What role for aid for trade in (deep) PTA relations? Empirical evidence from gravity model estimations

Abstract

While preferential trade agreements (PTAs) cover an increasing range of policy areas, little is known about the implications of this new emphasis on interactions with other trade-related policies. We approach this gap by examining the effectiveness of bilateral aid for trade (AfT) in promoting exports for recipient countries within deep North–South PTA relations. Using a structural gravity model for bilateral panel data of 29 OECD DAC countries and 144 developing countries from 2002 to 2015, we find that the marginal effect of AfT decreases as PTA policy areas expand. Further investigation of the underlying mechanisms suggests that the observed trade-off between PTA depth and AfT effectiveness may be due to compliance with the non-tariff provisions contained in deep PTAs. We find two lines of reasoning plausible. First, compliance efforts appear to consume large fractions of AfT, reducing its availability for potentially more effective projects. Second, since we also observe heterogeneity in interactions across donors, AfT provided by high-income PTA partners could well be used to redirect exports to third countries with comparatively fewer bilateral obligations. Provided that a core focus of AfT remains on strengthening international trade relations, including between donors and recipients, donor countries should therefore carefully weigh compliance costs to developing countries against the non-trade benefits of common deep PTAs, and accurately identify financial and technical assistance needs with their PTA partners.