Trade and The Post-2015 Development Agenda

WIN–WIN
How International Trade Can

Help Meet the Sustainable
Development Goals
Edited by Matthias Helble and Ben Shepherd
ASIAN DEVELOPMENT BANK INSTITUTE

Win–Win
How International Trade Can Help Meet
the Sustainable Development Goals
Edited by
Matthias Helble
Senior Economist, Co-Chair, Research Department
Asian Development Bank Institute
Ben Shepherd
Principal, Developing Trade Consultants

© 2017 Asian Development Bank Institute
All rights reserved.

First printed in 2017.
ISBN 978-4-89974- 081-0 (Print)

ISBN 978-4-89974- 082-7 (PDF)
The views in this publication do not necessarily reflect the views and policies of the
Asian Development Bank Institute (ADBI), its Advisory Council, ADB’s Board or
Governors, or the governments of ADB members. The responsibility for opinions
expressed in signed chapters rests solely with their authors, and publication does
not constitute an endorsement by ADBI, other international organizations and
secretariats which employ the authors, or their respective Board of Governors or the
governments they represent, or their member countries or economies, of the opinions
expressed in them.
ADBI does not guarantee the accuracy of the data included in this publication and
accepts no responsibility for any consequence of their use. ADBI uses proper ADB
member names and abbreviations throughout and any variation or inaccuracy,
including in citations and references, should be read as referring to the correct name.
By making any designation of or reference to a particular territory or geographic

area, or by using the term “recognize,” “country,” or other geographical names in this
publication, ADBI does not intend to make any judgments as to the legal or other
status of any territory or area.
Users are restricted from reselling, redistributing, or creating derivative works without
the express, written consent of ADBI.
ADB recognizes “China” as the People’s Republic of China.
Note: In this publication, “$” refers to US dollars.
The Asian Development Bank Institute, located in Tokyo, is the think tank of the Asian
Development Bank. The institute aims to identify effective strategies to improve policy
and development management in Asia and the Pacific. We work with an extensive
network of partners in the region and globally to influence policies on poverty
reduction, inclusive growth, the environment, regional cooperation, infrastructure
development, middle-income countries, and private sector development.
Contents
Figures, Tables, and Boxes v

Contributors x
Abbreviations xi
Preface xv
Acknowledgments xvii
1. Introduction 1
Matthias Helble and Ben Shepherd
2. From MDGs to SDGs: The Role of Trade 9
Patrick Messerlin
3. Trade and the Post-2015 Development Agenda 32
Bernard Hoekman
PART I: Poverty, Hunger, and Inclusive Growth

4. Trade and Poverty Reduction 61
Irene Brambilla and Guido Porto
5. Agricultural Trade and Hunger 87
Will Martin
6. Trade and Women 118
Ben Shepherd and Susan Stone
7. Can Trade Benefit Employment? 139
Paul Vandenberg
8. Trade and Inequality 175
Shujiro Urata and Dionisius A. Narjoko
PART II: Sustainable Growth

9. Trade and Environment 207
Dale Andrew
10. Trade and Climate Change 252
Andrew Prag
iii
ivContents
11. Trade and Sustainable Fisheries 272

U. Rashid Sumaila
12. The Trade and Water Nexus 294
Alexandre le Vernoy
13. Trade, Labeling, and Food Safety 317
Norbert Wilson
PART III: Education and Health

14. Trade in Education Services and the SDGs 337
Aik Hoe Lim, Pamela Apaza, and Alin Horj
15. Trade in Medical Products and Pharmaceuticals 375
16. Trade in Health Services 400
Rupa Chanda
PART IV: Other Linkages between Trade and the SDGs

17. Trade and Urbanization 439
Yuan Zhang and Guanghua Wan
18. Trade, Infrastructure, and Development 466
Marcelo Olarreaga
19. Facilitating Trade for Development: Aid for Trade 488
William Hynes and Frans Lammersen
20. Conclusion: Directions for Future Research
and Policy Making 530
Index 542
Figures, Tables, and Boxes
Figures
3.1 Services Share of Manufacturing Value Added (%) 35
3.2 Trade Policy Impacts: Conceptual Framework 36
3.3 Trade-Income Elasticity and Export/GDP Ratio
and Trade Growth since 1970 39
3.4 Services and Sustainable Development 44
3.5 How Trade Costs Matter 47
3.6 Services Trade Restrictiveness Index 48
4.1 Nigeria 77
4.2 Ghana 78
4.3 Malawi 78
4.4 The Gambia 79
4.5 Uganda 79
4.6 South Africa 80
5.1 Supply and Demand for a Storable Commodity, Region 1 94
5.2 Indexes of Staple Food Prices (%) 100
5.3 Price Insulation for Rice 100
5.4 Price Insulation for Wheat 101
5.5 Price Insulation for Soybeans 101
5.6 Special Safeguard Mechanism Duties for Rice
under the Doha Proposals (%) 106
6.1 Simple Average Applied Tariff Rate on Agricultural versus
Non-Agricultural Products, by Developing Region, Latest
Available Year 123
6.2 Share of Female Production and Non-Production
Workers, by Firm Type, All Countries and Years (%) 131
6.3 Female Workers as a Share of the Total Number of
Workers, Simple Average by Sector (%) 132
6.4 Percentage of Firms with at Least One Woman Owner
that Engages in International Activity, Compared with
Other Firms, All Countries and Years (%) 133
7.1 Share of Employed Persons Living on Less than
$1.25 per Day (%) 141
7.2 Employment-to-Population Ratio (%) 142
7.3 Services Sector Share of Total Exports (%) 155
7.4 Bilateral and Regional Trade Agreements with Labor
Provisions (number of agreements) 167
8.1 Trade–Gross Domestic Product Ratios (%) 176
v
viFigures, Tables, and Boxes
8.2 Gross Domestic Product per Capita Growth Rates

for Developed and Developing Countries (%) 179
8.3 Trade–Gross Domestic Product Ratios and Gini Index
for Selected East Asian Countries 185
9.1 Global Export Values for Important Forest
Risk Commodities 230
10.1 GHG Emissions of Selected Countries on a Production
and Consumption Basis 254
10.2 Services Trade Restrictiveness Index by Policy Area:
Engineering Services 266
11.1 Share of Fisheries Exports in Total Exports in Top LDCs
and SIDS Exporters (%, 1990–2009) 275
11.2 Fishery Trade Flows by Regions ($ ‘000) 276
11.3 Fisheries Subsidies by Type 281
12.1 Water Scarcity and Share of World’s Water-Related
Inventions, 2000–2010 (%) 305
12.2 Private Investment Commitments in Infrastructure
(1990–2013) 307
13.1 Total Technical Barriers to Trade Notifications, 1995–2015 322
13.2 New Notifications by Development Status, 1995–2015 322
13.3 Notifications Submitted per Year 325
13.4 Share of Total Notifications Submitted by Developing
Country Members (including Least Developed Countries)(%) 325
14.1 Share of Private Expenditure on Tertiary Educational
Institutions in Selected Economies (2002 and 2012) 342
14.2 Key Education Policy Priority Areas for Supporting
Participation in Global Value Chains 346
15.1 Product Groups Related to Public Health 377
15.2 Trade in Health Products 2002–2014 by Region
(measured by imports reported by countries) 378
15.3 Shares of Trade in Health Products 2002–2014 by Region
(measured by imports reported by countries) 379
15.4 Applied Most Favored Nation Tariff on Health Product
Groups (%) 380
15.5 Applied Most Favored Nation Tariff on Health Product
Groups by World Region (%) 381
15.6 Correlation between Logistics Competence and
Diphtheria, Pertussis, and Tetanus Immunization Rate,
latest available year 393
15.7 Evolution of Volumes and Values of Harmonized
System Code 300431, 1995–2013 394
15.8 Evolution of Imports of Harmonized System
Code 300431 ($, indexed to 1995 = 100) 395
Figures, Tables, and Boxesvii
15.9 Evolution of Average Import Unit Prices of Harmonized

System Code 300431, 1995–2013 (simple average) 396
16.1 Triad of Health and Sustainable Development 404
17.1 Equilibrium between Grain Surplus and Urbanization
in Closed Economies 447
17.2 Total Grain Output and Urbanization in the People’s
Republic of China (1955–1965) 447
17.3 Equilibrium between Grain Surplus and Urbanization
in Open Economies 449
17.4 Total Population and Urbanization of the World
(1000–1900) 449
17.5 Cereals Trade and Population Urbanization in Asia 452
17.6 Ratios of Export and Import to Gross Domestic Product
in the People’s Republic of China and India (1970–2008) 458
18.1 Gross Domestic Product Growth before and after
Trade Liberalization 468
18.2 Gains from Trade with and without Entry Costs 470
18.3 Sum of Squared Residuals of the Estimation of the
Threshold Model 482
19.1 Aid-for-Trade Creditor Reporting System Proxies 493
19.2 Aid-for-Trade Disbursements 494
19.3 Official Development Assistance and Other Official
Flows Trade-Related Commitments 2002–2014 Sector
Distribution ($ billion 2015 prices) 494
19.4 Aggregate Results from 111 Aid-for-Trade Case Stories 497
19.5 Success Factors Mentioned in the Case Stories 498
19.6 The Pillars of Sustainable Development 499
19.7 Contribution of Aid for Trade to the Sustainable
Development Goals 501
19.8 Aid for Economic Infrastructure ($ million 2015 prices) 502
19.9 Aid for Building Productive Capacities($ million 2015 prices) 504
19.10 Aid-for-Trade Policy and Regulations($ million 2015 prices) 505
19.11 Aid-for-Trade-Related Adjustment ($ million 2015 prices) 506
19.12 Aid for Trade with a Gender or Environment Objective
(shares in total aid for trade) 507
19.13 Flows to Developing Country by Development Assistance
Committee Members and Multilateral Agencies
(2015 constant, $ billion) 511
19.14 External Financial Flows to Developing Countries by
OECD Members and International Financial Institutions
(Share of total, 2013) 513
19.15 Aid-for-Trade Monitoring Framework 520
19.16 Aid-for-Trade Results Framework 521
viiiFigures, Tables, and Boxes
Tables
2.1 The MDG Production Process: The Inputs 15
2.2 MDG 8 Gap Report: “Revealed” Preferences 18
2.3 The MDG Production Process: Outputs 21
2.4 The Proliferation of SDG Goals, Targets, and Words 23
2.5 An Initial Economic Assessment of the SDGs’
“Reviewable” Targets 24
3.1 Average Annual Growth Rate of per Capita GDP
(constant 2005 $) [update to 2014] 33
4.1 Main Channels for Price Changes, Trade, and Poverty (in %) 74
5.1 Endowments of Agricultural Land (hectares/person) 90
5.2 Differences between Nutritional Diversity in Production
and in the Food Supply 96
5.3 Error Correction Coefficients, Simple Averages 102
7.1 Share of Persons Employed in the Informal Sector in Total
Nonagricultural Employment 143
7.2 Targets and Indicators for SDG 8 144
12.1 Mentions in Official Declarations—Counting Occurrences
and Frequencies 297
12.2 Top 10 Net Virtual Water Exporters and Importers (km3) 310
13.1 Technical Barriers to Trade and Sanitary and Phytosanitary
Disputes Raised at the World Trade Organization 323
14.1 Main Forms of Delivery of Higher Education Services 355
15.1 Percentage of Tariff Lines Protected with High
Import Duties 382
15.2 Countries with High Applied Tariffs on Health Products 383
15.3 Most Protected Products with Applied Tariffs Above 10%
by Number of Countries 384
15.4 Countries with an Applied Most Favored Nation Tariff
of 20% or More on Surgical Gloves of Vulcanized Rubber
(Harmonized System Code 401511) 385
15.5 Countries with an Applied Most Favored Nation Tariff
of 20% or More on Specially Designed Cameras
(Harmonized System Code 900630) 386
15.6 Percentage of Imports by Value Affected by Listed
Nontariff Measures, latest available year, World Integrated
Trade Solution – Trade Analysis Information System 389
16.1 Characterizing Trade in Health Services by GATS
Modes of Supply 410
17.1 Population Statistics (1960–2011) (million) 440
17.2 Definition of Variables 451
17.3 Effect of International Trade on Population Urbanization 453
Figures, Tables, and Boxesix
17.4 Effect of International Trade Components on Level

of Urbanization 454
17.5 Effect of Cereals Trade on Population Urbanization
(Two-Stage Least Squares Estimation) 456
17.6 Comparison of Population Urbanization between the
People’s Republic of China and India 457
17.7 Output of Cereals in the People’s Republic of China
and India 458
17.8 Net Export of Cereals in India (million tons) 459
17.9 Net Export of Cereals in the People’s Republic of China
(million tons) 459
18.1 Impact of Importer and Exporter Transparency
on Trade Flows 473
18.2 Intraregional to Extraregional Trade Cost Ratio
and Gross Domestic Product per Capita, 1995–2012 479
18.3 Identifying the Two Regimes 481
19.1 Estimates of Concessional Finance for Development
(Official Development Assistance-Like Flows) of Key
Providers of Development Cooperation that Do Not
Report to the Creditor Reporting System
(gross disbursements, $ million) 512
Boxes
10.1 Traded Emissions: Calculating Emissions Based
on Production and Consumption 254
10.2 Trade and the Paris Agreement 256
10.3 Local-Content Requirements in Renewable Energy Markets 262
10.4 Services Trade Restrictiveness Index 265
Contributors
Dale Andrew is an international economist, recently retired from the

Organisation for Economic Co-operation and Development where he
was head of the Environment Division in the Trade and Agriculture
Directorate.
Pamela Apaza is legal affairs officer in the Trade in Services and

Investment Division, World Trade Organization.
Irene Brambilla is a professor of economics at Universidad Nacional de

La Plata, Argentina.
Rupa Chanda is a professor of economics, Indian Institute of

Management, Bangalore.
Matthias Helble is a senior economist and co-chair of the research

department, Asian Development Bank Institute.
Bernard Hoekman is a professor and director of the Global Economics

at the Robert Schuman Centre for Advanced Studies at the European
University Institute, Florence, Italy.
Alin Horj is consultant at the Investment Division, Directorate for

Financial and Enterprise Affairs, Organisation for Economic Co-
operation and Development.
William Hynes is a senior economist at Office of the Secretary General

of the Organisation for Economic Co-operation and Development.
Frans Lammersen is the principal administrator of the Development

Co-operation Directorate, Organisation for Economic Co-operation and
Development.
Aik Hoe Lim is director of the Trade and Environment Division, World
Trade Organization.
Will Martin is a senior research fellow at the International Food Policy

Research Institute, Washington, DC.
x
Contributorsxi
Patrick Messerlin is professor emeritus of economics at Sciences Po

Paris, and serves as chairman of the Steering Committee of the European
Centre for International Political Economy, Brussels.
Dionisius A. Narjoko is a researcher at the Economic Research Institute

for ASEAN and East Asia.
Marcelo Olarreaga is professor of economics at the University of Geneva.
Guido G. Porto is a professor of economics at Universidad Nacional de

La Plata, Argentina.
Andrew Prag is an environmental policy analyst at the Organisation for

Economic Co-operation and Development.
Ben Shepherd is the principal at Developing Trade Consultants.
Susan Stone is the director of the Trade, Investment and Innovation

Division of the United Nations Economic and Social Commission for
Asia and the Pacific.
U. Rashid Sumaila is professor and director of the Fisheries Economics

Research Unit at the University of British Columbia Fisheries Centre.
Shujiro Urata is a professor at the Graduate School of Asia-Pacific

Studies, Waseda University, Tokyo.
Paul Vandenberg is a senior economist at the Asian Development Bank

currently on leave and serving as a visiting professor at Thammasat
University, Bangkok.
Alexandre Le Vernoy is an International Consultant at Groupe

d’Economie Mondiale.
Norbert Wilson is a professor at the Friedman School of Nutrition

Science and Policy at Tufts University.
Guanghua Wan is principal economist, Economic Research and

Regional Cooperation Department, the Asian Development Bank.
Yuan Zhang is a professor of economics at China Center for Economic

Studies, Fudan University.
xi
Abbreviations
AFT Aid for Trade

APEC Asia-Pacific Economic Cooperation
ASEAN Association of Southeast Asian Nations
CBD Convention on Biological Diversity
CBE Cross-Border Education
CCC Copenhagen Consensus Center
CITES Convention on International Trade in Endangered
Species of Wild Fauna and Flora
COP Conference of the Parties
CPC Central Product Classification
DFQF duty-free, quota-free
EEZ exclusive economic zone
EGF European Globalization Adjustment Fund
ETS Emissions Trading System
EU European Union
EUTR European Union Timber Regulation
FAO Food and Agriculture Organization
FDI foreign direct investment
FiBL Research Institute of Organic Culture
FiT feed-in tariff
FLEGT EU Forest Law Enforcement, Governance and Trade
FSS Forestry Stewardship Council
FTA free trade agreement
G20 Group of 20
G7 Group of Seven
GATT General Agreement on Tariffs and Trade
GDP gross domestic product
GHG greenhouse gas
GSP generalized system of preferences
GTS Working Group on Soy
GVC global value chain
HS Harmonized System
IBC international branch campus
ICT Information and communication technology
IEA International Energy Agency
ILO International Labour Organization
ITC International Trade Centre
IUCN International Union for Conservation of Nature
and Natural Resources
xii
Abbreviationsxiii
IUU illegal, unreported, and unregulated

LCRs local-content requirements
LDCs least developed countries
MDGs Millennium Development Goals
MFN most favored nation
MOOC massive open online course
MSITS Manual on Services of International Trade in Services
NAFTA North American Free Trade Agreement
NDCs Nationally Determined Contributions
NEG new economic geography
NGO nongovernment organization
NTB nontariff barriers
NTM nontariff measure
OECD Organisation for Economic Co-operation and
Development
OWG Open Working Group
PEFC Programme for the Endorsement of Forest Certification
PRC People’s Republic of China
PSS private sustainability standards
PTA preferential trade agreement
Q-SSM quantity-based SSM
R&D research and development
RCA revealed comparative advantage
REDD Reducing Emissions from Deforestation and Forest
Degradation
RTA regional trade agreement
SBTC skill-biased technological change
SDGs Sustainable Development Goals
SDT special and differential treatment
SIDS Small Island Developing States
SPS Sanitary and Phytosanitary
SSM Special Safeguard Mechanism
STRI Services Trade Restrictiveness Index
TBT Technical Barriers to Trade
TFA Trade Facilitation Agreement
TFTA Tripartite Free Trade Area
TiSA Trade in Services Agreement
TPP Trans-Pacific Partnership
TRAINS Trade Analysis Information System
TRIPS Trade-Related Aspects of Intellectual Property Rights
TTIP Transatlantic Trade and Investment Partnership
UEBT Union for Ethical BioTrade
UN United Nations
xiii
xivAbbreviations
UNCTAD UN Conference on Trade and Development

UNESCAP UN Economic and Social Commission for Asia
and the Pacific
UNESCO United Nations Educational, Scientific and Cultural
Organization
UNFSS UN Forum on Sustainability Standards
US United States
VPA Voluntary Partnership Agreement
VSS voluntary sustainability standards
VW Volkswagen
WASH Water Access, Hygiene and Sanitation
WHO World Health Organization
WTO World Trade Organization
Preface
The Sustainable Development Goals (SDGs) were adopted in September

2015 by the members of the United Nations after a lengthy negotiation
process. The SDGs cover basically all areas of human development and
the protection of planet earth. The 169 targets need to be implemented
by both developing as well as developed countries. The agenda in front
of everyone is enormous, especially as many countries have only very
limited financial and human resources at their disposal.
The promotion of trade integration is not an objective of the SDGs,
but is considered an important means to reach the goals. However, the
text of the agreement is rather mute on how countries can leverage on
trade to achieve the SDGs. This book aims to fill this gap. Written by
leading scholars in the area of trade and development, the book provides
an authoritative and encompassing analysis on the role trade can play.
Trade can be a powerful source for economic transformation. The book
looks at both the risks and opportunities of trade opening.
The book constitutes the Asian Development Bank Institute’s first
major contribution to debate on the SDGs. For Asia, trade has been a
tremendous force of progress. From the 1990s, many countries in the
region adopted an export-oriented growth strategy which helped them
attract foreign direct investment and integrate into regional and global
value chains. The subsequent economic growth lifted millions out of
poverty and allowed for substantive improvements in other areas of
human development, such as health and education. Asia is thus a prime
example of the potential positive force that trade can have. However,
trade opening is not without risks and it also makes adjustments
necessary. Most importantly, productive factors need to be shifted
across sectors and firms. This can mean that workers have to change
occupations and look for new opportunities. So far, the benefits of trade
opening have outweighed the costs in Asia.
In the future, trade integration will further play a pivotal role in
propelling the development of the region. In recent years, countries in
the region have invested heavily in upgrading their domestic and cross-
border infrastructure, bringing down trade costs substantially. However,
additional investment in infrastructure is needed to improve access to
international markets. Not only multinational companies benefit from
the more integrated Asian market and improved connectivity. Small and
medium-sized enterprises (SMEs) in the region are starting to connect
to international markets and reap the benefits of improved connectivity.
xv
xviPreface
Countries are also starting to find new solutions to bridge the finance
gap that SMEs face and help them to expand more quickly. Overall,
better connectivity and the integration of SMEs is thus expected to
further boost trade and increase growth in the region.
This book gives guidance to policy makers worldwide to best
leverage on the benefits of trade in order to achieve the SDGs. It is the
first book on the topic and I am sure that it will be of high interest to
all those involved in the implementation of the SDGs. I wish to thank
the editors, Matthias Helble, senior economist and co-chair, research
department, Asian Development Bank Institute, and Ben Shepherd,
principal, Developing Trade Consultants, for their excellent work and
for publishing this seminal and timely book. I wish the readers a pleasant
and insightful read.
Naoyuki Yoshino
Dean
Asian Development Bank Institute
Tokyo, Japan
xvi
Acknowledgments
The editors of this book would like to acknowledge a number of

persons without whom the publication of this book would have been
impossible. First of all, we would like to thank Dean Naoyuki Yoshino
for supporting this book project. Second, we are deeply indebted to
all chapter writers of the book. Many thanks for their outstanding
contribution and their patience in revising the chapters as well as
providing valuable comments to the book. A special thank you goes to
Guanghua Wan, principal economist at the Asian Development Bank,
who supported the idea of writing this book from the beginning. We
would also like to thank the Bay of Bengal Initiative for Multi-Sectoral
Technical and Economic Cooperation (BIMSTEC) Secretariat in
generously hosting a workshop on the topic in Dhaka, Bangladesh,
and its Secretary General Ambassador Sumith Nakandala, in March
2016. Finally, we thank the editing team under the supervision of
Ainslie Smith for their excellent and speedy work as well as the Asian
Development Bank Institute’s communications team with Marc Benger,
Jera Lego, and Muriel Ordonez for coordinating the publication and
launch of the book.
xvii
1
Introduction
In September 2015, the members of the United Nations (UN) agreed

on a new set of development goals, the so-called UN Sustainable
Development Goals (SDGs). As was the case for the UN Millennium
Development Goals (MDGs), the SDGs are expected to guide
development efforts through the 2030 time horizon. The 17 SDGs
cover many areas, such as poverty, health, environment, education,
innovation, inequality, urbanization, peace, justice and institutions,
and partnerships for development. Interestingly, there is no specific
SDG trade goal. Among the 169 SDG targets, there are few references
to trade-related objectives, the key ones being promotion of the rules-
based multilateral trading system, and implementation of duty-free and
quota-free market access for least developed countries, with a doubling
of their export market share.
This book comes at a timely moment. The international
development community, as well as policy makers in both developed
and developing countries, are currently developing road maps on how
to best achieve the SDGs. At the same time, there has been a backlash
against globalization, mostly in developed economies. The benefits of
trade opening are being increasingly called into question. It is therefore
crucial to fully understand how trade interacts with the various goals
enshrined in the SDGs. Trade integration holds many opportunities
for development, but, at the same time, can have risks that need to be
managed. The objective of this book is to map out a triple-win scenario:
when good trade policy spurs international trade, contributes to
development-friendly outcomes, and supports achieving the SDGs. This
book provides guidance by leading experts on how to best achieve this.
The nexus between trade and development is not new. Traditionally,
trade policy specialists have focused on the income channel, i.e., that
openness to international flow of goods and services can increase
national income, which in turn enables moving forward on resource-
intensive development issues. This argument has been received with a
certain skepticism; however, there are various other channels through
which trade can contribute to achieving the SDGs. For example, many
1
2Win–Win: How International Trade Can Help Meet the Sustainable Development Goals
countries use tariff and nontariff measures on pharmaceuticals and

