The Link Between Aid-for-Trade and Contingent Protection

Abstract

Foreign aid, in theory, is expected to mitigate constraints that impede the economic development of recipient countries. At the same time that help is committed, 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 contingent protection cases data from 2003 to 2018 (a 15-year period) against 106 recipient 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 decisions, 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