from

0.4% in 2005 to 0.8% in 2015, with commercial services exports growing by 14% over this period,

more than twice the rate of other countries (WTO, 2016).

Services matter not just because they are a potentially important source of foreign exchange rev-

enue and associated employment and household income. Many services are important for economic

growth and development by virtue of their role as inputs into production in all sectors of economic

Received: 27 April 2019

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Revised: 27 August 2019

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Accepted: 24 September 2019

DOI: 10.1111/roie.12452

ORIGINAL ARTICLE

Aid for trade and international transactions in

goods and services

BernardHoekman1

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AnirudhShingal2,3

1Robert Schuman Centre for Advanced

Studies, EUI and CEPR

2European University Institute (EUI)

3Indian Council for Research on

International Economic Relations

(ICRIER)

Correspondence

Anirudh Shingal, European University

Institute (EUI), Villa Schifanoia, Via

Boccaccio 121, 50133 Firenze, Italy

and Indian Council for Research on

International Economic Relations

(ICRIER), Plot. No. 16–17, Pushp Vihar,

Institutional Area, Sector 6, New Delhi -

110017, India.

Email: anirudh.shingal@eui.eu

Funding information

European Union’s Horizon 2020 research

and innovation programme, Grant/Award

Number: 770680

Abstract

The empirical literature on aid for trade (AfT) mainly con-

siders its effects on merchandise trade and investment. In

this paper, we provide an in-depth analysis of the relation-

ship between AfT and trade in services using both aggregate

and bilateral data. We find a statistically weak effect of AfT

on both goods and services trade in our aggregate analysis

once we account for endogeneity in the AfT–trade relation-

ship. In contrast, the bilateral analysis suggests that AfT,

in particular that allocated to services activities, especially

economic infrastructure, has a positive effect on recipients’

merchandise exports to donor countries. This novel find-

ing is robust across different lag structures and provides

evidence of complementarities between services AfT and

goods trade.

JEL CLASSIFICATION

F10; F14; F35

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HOEKMAN ANd SHINGAL

activity. Services also figure centrally if a human development perspective is taken. Realization of

many of the sustainable development goals (SDGs) depends on the performance of a range of specific

services sectors (Fiorini & Hoekman, 2018).

The quality, price, and availability of services inputs is determined by a mix of factors, including

infrastructure connectivity network investments, the restrictiveness of trade and investment policies

for goods and services, and the investment climate/business environment. There is substantial empir-

ical evidence that services trade and foreign direct investment (FDI) in services fosters productivity

growth by inducing greater competition in domestic markets and providing firms access to higher

quality, more varied, and cheaper services inputs. This benefits both producers of goods and producers

of services. The implication for policy is that a focus on reducing services trade costs may have high

payoffs. Trade costs for services are higher than trade costs for goods, and the rate of decline that has

been observed in services trade costs since the early 2000s has been much less than for trade costs for

goods (Miroudot & Shepherd, 2016). High trade costs reduce services trade volumes by compromis-

ing the ability of firms to exploit potential competitive advantages in world markets.

The launch of the aid for trade (AfT) initiative at the 2005 WTO Ministerial Conference in Hong

Kong reflected a recognition that negotiations to lower trade barriers would benefit developing coun-

tries more fully if complemented with development assistance targeted at improving the supply side of

the economy (Hoekman, 2011). AFT resources provided by the international development community

since the early 2000s have been significant (OECD & WTO, 2017). Much of this assistance has been

allocated to improving the quality of economic infrastructure and productive capacities of firms and

efforts to lower trade costs through trade facilitation projects. The focus of most of the global AfT ef-

fort has been on boosting trade in goods. Consistent with the international development community’s

AfT strategies, the growing literature assessing the trade effects of AfT has mostly investigated the

effects on merchandise trade and on investment in developing countries. There has been little work on

the effects of aggregate AfT on trade in services, or on the effects of the sectoral allocation of AfT on

different types of trade (goods vs. services).

This paper makes an initial contribution to filling this gap. Our primary interest is to assess the

relationship between AfT and trade in services. We decompose AfT into different categories and

analyze the effect of AfT as a whole as well subcomponents of AfT on both goods and services trade

using both aggregate and bilateral data.

Our identification strategy exploits changes in the AfT recipient status of some of our sample coun-

tries over the time period of analysis (2002–2015). While such changes in recipient status arguably

render the treatment effect in our analysis exogenous, we assess the robustness of our results by con-

trolling for potential endogeneity in the aggregate AfT–trade relationship using a synthetic instrument

for AfT in our aggregate analysis, following Temple and Van de Sijpe (2017) and by experimenting

with GMM specifications. We account for endogeneity in our bilateral analysis using three-way fixed

effects, following Baier and Bergstrand (2007) and Baier, Bergstrand, and Feng (2014) who employed

a similar strategy in the context of studying the trade effect of preferential trade agreements (PTAs).

We also experiment with different lag structures in our empirical analysis to allow for trade to respond

to AfT noncontemporaneously.

While there are some suggestive associations between AfT and services trade in aggregate data, es-

pecially at the sectoral level and for subtypes of AfT, we find a statistically weak effect of AfT on both

goods and services trade in our aggregate analysis once we account for endogeneity in the AfT–trade

relationship. In this regard, our analysis of AfT and trade in services comes to a similar finding as the

literature on AfT and merchandise trade, which finds only a weakly significant relationship between

AfT and goods trade. We add to the literature by confirming the presence of correlation but absence

of causal effects of AfT on aggregate services trade.