other medical products. These policies hinder poor people’s access
to those goods, and undercut the goal of promoting healthy lives in
developing countries. Free trade in health-related goods and services
could potentially improve developing countries’ health care access,
with corresponding positive impacts on people’s lives. Trade in health
services is subject to even bigger barriers that heavily impede access to
health care by millions of patients worldwide. The same logic applies
to environmental goods and services, where tariff and nontariff barriers
increase their cost, hampering the fight against climate change.
This book covers the trade linkages with all 17 SDGs, except for
Goal 16: “Promote peaceful and inclusive societies for sustainable
development, provide access to justice for all and build effective,
accountable and inclusive institutions at all levels.” Institution building
often goes hand in hand with economic development and trade opening.
Furthermore, the accession to international trade regimes, such as the
World Trade Organization, or the signing of regional and bilateral trade
agreements, might also streamline institutions. However, we consider
the relationship overly loose to cover it in an analytical piece.
We do not follow the 17 SDGs in order, but divide the book into five
parts. Part I introduces the topic, including an analysis of changes in
perception of the trade-development nexus. Part II addresses poverty,
hunger, and inclusive growth. The chapters of Part III study the links
between trade and education and health. Finally, the last part looks at
all other linkages between trade and the SDGs, such as urbanization and
infrastructure.
The authors of the individual chapters are among the leading experts
in trade and development. Each chapter holds the latest knowledge
of one or several specific “trade and…” issues, and examines ways in
which trade opening can support achieving the SDGs. The chapters also
analyze the types of complementary policies that might be necessary,
in particular to deal with resulting local losses, as well as adjustment
costs. All chapters are stand-alone. The book is conceptualized as a
key reference for both the trade and development communities. The
book complements the emerging literature on the SDGs themselves by
focusing on how trade policy can be used sensibly and pragmatically to
support medium-term sustainable development.
Chapter Overview
Chapter 2 by Patrick Messerlin compares the trade and trade policy
issues in the MDGs and the SDGs. The chapter first explains the
dramatic changes in the political, economic, and business arenas that
Introduction3
took place from the early 2000s (shaping the MDGs) to the early 2010s
(designing the SDGs). The chapter then compares the very different
production processes of the MDGs and SDGs. The author concludes
by stressing the huge, but largely ignored, common regulatory agenda
between trade policies and the SDGs, and argues that a well-designed
trade policy could play a key role for improving domestic regulations,
and, hence, contribute immensely to the SDGs’ goal—a “better life”.
Bernard Hoekman in his chapter shows that trade can and should
play an important role in achieving the SDGs, and emphasizes it vis-à-
vis services, as realizing many of the goals is conditional on improving
developing countries’ service sector performance. He predicts that the
global environment for trade and investment will be more challenging
for low-income countries in the coming decade than it was in the 1990s
and 2000s, calling for a sustained government effort to reduce trade
costs and support trade in services.
Part I on Poverty, Hunger, and Inclusive Growth starts with a chapter
by Irene Brambilla and Guido Porto on trade and poverty reduction.
The authors first develop a conceptual framework on how trade can
help eradicate poverty using microeconomic and macroeconomic
mechanisms, including the effects of policy on consumer prices,
producer prices, and wages. As these mechanisms affect real income,
they determine the likelihood that a household may be lifted out of
or pushed into poverty. The authors then provide a comprehensive
overview of the latest evidence on the trade and poverty nexus. While
there is sound evidence that trade can be pro-poor, there is significant
heterogeneity in its poverty impacts, both across households and
countries. This highlights the importance of complementary policies,
such as infrastructure, trade facilitation, and social protection.
Will Martin in his chapter shows how agricultural trade is vital for
ending hunger by 2030 (SDG 2). While trade is frequently seen as posing
threats to this, it can, in fact, play a major role in achieving it. Trade helps
in a number of ways, including allowing countries to take advantage
of their radically different factor endowments, with land-abundant
countries providing exports and land-poor countries taking advantage
of much more efficiently produced imports. Trade liberalization can also
streamline agricultural production, allowing improvements in dietary
diversity, and increasing food access. Allowing trade substantially
reduces food price volatility by diversifying supply. By contrast, beggar-
thy-neighbor price insulation policies, such as the imposition of export
bans in periods of high prices, redistribute rather than reduce volatility.
The chapter by Ben Shepherd and Susan Stone outlines the various
channels through which women are part of the global trading economy
and highlights their role as consumers, workers, business owners, and
informal cross-border traders. Trade theory offers rich implications for

the relationship between gender and trade, but depends on patterns of
consumption and production that may differ across countries. As an
example, the authors assess manufacturing industries, such as apparel,
and what prospects they can offer women workers. These industries
are often their entry points into the formal labor market and provide
an independent income that can favorably change household power
dynamics. New empirical evidence shows that internationally engaged
firms from developing countries tend to employ a higher proportion of
women workers. However, the authors conclude that much remains to
be done, especially as discriminatory norms are deeply ingrained in all
countries. Although trade has the potential to support gender-inclusive
growth and development, favorable regulations remain important.
In his chapter, Paul Vandenberg asks whether trade can help
achieve SDG employment targets. The chapter first examines trade vis-
à-vis employment and finds evidence for its positive aggregate impact
on welfare, which can lead to job creation. However, freer trade shrinks
some sectors and expands others, leading to associated job growth and
losses. The author concludes that government policies are needed to
cushion the impact of this adjustment and facilitate the movement of
labor from declining to rising sectors.
Shujiro Urata and Dionisius A. Narjoko’s chapter addresses
globalization and equality. The authors survey the literature, which
reveals that increased developing country trade openness appears to
have narrowed the development gap vis-à-vis developed countries,
though its impact on the income gap among developing countries is not
clear. Furthermore, the impact of increased trade or trade liberalization
on within-country inequalities is mixed. One reason for the mixed
findings is the impact of factors other than trade affecting inequalities,
including labor market conditions, inflow of capital, and policy reforms.
To ensure inclusive trade, the authors recommend a dual approach: more
investment in human resources development as well as appropriate
income redistribution policies.
Part II on Sustainable Growth starts with a chapter by Dale Andrew
on the topic of trade and the environment. The chapter explores how
trade can address many issues related to land-based renewable natural
resources in the SDGs. Approaches are categorized as to whether they are
mandatory or voluntary. Mandatory regulation of trade in nature-based
species started over 40 years ago with the Convention on International
Trade in Endangered Species. However, mandatory regimes remain
relatively limited. The more widespread approach is based on a model of
voluntary sustainability standards. However, many stakeholders remain
dissatisfied. The economic benefits remain less than expected and there
Introduction5
is limited empirical evidence of improved environmental outcomes. The

chapter assesses various improvement options, including a proposal for
a Trade Facilitation Agreement for Environmentally Sensitive Products.
Andrew Prag’s chapter assesses the interaction of international trade
with climate policies, and the influence of trade on the implementation
of SDG 13 (climate change). Although international trade contributes
directly to greenhouse gas (GHG) emissions, increasing it can help to
achieve development goals in a GHG-efficient manner, provided that
emissions are correctly priced everywhere. Given that emissions are
not universally priced, the chapter examines where policies related to
trade may be misaligned with or otherwise hindering climate change
objectives. While concluding that the multilateral agreements of the
World Trade Organization do not generally prevent governments from
pursuing strong domestic climate policies, the chapter does identify
potential misalignments. They include import tariffs on environmental
goods, barriers to trade in services, and domestic policies designed
to support local low-carbon industries, which restrict international
trade and are therefore potentially counterproductive. The chapter
concludes by stressing the importance of building resilience in the
global trading system in the face of increasingly frequent and severe
weather-related shocks.
Rashid Sumaila addresses in his chapter the topic of trade and
sustainable fisheries, first reviewing the literature on their relationship.
Policy recommendations for using fish trade to support the SDGs are
then provided under different headings that capture the main concerns
highlighted in the literature with respect to the sustainability of fisheries
in general and those related to the impact of trade in particular. The
policy measures presented have the potential to help ensure that trade
in fish and fish products support the SDGs.
Alexandre Le Vernoy explores the direct and indirect nexus
between international trade and water use management. The chapter
shows that with the right domestic policies and international trade
system, trade in water-related services, as well as the transfer of
innovation and technologies, can broaden access to water, sanitation,
and hygiene. Indirectly, international trade in goods also affects water
usage. Through a discussion of the concept of virtual water, the chapter
illustrates how countries are relying on trade to source products from
abroad to prevent the strain that domestic production would otherwise
put on their water resources. With the right policies, data collection, and
accounting methods in place, trade in goods may be a powerful tool to
help alleviate the water crisis across countries and regions.
In his chapter, Norbert Wilson studies how the freer flow of goods
and services internationally can encourage a transition toward more
sustainable consumption and production patterns. He argues that trade

restrictions such as nontariff barriers (NTB) may stymie potential gains
from trade, which supports the SDGs. This chapter explores the trade
effects of different NTBs, especially food and agriculture labeling and
safety regulations. The upshot is that trade can enhance economic
growth and development. Standards such as labels and food safety
regulations may contribute to or, in the worst case, hamper this growth,
which affects the capacity to attain the relevant SDGs. He concludes
that a careful assessment of industries, proposed standards, multiple
outcomes, and power relationships is needed to ensure an overall
positive effect of standards on trade and development.
Part III starts with a chapter by Aik Hoe Lim, Pamela Apaza, and
Alin Horj, who examine how international trade can help increase both
the supply of and investment in higher education, thereby supporting
the SDGs. First, the chapter retraces the changing dynamics in higher
education and the emergence of novel delivery services. Overall, the
authors observe an increasing trend toward internationalization of
education services. Despite this, the role of trade agreements and
their potential contribution to the respective SDGs has barely been
explored. The second part of the chapter, therefore, assesses how trade
agreements can facilitate trade in education services and the flexibility
they provide for attaining social policy objectives. The authors show
how international trade agreements can help achieve the SDG goals
by attracting foreign direct investment in education, reducing barriers
to entry, leveling the playing field among providers, and providing a
predictable and transparent regulatory environment.
Matthias Helble and Ben Shepherd show in their chapter that
countries around the world still apply tariffs and nontariff measures
on health products such as pharmaceuticals, vaccines, and medical
equipment. These barriers often unnecessarily increase prices and
limit the availability of health-related products and thus form a strong
case for trade liberalization. The authors further argue that facilitating
trade, for example by implementing the World Trade Organization’s
Trade Facilitation Agreement as a starting point can result in improved
handling of health-related products such as vaccines, which, in turn,
would boost usage. In the last part of the chapter, the authors study the
international market for insulin and find that more open trade typically
leads to lower insulin prices. The authors conclude that lowering trade
barriers on health products can enhance health systems and reduce
patients’ out-of-pocket payments.
Rupa Chanda’s chapter focuses on the impact of health services
trade on the realization of the SDGs. In recent years, health service
tradability has increased substantially due to better information and
Introduction7
communication technology and a higher mobility of health professionals

and patients across borders. The chapter explains the positive and
negative implications of health services trade for the SDGs, with the
overall impact depending on the specifics of a country’s national health
care system, the regulatory environment, the policies facilitating or
constraining this trade, and the associated externalities. The chapter
suggests that trade in health services can be strategically used to address
several SDGs, although it may pose potential challenges for equity
and sustainability. Countries need to proactively provide a supportive
regulatory and infrastructure environment so that the many potential
gains associated with health services trade can be enhanced, while the
associated negative effects can be minimized or prevented.
Part IV starts with a chapter by Yuan Zhang and Guanghua Wan
on trade and urbanization. The authors observe that many developing
countries have seen a rapid rise in urbanization in the past decades
that coincided with increasing participation in globalization. However,
possible links between urbanization and trade openness in developing
economies have so far been ignored. The chapter therefore first proposes
a simple framework explaining the food trade–population urbanization
nexus, showing how the food supply constrains population urbanization
and how international trade can change this. Then, it presents historical
evidence, empirical tests, and case studies from the People’s Republic
of China and India, further highlighting the critical role of cereals
trade in population urbanization in developing economies. Policy
suggestions that may help developing countries achieve more inclusive
and sustainable urban development are discussed in the final section of
this chapter.
The chapter by Marcelo Olarreaga surveys the literature on trade
and development, especially on complementarities associated with trade
infrastructure. The empirical literature shows that, on average, trade
causes growth, but the relationship is far from homogeneous across
countries. Although the empirical literature shows that investment in
soft and hard infrastructure has an unambiguously positive impact on
trade flows, the theoretical literature argues that priority should be
given to enhancing national, rather than international, infrastructure
in countries that are relatively poor. This chapter presents data that
support this prediction.
The final chapter by William Hynes and Frans Lammersen
discusses how aid for trade can contribute to the SDGs. The chapter
first highlights the achievements of the current Aid for Trade Initiative
and then analyzes the continued importance of aid in financing
development, particularly in the least developed countries. Next, the
role of the private sector in aid for trade is presented as an example of
how to improve development partnerships. Finally, the chapter draws

on lessons from Aid for Trade for the SDGs and the need for, but also
the difficulty of, making the process truly country driven. The chapter
concludes by stressing that Aid for Trade—12 years after its creation at
the World Trade Organization Ministerial Conference in Hong Kong,
China—is more than ever relevant in helping developing countries make
trade a tool for prosperity.
Conclusion
The recommendations of this book aim at facilitating the use of trade
policy as a tool for achieving the SDGs. For trade policy to play this
pro-development role, it needs to be developed in close coordination
with other sectors. Trade policy can only deliver on development if it
is designed coherently and holistically. Another important condition
is that adjustments to trade opening are actively facilitated through
flanking policies. Since the country context is different each time, these
flanking policies will take different forms. However, as this book shows,
countries can learn from each other. Overall, we hope that this book puts
trade policy in a new light. Opening to international trade carries risks;
by managing them and capitalizing on the benefits, trade opening can
deliver on sustainable development.
2
From MDGs to SDGs:
The Role of Trade
Patrick Messerlin
2.1 Introduction
The impression that the Sustainable Development Goals (SDGs) of the
United Nations (UN) have been much less interested in trade issues than
its Millennium Development Goals (MDGs) flows neither from there
being few places in the former’s documents where they are explicitly
mentioned, nor to the SDGs having much wider “transformational”
ambitions than the MDGs. While the MDGs were shaped with a heavy
aid perspective targeting poor countries, the SDGs addressed the roots
of world poverty by adopting a holistic development approach, with
every country expected to work for them (United Nations Association–
UK 2016). With such a change of scale, one should expect that trade
would be somewhat “downscaled” compared with their position in
the MDGs—as indeed with every other prominent issue in the MDGs.
Rather, this impression flows from the SDGs’ ideas and suggestions
being mere replicas of those highlighted by the MDGs, as if the issues
raised by trade policies in the 2010s and beyond resembled those faced
between 2000 and 2005. This routine approach signals a profound lack
of interest in trade.
This chapter presents an overview of the MDG and SDG trade and
policy issues in three sections. Section 2.2 shows the dramatic changes in
the political, economic, and business background from the early 2000s
(shaping the MDGs) to the early 2010s (designing the SDGs). Section 2.3
focuses on the differences in the inputs used in the preparatory process
of the MDGs and SDGs. The MDGs have been largely driven by small
teams of experts in a limited number of topics, while the SDGs have
relied on the grand-scale UN consulting and negotiating machinery for
defining and addressing a much wider agenda. The section also shows
how the MDG Gap Reports have failed to bridge the MDGs and SDGs.
9
Finally, section 2.4 focuses on the MDG and SDG outputs, that is, their
goals, targets, and indicators, showing the very different scale of these
two endeavors, before making a first tentative economic assessment of
the SDGs vis-à-vis trade issues.
2.2 Dramatic Changes in the Political, Business,

and Analytical Environment
The preparation phases of the MDGs and the SDGs occurred in
dramatically different environments in almost all possible dimensions:
increasingly chaotic domestic politics, severe and unresolved economic
turbulence, growing tensions in international relations, etc. Having
emerged in such different environments, these two endeavors could
hardly have been similar even had they wanted to be, which was not
the case.
2.2.1 The MDG Preparation Phase: Still a Pro-Trade Agenda
The core MDG preparation phase was from 2002 to 2005, and was
a product of then-recent world trade achievements. A pro-trade
environment and the successful conclusion of the Uruguay Round in 1995
and the expansion of the topics it covered meant that supporting opening
markets was still perceived as beneficial by most world politicians. This
was greatly amplified by the broad political and economic consequences
of the Fall of the Berlin Wall, which confirmed the prevalence of market
economies and suggested a shift from the adversarial United States
(US)–Soviet Union relationship to a US–People’s Republic of China
(PRC) duopoly, with the PRC seen as slowly but firmly conforming to
the Western economic model.
In addition, two events kept trade policy at the center of the world
diplomacy and stage. First was the “Millennium Syndrome”, that is, the
desire shared by many politicians to use the change of millennium as an
opportunity to scale up ambitions and their political visibility. One of
the very first manifestations of this happened in trade policy: Sir Leon
Brittan, then the European Union (EU) Trade Commissioner, tried to
launch a new round of negotiations (the “Millennium” Round) at the
new World Trade Organization (WTO) in the very late 1990s. This
attempt ultimately failed in the 1999 Seattle WTO Ministerial not so
much because of the anti-globalization movement, but because it relied
on a fundamental mistake: there was still a decade left before the full
implementation of the Uruguay Round commitments. As a result, many
From MDGs to SDGs: The Role of Trade11
countries, including those in the developed world, were waiting until

the last minute to fulfill their commitments in sensitive areas, such as
textiles (elimination of quotas) or agriculture (tariffication of existing
trade barriers). In such a context, nobody was eager to go back to the
negotiating table so soon. The second important political event was
the 11 September 2001 attacks on New York and Washington DC that
triggered a strong desire among the international community to unite
against terrorism. As the WTO is the largest gathering of countries
outside the UN, it was the best place to show this short-lived consensus,
with its first Round thus launched in Doha, Qatar, only 2 months after
the terrorist attacks.
However, the pro-trade agenda faced obstacles from two quarters.
First, the most often mentioned—although arguably the less damaging
in the long run—was the rise of nongovernment organizations (NGOs),
mostly from Organisation for Economic Co-operation and Development
(OECD) countries, which, almost invariably, perceived trade as a negative
force for their very specific agendas. Those such as Oxfam that took a
more balanced view of the trade role in development and governance
were relatively few. In this context, the early 2000s witnessed a complex
chemistry between the trade community (economists and negotiators)
and the anti-free-trade NGOs. Despite their opposing views, both
needed the other side. On the one hand, their anti-trade platform
notwithstanding, the NGOs had fragmented positive development
agendas competing against each other for public attention. On the other
hand, the trade community, realizing the progressive lack of public
support, was highlighting its role in development. In short, both sides
became part of an ecosystem based on the WTO “sound box” in hopes of
making their individual goals better known, understood, and supported.
The second obstacle, which was much less apparent in the early
2000s, although it could be seen as the most seriously damaging for
trade in the long run, was the fading support for multilateral trade
negotiations from the Western business community (most notably
in the US). This support was at its zenith among the large firms in
the second half of the 1990s when the Uruguay Round expanded the
General Agreement on Tariffs and Trade (GATT) coverage to issues
such as services and intellectual property rights. However, by the mid-
2000s, most large Western firms had already lost interest in the Doha
WTO negotiations, which were felt to be too slow—indeed, the arcane
discussions on “modalities” did their best to confirm this impression.
Even more important, the Doha discussions were increasingly irrelevant
for large international firms since they paid scant attention to such
issues as norms in goods, market access (and the related regulations) in
services, and intellectual property rights. This mismatch became deeper
and more entrenched when large firms found their own alternative to
WTO negotiations by designing tailor-made liberalization via global
value chains, that is, extracting tariff cuts on specific goods of interest to
them in exchange for investments in the countries at stake. These tailor-
made tariff cuts and foreign investments had an additional advantage for
the firms: they did not need to be “bound” in the GATT–WTO sense, and
did not require the huge political investments associated to bound deals.
In the early 2000s, trade still predominated in the MDG program,
and policy recommendations were largely dominated by the hope that
the 2005 WTO Ministerial in Hong Kong, China could open the door
to a successful Doha Round within a few years. As a result, trade was
involved at every step of the MDG production process, with a special task
force and a special report on Trade and Development (UN Millennium
Project 2005a). Trade was part of target 12 on global governance and
target 13 on the least developed countries; in addition, it was part of the
recommendations of the eighth MDG, “Developing a global partnership
for development,” a point examined in more detail in section 2.3.
2.2.2 The SDGs’ Preparation: Lack of Interest in Trade

