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

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Stender, Frederik / Tim Vogel
Discussion Paper 13/2023

Bonn: German Institute of Development and Sustainability (IDOS)

ISBN: 978-3-96021-216-4
DOI: https://doi.org/10.23661/idp13.2023

While recent preferential trade agreements (PTAs) cover an increasingly broad range of policy areas beyond their traditional competence for reducing bilateral tariffs, little is known about the implications of this new emphasis on interactions with other trade-related policy measures. We approach this gap by examining the effectiveness of bilateral aid for trade (AfT) in deep North–South PTA relations. To this end, we use a structural gravity model for bilateral panel data of 29 OECD DAC countries and 144 developing countries from 2002–2015 and find that the marginal effect of AfT decreases as the policy areas of a PTA 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 and thus reduce AfT available for potentially more effective projects, as we do not observe an alignment of AfT in deep PTAs. Second, since we also observe heterogeneity in interactions across donors, depending on their specific project portfolios, AfT provided by high-income PTA partners could well be used to redirect exports to third countries with comparatively fewer bilateral obligations. 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 together with their PTA partners.