Twelve years later, the policy and analytical environment of the SDGs
is vastly different, following a slow, but continuous political evolution
in the developed countries and a brutal world economic shock. Indeed,
it is very revealing that, while the early 2000s were rich in anti-trade
books, papers, and op-eds, such literature almost disappeared in the
early 2010s.
The political evolution, which is related neither to trade nor
development, but to the functioning of representative democracies,
started in the 1990s when freer trade was still firmly part of the
international consensus. Since then, in almost all the large democratic
countries, presidential and/or parliamentary elections have repeatedly
brought increasingly thin governing majorities. Such ill-elected
governments have a hard time fighting even the smallest vested
interests, which exacerbates the asymmetrical situation between trade
and development. In trade, small vested interests are mostly defensive,
and easy to mobilize because they have a strong sense of the potential
economic damage in case of liberalization, as well as their own political
clout. Offensive trade interests are generally weaker since they don’t
perceive as robust or clear the opportunities brought by more open
foreign markets, they are often not politically powerful since they are
often emerging sectors, and they are simply too busy, with little time for
lobbying. The situation in the development-related issues is largely the
opposite, where offensive interests with their anti-trade corollaries are
often supported by small groups that lobbied hard at home, but also used
the world to bypass local opposition.
In short, during the last 2 to 3 decades, democratic governments
elected by increasingly thin majorities have had to face defensive
interests in trade issues and offensive interests in development matters.
Such a situation could only result in an increasing anti-trade bias,
with the SDGs abandoning the more balanced approach on trade and
development that prevailed during the MDGs. This was all the easier
because, as stressed above, the SDGs have been an intergovernmental
process in the UN context.
The SDGs have also been profoundly shaped by the 2008 Great
Crisis, which, interestingly, hurt trade’s reputation as much as—if not
more than—finance. This is strange for two reasons: first, it is not yet
very well known that, while there has been a very long financial crisis
(especially in the EU), there has been no trade crisis. The trade collapse
in 2008–2009 only lasted a few months and was largely driven by the
collapse of trust, including among subsidiaries of the same firm located
in different countries. Though the WTO annual reports provided
information showing the very time-limited trade crisis, the public at
large did not pay attention, and still does not realize that trade has been
a strong stabilizing force in the post-2008 world economy.
The second strange aspect of the loss of credibility in trade pertained
to the criticisms regarding the efficiency of the markets. The belief in
“perfect” markets that prevailed in most financial circles before 2008
was never a strong element in trade matters; rather, trade economists
spent most of their time looking for more efficient public measures, with
one of the oldest basic elements of trade theory (the Stolper-Samuelson
theorem) stressing that freer trade will always face opponents since any
attempt to eliminate barriers will generate some losers. In this context,
no wonder that trade policy requires very determined and proactive
governments—in sharp contrast to the widespread public opinion that
freer trade strips domestic governments of their powers.
All these forces converged to weaken the SDGs’ pro-trade approach.
Top politicians became mute on trade, before becoming increasingly
outspoken on plain mercantilist actions that started with a focus on
job-creating exports in the late 2000s and is ending up in the mid-
2010s with unrestrained advocacy for retaliatory tariffs and trade wars.
The long agony of the Doha Round has added its burden—even to the
point of dividing the trade economists’ community, as illustrated by two
forums in 2011, that is, the year before the launch of the SDG production
process (Messerlin and van der Marel 2011). Following the Doha Round,
these two groups split into half a dozen subgroups pushing for different
concrete solutions, a recipe for becoming increasingly irrelevant.
2.3 Differences in the Production Processes

of the MDG and the SDG
The differences in the MDG and SDG environments have extended to
their respective philosophies and related production processes. The
MDGs were a relatively limited exercise when they were launched,
with a carefully defined mandate. That made their production process
relatively light and well organized. By contrast, as already mentioned,
the SDGs have an agenda that was almost borderless at the beginning; its
final definition required several years of debate. It is thus not astonishing
that the SDG production process was more volatile and complicated.
This section presents in more detail the two preparatory processes
before looking at the missed opportunity of the Gap Reports set up by
the MDGs for monitoring their implementation until 2015.
2.3.1 The MDG Preparatory Phase
The MDG preparation phase was a two-step process. First, a very

limited number of top UN officials worked in “relative casualness” for
shaping the list of the topics to be addressed. This first step was so short
that topics that today seem a must for such an endeavor were nearly
overlooked, with environmental issues being included literally at the
last minute (Tran 2012). The second phase was a 3- to 4-year work
done by the 10 task forces listed in Table 2.1 (task force 5 on Diseases
and Medicines was composed of four subtask forces to better address
the wide spectrum of its issues). Each task force was invited to write
a comprehensive report documenting and analyzing the main issues in
the fields covered and suggesting the key MDG targets for the end of
2015. An overview report was then presented (UN Millennium Project
2005b).
As trade was one of the topics listed at the MDGs’ very start, its
issues received a fair amount of attention. This enviable situation
is illustrated by examining the input side of the MDGs’ production
process, that is, the various task forces. Table 2.1 shows an average
number of participants of 30 persons per task force. This size seems
to allow enough diversity in opinions and analysis while achieving
coherence and an acceptable level of consensus when making
recommendations. The modest size of all the task forces allowed a
smooth process of the whole endeavor, which was facilitated by a very
small core group around Secretary General Kofi Annan, comprising
Mark Malloch-Brown, Jeffrey Sachs, and a few influential members
with both high political visibility and robust economic expertise, such
Table 2.1 The MDG Production Process: The Inputs
Distribution according to Background

Number
Task Forces’ of International National
Topics Members Academics Businesses Institutions Authorities NGOs
1 Poverty and 35 22.9 0.0 57.1 11.4 8.6
Economic
Development
2 Hunger 30 10.0 10.0 30.0 13.3 36.7
3 Education and 30 23.3 0.0 33.3 6.7 36.7
Gender Equality
4 Child and 18 33.3 0.0 38.9 22.2 5.6
Maternal Health
5A Access to 28 21.4 14.3 21.4 17.9 25.0
Essential
Medicines
5B HIV/AIDS 24 8.3 4.2 33.3 16.7 37.5
5C Malaria 17 29.4 5.9 41.2 5.9 17.6
5D Tuberculosis 15 13.3 0.0 40.0 26.7 20.0
6 Environmental 21 28.6 0.0 23.8 9.5 38.1
Sustainability
7 Water and 26 11.5 3.8 26.9 7.7 50.0
Sanitation
8 Improving the 18 27.8 5.6 11.1 16.7 38.9
Lives of Slum
Dwellers
9 Open, 13 23.1 7.7 53.8 0.0 15.4
Rule-Based
Trading System
10 Science, 17 47.1 5.9 29.4 11.8 5.9
Technology
and Innovation
All Task Forces 292 21.9 4.5 33.9 12.7 27.1
NGO = nongovernment organization.
Note: Figures do not include the chairpersons (often two).
Source: MDGs 2005.
as Ernesto Zedillo, former President of Mexico and Chair of the Trade

Task Force. This organization helped make trade matters fairly well
represented in the final MDG outcome.
The Trade Task Force exhibits two special features in terms of
inputs. First, it is the smallest one due to its well-circumscribed mandate.
Second, its composition differs in several respects from the average task
force: the absence of representatives of national authorities, a larger
participation from international institutions, a better representation of

business interests, and a smaller representation of NGOs.
These differences deserve some explanation. The absence of national
authorities is by far the starkest difference with the SDGs, which have
been driven by government representatives at the UN. This was because
selecting a few countries would have run the risk of appearing to play
favorites; and there was always the possibility of consulting the countries’
ambassadors to the WTO through regular contacts and meetings in
Geneva. The large participation of international institutions was meant
to accommodate all these main actors involved in the multilateral trade
system in order to ensure that they will feel reasonably committed to
support the implementation of the MDG recommendations until 2015.
The only slightly better representation of the business community
mirrored its ongoing erosion of interest in the multilateral trade system.
Finally, the NGOs’ smaller representation reflected most of them having
taken positions on trade issues in the early 2000s, not so much because
of their interests, but largely as a corollary of their positions and, as
said above, as a free ride on the media attention generated by the WTO
Ministerials during this period. The MDGs’ preparation process offered
them an organizational structure that was much more appropriate to
their core issues.
2.3.2 The SDG Preparatory Phase
In sharp contrast with the MDGs, the SDG preparatory phase has
been largely an intergovernmental process held at the UN and under
its rules (Lunn, Downing, and Booth 2015), hence the impossibility of
drafting a table equivalent to Table 2.1 for the MDGs. The year 2012
witnessed the birth of the three key SDG bodies: in January, the UN
Task Team made up of more than 60 UN agencies and international
institutions; in June, the Rio+20 Summit mandated the creation of an
Open Working Group (OWG) to come up with a draft agenda; and in
July, a high-level panel co-chaired by President Ellen Johnson Sirleaf
(Liberia), President Susilo Bambang Yudhoyono (Indonesia), and
Prime Minister David Cameron (United Kingdom) was established.
The OWG had representatives from roughly 70 countries, mostly drawn
from the members’ missions to the UN. The wide range of SDG issues
and the narrowness of the pool of official representatives made it very
difficult for most countries to align the needed expertise—a point that
emerged as a deep source of difficulties when defining the indicators.
Alongside the OWG, the UN conducted 12 international thematic
consultations (groups until 2015 and networks since 2016, for instance
on social inclusion, health, sustainable cities, etc.), and national
consultations with 83 UN members, with the results being fed into

the OWG discussions. The final OWG draft was presented to the UN
General Assembly, which endorsed it in September 2014, opening the
phase of negotiations among the members. The final document stating
17 goals and 169 associated targets was agreed upon in September 2015.
However, negotiations on the 229 indicators continued until March
2016 (Sachs, Schmidt-Traub, and Durand-Delacre 2016).
Clearly, this procedure was not able to harness the trade potential
in promoting development and governance—the two ultimate SDG
objectives. Moreover, the lack of written reports on the issues covered
introduced a bias favoring fragmented views to the detriment of a more
comprehensive and consistent approach. Such fragmentation concerned
all the topics—very often, reading the SDGs gives the impression of
looking at unconnected silos—but it was particularly detrimental to
topics that seemed “peripheral” to many SDG drafters, such as trade.
2.3.3 A Missed Opportunity: The MDG 8 Gap Reports
Despite the differences of approach between the MDGs and SDGs, one
instrument could have established a useful link between them: the annual
MDG 8 Gap Reports. In May 2007, the UN Secretary General established
an MDG Gap task force integrating more than 30 UN and international
agencies to monitor the implementation of the MDG 8 Goal, “Developing
a global partnership for development.” The Gap Reports covered not
only trade issues, but also official development assistance, debt relief,
access to medicines and new technologies (especially information and
communication)—all prominent and highly charged topics. However,
their impact in trade matters has been minimal, as they were unable to
convey to the SDG participants that trade policy could be a development
and governance tool, even in the political and economic environment of
the 2010s.
This failure does not flow from a meager coverage of trade by the
successive Gap Reports (a possibility since trade had to compete with
several other issues, as stressed above). Block A of Table 2.2 shows
that trade received its “fair” share of words in the Gap Reports, which
were organized in three components: the executive summaries, the
recommendations included therein, and the detailed texts. The executive
summaries contain a large share of the words devoted to trade issues,
except for the 2014 report, which is a clear result of the meager results of
the Bali Ministerial. The recommendations show signs of a more marked
decline in trade visibility in the 2013 and 2014 Gap Reports (the 2015
report has no recommendation for any issue covered by the MDG 8).
Finally, the full texts of the Gap Reports show again a relative stability
in terms of words, except in 2015. In short, a word count suggests some

signs of erosion in trade visibility, but nothing systematic or dramatic.
However, this observation could simply reflect an institutional
constraint, namely the obligation to give equal weight to the various
issues to be monitored by the Gap Reports. There is thus a need for
content-based analysis, presented in Block B of Table 2.2. This analysis
suggests a much less benign conclusion: the Gap Reports have become
an increasing formality leading to a progressive fossilization of the
trade issues in the MDG and, hence, UN context, facilitating their
marginalization in the SDG context.
Block B of Table 2.2 shows that the report recommendations
have increasingly focused on the Doha Round: the share devoted to
Table 2.2 MDG 8 Gap Report: “Revealed” Preferences
2011 2012 2013 2014 2015

Share of words devoted to trade issues in the MDG 8 Gap Reports
Executive summaries
Texts 15.6 14.7 16.4 11.1 16.5
Recommendations 26.6 24.2 14.8 17.9 –
Whole reports (excluding 18.9 20.7 19.7 20.7 15.1
executive summaries)
Breakdown of recommendations on trade issues by issue
Doha Round 47.4 47.4 79.1 84.7 –
Completion 7.7 19.5 27.9 23.6 –
DFQF 25.5 14.3 – – –
Agriculture 14.3 13.5 51.2 19.4 –

Bali package – – – 41.7 –
Trade capacity 18.4 21.8 – 15.3 –
Trade finance 16.3 0.0 – – –
New trade restrictions 17.9 17.3 – – –
Green economies – 13.5 – – –
Supply issues – – 20.9 – –
Total number of words 196 133 43 72 –
– = data not applicable, DFQF = duty free quota free.
Notes: A reasoned assessment of the word count should consider that WTO Ministerial Conferences
occurred in December 2011 (Geneva), 2013 (Bali), and 2015 (Nairobi). As the Gap Reports were published
in September, the 2011, 2013, and 2015 reports were written and released before the Ministerials, while the
2012 and 2014 reports were written after the Ministerials.
Source: MDG 8 Gap Reports.
the multilateral trade negotiations increased from 47% to 85% (of

increasingly shorter texts, to be fair). This evolution occurred precisely
at a time when it was becoming increasingly clear that the Doha
negotiations were going nowhere, whereas trade was being reshaped by
powerful structural changes (such as global value chains) and policies
of the major trading powers were shifting from multilateral to de facto
bilateral negotiations. In other words, the Gap Reports were increasingly
out of touch with international trade realities.
One could argue that such a narrow focus of the Gap Reports on the
Doha Round was reflecting the MDG Trade Task Force report. But, the
task force report has clearly focused on the Doha Round because it was
written between the Ministerial Conferences in Cancun and Hong Kong,
China. At this time, it seemed reasonable to focus on WTO issues, and
not to miss what could have been an historic opportunity. By contrast,
the successive Gap Reports kept focusing on the WTO after the June
2008 Geneva failure to reach an agreement and after the US “pivot to
East Asia” (Trans-Pacific Partnership) in September 2008. They made
no attempt to mention new ways of improving market access among
developing countries, such as the Pacifico Arco. This “routine” approach
could only lead to a progressive fossilization of trade issues in the MDG
context and their marginalization in the SDGs.
From this perspective, it is important to note that, by contrast, the
MDG Trade Task Force report was very careful to insist on key elements
going much beyond the Doha negotiations. These elements could have
been used as a basis by the Gap Reports for stressing the continued
relevance of trade policy for development. Three illustrations follow.
First, the MDG Trade Task Force report insists on the capacity to
export depending largely on efficient domestic production processes,
hence on the ease with which domestic firms can get good quality and
affordable imported inputs, a key dimension of global value chains. The
various Gap Reports never stressed imports; on the contrary, they kept
repeating the need to open the markets of the developed countries—
hence adding no value to the (nonperforming) rhetoric prevailing in
Geneva. The only exception was the 2013 Gap Report, which alluded
in a cryptic way to the “supply issues” in developing countries and least
developed countries (see Block B, Table 2.2 last line).
Second, the Gap Reports have made no attempt to reflect the
progressively emerging understanding of the possible complementarities
between the WTO and economically sound Preferential Trade
Agreements. These complementarities have many facets, the most
important of which is that the WTO forum is not well suited to address
trade-related regulatory issues. Defining norms for products and/or
production processes, shaping regulations for getting efficient markets
in services, and drafting innovative agreements on public procurements

or on state-owned enterprises are tasks largely out of reach for the WTO
in the short to medium term because they require a level of trust among
the partners that does not exist among all its members. Such a trust can
only be achieved by introducing trade negotiations—or rather in “trade-
related conversations”—on these topics to the appropriate domestic
regulators in charge of defining and monitoring the corresponding
norms and regulations in the various countries. Underlining this tectonic
shift of modern trade policy from negotiators to regulators could have
attracted the interests from those SDG drafters who were interested in
domestic governance.
Finally, the MDG Trade Task Force report has made some effort
to show how trade policies could support other MDGs. Arguably, these
developments were limited to the trade impact on poverty and to a
few environmental issues, such as agriculture and fisheries, and the
corresponding texts were often relatively short. However, these limits
also reflected a balance still hard to achieve in the early 2000s between
the need to make a case for the Doha Round from the development
perspective, and the still-adversarial relations between the trade and other
crucial communities (such as for climate change or for water) involved in
the MDGs. These relations became much better in the second half of the
2000s. However, the Gap Reports did not make any attempt to reflect these
increasingly fruitful debates, for instance, between the trade, climate, and
water communities, except with a somewhat awkward recommendation
on “greening” the developing economies in the 2013 report.
To sum up, if the Gap Reports did not reveal any strong sign of
erosion of trade visibility, their inability to de-link trade issues at large
from the narrow and increasingly hopeless Doha negotiations has been
a missed opportunity to keep trade policy as an attractive topic in the
SDG context.
2.4 MDG and SDG Outputs: Targets and Indicators

This section presents the main outputs—goals, targets, and indicators—
of the two endeavors, and underlines the difference of scale between
them, the SDGs being 8 to 12 times “bigger” than the MDGs. It also
assesses some SDG targets, and looks in more detail on trade indicators.
2.4.1 MDG Output
Table 2.3 lists the goals, core targets, and indicators for defining MDG
achievement. The insistence on indicators reflects the strong preference
for “metrics” in the MDGs—as indeed in the SDGs. Table 2.3 suggests a
reasonable output for a worldwide endeavor such as the MDGs: eight
goals, 21 targets expressed in fewer than 400 words, and 60 indicators.
The output of the MDG Trade Task Force deserves two specific
remarks. First, the Trade Task Force does not have its “own” specific
goal(s), contrary to some others. Trade was included in two targets
that were part of Goal 8 on “Developing a global partnership for
Table 2.3 The MDG Production Process: Outputs
Goals Targets
Number Number Number
How of the How of of
Task Forces’ Topics Many? Goal Many? Words Indicators
1 Poverty and Economic 1 1 2 34 7
Development
2 Hunger 1 13 2
3 Education and 2 2, 3 2 42 6
Gender Equality
4 Child and 2 4, 5 3 31 9
Maternal Health
5A Access to Essential 1 8 1 14 1
Medicines
5B HIV/AIDS 2 27 5
5C Malaria 1 6
5D Tuberculosis 1 16 5
6 Environmental 2 32 7
Sustainability
7 Water and Sanitation 1 7 1 17 2
8 Improving the Lives 1 18 1
of Slum Dwellers
9 Open, Rule-Based 2 73 4
Trading System
10 Science, Technology 1 8 1 17 3
and Innovation
Goal not Task 1 8 2 63 8
Force-Specific
All Task Forces 8 – 21 397 60
MDG = Millennium Development Goal.
Note: The goal of task forces 5A, 9, and 10 is the same as “MDG 8”.
Source: MDGs 2005.
development”, which covered task forces 5A, 9, and 10. Such a grouping
was meant to reflect the MDGs’ development focus. However, it should
be stressed that it was logical from a trade and trade policy perspective,
as it underlines the crucial—but too often forgotten—point that trade
and trade policy should not be conceived as a goal per se. If well used,
they are powerful instruments that can deliver goals, such as growth and
development, and improve lives. This view is clearly reflected in targets
8.A and 8.B:
Target 8.A: Develop further an open, rule-based, predictable, non-
discriminatory trading and financial system. Includes a commitment to
good governance, development and poverty reduction—both nationally
and internationally.
Target 8.B: Address the special needs of the least developed countries
Includes: tariff and quota-free access for the least developed countries’
exports; enhanced programme of debt relief for heavily indebted poor
countries (HIPC) and cancellation of official bilateral debt; and more
generous ODA for countries committed to poverty reduction.
It is particularly interesting to note that trade is linked to “good
governance”—a term that appears nowhere else in the MDG target list,
but that constitutes a pillar of the SDGs.
2.4.2 SDG Output: Goals and Targets
Table 2.4 summarizes the goals of the SDGs and the MDGs, and the
number of words defining them, and shows that the SDGs had eight times
as many targets as compared with the MDGs. It also shows how it took
time to stabilize the number of SDG targets in particular. However, it
should be noted that this difficulty was largely solved by merging two or
more previously independent targets—hence the stability in the number
of words in Table 2.4 between the 12th OWG and the final document. In
addition, the change of scale between the MDGs and the SDGs is even
bigger in terms of words—by a factor of 12. In international negotiations,
the number of words can be interpreted in two ways: as a source of
increased precision, or of “constructive ambiguity”, that is, a way for
keeping each participant largely free to do whatever it wants beyond broad
(often non-committing) principles. Reading the SDG targets suggests that
the second alternative is more common, not such a surprising result in
the UN or trade negotiation forum. Finally, the number of targets per goal
and the number of words per target are significantly higher in the SDGs
than in the MDGs. Such a feature can again be interpreted in two ways: an
effort to be more precise, or a propensity to add different aspects with less
of a sense of priorities. Reading the SDG targets suggests again the second
alternative is more common.
Table 2.4 The Proliferation of SDG Goals, Targets, and Words
Number of Words
Targets per
Goals Targets Words per Goal Target
MDGs 8 21 374 2.6 17.8
SDGs
High-Level Panel – 54 889 – 16.5
11th OWG – 139 2,360 – 17.0
12th OWG – 212 4,389 – 20.7
Final 17 169 4,369 9.9 25.9
– = data not applicable, MDG = Millennium Development Goal, SDG = Sustainable Development Goal,
OWG = open working group.
Sources: Table 2.1 for the MDGs and Copenhagen Consensus Center for the SDGs.
These observations raise questions: To what extent have the SDG

targets been able to keep an economic dimension? Has the proliferation
of goals, targets, and words been achieved by piling up too many
quantitative elements? For instance, is the indicator 12.6.1 “number of
companies publishing sustainability reports” useful and appropriate for
monitoring the target 12.6 “encourage companies, especially large and
transnational companies, to adopt sustainable practices and to integrate
sustainability information into their reporting cycles”? Answering
these questions goes beyond this paper and would require an in-depth
analysis. However, key words suggest that basic economic terms rarely
appear: for instance, the word “price” appears only twice in the targets
and indicators (United Nations Economic and Social Council 2015).
Similar observations could be made for trade, exports, and imports,
with again the notable bias of exports preferred over imports, revealing
a mercantilist approach not amenable to improving trade policies.
In this context, the analysis done by the Copenhagen Consensus
Center (CCC), the only existing systematic review of the SDGs from a
purely economic perspective, deserves some attention (Lomborg 2014).
Table 2.5 summarizes its main conclusions. Columns 1 and 2 list the
17 goals and 169 targets associated with each goal. Column 3 presents the
goals in which there are some references to trade (based on the words
“trade,” “export,” and “import”) and trade policy (based on the words
“tariff,” “quota,” and “subsidy”). Columns 4 through 9 summarize the
CCC’s conclusions. Column 4 shows the distribution of the “reviewable”
targets, that is, the targets for which the CCC has estimated to have
enough knowledge and information to provide a reasoned economic
Table 2.5 An Initial Economic Assessment

of the SDGs’ “Reviewable” Targets
Targets
Targets Reviewed CCC’s Assessments
Number
by the CCC [b]
Refer to of
Goal Number Trade [a] Number Ratio 4/1 Phenomenal Good Fair Poor Indicators
1 2 3 4 5 6 7 8 9 10
1 7 1 14.3 1 9
2 8 yes 3 37.5 1 1 1 15
3 13 8 61.5 3 4 1 25
4 10 4 40.0 1 2 1 11
5 9 1 11.1 1 14
6 8 1 12.5 1 10
7 5 3 60.0 2 1 6
8 11 yes 4 36.4 2 1 1 15
9 8 2 25.0 1 1 12
10 10 2 20.0 1 1 12
11 10 0 0.0 13
12 11 2 18.2 1 1 12
13 6 0 0.0 5
14 10 3 30.0 2 1 10
15 12 0 0.0 15
16 12 0 0.0 21
17 19 yes 4 21.1 1 1 1 1 24
All 169 3 38 22.5 13 11 9 5 229
CCC = Copenhagen Consensus Center.

Source: Copenhagen Consensus Center (2014).
assessment of those that do not contain internal inconsistencies. Only

38 of the targets have been considered reviewable. Column 5 shows that
the distribution of these targets is very uneven among the various goals:
at one end of the spectrum, a few goals have no reviewable target at all,
while at the other end, two goals have listed targets two-thirds of which
have been considered reviewable.
For the 38 reviewable targets, columns 6 to 9 show that the CCC
cost–benefit analysis has led to four outcomes: “phenomenal” (robust
evidence that benefits are 15 times higher than costs); “good” (robust
evidence that benefits are 5 to 15 times higher than costs); “fair”
(robust evidence that benefits are 1 to 5 times higher than costs); and
“poor” (robust evidence that benefits are smaller than costs, or that the
target definition is inconsistent or provides wrong incentives).
The CCC review leads to two main conclusions. The first deals
with all the targets reviewed, either trade-related or not. Two-thirds
of the reviewable targets (24) benefit from a “phenomenal” or “good”
assessment. Though this seems a very positive outcome, this impression
should be seriously nuanced by 131 targets—77% of the total—not
being able to be reviewed because of a lack of information or internal
inconsistency. The second conclusion deals only with the targets that
include one of six key words related to trade (“trade,” “export,” “import,”
“tariff,” “quota,” and “subsidies”). All the targets containing one of these
six words are among the 38 reviewable targets, and they have been rated
as “phenomenal” or “good.” In this context, it is interesting to note that
the CCC assessment on trade-related targets (Anderson 2014) has been
careful enough to accommodate the most recent developments in trade
policy, such as the “mega” preferential trade agreements that have been
omitted by the Gap Reports.
2.4.3 SDG Outputs: Indicators in Trade Matters
Column 10 of Table 2.5 lists the current number of indicators associated

with the targets (Leadership Council of the Sustainable Development
Solutions Network 2015).1 There are 229 indicators, roughly four times
the number under the MDGs. There are wide differences among the
targets, some of them having a much higher number of indicators than
others. What follows focuses on the indicators under the Trade heading
(Goals 17-10, 17-11, and 17-12). A rapid analysis reveals serious problems
in the way these indicators are defined.
Goal 17-10 is a rewording of the MDG goal: “promote a universal,
rules-based, open, non-discriminatory and equitable multilateral trading
system under the World Trade Organization, including through the
conclusion of negotiations under its Doha Development Agenda.” The
associated indicator 17.10.1 reads as follows:
17.10.1 Worldwide weighted tariff average.

This indicator is hard to understand. Is it the average over
all the goods for a given country, or the average over all the
countries for a given good? Is this average trade-weighted or
not? In any case, broad tariff averages are not useful because
they “dilute” the limited number of high tariffs (tariff
1
This number may still be subject to change.
peaks)—those which really hurt domestic consumers, be

they households or firms, and are welfare-deteriorating—in
the number of small or zero tariffs imposed on most of the
goods. They are particularly unhelpful when one focuses on
least developed countries, which export a very limited range
of goods.
Goal 17-11 requests to “significantly increase the exports of developing

countries, in particular with a view to doubling the least developed
countries’ share of global exports by 2020.” The associated indicator
17.11.1 reads as follows:
17.11.1 Developing countries’ and least developed

countries’ share of global exports.
This goal raises also several questions. Why has “doubling”
been preferred to any other predetermined figure? Even
more important, how should such a result be assessed: is it
the consequence of the proper functioning of the markets, or
of some government policy (for instance, export subsidies)?
Is it possible to disentangle the many economic forces and
policies that could have led to such a result, with possibly
none of them due to the developing countries or least
developed countries?
Goal 17-12 requests to “realize timely implementation of duty-free

and quota-free market access on a lasting basis for all least developed
countries, consistent with World Trade Organization decisions, including
by ensuring that preferential rules of origin applicable to imports from
least developed countries are transparent and simple, and contribute to
facilitating market access.” The associated indicator 17.12.1 reads as
follows:
17.12.1 Average tariffs faced by developing countries, least

developed countries and Small Island Developing States.
As in the case of Goal 17-11, defining such an indicator
exclusively in terms of tariff averages does not provide robust
enough information for monitoring this goal.
2.5 Concluding Remarks

The SDGs have missed the opportunity to harness trade as an
instrument for achieving their ultimate target—a “better life.” The SDGs’
working framework did not allow them to be both bold and pragmatic
in trade matters for two main reasons: first, the Gap Reports have been
uninspired and cantoned themselves in the increasingly sterile WTO
negotiations. As a result, they were unable to inform the UN about the
new aspects of the trade debate that could be of great interest for the
SDG participants. The second reason is that the Missions to the UN have
been the main SDG negotiating bodies. Unfortunately, staff members of
the UN Missions rarely have an intimate knowledge of how to handle
trade, and the limited funds for the SDGs have prevented many countries
from bringing trade experts from their capital cities.
This is a great loss because trade and the SDGs have a common
regulatory agenda. What the trade aspect could bring to the SDGs is the
realization of how a well-designed trade policy can improve domestic
regulations. To some extent, this theme has emerged during the MDGs:
for instance, the MDG report on Trade for Growth has stressed how
eliminating water subsidies for farm production would improve water
management and reduce agricultural trade distortions.
What happened during the last decade is the realization that such
mutual benefits between better domestic regulations and better trade
policies exist in almost every economic sector. Modern economies
are split between two economic drivers: the desire for harmonization
associated with scale economies and the endless appetite for diversity
in goods and services fueled by economies of scope. So far, the first
force has been the most powerful—hence the massive efforts until the
late 1990s to harmonize norms in goods (harmonization has impacted
very few services where diversity has always been prevalent). But the
huge technological progress of the last 20 years enables an endless
diversity in goods and services at increasingly lower costs—turning
harmonization into a costly constraint. One of the best illustrations
of these changes is provided by the EU “five decades” harmonization
approach in the automotive sector. It has recently faced a remarkable
debate, with Daimler (interestingly backed by Greenpeace) refusing
to enforce a new, less polluting car coolant because it was found to be
more flammable.2 In other words, this case illustrates the increasing
difficulties to define a norm that is unambiguously better than any
alternative from all the conceivable criteria (pollution vs. safety in the
Daimler case).
The second case is the “Volkswagen (VW) case” of playing with
the norms—in fact, most EU carmakers have behaved as VW has. To
dictate norms is worthless if they are not implemented and monitored.
The VW case is a powerful illustration of how useful a trade partner
2
Interestingly, it is reported that the new coolant is produced by only two firms
(Honeywell and Chemours), a non-competitive situation opening the way to high
prices (Hakim 2016).
can be for ensuring compliance. It must be stressed that the case did
not emerge because of some protectionist intent to hurt VW. On the
contrary, the first tests were done in California by an engineer eager
to assess the quality of German cars. When the engineer discovered
what was going on, he turned to the California authorities, which
sent the issue to the US federal authorities after having confirmed the
engineer’s results.
The lesson to be drawn from the Daimler and VW cases is simple:
designing, enforcing, certifying, and monitoring “better” norms is
a very difficult task and would greatly benefit from international
“conversations” among the concerned regulating agencies.
This key lesson is embodied in the concept of “mutual equivalence,”
which is a much better approach than harmonization, or mutual
recognition, a weaker form of it (Messerlin 2011, 2015; Morall III
2011).3 Under mutual equivalence, two countries debate whether their
norms or regulations are “different, but equivalent.” Their decisions are
prepared by a joint evaluation made by the partners’ relevant regulatory
bodies—not the trade negotiators—of their existing norms for a given
good or of their regulations for a given service. (This process of mutual
evaluation can be made at the level of the definition of the norms or
regulations, or at the corresponding certification processes, or at both
levels.) This preliminary step of mutual evaluation is essential. Beyond
its “technical” aspects, it is political to the extent that it creates the trust
among the regulatory agencies—hence among the two countries—that
is so badly needed when dealing with issues as complex and subtle as
norms or regulations. If, and only if, mutual equivalence is granted after
a satisfactory mutual evaluation process, producers can produce the
good or service in question under the regulations of their own country
and/or to sell it to the consumers of the other country without any other
formality.
Mutual equivalence is the only way to get a deeper and more
beneficial integration of two economies because it does not generate the
costs that harmonization imposes. It has two additional benefits that
should not be underestimated. First, it is a careful process that requires
time and thus fits well the concept of bilateral trade agreements as
“living” agreements. An “ambitious” agreement concluded “quickly” is an
oxymoron in 21st century economies, as it defies the complex economic
and regulatory realities—hence, it is doomed to generate anxiety among
the public opinion and ultimately to be self-defeating. Second, mutual
3
At a first glance, mutual equivalence seems a new and untested idea. It is not.
The EU 2006 Services Directive is based on this principle, as stated in Article 15.
equivalence provides a robust solution to the widespread fear of trade

agreements generating a “race to the bottom” in regulatory matters. If a
country decides to change its regulation for some reason, under mutual
equivalence, the partner could, if needed, evaluate this new regulation.
If it does not find the new regulation equivalent, then it can suspend the
existing agreement, possibly conditional on some measures being taken
by its partner. In such a context, no regulator has an interest to a race to
the bottom. The only true option is a race to the top.
References
Anderson, K. 2014. Trade Assessment Paper. Benefits and Costs
of the Trade Targets for the Post-2015 Development Agenda.
10 October. Copenhagen Consensus Center. Available at www
.copenhagenconsensus.com/post-2015-consensus/trade (accessed
3 December 2016).
Hakim, D. 2016. Refrigerant Now Adopted in Cars Isn’t Worry-Free.
The New York Times International Edition. 22–23 October, 1–10.
Leadership Council of the Sustainable Development Solutions Network,
2015. Abridged Report: Indicators and a Monitoring Framework for
the SDG. Launching a Data Revolution for the SDGs. New York:
United Nations.
Lomborg, B. 2014. Preliminary Benefit–Cost Assessment of the Final
OWG Outcome. 18 August. Copenhagen Consensus Center.
Available at http://www.copenhagenconsensus.com/sites/default
/files/owg_ccc_preliminary_cost-benefit_final_assessment.pdf
(accessed 3 December 2016).
Lunn, J., E. Downing, and L. Booth. 2015. The SDGs and the Post-2015
Development Agenda. Briefing paper #7291, 28 September. Library,
UK House of Commons.
Messerlin, P. 2011. The EU Single Market in Goods: Between Mutual
Recognition and Harmonization. Australian Journal of International
Affairs 65(4): 410–435.
____. 2015. The Services Dimension of Transatlantic Trade and
Investment Partnership. In Rule Makers or Rule Takers? Exploring
the Transatlantic Trade and Investment Partnership, edited by
D. Hamilton and J. Pelkmans. Brussels: Centre for European Policy
Studies.
Messerlin, P., and E. van der Marel. 2011. Polly Wants a Doha Deal:
What Does the Trade Community Think? World Trade Review 10(4):
551–55.
Morall III, J. 2011. Determining Compatible Regulatory Regimes
between the US and the EU. Washington, DC: US Chamber of
Commerce.
Sachs, J., G. Schmidt-Traub, and D. Durand-Delacre. 2016. Preliminary
Sustainable Development Goal (SDG) Index and Dashboard.
Sustainable Development Solutions Network. 15 February.
http://unsdsn.org/wp - content/uploads/2016/02/ 160215
-Preliminary-SDG-Index-and-SDG-Dashboard-working-paper
-for-consultation.pdf (accessed 3 December 2016).
Tran, M. 2012. Mark Malloch-Brown: Developing the MDGs

Was a bit like Nuclear Fusion. The Guardian. 16 November.
http://www.theguardian.com/global-development/2012/nov/16
/mark-malloch-brown-mdgs-nuclear (accessed 3 December 2016).
UN Millennium Project. 2005a. Trade for Development, Task Force
on Trade. London: Earthscan.
____. 2005b. Investing in Development. A Practical Plan to Achieve the
Millennium Development Goals: Overview. London: Earthscan.
United Nations Association–UK. 2016. Sustainable Development Goals:
The People’s Agenda. London: Witan Media Ltd.
United Nations Economic and Social Council. 2015. Report of the
Inter-Agency and Expert Group on SDG Indicators. Statistical
Commission, 47th session (8–11 March 2016).
3
Trade and the Post-2015
Development Agenda
Bernard Hoekman
3.1 Introduction
Sustaining real per capita income growth rates that exceed population
growth by a substantial margin is necessary for achieving the post-
2015 development agenda. Cultivating incentives to invest in tradable
activities is a key factor determining an economy’s growth potential and
performance. Trade and foreign direct investment (FDI) are sources of
technology and knowledge, as well as mechanisms whereby firms can
specialize in activities in which they have a comparative advantage.
The experience of many countries demonstrates how effective global
integration can be as a core element of economic development. But
numerous countries that have pursued trade liberalization have not
been able to leverage it for development. Many complementary factors
need to be in place, chiefly those pertaining to macroeconomic policies
and the investment climate confronting businesses.
In the coming decade, the challenge of using trade as an instrument
for sustainable development may well be greater than it was in the past.
Since 2010, following the sharp collapse in trade in 2008 and the equally
sharp recovery in 2009, global trade has grown in line with global output,
as opposed to increasing 2 to 3 times faster than output in the 1980s,
1990s, and much of the 2000s. The period from the late 1980s to the
2008 global financial crisis was unique. Unprecedentedly high global
trade growth rates reflected a mix of technological change and business
innovation, policy reforms around the globe, and the reintegration of
the People’s Republic of China (PRC) into the world economy. Demand
by the PRC for natural resources benefited many countries in Africa
and Latin America, but at the same time rapid growth in the PRC’s
manufactured exports was a competitive pressure. Growth in the
PRC increased the economic footprint of East Asia, leading to further
dominance of the three regional “factories”/major markets in the world
economy (North America, Europe, and Asia). Whether the post-2010
32
Trade and the Post-2015 Development Agenda33
trade slowdown constitutes a “new normal” is a hotly debated question

(Hoekman 2015). The answer matters for the role that trade can play in
the post-2015 development agenda.
This chapter discusses how trade can help achieve the post-2015
development agenda. It starts in section 3.2 with some reflections
on recent global trade-growth trends, followed in section 3.3 with a
discussion of why and how trade is important for poverty reduction and
the achievement of the 2030 Sustainable Development Goals (SDGs).
Section 3.4 puts forward several suggestions regarding what could be done
by governments to leverage trade opportunities for development and how
the international community can assist, both through cooperation in trade
policy broadly defined and through aid for trade. Section 3.5 concludes.
3.2 Growth, Trade, and Trade Policy

Trade has been a driver of growth in most countries that have been able
to greatly increase per capita incomes and reduce poverty. Countries
in East Asia have been the star performers, with an increase in per
capita incomes of some 700% since the early 1980s, followed by South
Asian countries (220%) (Table 3.1). Asia includes the PRC and India,
Table 3.1 Average Annual Growth Rate of per Capita GDP

(constant 2005 $) [update to 2014]
1975– 1985– 1995– 2000– 2005– %ǻ 1982–

1985 1995 2000 2005 2012 2012 $ 2012
Developing Regions
East Asia and the Pacific 7.0 9.1 6.5 9.4 9.9 698 2,856
Europe/Central Asia NA –1.5 3.1 6.5 3.4 70 4,727
Latin America 2.7 –0.6 1.9 1.4 2.8 39 5,642
Middle East/North Africa 1.4 –0.3 3.3 2.8 NA 44 2,381
Sub-Saharan Africa –2.0 –1.6 0.8 3.2 2.5 12 989
South Asia 2.5 3.8 4.6 5.8 6.4 223 1,009
LDCs NA 0.4 2.8 4.7 4.2 60 518
Small States NA 1.2 3.2 4.4 1.9 60 4,468
High Income 3.0 2.6 3.3 2.1 0.8 74 31,373
World 1.9 1.5 2.5 2.0 1.3 55 7,732
GDP = gross domestic product, LDC = least developed country, NA = not available.
Source: World Bank. World Development Indicators database.
the two most populous nations in the world, as well as several other
countries with both large populations and many poor households (e.g.,
Bangladesh, Indonesia, Pakistan, the Philippines, and Viet Nam). High
per capita growth in Asia has therefore implied a substantial reduction
in the number of households with incomes below the poverty line.
Trade played an important role in driving the recent decades’ global
growth. Between 1950 and 2008, the year the global financial crisis
erupted, global trade increased 27-fold, that is, three times more than the
growth in global gross domestic product (GDP). The total value of world
trade in goods and services was over $22 trillion in 2014. The trade-to-
GDP ratio for the world stood at 60% in 2014, up from some 25% in the
1960s. The rise in incomes that has been observed in many parts of the
world illustrates the payoff to trade openness and economic policies that
encourage investment in production of tradable goods and services.
The boom in global trade reflected many factors, with two standing out:
innovation and economic policy reform. The well-known technological
changes that have underpinned global trade growth include advances in
information and communication technology, which led to a sharp drop in
the costs of international telecommunications, as well as new products
and services that reduce the effect of distance and geography and permit
the production of many products in global value chains (GVCs).1 Small
and medium-sized enterprises today have greater opportunities to sell
and source internationally, in part by connecting to the international
production network and to buyers and suppliers through internet-based
platforms that also provide payment services. Technological change and
innovation has led to significant leveling of the international playing field
for small companies relative to large multinationals.
Another key driver of trade growth was the shift to outward-
oriented strategies in many developing countries and former centrally
planned economies in Europe and Asia. The world went from a situation
with tariffs in the 20%–30% range and frequent use of quantitative
restrictions and foreign currency and exchange controls to one where
exchange rates are much more flexible, capital controls and quantitative
restrictions were largely removed, and the average uniform tariff
equivalent for merchandise trade is in the 5%–10% range (Kee, Nicita,
1
The shift to GVC-based production was a major factor leading global trade to grow
much faster than aggregate output, that is, GDP. Trade flows are recorded on a gross
value basis, including the value of the intermediate inputs that are embodied in a
product. Thus, an input that is shipped from country A to country B as part of a
GVC is measured as an export from A to B; the value of the subsequent export of the
processed product from B to C (or back to A) will embody the value of the imported
input. From a value-added perspective, this implies there is double counting. GDP, in
contrast, is a value-added concept: it is the sum of all value added that is produced in
an economy, including only net exports (exports minus imports).
Figure 3.1 Services Share of Manufacturing Value Added (%)
40
35
30
25
20
15
10
5
0
e s g l h d s s als ls s y y s t g
ur uct inin pare blis oo um tics cal ral t ta nic er er cle por rin
cult ro
d M ap t pu W trole plas emi ine me me ctro chin chin vehi ans actu
gri p n d
rin
e
p and h
C llic
m s i c
te
d l e a
M l m tor er
a t r u f
A od s a r, p e, a Ba rica nd e ca Mo th an
Fo tile ape ok ber et tri O er m
x C b - m F ab T a c
Te P Ru n IC Ele th
No O
Construction Wholesale, retail, and hotels Transport and telecoms

Finance and insurance Business services Other services
ICT = information and communication technology.

Source: Organisation for Economic Co-operation and Development–World Trade Organization Trade in
Value-Added Database. June 2015.
and Olarreaga 2009).2 Effective (applied) tariffs for firms are often zero
due to preferential trade agreements or duty-free, quota-free (DFQF)
programs in the case of the least developed countries (LDCs).
Growth in the incomes of the poor is strongly related to overall
growth in the economy, although the precise relationship will vary
across countries depending on government policies and social and
economic conditions. Given that openness to trade promotes growth,
which is linked with poverty reduction, trade policy has an important
role to play in economic development. A country’s trade policy is the
interface between the world market for goods, services and knowledge,
and the national economy. The prices of products that prevail on world
markets are critical indexes for firms to determine whether they can be
competitive in a given sector. An open trade and investment regime helps
investors to identify activities in which a country has a comparative
advantage. This applies to services as much as it does to goods. As services
account for a large share of manufacturing value added (Figure 3.1), the
competitiveness of firms depends on their ability to source intermediate
inputs and components from the most efficient suppliers and to use the
most appropriate available technologies to produce goods and services
(Miroudot and Shepherd 2016).
2
Michalopoulos and Ng (2013) calculated for a sample of 50 developing countries that
the simple average tariff in the late 2000s was 9.1%.
Figure 3.2 Trade Policy Impacts: Conceptual Framework
World Prices Exchange Tariffs, Trading Domain

and Quantities Rate QRs Tariff Revenue
Pass through, competition

Border Price Tradables
Enterprises Taxes, regulation, distributors, procurement Taxes

National
Wholesale Price
Distribution, taxes, regulation, coops

Spending Regional
Profits
Retail Price
Wages
Employment
Cooperatives, technology, random shocks
Household
Welfare Subsistence
males elderly
Prices, Wages,
Endownments, young
females
Profits, Other Income
QR = quantitative restrictions.
Source: McCulloch, Winters, and Cirera (2001).
Trade policy affects the welfare (real income) of households by

impacting the prices of the goods and services they buy and those that
they produce, either directly (such as agricultural products) or indirectly,
by working in a given sector. Figure 3.2 provides an overview of the
channels through which trade policy impacts firms and households.
Household welfare depends on the retail prices of goods consumed,
which are determined by wholesale prices, which in their turn are
determined by how the world price is affected by the exchange rate, trade
policy instruments such as tariffs, the costs associated with customs
controls, and corruption or delays in transporting consignments.
For firms, the effects of trade policy depend on the balance between
impacts on the costs of inputs and the extent to which their products
benefit from import protection. If tariffs increase the price of key inputs,
this will negatively affect a firm, reducing profits and wages and/or
employment. If the trade policy increases the price of the enterprise’s
output, it may have the opposite effect vis-à-vis domestic sales. In
practice, the net effect is generally an empirical question. Particularly
important from a dynamic (growth) perspective is that a liberal trade
policy may enhance economies by encouraging diversification and
expansion along the extensive margin of trade.
From the perspective of the household, what matters are the
effects of trade-policy-induced changes in relative prices of goods on
wages in affected domestic industries. In addition, trade taxes will

generate revenue that can be used to provide transfers to households,
e.g., cash transfer programs, or public services such as health and
education.3 The net effect of trade policy on households therefore is
a function of the impacts on the cost of their consumption bundles,
wages, and net transfers received. Given large rates of unemployment
and underemployment in many low-income countries, actions to reduce
trade protection can also generate new employment opportunities in
export-oriented activities and in ancillary services for which demand
will rise as export production and incomes rise.
Trade policy will have differential effects on households and
enterprises depending on whether firms and workers are engaged in
production for export, are focused on the domestic market and produce
goods that confront competition from imports, or are engaged in non-
tradable activities. Trade policy is generally not pro-poor, reflecting
poor households having less political power. How trade policy impacts
development also depends upon the pass-through of price changes.
Retail prices not affected by trade policy (changes) because of market
power in transport or distribution services, or because households are
poorly connected to markets, may not be very responsive to changes in
border prices. If, for example, road transport is not a competitive sector,
trucking companies may not pass on the reduction in prices that comes
with a reduction in import tariffs. Similarly, if firms confront very high
costs because of poor infrastructure or corruption and red tape, the
supply responses to trade policy may be weak. These considerations
illustrate the importance of complementary policies, in particular, a
focus on lowering trade costs.
Trade is not an elixir for development—it is simply one mechanism
for raising incomes over time. Greater openness to trade may not raise
average incomes if other policies are not supportive of investment and
entrepreneurship. Extensive empirical analysis has found that export
surges in developing countries tend to be preceded by a large real
depreciation, which leaves the exchange rate significantly undervalued.
Ensuring that the real exchange rate does not become overvalued, and
establishing a macro environment that lowers exchange rate volatility is
important (e.g., Schatz and Tarr 2002; Eichengreen 2008; Rodrik 2008;
and Freund and Pierola 2012). Countries with weak and unsupportive
business environments and high levels of corruption may benefit
little from trade liberalization (Freund and Bolaky 2008). A variety of
supporting policies and institutions are needed to encourage investment
3
Nontariff trade policies will not generate revenue, but may create rents that are
captured by specific groups.
into internationally competitive sectors and the most productive firms, as

well as to permit resources to be diverted from less productive companies.
Equally important is that firms and households have access to
a variety of public and private services, most notably connectivity
and related infrastructure, health and education, and finance. Many
services play an important “intermediation” function, supporting
the specialization associated with economic development. Financial,
logistics, and professional services are critical production inputs.
Services also play a major role in the operation of GVCs, with the
productivity of services firms impacting their clients’ export performance
(e.g., Francois and Hoekman 2010; Hoekman and Shepherd 2015a).
Consistent with the findings of Freund and Bolaky (2008) regarding the
effects of merchandise trade reforms, Beverelli, Fiorini, and Hoekman
(2017) found that the effects of services trade restrictions are mediated
by the quality of domestic economic governance. A services trade policy
reform implemented by two different countries may have very different
impacts on the performance of downstream sectors depending on the
quality of governance that prevails.4 This is another example illustrating
that complementary policies play a critical role in determining the
extent to which an economy will benefit from open trade.
3.2.1 Global Value Chains and the Post-2008 Trade

Growth Slowdown
Supply chain-based trade involving manufactured products has been

a key feature of East Asia’s growth, and has been much less prevalent
in other regions. Indeed, countries in regions with the worst per capita
income growth performance are often either not participating in GVCs
or are natural resource exporters.5 Rising real wages and rebalancing of
the PRC’s economy toward domestic consumption in conjunction with
efforts to lower domestic trade costs may provide greater incentives for
investors in the future to (re-)locate activities in regions that to date
have been off the GVC map, most notably Africa. Although the ratio of
trade to GDP of African economies is often above 60%, exports tend to
be dominated by natural resources and agricultural products. To date,
most of Africa has not seen the shift toward intra-industry trade, vertical
specialization, and participation in international supply chains that has
4
The Beverelli, Fiorini, and Hoekman (2017) finding does not capture differences in
level of economic development as they control for the level of per capita income.
5
South Asia is an exception to this pattern, reflecting the large internal market and
high barriers to trade that are to a significant extent the result of deliberate economic
policies. But even South Asia is much more engaged in GVCs than are most countries
in Africa and Latin America.
been a driver of trade growth in East Asia, Mexico, Turkey, and Central
and Eastern Europe. Moreover, intraregional trade is limited—less than
10% of the total, as measured by official trade statistics (see World Bank
2012), although informal trade within Africa is significant, so the actual
figure is likely higher (Pesce, Karingi, and Gebretensaye 2015). However,
this mostly comprises low-value items and trade in foodstuffs. While
important from a welfare perspective—this type of trade generates
revenue for the small traders involved (who are often women)—it does
not constitute the type of specialization and GVC trade that has supported
high per capita income growth in East Asia.
An important question is whether trade integration continues to offer
prospects to drive the type of dynamic effects it had in East Asia. Starting
in the early 2000s, the rate of global trade growth slowed relative to
income growth (Figure 3.3). Post-2008, trade growth has been particularly
anemic—in line with the very weak GDP growth performance—and it has
not driven either industrialized or emerging economies. Understanding
why this is the case and, more specifically, whether it portends a decline
in the potential for growth is important for countries seeking to use trade
for development. The decline in the income elasticity of trade observed
in Figure 3.3 in part reflects the reintegration of the PRC, and, to a lesser
Figure 3.3 Trade-Income Elasticity and Export/GDP Ratio

and Trade Growth since 1970
3.0 35
Trade-Income
elasticity
(Left-hand scale) 30
2.5
25
2.0
20
1.5
15
1.0
10
Trade/GDP % Ratio
0.5 at 2005 prices 5
(Right-hand scale)
0.0 0
5
90
05
0
70
75
80
1
20
19
19
19
20
19
19
20
19
GDP = gross domestic product.

Source: Escaith and Miroudot (2015).
extent, the countries of Central and Eastern Europe, being a transitional

phenomenon. Once the adjustments associated with what was to a large
extent a move from autarky had occurred, trade inevitably grew much
more in line with income.
A more fundamental reason for declining post-2008 trade growth
may be diminishing returns from the use of “GVC technology.” The
more international production is fragmented across countries, the
greater the associated gross trade flows relative to total value added.
Insofar as at some point businesses achieve what they perceive as the
optimal use of GVCs, the growth of trade associated with this process
will slow and increase more in line with total output (value added)
produced. Indeed, insofar as the decline in the output-trade elasticity
is due to supply chain managers deciding that it is more profitable to
shorten supply chains or to “reshore” production, the result will be a
fall in recorded gross trade flows and a smaller difference between the
gross value of trade and trade in value added. Supply chain specialists
predict that in the coming years there will be a move away from highly
fragmented, globe-spanning supply chains toward a greater reliance
on regional production networks (Srinivasan et al. 2014; Stank et
al. 2014). Greater use of technologies such as 3D printing (“additive
manufacturing”) and robots/automation of tasks would have similar
effects.
There are several reasons to believe that trade has not peaked and
can grow faster than income in the coming decades, thus driving the
ratio of global trade (exports plus imports) to GDP beyond the current
level (around 60%). One reason for optimism is that ongoing and
future technological change may enhance the ability of small firms to
engage in international trade. The internet, digitization, more efficient
logistics, e-payment systems, translation software, and so on are all
potential drivers of the internationalization of small and medium-sized
enterprises. Another potential driver is rapid growth in trade in services.
Services are much more tradable than is generally thought (Gervais and
Jensen 2013), but are often subject to restrictive policies (see below).
Traditional barriers to trade in goods and restrictions on inward FDI
continue to be much higher in emerging and developing economies than
in Organisation for Economic Co-operation and Development (OECD)
nations. There is great potential for further trade growth, especially in
developing country regions with high barriers to trade, if these can be
lowered. Regional integration is an important mechanism that can be
used to do so. Indeed, from the perspective of what trade can do to help
achieve sustainable development, regional integration and cooperation
is a key priority.
3.3 Trade and Sustainable Development

As already mentioned, the most important channel through which trade
and investment policy can support development is increasing economic
growth. This is also true for the 2030 Agenda for Sustainable Development
and the associated SDGs that were adopted by all United Nations (UN)
members (United Nations 2015a; b).6 Thus, economic growth, which is
itself an SDG (Goal 8: Decent Work and Economic Growth), is important
for ending poverty (SDG 1). More generally, the additional resources
generated through growth are necessary to make the investments
required to attain the various goals. This indirect channel linking trade
to the SDGs is complemented by other, more direct channels. Thus,
trade reform can help reduce poverty if governments focus explicitly
on reducing any anti-poor biases that are implied by prevailing trade
policies—e.g., abolish higher tariffs on products that are important in
the consumption basket of poor households (Nicita, Olarreaga, and
Porto 2015). Food security and the prospects of achieving the goal of
eliminating hunger may be enhanced by removing agricultural exporters’
trade restrictions (Martin and Anderson 2012). Access to energy may be
enhanced by eliminating restrictions on trade in electricity and energy
products (Florini and Sovacool 2012). Connecting smallholder farmers
to GVCs can have significant positive impacts on health and nutrition
(Swinnen 2014) and reducing food losses and wastage (FAO and World
Bank 2011). Aid for trade that targets regional infrastructure spanning
two or more countries may have a high payoff in improving connectivity
for informal day traders as well as firms in the formal sector (Brenton,
Portugal-Perez, and Regolo 2014).
Trade policy and trade-related measures are referenced in several
SDGs and targets, as follows:
ƀǇ )&Ǉ ŲǇ (Zero Hunger) includes a call to correct and prevent
trade restrictions and distortions in world agricultural markets,
including through the parallel elimination of all forms of
agricultural export subsidies and all export measures with
equivalent effect.
ƀǇ )&ǇŸǇ(Decent Work and Economic Growth) calls on improving
Aid for Trade support for developing countries, especially for
LDCs, including through the Enhanced Integrated Framework
for trade-related technical assistance.
6
The Appendix lists all 17 of the agreed SDGs.
ƀǇ )&ǇŹǇ(Industry, Innovation and Infrastructure) notes the need

for quality, reliable, sustainable, and resilient infrastructure,
including regional and trans-border infrastructure and
increasing the integration of small-scale industrial and other
enterprises, in particular in developing countries, into value
chains and markets.
ƀǇ )&Ǉ űŰǇ (Reduced Inequalities) stresses the importance of
special and differential treatment for developing countries, in
accordance with World Trade Organization (WTO) agreements.
ƀǇ )&ǇűŴǇ(Life Below Water) calls on disciplining (rich countries’)
fishery subsidies.
ƀǇ )&Ǉ űŷǇ (Partnerships for the Goals) includes language on the
importance of
– a universal, rules-based, open, nondiscriminatory, and
equitable multilateral trading system under the WTO,
including through the conclusion of negotiations under its
Doha Development Agenda (17.10);
– significantly increasing developing countries’ exports,
including doubling the share of LDCs by 2020 (17.11);
– timely implementation of DFQF market access on a
lasting basis for all LDCs, consistent with WTO decisions,
and ensuring that preferential rules of origin applicable
to imports from LDCs are transparent and simple, and
contribute to facilitating market access;
– enhancing policy coherence for sustainable development
(17.14); and
– respecting each country’s policy space and leadership to
establish and implement policies for poverty eradication
and sustainable development (17.15).
The focus in the SDGs is on improving market access for developing

countries, including through WTO negotiations and DFQF treatment
for exporters in LDCs, and ensuring that developing countries have
“policy space”—matters that have long been on the international
agenda. While development assistance, policy space, and preferential
market access can contribute to sustainable development, they may not
do much to expand trade. Although there are important exceptions,
such as Bangladesh exports to the United States (US), LDCs already
have DFQF access to many high-income markets. The US and the large
emerging economies, such as the PRC and India, can and should do
more to provide LDCs with DFQF access to their markets, but research
has documented that the binding market access constraints tend to
take the form of nontariff measures (NTMs), including restrictive

rules of origin.
The language on trade and trade policy in the various SDGs
constitutes “business as usual”—the underlying approach that has
been pursued in the UN and the General Agreement on Tariffs and
Trade (GATT)/WTO context for decades. The only specific target,
that is, to double the global share of LDC exports by 2020,7 is already
included in the Istanbul Programme of Action (United Nations 2011).
There is a mercantilist flavor to how trade is included in the SDGs:
the focus is on exports as opposed to trade (imports and exports),
and the critical importance of addressing competitive weaknesses
and improving governance and the business environment confronting
firms in developing countries is underemphasized. What matters is to
help firms deal with NTMs in the relevant markets, both at home and
abroad.
Many of these NTMs affect services trade and investment. This is
important for any consideration of trade and the post-2015 development
agenda because the performance of services sectors will influence the
extent to which many SDGs will be realized. Each of the 17 broad SDGs
(see Appendix) is further articulated into a subset of more specific
objectives, reflected in 169 targets.8 Many of these targets map directly
to (coincide with) the performance of specific services sectors (e.g.,
health services—SDG 3, education—SDG 4, etc.).
The links between services performance and the SDGs are illustrated
in Figure 3.4. The upper box includes both domestically produced
services and services provided through trade and investment. The cost
and efficiency/productivity of both sources of services provision is
impacted by policy. The effect of services performance on sustainable
development outcomes is represented in the lower part of Figure 3.4.
This distinguishes between two channels: (i) impacts of better services
performance on economic growth—raising incomes increases both the
scope to achieve income-related SDGs, such as reducing poverty and,
indirectly, helps to realize other SDGs that require resource investments;
and (ii) the direct impact of services performance on specific dimensions
of the various SDGs.
7
It is not clear what the baseline year is or whether the target includes trade in
services.
8
Sustainable Development Knowledge Platform. Transforming our world: the 2030
Agenda for Sustainable Development. https://sustainabledevelopment.un.org
/post2015/transformingourworld (accessed 30 January 2017).
Figure 3.4 Services and Sustainable Development
Services
Domestic Policies International
output/employment/productivity regulations/trade costs cross-border trade/FDI
input penetration/access/informality trade agreements mode 4/trade in value added GVCs
environmental accounts
Non-Income Dimensions Economic Growth

primary needs assesment (SDG 1/2/3/7) and Other Income Dimensions
gender parity and social inclusiom(SDG 1/4/5) poverty reduction (SDG1)
environmental sustainability (SDG 13/14) equity (SDG10)
Sustainable Development
Effect of services on growth Effect of services on nongrowth dimensions of SD
+
Direct Effect Indirect Growth Effect Other Indirect Effect
FDI = foreign direct investment, GVC = global value chain, SD = sustainable development, SDG = Sustainable
Development Goal.
Source: Fiorini and Hoekman (2015).
3.4 Leveraging Trade for Development

To “operationalize” trade as a means of achieving the SDGs, a first
requirement is to identify what the binding constraints on trade
growth are and then to design an agenda focused on attenuating
them. Adopting (agreeing on) specific indicators that can act as
focal points for action and be used to monitor progress over time in
addressing the constraints will help in leveraging trade opportunities.
Specific performance indicators are important to focus attention at
both the national level (developing country governments) and the
international level (development partners) on actions that will help
firms in developing countries utilize trade opportunities. Given that
the post-2015 development agenda centers to a significant extent
on services, such indicators must span services trade performance
measures as well as more traditional trade policy foci. To date, the
indicators that have been the focus of deliberation are too limited to
serve this purpose.9
A common factor that inhibits use of the global trading system by
firms in developing countries is high trade costs. Extensive research
has shown that trade costs are substantially higher in poor countries
than elsewhere (e.g., Arvis et al. 2015). The result is that firms in these
countries—most notably the LDCs—are at a competitive disadvantage.
High trade costs are one reason many African countries have a very
narrow export base, whether measured in terms of the number of
products that account for most revenue earned, the number of export
markets, or the number of companies that export (Cadot, Carrère, and
Strauss-Kahn 2013; Cadot et al. 2011). Dennis and Shepherd (2011)
found that a 10% improvement in trade facilitation is associated with
a 3% increase in the number of products exported. Higher value-
added products and intermediate inputs, such as machinery parts and
components, are more sensitive to the quality of logistics services and
efficient border clearance than trade in other types of goods (Saslavsky
and Shepherd 2012; Zaki 2015). Every extra day it takes in Africa to get
a consignment to its destination is equivalent to a 1.5% additional tax
(Freund and Rocha 2011). Slow and unpredictable land transport keeps
most of sub-Saharan Africa out of manufacturing value chains (Christ
and Ferrantino 2011).
The available evidence suggests that trade costs are often an order
of magnitude higher than prevailing import tariffs. Even if NTMs are
accommodated, export market access barriers are rarely the binding
constraint on trade expansion. This is illustrated by the diverging
trade performance of East Asian countries as compared with other
developing country regions—East Asia has historically benefited less
from preferential access to markets than other developing regions.
The post-1980 experience makes clear that, in practice, autonomous
reforms drive economic development and that a key need is to reduce
the operating costs that confront firms, including trade costs created by
NTMs, services trade restrictions, and inefficient border management.
These and related sources of real trade costs should therefore figure
prominently in the 2030 agenda for sustainable development.
In today’s highly integrated world economy, with extensive
international production and value chains that span many countries,
9
In the case of the trade dimensions of goal 17, for example, performance indicators are
limited to the weighted average global tariff, the coverage of DFQF access for LDCs,
and development assistance. See http://unstats.un.org/sdgs/ (accessed 30 January
2017).
the level of trade-related transactions and operating costs is a major

determinant of the ability of efficient firms to expand their market share.
High trade costs increase what firms have to pay for critical inputs of
goods and services and decrease the returns they obtain from engaging
in exports. Indeed, high trade costs may simply bar productive firms
from trading at all, thus precluding the opportunities that are offered by
world markets.
Trade costs affect trade and associated investment incentives all
along the value chain (Figure 3.5). They impact the costs associated with
getting products from where they are produced to a country where they
have a buyer; they are incurred at the border, reflecting the time and
resource costs of dealing with administrative procedures and red tape;
and they continue to impact overall costs, and thus profitability, after
products have cleared the border if firms are subjected to inefficient
service providers, noncompetitive markets for transport, etc.
Trade costs also affect trade and investment in services (Miroudot
and Shepherd 2016). Regulatory barriers, such as restricting foreign
providers from offering services through nationality requirements or
banning inward FDI in segments of the transport or communications
sectors, will increase costs for all firms and make them less competitive.
As noted above, many services are inputs into production; a substantial
share of production and operating costs of firms, no matter what sector
of activity they are engaged in, will comprise services. The cost, quality,
and variety of available services will therefore be a determinant of the
competitiveness and productivity of firms. In turn, lowering services
trade and investment barriers is likely to have both direct and indirect
positive effects on economy-wide productivity.10
Barriers to trade and investment in services are often much higher
than for goods. Although information on services trade policy is limited,
new data sets have characterized the restrictiveness of services trade and
investment policies (Borchert, Gootiiz, and Mattoo 2014). The World
Bank’s Services Trade Restrictiveness Index reveals that barriers to
10
See e.g., Miroudot, Sauvage, and Shepherd (2012). Using a large sample of countries
and firm-level data, Hoekman and Shepherd (2015a) showed that services productivity
is a statistically significant determinant of the productivity of manufacturing firms.
Many landlocked countries restrict trade in services that are particularly important
for value-chain participation and investments. Road and air transport policies are
significantly more restrictive in landlocked sub-Saharan African countries than in
comparators, reducing connectivity with the rest of the world by increasing the cost
of transport services (Arvis et al. 2010). Borchert et al. (2015) concluded that even
moderate liberalization of air transportation services could lead to a 25% increase in
the number of flights. Actions to facilitate trade in services will increase competition
and give firms and households access to a wider variety of services at lower prices
(Francois and Hoekman 2010).
Figure 3.5 How Trade Costs Matter
GETTING TO THE AT THE ORDER BEHIND THE

BORDER BORDER
Export
restrictions Direct Tarifs
Costs Regulation Institutional
Trade Logistics Supplying (NTMs) Structure
Finance Services Info and Supplying
docs info and
docs Services
Hard Standards
Access Competition TBTs, SPS Trade
to credit Infrastructures policy Quotes Transparency
Foreign Indirect
currency and Private Costs Business
exchange rate sector Procedural environment
participation delays Inventory Direct barriers
holding foreign ICT,
Inland Seaports, airports Opportunity ownership, MA
transit costs R&D
restrictions
Implicit barriers
Hidden licensing,
Costs recognition
Smuggling Corruption
and info and bribery
trade
TRANSPORT
TRADE CHAIN
EXPORTING COUNTRY IMPORTING COUNTRY
ICT = information and communication technology, MA = market access, NTM = nontariff measure, R&D = research and development, SBS = sanitary and phytosanitary
measure, TBT = technical barrier to trade.

Source: Moïse and Le Bris (2015: 12).
Figure 3.6 Services Trade Restrictiveness Index
60
50
40
30
20
10
0
Africa East Asia ECA LCR MENA OECD South Asia
Overall Finance Telecoms Retail Transport Prof. services
ECA = Europe and Central Asia, LCR = Latin America and the Caribbean, MENA = Middle East and
North Africa, OECD = Organisation for Economic Co-operation and Development.
Source: World Bank Services Trade Restrictiveness Index database.
trade in services are often much higher than tariffs that apply to imports
of goods.11 They also show that in some developing countries, formal
barriers to trade in services are relatively low (Figure 3.6). High barriers
to trade in services and high trade costs for services are detrimental to
growth prospects given that services “are the future”—technological
changes are rapidly increasing the share of products that are digital or
that can be digitized.
3.4.1 Trade Cost Indicators as a Focal Point for using

Trade for Development
The foregoing considerations suggest using specific trade cost indicators

to mobilize actions to help low-income countries benefit more from the
trading system. Focusing on monitoring trade cost trends would help
inform the global community as to the most effective measures available
11
See Services Trade Restrictions Database. http://iresearch.worldbank.org
/servicetrade/aboutData.htm and OECD. Services Trade Restrictiveness Index.
http://www.oecd.org/tad/services-trade/services-trade-restrictiveness-index.htm
(accessed 30 January 2017).
to use trade to achieve the SDGs (Hoekman and Shepherd 2015c). There
is a precedent for adopting a trade cost target: the Asia-Pacific Economic
Cooperation (APEC) members agreed to a common trade facilitation
performance target in two consecutive action plans starting in 2001:
setting a goal of reducing trade costs by 10% over the 10-year period
on a regional basis (APEC Policy Support Unit 2012). Emulating this
initiative and building on and learning from the APEC experience could
be one element of monitoring progress in leveraging trade for sustainable
development. One possibility would be for countries to establish a target
for reducing trade costs over several years, e.g., to lower costs of trade
for goods and services by 1% per year through 2030.
An international effort to track trade cost developments can build on
existing data sets. Recent developments in the empirical international
trade literature have made it possible to infer trade costs for a wide
variety of countries from 1995 onward, with a data lag of around 2 years
for many countries. The UN Economic and Social Commission for Asia
and the Pacific (UNESCAP) and the World Bank have partnered to
produce a trade costs database, which contains bilateral trade costs in
manufacturing and agriculture for over 150 countries. The UNESCAP
and World Bank effort provides information on the evolution of trade
costs through time in different income groups and regions. Their
methodology involves a comparison of domestic costs of trade within
countries with those applying to international transactions of goods.
It captures all sources of trade costs, not just the costs associated with
specific policies. While this is a disadvantage from a policy reform
perspective in that it does not help governments identify priority areas,
it is an objective measure of overall trade costs on a country-by-country
basis, and allows for the tracking over time of the impact of efforts to
lower trade costs.
That said, research is needed to break down overall trade cost
estimates into their determinants, distinguishing between factors that
can be affected by policy changes and public investments, those that
require international cooperation (e.g., need to be addressed in the
context of regional trade agreements), and those that cannot be changed.
Specific initiatives such as the efforts to monitor services trade policies
by the OECD, the World Bank, and the WTO, and to collect information
on transport costs and logistics performance on a country-by-country
basis by the UN Conference on Trade and Development (UNCTAD) and
the World Bank (see, e.g., World Bank 2014) already permit an initial
“unpacking” and mapping of how different policies impact on trade costs.
A focus on reducing trade costs is fully consistent with growth and
poverty reduction; lowering trade costs is likely to be a particularly
effective mechanism to increase welfare (real incomes). While trade
cost reductions are in all countries’ self-interest, they also benefit

trading partners and thus contribute to sustainable development more
broadly. The added value of a global initiative on trade cost reduction is
not just as an instrument to increase real incomes and attain the SDGs;
there is also an important public good or collective action dimension. A
large and expanding body of research has documented that the potential
benefits for the world as a whole of action in this area is substantial (e.g.,
Decreux and Fontagné 2015).
In practice, reducing trade costs will require high-level political
attention to achieve the needed coordination within governments, as
well as cooperation across governments, to identify and implement
cross-border projects and joint ventures that benefit both the countries
directly and traders located anywhere in the world. Explicit trade
cost reduction targets will incentivize the relevant international
organizations to focus on assisting governments to achieve them.
Following the successful negotiation of a WTO Trade Facilitation
Agreement (TFA) in 2013, the international development community
has been focusing on assisting countries to implement the agreement.
The trade cost reduction agenda goes far beyond what is covered by the
TFA (Hoekman and Shepherd 2015b). Use of trade cost indicators would
provide a concrete focal point for both national action and international
cooperation, along the lines of what is foreseen in the TFA, but with a
more holistic frame of reference. In practice, it may be that the most
important sources of trade costs and supply chain frictions concern
areas that are not covered by the TFA, e.g., service sector policies or
weaknesses in infrastructure. A trade cost reduction target leaves it
to governments, working with stakeholders, to determine how best to
reduce trade costs, thereby leveraging the implementation of the TFA.
Agreeing on and pursuing trade cost reductions is economically
superior to the mercantilist thinking that is embedded in the trade
approach that is implicit in the SDGs. Reducing trade costs will help
importers and exporters, as well as benefit households in developing
countries by reducing prices of goods. A major advantage of a trade
cost target is that it is left to the governments concerned—both the
developing country government and its trading partners—to identify
actions that will reduce them. There are many reasons why costs are
high, including own trade policies of developing economies, NTMs at
home and abroad, a lack of trade facilitation, weaknesses in transport
and logistics, etc. A trade cost reduction target leaves it to governments
to work with stakeholders to identify how best to reduce prevailing
excess costs. There is no one-size-fits-all associated with achieving a
trade cost reduction target.
3.4.2 Some Implications for Aid for Trade

From a development perspective, it is not just the effects of prevailing
policies in a country that matter for the incentives to trade. Differences
across countries in policies for a given product also give rise to trade
costs. Addressing this source of costs will require more than a developing
country government’s unilateral action. International cooperation is
called for—both aid for trade and trade agreements. In the case of Aid for
Trade (AFT), much has been done following the 2005 WTO ministerial
conference in Hong Kong, China, the result of recognition by high-
income nations that trade negotiations and liberalization needed to be
complemented with assistance to bolster the supply side in low-income
economies. In the case of trade agreements, greater willingness is
needed to revisit longstanding shibboleths, most notably the insistence
on “special and differential treatment” (SDT) for developing countries.
SDT has been a core element of the approach that developing
countries have historically pursued in UNCTAD and the WTO and
continues to be prominent in the SDGs (see previous section). A
rethinking of this approach is called for if trade is to be a more effective
instrument to help achieve the post-2015 development agenda. SDT
has tended to revolve around arguments that developing countries
should be able to maintain high(er) trade barriers and provide less-
than-full reciprocity in trade negotiations, as well as efforts to obtain
preferential access to major export markets through the generalized
system of preferences (GSP) and, more recently, DFQF access for
LDCs. Much progress has been attained in pursuing this agenda and
both have reached, if not passed, the point of diminishing returns. Most
OECD countries now provide DFQF access to most LDCs, but given
that average most-favored-nation tariffs have been declining steadily,
the value of DFQF treatment, let alone GSP, is inherently limited and is
rapidly converging toward zero.
Efforts to limit the extent of own trade policy concessions in
agreements are arguably misconceived from a trade and development
perspective because they do little to address the factors that matter
for competitiveness. Policy areas that stand out in this regard include
lowering tariffs, the cost and quality of service inputs, reducing the
trade-impeding effects of NTMs, and pursuit of trade facilitation. It must
be recognized, however, that dealing with NTMs and opening services
markets is more complex than traditional trade liberalization. It is a
platitude that tariffs can be reduced at the stroke of a pen by the minister
of finance, while regulatory reform cannot. But not enough is being done
to deal with the implications of this. This is an area where AFT can do
more to help governments pursue reforms, both on an autonomous basis

and via trade agreements.
The launch of the AFT initiative and the creation of the Enhanced
Integrated Framework for trade-related technical assistance for the
LDCs signified recognition by the WTO membership that technical and
financial assistance was needed to help low-income countries improve
supply capacity. Many developing countries need to strengthen economic
governance and regulatory institutions to ensure that the potential
benefits from services liberalization are realized. This calls for greater
efforts to ensure a “whole of government” approach to defining and
implementing reforms, supported by “knowledge platforms” (Hoekman
and Mattoo 2013) that bring together the associated stakeholders and
epistemic communities, or “supply chain councils” (Hoekman 2014) that
bring together different groups in society that have a direct stake in the
operation of international value chains. The idea is to foster substantive,
evidence- and analysis-based discussion of the impacts of prevailing
policies with a view to building a common understanding of key factors
that impede investment and identifying where there are large potential
gains from public action. Such mechanisms could help to
ƀǇ generate information on the effects of NTMs and prevailing
regulatory policies to support a broad-based discussion on
potential priorities for action (Cadot and Malouche 2012);
ƀǇ enhance knowledge of regulatory experiences of other countries
and what constitutes good practices, including complementary
measures to address market failures and attain distributional
objectives; and
ƀǇ bring together representatives of the business community
and international agencies to benchmark performance and
assess progress in addressing specific trade constraints and
institutional weaknesses that reduce investment in international
value-chain activities.
In practice, such mechanisms may best be pursued on a regional

basis, linked to integration initiatives and institutions, such as the regional
development banks. First steps could be to undertake a “mapping exercise”
to identify existing international networks of regulators (regional or
global) and related epistemic communities. AFT that supports this type
of international cooperation could enable progress on services trade
liberalization and create more fertile ground for countries to work
together to reduce the costs associated with NTMs. Such efforts could
also support greater ambition in terms of the design and coverage of trade
agreements insofar as they provide greater assurance that the regulatory
preconditions for benefiting from commitments to open access to services
markets and reducing the negative incidence of NTMs were in place.

The 2030 Agenda for Sustainable Development recognizes that
international trade is an important mechanism through which many
of the specific goals and targets that have been agreed upon can be
achieved. Making trade an effective means of implementation will
require action on a broad front. A common denominator of such actions
should be to reduce the costs of trade so that firms in developing
countries can source the inputs they need to be competitive and give
households better access to a range of products and services that will
improve their welfare, ranging from food security to health. Many of
the SDGs involve services—finance, transport, medical, education, etc.
Trade can help improve the availability and quality of services, implying
that efforts to reduce costs should include services sectors and not be
limited to goods, which to date has been the focus of reforms and AFT
projects and programs.
There is still very great scope to leverage trade for development
in many countries, including through expansion of supply chain trade,
especially in regions where value-chain-based production is limited—
most notably Africa. Technological change, the rebalancing of the
PRC’s economy toward domestic consumption, and a possible more
protectionist policy stance in some emerging and advanced economies
all point to a potentially less hospitable global environment than what
confronted East Asia in recent decades. Insofar as this is the case, it
illustrates the need to focus primarily on national policy reforms and
more effective regional integration efforts. The potential for greater use
of the GVC technology and further specialization and fragmentation of
production remains very significant for many developing countries. The
same is true for trade in services and prospects for expanding trade in
digital products, e-commerce, etc.
Much will depend here on the extent to which countries in Africa,
Latin America, the Middle East, and Central Asia manage to increase
their GVC participation. Policies matter importantly—action by
governments to reduce trade costs and to refrain from protectionism—
and on the extent to which international trade in services and digital
transactions will expand in coming years. The share of services in
total output and employment for the world has been increasing over
time as countries become richer. This is nothing new (Kravis, Heston,
and Summers 1983; Riddle 1986), but for any level of economic
development, the role of services is today more important than ever
as a result of technological changes. It is therefore important that in
thinking about how trade should figure in the post-2015 development
agenda, services are front and center in the growth strategies of low-
income countries.
References
APEC Policy Support Unit. 2012. APEC’s Achievements in Trade
Facilitation 2007–2010 – Final Assessment of TFAP-II. Singapore:
APEC Secretariat.
Arvis, J. F., Y. Duval, B. Shepherd, and C. Utoktham. 2015. Trade Costs
in the Developing World: 1995–2010. World Trade Review. doi: http
://dx.doi.org/10.1017/S147474561500052X (accessed 30 January 2017).
Arvis, J., G. Raballand, and J. Marteau. 2010. The Cost of Being Landlocked:
Logistics Costs and Supply Chain Reliability. Washington DC: World
Bank.
Beverelli, C., M. Fiorini, and B. Hoekman. 2017. Services Trade
Restrictiveness and Manufacturing Productivity: The Role of
Institutions. Journal of International Economics 104: 166 –182.
Borchert, I., B. Gootiiz, and A. Mattoo. 2014. Policy Barriers to
International Trade in Services: Evidence from a New Database.
World Bank Economic Review 2012 28(1). 162–188.
Borchert, I., B. Gootiiz, A. Grover, and A. Mattoo. 2015. Services Trade
Protection and Economic Isolation. The World Economy. doi: 10.1111
/twec.12327.
Brenton, P., A. Portugal-Perez, and J. Regolo. 2014. Food Prices, Road
Infrastructure, and Market Integration in Central and Eastern
Africa. World Bank Policy Research Working Paper 7003.
Cadot, O. and M. Malouche, eds. 2012. Non-Tariff Measures: A Fresh Look
at Trade Policy’s New Frontier. London: CEPR/World Bank.
Cadot, O., C. Carrère, and V. Strauss-Kahn. 2011. Export Diversification:
What’s Behind the Hump? Review of Economic and Statistics 93(2):
590–605.
Cadot, O., L. Iacovone, M. Pierola, and F. Rauch. 2013. Success and
failure of African exporters. Journal of Development Economics
101(C): 284–96.
Christ, N., and M. Ferrantino. 2011. Land Transport for Exports: The
Effects of Cost, Time, and Uncertainty in Sub-Saharan Africa. World
Development 39(10): 1749–59.
Decreux, Y., and L. Fontagné. 2015. What next for multilateral trade
talks? Quantifying the role of negotiation modalities. World Trade
Review 14(1): 29–43.
Dennis, A., and B. Shepherd. 2011. Trade Facilitation and Export
Diversification. The World Economy 34(1): 101–122.
Eichengreen, B. 2008. The Real Exchange Rate and Economic Growth.
Commission on Growth and Development Working Paper No. 4.
World Bank: Washington, DC.
Escaith, H., and S. Miroudot. 2015. World trade and income remain
exposed to gravity. In The Global Trade Slowdown: A New Normal?
Edited by B. Hoekman. London: CEPR.
Food and Agriculture Organization of the United Nations (FAO) and
World Bank. 2011. Missing Food: The Case of Post-Harvest Grain
Losses in Sub-Saharan Africa. Report Number 60371-AFR.
Fiorini, M., and B. Hoekman. 2015. Services, Trade and Sustainable
Development. EUI. mimeo.
Florini, A., and B. Sovacool. 2011. Bridging the Gaps in Global Energy
Governance. Global Governance 17(1): 57–74.
Francois, J., and B. Hoekman. 2010. Services Trade and Policy. Journal of
Economic Literature 48(3): 642–92.
Freund, C., and B. Bolaky. 2008. Trade, regulations, and income. Journal
of Development Economics 87(2): 309–321.
Freund, C., and D. Pierola. 2012. Export surges. Journal of Development
Economics 97(2): 387–95.
Freund, C., and N. Rocha. 2011. What constrains Africa’s exports? World
Bank Economic Review 25(3): 361–86.
Gervais, D., and J. B. Jensen. 2013. The Tradability of Services: Geographic
Concentration and Trade Costs. NBER Working Paper 19759.
Hoekman, B. 2014. Supply Chains, Mega-Regionals and Multilateralism:
A Road Map for the WTO. London: CEPR Press and VoxEU.
Hoekman, B., ed. 2015. The Global Trade Slowdown: A New Normal?
London: CEPR Press and VoxEU.
Hoekman, B., and A. Mattoo. 2013. Liberalizing Trade in Services:
Lessons from Regional and WTO Negotiations. International
Negotiation 18(1): 131–51.
Hoekman, B., and A. Nicita. 2011. Trade Policy, Trade Costs and
Developing Country Trade. World Development 39(12): 2069–79.
Hoekman, B., and B. Shepherd. 2015a. Services Productivity, Trade
Policy and Manufacturing Exports. The World Economy. doi: 10.1111
/twec.12333.
____. 2015b. Who Profits from Trade Facilitation Initiatives? Implications
for African Countries. Journal of African Trade 2(1–2): 51–70.
____. 2015c. Reducing Trade Costs. International Growth Centre. http://
www.theigc.org/blog/reducing-trade-costs/ (accessed 30 January 2017).
Kee, H., A. Nicita, and M. Olarreaga. 2009. Estimating Trade
Restrictiveness Indices. Economic Journal 119(534): 172–99.
Kravis, I., A. W. Heston, and R. Summers. 1983. The Share of Services
in Economic Growth. In Global Econometrics: Essays in Honor of
Lawrence R. Klein. Edited by F. Adams and B. Hickman. 188–218.
Cambridge, MA: MIT Press.
Martin, W., and K. Anderson. 2012. Export Restrictions and Price

Insulation during Commodity Price Booms. American Journal of
Agricultural Economics 94(2): 422–27.
McCulloch, N., L. A. Winters, and X Cirera (2001). Trade Liberalization
and Poverty: A Handbook. London: Centre for Economic Policy
Research.
Michalopoulos, C., and F. Ng. 2013. Developing Country Trade Policies
and Market Access Issues: 1990–2012. World Bank Policy Research
Working Paper.
Miroudot, S., and B. Shepherd. 2016. Trade Costs and Global Value
Chains in Services. In Research Handbook on Trade in Services.
Edited by M. Roy and P. Sauvé. Edward Elgar.
Miroudot, S., J. Sauvage, and B. Shepherd. 2012. Trade costs and
productivity in services sectors. Econ. Lett. 114: 36–38.
Moïse, E., and F. Le Bris. 2015. Trade Costs: What Have We Learned? A
Synthesis Report. OECD Trade Policy Paper No. 150.
Nicita, A., M. Olarreaga, and G. Porto. 2014. Pro-poor trade policy in Sub-
Saharan Africa. Journal of International Economics 92(2): 252–65.
Pesce, O., S. Karingi, and I. Gebretensaye. 2015. Trade growth prospects:
An African perspective. In The Global Trade Slowdown: A New
Normal? Edited by B. Hoekman. London: Centre for Economic
Policy Research.
Riddle, D. 1986. Service-Led Growth: The Role of the Service Sector in
World Development. New York: Praeger Publishers.
Rodrik, D. 2008. The Real Exchange Rate and Economic Growth.
Brookings Papers on Economic Activities No. 2: 365–412.
Saslavsky, D., and B. Shepherd. 2012. Facilitating International
Production Networks: The Role of Trade Logistics. World Bank
Policy Research Working Paper 6224.
Schatz, H., and D. Tarr. 2002. Exchange Rate Management and Trade
Protection. In Development. Edited by B. Hoekman, P. English, and
A. Mattoo. Washington, DC: World Bank.
Srinivasan, M., T. Stank, P. Dornier, and K. Petersen. 2014. Global Supply
Chains: Evaluating Regions on an EPIC Framework – Economy,
Politics, Infrastructure, and Competence. New York: McGraw-Hill.
Stank, T., M. Burnette, and P. Dittman. 2014. Global Supply Chains.
http://globalsupplychaininstitute.utk.edu/publications/documents
/GSCI-EPIC-paper.pdf (accessed 30 January 2017).
Swinnen, J. 2014. Global Agricultural Value Chains, Standards, and
Development. RSCAS Working Paper 2014/30.
United Nations. 2011. Istanbul Declaration and Programme of Action for
the Least Developed Countries for the Decade 2011–2020. New York:
United Nations.
____. 2015a. Transforming Our World: the 2030 Agenda for Sustainable
Development. New York: United Nations.
____. 2015b. Addis Ababa Action Agenda of the Third International
Conference on Financing for Development.
World Bank. 2012. De-fragmenting Africa: Deepening Regional Trade
Integration in Goods and Services. Washington DC: World Bank.
____. 2014. Connecting to Compete, 2014: Trade Logistics in the Global
Economy. Washington DC: World Bank. www.worldbank.org/lpi
Zaki, C. 2015. How Does Trade Facilitation Affect International Trade?
European Journal of Development Research 27(1): 156–85.
Appendix: The 17 Sustainable Development Goals
)&Ǉű End poverty in all its forms everywhere

)&ǇŲ End hunger, achieve food security and improved nutrition,
and promote sustainable agriculture
)&Ǉų Ensure healthy lives and promote well-being for all at all
ages
)&ǇŴ Ensure inclusive and equitable quality education and
promote lifelong learning opportunities for all
)&Ǉŵ Achieve gender equality and empower all women and girls
)&ǇŶ Ensure availability and sustainable management of water
and sanitation for all
)&Ǉŷ Ensure access to affordable, reliable, sustainable, and
modern energy for all
)&ǇŸ Promote sustained, inclusive and sustainable economic
growth, full and productive employment and decent work
for all
)&ǇŹ Build resilient infrastructure, promote inclusive and
sustainable industrialization and foster innovation
)&ǇűŰ Reduce inequality within and among countries
)&Ǉűű Make cities and human settlements inclusive, safe, resilient
and sustainable
)&ǇűŲ Ensure sustainable consumption and production patterns
)&Ǉűų Take urgent action to combat climate change and its impacts
)&ǇűŴ Conserve and sustainably use the oceans, seas and marine
resources for sustainable development
)&Ǉűŵ Protect, restore, and promote sustainable use of terrestrial
ecosystems, sustainably manage forests, combat
desertification, halt and reverse land degradation and halt
biodiversity loss
)&ǇűŶ Promote peaceful and inclusive societies for sustainable
development; provide access to justice for all; and build
effective, accountable and inclusive institutions at all levels
)&Ǉűŷ Strengthen the means of implementation and revitalize the
global partnership for sustainable development
Source: Sustainable Development Knowledge Platform. https://sustainabledevelopment.un.org/sdgs
PART I
Poverty, Hunger,
and Inclusive Growth
4
Trade and Poverty Reduction
Irene Brambilla and Guido Porto
4.1 Introduction
This chapter investigates whether trade can help achieve the Sustainable
Development Goals set by the United Nations, particularly the ambitious
poverty eradication goal. The first of 17 goals, it proposes to “end poverty
in all its forms everywhere.” Other associated targets include:
(i) by 2030, eradicate extreme poverty for all people everywhere,
currently measured as people living on less than $1.25 a day;
(ii) by 2030, reduce at least by half the proportion of men, women,
and children of all ages living in poverty in all its dimensions
according to national definitions;
(iii) implement nationally appropriate social protection systems
and measures for all, including floors, and, by 2030, achieve
substantial coverage of the poor and the vulnerable;
(iv) by 2030, ensure that all men and women, in particular the poor
and the vulnerable, have equal rights to economic resources,
as well as access to basic services; ownership and control
over land and other forms of property; inheritance; natural
resources; appropriate new technology; and financial services,
including microfinance;
(v) by 2030, build the resilience of the poor and those in vulnerable
situations, and reduce their exposure and vulnerability to
climate-related extreme events and other economic, social,
and environmental shocks and disasters;
(vi) ensure significant mobilization of resources from a variety
of sources, including through enhanced development
cooperation, to provide adequate and predictable means for
developing countries, in particular least developed countries,
to implement programs and policies to end poverty in all its
dimensions; and
61
(vii) create sound policy frameworks at the national, regional, and

international levels, based on pro-poor and gender-sensitive
development strategies, to support accelerated investment in
poverty eradication actions.
Trade1 can affect poverty through several channels, notably through

macroeconomic and microeconomic mechanisms.2 Macroeconomically,
trade affects economic growth, which, in turn, can benefit the poor.
Microeconomically, poverty is defined at the household and individual
level. Consequently, trade affects poverty through impacts on household
behavior. Trade liberalization changes prices, which often determine
households’ and individuals’ economic decisions. Consumption
decisions depend on prices as well, and households are affected as
consumers. Higher prices lower real expenditures, while lower prices
increase them. Consumers will consume less of more expensive goods,
and more of the less expensive ones. Supply and production decisions
also depend on prices, and households will be affected as income earners.
The production of food, for own consumption or for sale; production of
cash crops; supply of labor; and wages paid in labor markets are examples
of how household incomes can change with trade liberalization.
It is difficult to summarize how trade affects poverty. There are
multiple channels that may operate in different directions. Higher
prices are good for producers, but are bad for consumers. In addition,
households are heterogeneous. A study of the effects of trade
liberalization on poverty must consider differences in employment,
consumption, and production among the poor. Moreover, trade
liberalization may differ across countries, just as it may affect members
of the same household differently. Some countries may be relatively
open, while others will have much higher protection. The level of
trade protection, in turn, may differ across sectors. Some countries may
have higher tariffs on agriculture, others on manufacturing or services.
Finally, trade liberalization operates and interacts with the general
economic environment, institutions, and other policies in different
manners, further complicating results.
1
For this chapter, trade is defined as anything that affects exports and imports. This
can include own tariffs, world interventions (e.g., foreign tariffs, quotas, or standards),
regional or multilateral trade agreements (e.g., Doha and Mercosur), or even foreign
subsidies (especially in agriculture).
2
Winters, McCulloch, and McKay (2004) provided an overview of these channels.
Trade and Poverty Reduction63
4.2 Trade and Poverty: Microeconomic

Mechanisms
This section uses a theoretical framework to explain how trade policy
can affect poverty and to illustrate the associated mechanisms. In this
analysis, poverty is a microeconomic issue that operates at the level of
households, workers, and people. Since trade affects prices for producers
and consumers, the trade–poverty link can be examined by tracing trade
and, in turn, how prices affect poverty.
4.2.1 Net Consumers and Net Producers
The framework builds on standard agricultural household models

(Barnum and Squire 1979; Singh, Squire, and Strauss 1986). The unit of
analysis is the household, denoted by h, and its members. To measure
welfare changes, the indirect utility function approach is adopted
(Deaton 1997). Welfare changes are mostly associated with changes in
household real income.
The indirect utility function of household h depends on a vector of
prices p and on household income yh:
ܸ ௛ ൫‫݌‬ǡ ‫ ݕ‬௛ ൯ ൌ ܸ ௛ ൫‫݌‬ǡ ‫ݔ‬௢௛ ൅ σ௝ ߨ௝௛ ሺ‫݌‬௝ ሻ൯, (1)
where the vector p comprises consumer prices for all goods. In this
equation, household income comprises profits from the production of
goods j, ߨ௝௛ ሺ‫݌‬௝ ሻ, and exogenous income, ‫ݔ‬௢௛. Labor income, transfers, and
other sources of income (i.e., capital income) are left out for the moment.
Consider the impacts of changes in the price of commodity j. The
short-term impacts on a household can be derived by differentiating the
indirect utility function:
߲ܸ ௛ ߲ܸ ௛
ൌ ൫‫׎‬௛௜ െ ܵ௜௛ ൯. (2)
߲‫݌‬௜ ߲‫ ݕ‬௛
The left side is the object being measured. On the right side,
ሺ߲ܸ ௛ ሻȀሺ߲‫ ݕ‬௛ ሻis the marginal utility of money to individual h, ‫׎‬௛௜ is
the share of household income derived the production of good i, and
ܵ௜௛ is the budget share spent in good i. In Deaton (1989b) and (1997), the
quantity
ܾ௜௛ ൌ ൫‫׎‬௛௜ െ ܵ௜௛ ൯, (3)
is the net benefit ratio. In fact, ‫׎‬௛ ௛

௜ െ ܵ௜ is the money equivalent of
the losses or gains for different individuals. Note that ሺ߲ܸ ௛ ሻȀሺ߲‫ ݕ‬௛ ሻ is
the private marginal utility of income, but the social marginal utility of
money is the most important. This summarizes the attitudes of a policy
maker toward providing resources to individual h.
Note that the household is affected both on the consumption and
income sides. On the consumption side, consumers are worse off if prices
go up, but are better off if prices go down. In a first-order approximation,
these impacts can be measured with budget shares, ܵ௜௛ . On the income
side, there is also a direct impact on profits if the household produces
goods i, which depends on the share of income attributed to these
goods,൫‫׎‬௛௜ . In ruraleconomies, this source of income can account for a
large fraction of total income. In more urbanized economies with more
developed labor markets (e.g., many places in Latin America), the role of
direct agricultural production will be much less important.
Overall, the right side of this equation establishes the key net-
producer/net-consumer result. After a price increase, net consumers
(as defined by the difference between budget shares and income shares)
are worse off, and net producers are better off. The opposite is true
for price declines. Further, it shows that the welfare impacts will be
heterogeneous across countries. An exporter of agricultural goods will,
on average, benefit from price increases associated with the international
liberalization of agriculture, but an importer will probably be hurt by
those changes.
This result was originally introduced by Deaton (1989b),
who advocated the use of nonparametric density estimation and
nonparametric regressions in economic development to study price
changes’ distributional effects. Deaton used data from the Thailand
Socio-Economic Survey of 1981–1982 to explore the distributional
consequences of the export tax on rice across all households. He found
that an increase in the price of rice, resulting from the elimination of
an export tax, would benefit the average household across the entire
income distribution. The average poor person, as well as the average
rich person, would benefit little. The benefits for the poor were small,
because they tend to both consume and produce lots of rice, selling little.
The benefits for the rich were also small, because while sellers are often
large, there are only a few of them. The gains would be much higher
in the middle of income distribution, indicating that the middle class
would gain the most from higher rice prices.3
3
This analysis does not take into account the fiscal implications of eliminating the tax.
The ideas introduced in Deaton’s work have been, and still are,
extensively utilized in the literature. Examples include Deaton
(1989a), for Ivory Coast, Indonesia, and Morocco; Budd (1993), who
investigated food prices and rural welfare in Ivory Coast; Benjamin
and Deaton (1993), who studied cocoa and coffee in Ivory Coast;
Barrett and Dorosh (1996), who looked at rice prices in Madagascar;
and Sahn and Sarris (1991), who examined structural adjustments in
several sub-Saharan African countries. Deaton (1997) also provided an
account of the early use of these techniques in distributional analysis
of pricing policies.
4.2.2 Wage Income and Prices of Non-traded Goods
While the net-consumer/net-producer result is intuitive, it rests, in

part, on the omission of labor market effects and impacts on the prices
of non-traded goods. In a small, open economy that faces exogenous
commodity prices (determined in international markets), wages
will respond to price changes, mainly because the demand for labor
depends on them.4
Changes in relative product prices cause some sectors to expand
and others to contract. If sectors use factors of production in different
proportions, then the relative demand for factors (including skilled
labor, unskilled labor, and capital) will change. Even with a fixed
labor supply, wages will adjust. If the labor supply reacts as well, an
additional channel emerges. In practice, the link between wages and
prices depends on the way that product prices affect factor demands
and supplies, and changes in factor demands and supplies transmit to
wages.5
The prices of non-traded goods can also be affected. In the simplest
mechanisms, a change in the price of a traded good affects factor prices.
This, in turn, affects the cost of production of non-traded goods. As a
result, the prices of these goods may change as well. How these prices,
including wages, respond to trade policy is an empirical question.
It is simple to amend the theoretical framework to account for these
responses. The indirect utility function now is
ܸ ௛ ൫‫݌‬ǡ ‫ ݕ‬௛ ൯ ൌ ܸ ௛ ൫‫݌‬ǡ ‫ݔ‬௢௛ ൅ σ௝ ߨ௝௛ ൫‫݌‬௝ ൯ ൅ σ௠ ܹ௠௛ ൯, (4)
4
Labor supply can be affected by prices as well, but this is not the discussion for the
moment.
5
It is possible to imagine situations where wages would not react to a change in a
given price, or situations where wages would increase or decrease.
where σ௠ ܹ௠௛ is the wage income of household h, which is the sum
of the wages of all working members ݉ሺܹ௠௛ ሻ.
The first-order impact of changes in the price of good i can be derived
by differentiating equation 4. The net benefit ratio becomes
ܾ௜௛ ൌ ൫ܾ௜௛ െ ܵ௜௛ ൯݀‫݌‬௜ ൅ σ௠ ߠ௠

௛ ௛
ߝ‫ݓ‬௜ǡ௠ ݀‫݌‬௜ , (5)
௛
where ߠ௠ is the share of the wage income of member m in total
௛
household income, and ߝ‫ݓ‬௜ǡ௠ is the elasticity of the wage earned by
household member m with respect to price ‫݌‬௜.
Equation 5 summarizes the first-order impacts of a price change.
The first term on the right re-establishes the net-consumer/net-
producer result as before. Now, price changes also affect wages. This
channel is described by the second term to the right of equation 5.
When there is a price change, demand for different types and
amounts of labor can change, thus affecting equilibrium wages. In
௛
equation 5, these responses are captured by the elasticities ߝ‫ݓ‬௜ǡ௠ , which
will vary from one household member to another, provided that different
members are endowed with different skills (i.e., unskilled, semiskilled,
or skilled labor) or if they work in different sectors. These impacts on
labor income depend on the share contributed by the wages of different
௛
members, ߠ௠ . Clearly, if countries differ in technologies, endowments,
or labor regulations, the responses of equilibrium wages to prices can be
heterogeneous across different economies.
In the presence of wage adjustments, the standard net-consumer/
net-producer proposition needs to be modified. Consider an extreme
case where a farm-household consumes a product, but does not produce
it. Instead, the farm earns income from selling labor to neighboring
farms. Omitting wages, this household is a net consumer and could thus
be hurt by a price increase. However, if wages respond positively to
prices, the final welfare effect may not entail a loss.
Ravallion (1990) studied this type of wage response, exploring the
conditions under which net consumers of food products in Bangladesh
lose or gain in the face of increased food prices when rural wages adjust.
Ravallion estimated low elasticities of agricultural wages to food prices
and concluded that responses are unlikely to be strong enough to offset
the short-term adverse distributional effects of higher food prices. The
long-term estimates appeared to be more favorable to the poor, but it
would take around 4 years for any gains to materialize.
Boyce and Ravallion (1991) looked at this issue using newer data for
Bangladesh. They set up a dynamic econometric model of agricultural
wages and rice prices, finding that increases in prices relative to
manufactured goods have adverse effects on the real wages in terms of

rice in both the short and long term.
Porto (2005, 2006) used two models where the first-order
approximation was extended to allow for wage adjustments. Porto
derived additional terms in the expression for the compensating
variation. A major component of b was the direct impact on wages (as
in equation 5 here). Also, a given farm could either sell or buy labor
in the farm-labor market; thus, the estimation of b had to include
additional impacts that arose due to changed wage earnings or to
changed paid wages. Porto (2005) found that increases in the prices
of agro-manufactured exports such as wine (a major Moldova export)
reduce poverty. Moreover, wages respond positively to export prices,
causing first-order gains that dominate both the consumption losses
due to higher consumer prices and the profit losses due to higher wages
paid to hired labor. Porto (2006) further explored the distributional
consequences of Mercosur in Argentina and found welfare gains for
average poor and middle-income households (and negligible effects
for the wealthiest households), because, on top of gains from price
reductions due to tariff cuts, wage changes occurred that favor unskilled
workers, who are concentrated at the bottom of the income distribution,
over skilled workers.
Ferreira et al. (2011) and Jacoby (2013) studied similar issues,
but instead of looking at trade policy, they investigated commodity
price impacts. Ferreira et al. (2011) looked at Brazil and found large,
negative consumption effects, but positive, progressive income effects,
particularly in rural areas. Thus, overall, the Brazilian middle-income
household has suffered larger proportional losses than the very poor or
rich households. Jacoby (2013) reached a similar conclusion in his study
of food prices in India. Specifically, he found that, once the wage gains
are accounted for, rural households across the income spectrum actually
benefit from higher agricultural commodity prices.
It is noteworthy that, in all of these papers, wage adjustment is a
fundamental channel through which trade operates. An important
element of this work is the estimation of the responses of wages to
prices, i.e., wage-price elasticities. Ravallion (1990) used an aggregate
time series of agricultural wages and rice prices to estimate them.
Porto (2005, 2006) combined time series of prices with time series of
household surveys for identification. In his study of the North American
Free Trade Agreement and Mexico, Nicita (2009) adopted Porto’s
approach and combined a time series of regional prices and household
surveys to link wages to agricultural and manufacturing export prices.
Nicita, Olarrega, and Porto (2014) proposed a different estimation using
the duality theory and trade and endowment data to infer wage-price
from Rybczynski elasticities. Another way to estimate wage-price
elasticities using simulation methods can be found in Artuc, Lederman,
and Porto (2015) and Artuc, Porto, and Rijkers (2016).
Regarding the responses of non-traded goods, spillovers are
defined as the impacts of a change in market i on the activity in market
j. There are two types of spillovers: (i) production linkages occur when
the expansion of a sector affects upstream activities (i.e., backward
linkages) or downstream activities (i.e., forward linkages), and
(ii) expenditure linkages occur when the income increase due to sector
expansion raises the demand for outputs and thus the derived demand
for inputs in other sectors. Porto (2015) also described a variant of
the spillover mechanism in which markets may be segmented so
that wages can differ across sectors. However, sectors are related via
forward and backward linkages, so that an expansion of one sector
may have implications on others.
Here, a different type of spillover exists that arises when other
product markets, rather than labor markets, are affected. These spillovers
are likely to take place in non-traded goods. As shown previously, changes
in commodity prices affect factor prices, including wages. If the wages
earned in non-traded sectors are affected, then the cost of producing
these goods will change. This, in turn, will affect the equilibrium prices
of these goods. As a result, there are additional welfare impacts on the
consumption side. Notice that these are first-order impacts. To derive
the impacts, the indirect utility function is
ܸ ௛ ൫‫ ்݌‬ǡ ‫݌‬ே் ǡ ‫ ݕ‬௛ ൯ ൌ ܸ ௛ ൫‫݌‬ǡ ‫ݔ‬௢௛ ൅ σ௝ ߨ௝௛ ൫‫݌‬௝ ൯ ൅ σ௠ ܹ௠௛ ൯, (6)
which is now a function of both traded good prices ‫ ்݌‬and non-

traded good prices ‫݌‬ே்.
The net benefit ratios are
డ୪୬௣
ܾ௜௛ ൌ ൫ܾ௜௛ െ ܵ௜௛ ൯݀‫݌‬௜ ൅ σ௠ ߠ௠
௛ ௛
ߝ‫ݓ‬௜ǡ௠ ݀‫݌‬௜ െ σ௞ ܵ௞௛ డ୪୬௣ೖ ݀‫݌‬௜,(7)
೔
where ܵ௞௛ is the budget share spent in non-traded good m.

Porto (2006) showed how to estimate these impacts for Mercosur.
He used a series of prices to recover the elasticity of the price of non-
traded goods with respect to the prices of traded products. As in equation
2, the first-order impacts are given the product of the induced changes
in the prices of non-traded goods and the budget shares spent on those
goods. Porto found that the tariff cuts of Mercosur caused the prices of
non-traded goods to decline and households to benefit.
Artuc, Porto, and Rijkers (2016) offered an alternative way to

compute these elasticities using simulation methods.
4.2.3 Price Transmission
Price changes must be explored to understand how trade policies and

trade shocks transmit to the local economy and how this link depends
on market structure, competition policies, infrastructure, transport, and
distribution costs.
There are two related issues: (i) the pass-through of international
prices to the domestic economy, and (ii) the pass-through to the
household. Standard models of international trade and economics
assume competitive markets (and homogenous goods) and frictionless
trade. In this scenario, markets are integrated, and the law of one price
holds. Domestic prices are equal to international prices converted to the
local currency. A slightly more detailed model allows for transport and
distribution costs, as well as for trade policy. If ‫݌‬௜ is the domestic price
of an importable, ‫݌‬௜‫ כ‬is the international price, ݁௜ is the exchange rate,
‫ݎݐ‬௜ are international transaction costs, and ߬௜ is the tariff rate applied to
goods i, then
‫݌‬௜ ൌ ‫݌‬௜‫݁ כ‬௜ ሺͳ ൅ ‫ݎݐ‬௜ Ϳሺͳ ൅ ߬௜ Ϳ൅ߛ௜ , (8)
where ߛ௜ represents internal transport, resale, marketing, and

distribution costs. If goods i are exported, then
‫݌‬௜ ൌ ‫݌‬௜‫݁ כ‬௜ ሺͳ െ ‫ݎݐ‬௜ Ϳሺͳ െ ‫ݎ‬௜ Ϳെߛ௜ , (9)
where ‫ݎ‬௜ is the export tax.

This framework is now used to explore various issues concerning
the responses of domestic prices to changes in international prices,
exchange rates, national trade policies, international trade policies, and
transaction costs. Clearly, if these equations hold, then a proportional
change in the exchange rate ݁௜ , international price ‫݌‬௜‫כ‬, or tariff (rather
in (ͳ ൅ ߬௜ )) is fully transmitted to domestic prices.
The law of one price relies on strong assumptions, and there
is evidence against it. In their review, Goldberg and Knetter (1997)
concluded that a pass-through rate of around 60% is expected. In
another comprehensive analysis of pass-through rates, Campa and
Goldberg (2005) found large differences across developed countries.
The estimated rate for the US is 42%, 98% for France, 80% for Germany,
and 46% for the UK.
There are various reasons why the law of one price may fail.
One important factor, especially for trade and poverty, is imperfect
competition (Feenstra 1989). If markets are not competitive, firms can
charge a markup on marginal costs, and these may depend on trade
policy or trade shocks. Using import unit values for cars, compact trucks,
and heavy motorcycles from trade flows between the US and Japan,
Feenstra tested for the symmetry between exchange rate and tariff rate
pass-throughs implicit in equation 3. For trucks, he found an exchange
rate pass-through of 63% and a tariff rate pass-through of 57%. For
motorcycles, he reported an exchange rate pass-through of 89%–100%
and tariff rate pass-through of over 100%.
A different instance of imperfect competition and pass-through
occurs in agriculture export markets. In rural areas, and especially in sub-
Saharan Africa, most farmers produce for home consumption. Yet some
are engaged in high-value export agriculture, such as coffee, cotton, cocoa,
and tobacco. Often, commercialization of export agriculture is produced
along a supply chain where intermediaries, exporters, and downstream
producers interact with farmers. Sectors are typically concentrated,
with a few firms competing for the commodities produced by atomistic
smallholders. This structure of the market conduces to oligopsony
power: firms have power over farmers and are able to extract some of
the surplus that the export market generates. The extent of oligopsony
power depends on the number of competitors and relative size of each
(i.e., the distribution of market shares). Changes in the configuration of
the market will thus affect the way that the firms interact with farmers.
In principle, tighter competition induced by entry or policies that foster
competition (e.g., merger or antitrust policies) can affect farm-gate
prices and, therefore, household welfare and poverty. These issues have
been studied in Africa (e.g., Porto, Depretris Chauvin, Olarreaga 2011),
finding that increases in competition in export agriculture can indeed
have strong impacts on poverty reduction, especially in rural areas.
Even if there is full pass-through of trade shocks to prices at the
border, the transmission to households may still be imperfect because of
transport and distribution costs and the internal structure of competition.
Nicita (2009) studied Mexico, which aggressively opened the economy
in the last 2 decades while domestic markets are poorly interconnected
across regions. This creates different pass-through patterns (i.e., perfect
and imperfect) across regions because location affects transport cost.
Using ex-post econometrics based on household data, Nicita estimated
different pass-through rates for agriculture and manufacturing. In
agriculture, tariffs transmit to prices with a coefficient equal to 0.349,
and distance does not matter (i.e., more homogenous, integrated, and
thus competitive markets). In manufacturing, tariffs transmit to prices
with a coefficient equal to 0.702 at the border. This pass-through declines

significantly with distance; the pass-through at the border is 70%; 40%
at 1,000 kilometers; and 20% at 2,000 kilometers.
4.2.4 Additional Issues
In the framework outlined in this section, households can adjust to

trade shocks both on the consumption and income side. Consumption
adjustment occurs when a household consumes fewer expensive goods
due to trade and more inexpensive goods. Income adjustment occurs
when there are supply responses. In farm economies, the most relevant
supply responses take place in agriculture and include, for instance,
households switching from potatoes to cotton. In economies with more
developed labor markets, labor supply decisions may be more important.
Also, if labor markets are segmented, labor reallocation can play a major
role in the quantification of the gains from trade (Artuc, Lederman,
Porto 2015). In the Deaton (1989) framework, these types of adjustments
are considered second order and are consequently small. While this is
true in theory, the role of household adjustment increases when price
changes are large (Friedman and Levinsohn 2002) and when extensive
reforms covering many goods are considered (Ivanic and Martin 2008;
Fajgelbaum and Khandelwal 2015).
The previous analysis omitted the responses of labor markets. Yet
many households earn some of their living (and sometimes a large
fraction of it) from wages. If wages depend on the prices of goods affected
by the trade reforms, then these mechanisms should be incorporated
when classifying households as net producers or net consumers. The
impact of trade now suddenly depends on how wages respond to
price changes. This, in turn, depends on whether labor markets are
integrated or segmented and if there are spillovers and backward and
forward linkages (Ravallion 1990; Porto 2005, 2006). The way labor
markets function may also depend on complementary domestic factors,
including labor market regulations, labor laws, the flexibility to hire and
fire workers, and migration costs.
An important instance when the first-order approximation may fail
is if the principle of separability does not hold. Under perfect markets,
household production decisions are separated from its consumption
decisions, and this result greatly simplifies the analysis. However,
if markets are not perfect, then the net-consumer/net-producer
proposition is not satisfied, and the conclusions derived from it can be
misleading.
Consider two examples of potential problems with the lack of
separability (Brambilla, Porto, Tarozzi 2010). If labor markets are
imperfect and limited off-farm employment opportunities exist, then the

market wage will differ from the shadow wage of own labor and outside,
hired labor. This affects how the welfare impacts of price changes are
measured and invalidates the net benefit ratio (Deaton 1989). As another
example, consider a case where there are imperfections in credit and
capital markets, and households thus need to rely on own funding to
finance productive investments. In this case, a decline in the prices of
cash crops, which provide the only way to raise cash, can make the cash-
in-advance constraint binding with severe repercussions for household
welfare.6
Factors like access to credit, inputs, transport, education, and health
affect adjustment both in consumption and production. If, for example,
trade liberalization inflates export crop prices, but farmers cannot
increase production because of lack of infrastructure, then gains from
trade will not be realized. Balat, Brambilla, and Porto (2009) showed
how marketing costs (i.e., the cost of reaching export markets) can
hinder farm participation in exports in Uganda in coffee, tea, cotton, or
fruits, thus eroding the poverty eradication impact of trade reforms.
The other role of the complementary agenda is related to separation
of property. The principle of separation fails when there are market
failures or missing markets, and often these failures are associated with
policies or distortions in the local economy. Cash constraints may result
from credit constraints, which are the consequence of moral hazard
and a deficient judicial system. Limitations in off-farm employment
may arise because of monitoring costs or sluggish firm adjustment
due to uncertainty about the rule of law. It is not clear whether the
principle of separability holds. Benjamin (1992) found evidence that
supports separability in Indonesia, but Le (2009, 2010) found evidence
inconsistent with it in Viet Nam.
In the end, markets may work well in some cases and not in others.
More importantly, the way the market works in different countries may
depend on a complementary agenda. So far, this has been examined
as factors limiting households’ responses to trade reforms. One way
to visualize this is to think of trade reforms as causing price changes
that reach households while these households cannot react due to
insufficient complementarities.
A different view is when trade reforms do not reach some households.
This idea is related to the imperfect price pass-through issue. In the trade
poverty discussion, the theme of imperfect competition raises the issue
6
There are other examples of the problems created by market imperfections. Krivonos
and Olarreaga (2009) and Porto (2008), for instance, showed how the conclusions
of the first-order approach can change when there is unemployment in the labor
market.
of supply chain organization and competition policies. For instance,

regarding rural markets and export crops, the supply chain structure
may affect how prices transmit to the local economy, such as in African
marketing boards. How changes in international prices filter down to
producers depends to a large extent on the level of competition across
different supply chain layers. In turn, the extent of competition may
depend on domestic policies such as liberalization of internal markets
and entry deregulation. Research on Zambia (Brambilla and Porto 2011)
and Madagascar (Cadot, Dutoit, and de Melo 2009) uncovered some
interactions among market structure, household responses, and poverty
impacts of trade.
Another reason why changes in border prices may not reach
households is lack of complementarities (Cadot, Dutoit, and Olarreaga
2010). For example, with deficient transport infrastructure, some remote
regions may become isolated from world markets if costs are prohibitive.
If markets are isolated, producers will not be able to enjoy higher prices,
but consumers will also be cushioned from them. Similarly, lower prices
will not hurt producers, but neither will they benefit consumers (e.g.,
Nicita 2009).
Growth can indeed reduce absolute poverty if it affects the poor.
There may be an unbalanced growth process favoring the rich more
than the poor, but in the income- and expenditure-based definition
of poverty, it is reasonable to argue that growth should be a poverty
reduction engine. For instance, Dollar and Kraay (2002) found that a
1.0% rise in real gross domestic product raises the income of the poorest
by 1.2%. Ravallion (2001) estimated that a 1.0% increase in the mean
income reduces, on average, the share of the population below the
absolute poverty line by 2.5%.
The role of trade in fostering growth, however, is less clear. Trade
liberalization allows for a more efficient use of resources, promotes
gains in technical efficiency, induces gains from increasing returns to
scale, and fosters technological change. Yet these positive impacts on
growth may not take place if factor reallocations are costly due to factor
market frictions and distortions or if trade induces specialization in
low-growth industries. The available empirical evidence seems to favor
the notion that trade is good for growth, but the studies are not totally
convincing or conclusive.7
7
For instance, Sachs and Warner (1995) used cross-country regressions to suggest that
openness is associated with faster growth, and Dollar and Kraay (2004) used decade-
over-decade changes in the volume of trade as an imperfect proxy for changes in
trade policy. In a dataset spanning 100 countries, they found that changes in growth
rates are highly correlated with changes in trade volumes, controlling for lagged
growth and addressing a variety of econometric difficulties.
4.2.5 Illustrating the Mechanisms

There is little controversy about how households are affected by price
changes, including those brought about by trade policy. Households
consume goods and services, benefit from price declines, and are hurt
by price increases. In farm-households, some goods are also produced
within the family, such as food crops (e.g., maize or rice), as well as cash
or export crops (e.g., coffee, cotton, or cocoa). As producers, households
are harmed by price declines and benefit from price increases. Since
households are often both consumers and producers (especially of
agricultural goods), higher prices hurt net consumers, but benefit net
producers (and vice versa). This is the net-producer/net-consumer
proposition, originally discussed in Deaton (1989) and later adopted by
many researchers.
Using the Encuesta Nacional de Ingreso y Gasto de los Hogares
household survey in Mexico, the following exercise was based on
Lederman and Porto (2016). In the first panel of Table 4.1, the first-
order welfare impacts of a hypothetical increase of 20% in corn prices
Table 4.1 Main Channels for Price Changes, Trade, and Poverty (in %)
Net Producers Net Consumers All

First-Order Effects
Consumption effects –0.99 –2.70 – 1.99
Production effects 2.78 0.77 1.60
Net effects 1.78 –1.93 –0.39
Segmented Labor Markets
Income effects 7.22 1.99 4.16
Net effects 6.23 –0.71 2.17
Labor Market Spillovers
Net effects 9.78 0.44 4.32
Second-Order Effects
Consumption effects –0.93 –2.53 –1.87
Production effects 3.05 0.84 1.76
Net effects 2.12 –1.69 –0.11
Complementary Factors
Net effects 4.56 –1.17 1.21
Source: Authors’ calculations based on Porto (2015).
in rural Mexico were computed, perhaps caused by world trade

liberalization in agriculture (Porto forthcoming). Net producers would
enjoy gains equivalent to 1.78% of their initial (i.e., pre-price increase)
average expenditure. Net consumers would suffer a loss of 1.93%. For
the whole sample, the average impact of an increase in corn prices is
negative, but small (i.e., equivalent to only 0.39% of average national
income).
In the second panel, labor markets are assumed to be segmented;
thus, only wages in the agricultural sector can respond to corn prices. A
wage-price elasticity of 0.40 was used (as estimated in Porto 2008). The
income gains of net producers jump to 7.22%, and their net gain is now
6.23%—nearly 3.5 times higher than before. For net consumers, the income
gains are more modest, of around 1.99%, and these gains are not enough
to offset the consumption losses. In the end, even with wage responses,
net consumers would lose from higher corn prices. The national average
effect would, however, be positive, as higher corn prices would bring
welfare increases of 2.17% on average.
In another example, spillovers from corn prices to the wages of
self-employed individuals are allowed in rural areas. The idea is that
increases in agricultural prices may raise the derived demand for labor
in services, odd jobs, and, more generally, in local rural labor markets.
Using the same wage-price elasticity as before (0.40), the following
welfare impacts were estimated: (i) the income gain of net producers
would be equivalent to 10.22% of their initial income, and the net gain
would be 9.78%; (ii) net consumers would also gain, with an income
gain of 3.44% and a net gain of 0.44%; and (iii) the average national gain
would be equivalent to 4.32% of initial income.
Turning to the role of household adjustments, an example is shown
in the fourth panel of the table, where consumption substitutions and
supply responses were estimated.8 Allowing for consumption and
production second-order effects does not affect the results. The gains
for net producers are slightly larger, and the losses for net consumers
are slightly smaller, but the welfare impacts are not affected much.
As pointed out above, however, these conclusions may change if price
changes are large or if many goods produced and consumed are affected
simultaneously (as is likely to be the case in actual trade reforms).
Finally, an example of the role of complementarities in the case of
corn in Mexico is in the fifth panel of the table. Concurrently with the
increase in corn prices, it was assumed there are also complementary
factors that allow farmers to expand production at no additional cost.
This could occur, for example, due to productivity gains from transport,
8
A full set of demand elasticities is in Porto (2015). For the purpose of this analysis,
a corn supply elasticity of 1 was assumed.
education, or extension services.9 The complementary agenda can play

a significant role in boosting welfare gains. Compared to the first-order
effects of the first panel, net gains for net producers were estimated at
4.56% (instead of 1.78%) and net losses for net consumers at 1.17% (instead
of 1.93%). Interestingly, when the complementary agenda kicks in, the
national average loss of 0.39% turns into a national average gain of 1.21%.
4.3 Trade Liberalization and Poverty

In this section, an empirical exercise measured the impacts of trade
liberalization in several developing or low-income countries in Africa.
Household survey data were used for each country to measure the
consumption effects, the income effect (including both the sales and labor
income effects), and the overall effects of trade policy. The surveys used were
Ghana Living Standards Survey 1998, 1998 National Household Poverty
Survey Report of the Gambia, Malawi Second Integrated Household
Survey 2004–2005, Nigeria Living Standards Survey 2003–2004, National
Household Survey 2005–2006 of Uganda, and South Africa Income and
Expenditure Survey 2010–2011.10 From the surveys, expenditures and
income variables were constructed, as well as an aggregate measure
of household welfare, i.e., the level of per capita expenditure (at the
household level). Budget shares, income shares, and labor income shares
were also computed to calculate first-order approximations.
The trade liberalization episode considered here was a full
elimination of own tariffs. A full pass-through was assumed so that
price changes are approximately equal to the negative of the initial
level of tariffs.11 This allowed calculation of the welfare effects by
multiplying the price changes with income and budget shares. To
describe the results, average effects were computed conditional on the
well-being level of different households using standard nonparametric
techniques, allowing exploration of the impacts across income
distribution, the poor, the middle class, and richer households. Results
are reported in Figures 4.1 to 4.6. Each of the six case studies uncovers
different effects patterns.
In Nigeria, on average, the poorest households lose with tariff cuts,
while richer households gain (Figure 4.1). This goes against the poverty
reduction goal. The consumption effects are positive for all households,
9
See the case studies in Hoekman and Olarreaga (2007) for details.
10
Details on these surveys can be found in Porto, Depretris Chauvin, and Olarreaga
(2012) and Nicita, Olarreaga, and Porto (2014).
11
This exercise follows the analysis of Nicita, Olarreaga, and Porto (2014).
Figure 4.1 Nigeria
% change in real household expenditures 2
–1
–2
4 5 6 7 8 9
Log per capita expenditure
Notes:
1. The short-dash curve represents the consumption mechanism; the long-dash curve, the income
mechanism; and the solid curve is the overall welfare effect of trade policy.
2. The curves are estimated with nonparametric Kernel regressions.
while the income effects are negative. The income losses for the poor
dominate their consumption gains. Instead, the consumption gains for
the richer households (which are larger than those of poorer families)
dominate their income losses (which in turn are smaller than those of
poorer families).
In Ghana, the overall effects of trade liberalization are positive, on
average, for everyone (Figure 4.2). The impacts are larger for richer
households, so trade is pro-rich. This is driven by two mechanisms: the
consumption effects are positive and roughly similar across households,
while the income effects are negative, but smaller for richer households.
Figure 4.3 shows the case of Malawi. It is similar to Ghana in that the
overall effects are positive, on average, for all households. It is different
from Ghana in that the poorer households seem to benefit more than the
richer ones.
A different pattern emerges for The Gambia (Figure 4.4). The overall
effects are positive, on average, for all households, as in Ghana and
Malawi. Unlike all the previous cases, however, the poor gain from the
consumption mechanism, but they lose from the income mechanisms.
Richer families benefit both on the consumption and income sides.
Uganda (Figure 4.5) displays yet another pattern. Here, the overall
effects are positive for the poor and negative for the rich. While the
Figure 4.2 Ghana
.15
% change in real household expenditures
.1
.05
–.05
–.1
9 10 11 12 13
Notes:
Figure 4.3 Malawi
.08
.06
.04
.02
–.02
6 7 8 9
Notes:
Figure 4.4 The Gambia
% change in real household expenditures .15
.1
.05
–.05
2 4 6 8
Notes:
Figure 4.5 Uganda
.02
–.02
–.04
–.06
8 10 12 14 16
Notes:
Figure 4.6 South Africa
.08
.06
.04
.02
2 4 6 8 10
Notes:
consumption effects are similar across households, the income effects

are negative and much larger for richer households.
Finally, South Africa (Figure 4.6) displays a case where the overall
effects are positive, and both the consumption and income effects are
positive as well.
4.4 Trade and Complementary Policies

While there are strong theoretical grounds to advocate for gains from
trade, it is not obvious that they can be realized in practice. Also,
even if there are aggregate gains from trade, there will most likely be
winners and losers from trade reforms. The losers may, or may not,
be the poor. Indeed, the impacts are heterogeneous, not only within
a country (i.e., across the income distribution), but also across countries.
To a large extent, this is because the effects of trade policies depend on
the economic environment, such as differences in endowments across
households and countries, frictions in factor markets, the extent of
imperfect competition, and the economic policy setting (e.g., other
taxes, distortions, and the institutional framework). It is, therefore,
difficult to identify a set of good policies that should accompany trade

reforms to make the most of any trade liberalization episode. This is
not inherent to trade policy; it is a more general conclusion in various
policy forums.
An example is the book edited by Cohen and Easterly, What Works
in Development: Thinking Big and Thinking Small. Cohen and Easterly
compiled several papers from renowned experts on policies that work
for development and, in particular, on whether academics and policy
makers should focus on big answers and policies or smaller projects. One
of the reasons people tend to see a crisis in the “thinking big” approach
is because of how difficult it is to pin down major growth determinants.
Durlauf, Johnson, and Temple (2005) identified 143 determinants of
growth and 41 theories to explain it. With an extreme approach, Levine
and Renelt (1992) found, however, that only a few of those determinants
are robust. More lenient approaches identify a few more robust variables,
but still too many. The Commission on Growth and Development (2008)
summarized, “It is hard to know how the economy will respond to a
policy, and the right answer in the present moment may not apply in the
future.”
Similar conclusions apply to the complementary agenda to trade
reforms. Trade liberalization is good, in aggregate and across the
income distribution, including the poor. Yet trade liberalization must be
accompanied by sound supporting policies. The policies that are likely
to be convenient include those that facilitate and transmit trade, such
as competition policies in traded sectors; smooth adjustments in factor
markets, such as labor market frictions and capital reallocation costs;
encourage specialization in goods with comparative advantage, such as
technical advice or input adoption; and help the losers in the short term
and make them winners in the longer term.
4.5 Conclusions
This chapter explored whether trade can help or hinder the achievement
of the poverty eradication goal of the United Nations Sustainable
Development Goals. The impression that emerges from the literature
and empirical exercises is that trade can be positive for all types of
households, including the poor. However, its effects are heterogeneous,
even conditional of broad household characteristics. In principle, it
is possible to observe poor households both benefiting from trade
liberalization and being hurt by trade reforms. The impacts depend on
consumption and production patterns, household endowments, and
household characteristics (e.g., demographic or geographic).
In addition, there is consensus that trade liberalization needs to be

accompanied by complementary policies, either to boost the resulting
gains or to ameliorate potential negative impacts. The design of the
complementary agenda is difficult to establish because countries are
heterogeneous in their characteristics. Specific policy advocacy requires
a careful examination of the environment in which trade liberalization
may take place and on the policy and institutional context in which it
happens.
Overall, a well-structured trade liberalization agenda, together
with a sound complementary agenda, will help reach the Sustainable
Development Goal. Trade is certainly not the only element in play, but it
can be an important contributing factor.
References
Artuc, E., D. Lederman, and G. Porto. 2015. A Mapping of Labor Mobility
Costs in the Developing World. Journal of International Economics
95(1): 28-41.
Artuc, E., G. Porto, and B. Rijkers. 2016. Trading-Off the Income Gains
and the Inequality Cost of Trade Policy. Unpublished.
Balat, J., I. Brambilla, and G. Porto. 2009. Realizing the Gains from
Trade: Export Crops, Marketing Costs, and Poverty. Journal of
International Economics 78(1): 21–31.
Barnum, H., and L. Squire. 1979. A Model of an Agricultural Household:
Theory and Evidence. World Bank Occasional Paper 27. Washington,
DC: World Bank.
Barrett, C., and P. A. Dorosh. 1996. Farmers’ Welfare and Changing
Food Prices: Non-Parametric Evidence from Rice in Madagascar.
American Journal of Agricultural Economics 78(3): 656–669.
Benjamin, D. 1992. Household Composition, Labor Markets, and Labor
Demand: Testing for Separation in Agricultural Household Models.
Econometrica 60(2): 287–322.
Benjamin, D., and A. Deaton. 1993. Household Welfare and the Pricing
of Cocoa and Coffee in Côte d’Ivoire: Lessons from the Living
Standards Surveys. The World Bank Economic Review 7(3): 293–318.
Boyce, J., and M. Ravallion. 1991. A Dynamic Econometric Model of
Agricultural Wage Determination in Bangladesh. Oxford Bulletin of
Economics and Statistics 53(4): 361–376.
Brambilla, I., and G. Porto. 2011. Market Structure, Outgrower Contracts
and Farm Output: Evidence from Cotton Reforms in Zambia. Oxford
Economic Papers 63(4): 740–766.
Brambilla, I., G. Porto, and A. Tarozzi. 2012. Adjusting to Trade Policy:
Evidence from US Antidumping Duties on Vietnamese Catfish.
Review of Economics and Statistics 94(1): 304–319.
Budd, J. W. 1993. Changing Food Prices and Rural Welfare: A
Nonparametric Examination of the Côte d’Ivoire. Economic
Development and Cultural Change 41(3): 587–603.
Cadot, O., L. Dutoit, and J. de Melo. 2009. The Elimination of Madagascar’s
Vanilla Marketing Board, 10 Years on. Journal of African Economics
18(3): 388–430.
Cadot, O., L. Dutoit, and M. Olarreaga. 2010. Barriers to Exit from
Subsistence Agriculture. In Trade Adjustment Costs in Developing
Countries: Impacts, Determinants and Policy Responses, edited by
G. Porto and B. Hoekman. Washington, DC: CEPR and World Bank.
Campa, J. M., and L. S. Goldberg. 2005. Exchange Rate Pass-through

into Import Prices. The Review of Economics and Statistics 87(4):
679–690.
Cohen, J., and W. Easterly. 2012. What Works in Development? Thinking
Big and Thinking Small. Washington, DC: Brookings Institution.
Commission on Growth and Development. 2008. Urbanization and
Growth. Washington, DC: World Bank.
Deaton, A. 1989a. Household Survey Data and Pricing Policies
in Developing Countries. The World Bank Economic Review 3(2):
183–210.
____. 1989b. Rice Prices and Income Distribution in Thailand: A Non-
Parametric Analysis. Economic Journal 99(395): 1–37.
____. 1997. The Analysis of Household Surveys: A Microeconometric
Approach to Development Policy. Baltimore, MD: Johns Hopkins
University Press for the World Bank.
Dollar, D., and A. Kraay. 2002. Growth Is Good for the Poor. Journal of
Economic Growth 7(3): 195–225.
____. 2004. Trade, Growth, and Poverty. The Economic Journal 114(493):
F22–F49(1).
Durlauf, S. N., P. A. Johnson, and J. Temple. 2005. Growth Econometrics.
In Handbook of Economic Growth, edited by P. Aghion and S. Durlauf.
Amsterdam: Elsevier.
Fajgelbaum, P., and A. Khandelwal. 2015. Measuring the Unequal Gains
from Trade. Quarterly Journal of Economics 131: 1113 –1180.
Feenstra, R. 1989. Symmetric Pass-through of Tariffs and Exchange
Rates under Imperfect Competition: An Empirical Test. Journal of
International Economics 27(1, 2): 25–45.
Ferreira, F., A. Fruttero, P. Leite, and L. Lucchetti. 2011. Rising Food
Prices and Household Welfare: Evidence from Brazil in 2008. Policy
Research Working Papers. Washington, DC: World Bank.
Friedman, J., and J. Levinsohn. 2002. The Distributional Impacts of
Indonesia’s Financial Crisis on Household Welfare: A “Rapid
Response” Methodology. World Bank Economic Review 16(3):
397–423.
Ghana Statistical Service. 2009. Ghana Living Standard Survey. Accra.
Goldberg, P., and M. Knetter. 1997. Goods Prices and Exchange Rates:
What Have We Learned? Journal of Economic Literature 35(3):
1243–1272.
Government of The Gambia. 1998. 1998 National Household Poverty
Survey Report. Banjul.
Hoekman, B., and M. Olarreaga, eds. 2007. Global Trade and Poor
Nations: Poverty Impacts and Policy Implications of Liberalization.
Washington, DC: Brookings Institution Press.
Ivanic, M., and W. Martin. 2008. Implications of Higher Global Food

Prices for Poverty in Low-Income Countries. World Bank Policy
Research Working Paper 4594. Washington, DC: World Bank.
Jacoby, H. 2013. Food Prices, Wages, and Welfare in Rural India. World
Bank Policy Research Working Paper 6412. Washington, DC: World
Bank.
Krivonos, E., and M. Olarreaga. 2009. Sugar Prices, Labor Income,
and Poverty in Brazil. Economia Journal of the Latin American and
Caribbean Economic Association. January: 95–128.
Le, K. 2009. Shadow Wages and Shadow Income in Farmers’ Labor
Supply Functions. American Journal of Agricultural Economics
91(3): 685–696.
____. 2010. Separation Hypothesis Tests in the Agricultural Household
Model. American Journal of Agricultural Economics 92(5):
1420–1431.
Lederman, D., and G. Porto. 2016. The Price Is Not Always Right: On
the Impacts of Commodity Prices on Households (and Countries).
World Bank Research Observer 31(1): 168–197.
Levine, R., and D. Renelt. 1992. A Sensitivity Analysis of Cross-Country
Growth Regressions. American Economic Review 82(4): 942–963.
National Bureau of Statistics. 2010. Nigeria Living Standards Survey,
2003–2004. Abuja.
National Statistical Office. 2005. Malawi Second Integrated Household
Survey 2003–2004. Lilongwe.
Nicita, A. 2009. The Price Effect of Trade Liberalization: Measuring the
Impacts on Household Welfare. Journal of Development Economics
89(1): 19–27.
Nicita, A., M. Olarrega, and G. Porto. 2014. Pro-Poor Trade Policy in
Sub-Saharan Africa. Journal of International Economics 92(2):
252–265.
Porto, G. 2005. Informal Export Barriers and Poverty. Journal of
____. 2006. Using Survey Data to Assess the Distributional Effects of
Trade Policy. Journal of International Economics 70:140–160.
____. 2008. Agro-Manufactured Export Prices, Wages, and
Unemployment. American Journal of Agricultural Economics 90(3):
748–764.
____. 2015. Estimating Household Responses to Trade Reforms. Net
Consumers and Net Producers in Rural Mexico. International
Economics. 144: 116 –142.
Porto, G., N. Depretris Chauvin, and M. Olarreaga. 2011. Supply Chains in
Export Agriculture, Competition, and Poverty in Sub-Saharan Africa.
Washington, DC: CEPR and World Bank.
Ravallion, M. 1990. Rural Welfare Effects of Food Price Changes under

Induced Wage Responses: Theory and Evidence for Bangladesh.
Oxford Economic Papers 42(3): 574–585.
____. 2001. Growth, Inequality and Poverty: Looking beyond Averages.
World Development 29(11): 1803–1815.
Sachs, J. D., and A. M. Warner. 1995. Economic Reform and the Process
of Global Integration. Brookings Paper on Economic Activity 1.
Washington, DC.
Sahn, D., and A. Sarris. 1991. Structural Adjustment and the Welfare
of Rural Smallholders: A Comparative Analysis from Sub-Saharan
Africa. World Bank Economic Review 5(2): 259–289.
Singh, I., L. Squire, and J. Strauss, eds. 1986. Agricultural Household
Models: Extensions, Applications and Policy. Baltimore, MD: Johns
Hopkins Press for the World Bank.
Statistics South Africa. 2013. South Africa Income and Expenditure
Survey 2010–2011. Pretoria.
Uganda Bureau of Statistics. 2012. National Household Survey
2005–2006. Kampala.
Winters, A., N. McCulloch, and A. McKay. 2004. Trade Liberalization
and Poverty: The Evidence So Far. Journal of Economic Literature
XLII: 72–115.
5
Agricultural Trade
and Hunger
Will Martin
5.1 Agricultural Trade and Food Security

The food security element of the United Nations’ second Sustainable
Development Goal (SDG) is to “end hunger, achieve food security and
improved nutrition.” This is an extraordinarily important goal that
rightly commands a high degree of consensus. It is, however, difficult and
multifaceted, and seemingly reasonable policies can easily undermine it.
Ending hunger is surely the most important goal, but many challenges
arise from the so-called double burden of malnutrition in a world in
which more people are overweight than undernourished (Masters et
al. 2016). Further, the topic is emotionally charged, with often fractious
debate (Diaz-Bonilla 2015). However, the importance of good policy for
achieving this goal is increased by the recent slowdown in economic
growth, which will hamper achieving the first SDG of eliminating
poverty by 2030 (Laborde and Martin 2016).
Because this goal is about domestic policy outcomes, it should be
addressed directly, as per Tinbergen’s famous 1952 principle of policy
assignment, rather than using such indirect measures as trade policy.
However, there is much interest in the effects of agricultural trade
policy on food security and nutrition, with many firmly convinced that
restricting trade is important, while others feel that open trade is equally
important. Perhaps the most useful approach is to retain the primary
focus on direct policies, but also to ask whether trade policy is generally
supportive of or prejudicial to the goal. And, if trade measures are to be
used, how?
The 1996 World Food Summit provided a widely accepted definition
of food security as “…when all people, at all times, have physical and
economic access to sufficient, safe and nutritious food that meets their
dietary needs and food preferences for an active and healthy life.” This
87
definition focuses on peoples’ access to food, rather than on whether

sufficient food is available. This is because, as Sen (1981) showed very
clearly, while availability is necessary for food security, it is far from
sufficient, and massive food insecurity can arise even in the midst of
plenty. Its “at all times” dimension also takes into account that food
access may be challenged at times of market disruption unless policies
are in place to ensure it.
Key food security policies directly targeted to the poor focus on
access. In poor countries, social safety nets that ensure access are a high
food security priority. A good social safety net helps the poor without
risking the rest of the community’s welfare. In this, it is in strong
contrast with food price measures that are likely to create substantial
numbers of both winners and losers. In examining the 2010–2011 price
shock, Ivanic, Martin, and Zaman (2011) found, for example, that the
net increase in poverty of 44 million was associated with 68 million
people falling into poverty and 24 million people (mostly small farmers)
moving out of it.
In the longer term, key food security influences operate through
consumer real incomes and preference structures, as well as food
nutritional content and costs. Raising real incomes through economic
development is the most effective long-run approach to dealing with
hunger. Promoting broad-based agricultural productivity in developing
countries is likely to be particularly effective in reducing poverty-
associated hunger because it operates through three channels: raising
farmer incomes at any output price level, lowering the cost of food to
poor consumers, and raising real wages (Ivanic and Martin 2016).
The goal’s nutrition dimension is considerably more wide-ranging
than that for food security. There is a well-known transition as consumers’
real incomes rise, with a move away from basic carbohydrates, toward
a more diverse diet including more fruits, vegetables, and livestock
products (Masters et al. 2016). However, consumers may choose
unhealthy diets, either because they are unaware of the risks or because
of behavioral factors. This has become very controversial as the double
burden associated with diet-related conditions such as obesity and
diabetes has been more clearly appreciated (Popkin 2003). Potential
policies targeted to these problems include education; “nudges” that
address behavioral factors (Just and Gabrielyan 2016); and subsidies/
taxes that attempt to change food choices.
One other perspective influencing agricultural trade reform
proposals arises from concerns about the implications of globalization
for small, vulnerable, subsistence producers, and preferences for
consumption of locally produced food. Food sovereignty proponents
tend to view trade in food negatively, frequently seeing it as exposing
Agricultural Trade and Hunger89
producers to price volatility and competition (Edelman et al. 2014).

However, Burnett and Murphy’s important 2014 contribution
questioned the universality of this approach, pointing out that
agricultural exports are important sources of income for many small
farmers, and the rising influence of developing countries in the World
Trade Organization (WTO).
This chapter first examines how opening to agricultural trade can
affect food security, and then turns to the associated impacts of trade
policies on domestic prices in developing countries. The discussion first
covers the potentialities of agricultural trade liberalization and those
of current trade policy responses to changes in world prices, and then
turns to the proposed WTO Special Safeguard Mechanism (SSM). The
concluding section brings together the overall impacts of trade and
trade policies on achieving SDG 2.
5.1.1 Links between Trade and Food Security
The first part of this chapter examines the links between trade and
food security. The five different channels considered are (i) income
changes resulting from opening to trade, (ii) productivity gains from
trade, (iii) substitution effects from trade, (iv) food price volatility, and
(v) changes in dietary diversity and quality.
Income Changes from Trade

Standard economic theory shows that opening up to trade will generally
raise real national income. The first demonstration of this, by David
Ricardo, relied on differences in technology between countries and
highlighted one vital—and nonobvious—point. Comparative advantage
does not depend on absolute productivity levels, but rather on countries’
relative productivity in different products. This means that both a poor
and a rich country can—at the same time—benefit from opening to trade.
The classic example examines economies where only labor is used for
production and focuses on a poor country that uses more to produce
each good, but still benefits by it due to comparative advantages. How
can it compete despite using more labor in its export than the rich
country? Because, unfortunately, it has a lower wage rate than the rich
country. The rich country similarly benefits by importing from the poor
country. How does it compete in its export, despite having higher wage
rates? Because it uses labor more efficiently.
Although more recent models accommodate factor endowments as
well as productivity differences, they still come to the same conclusion.
Both poor and rich countries can gain by trading with each other.
Applied models also view opening to trade as not being an all-or-nothing
decision, and include barriers that influence trade flows. Regional and
global trade models also consider one potential route by which some
countries may benefit from trade barriers: by improving their terms of
trade, perhaps by lowering the price they pay for imports. Since these
gains are beggar-thy-neighbor in nature, complete models generally
find that removing all barriers will raise real incomes of all, or at least
almost all, countries (see, for example, Laborde, Martin, and van der
Mensbrugghe 2011), and certainly raise global income, allowing the
losers from reform to be compensated.
A simple but useful indicator of the importance of agricultural
products trade is the sharp diversity in different countries’ land
endowments. As shown in Table 5.1, agricultural land per person in
the United States (US) in 2005–2009 was slightly more than twice the
world average, and Brazil’s land endowment per person was nearly as
high. At the other extreme, Japan and the Republic of Korea had land
endowments one-tenth of the world average. Little wonder that Brazil
and the US are large agricultural exporters, while Japan and the Republic
of Korea are large agricultural importers. These numbers alone are
strongly suggestive of the extraordinarily high costs—to both importers
and exporters—that would be associated with moving to self-sufficiency.
The People’s Republic of China (PRC) is a particularly interesting case,
with a move to agricultural import status associated with rapid growth
related to increasing demand for animal products, although Fukase and
Table 5.1 Endowments of Agricultural Land (hectares/person)
1980– 1985– 1990– 1995– 2000– 2005– 1980–

Country 1984 1989 1994 1999 2004 2009 2009
Brazil 0.87 0.81 0.79 0.78 0.75 0.75 0.79
PRC 0.21 0.22 0.22 0.21 0.20 0.19 0.21
EUa 0.34 0.34 0.33 0.32 0.30 0.29 0.32
India 0.24 0.21 0.19 0.17 0.16 0.15 0.19
Japan 0.05 0.05 0.04 0.04 0.04 0.04 0.04
Korea, Rep. of 0.06 0.05 0.05 0.04 0.04 0.04 0.05
US 1.15 1.09 1.03 0.95 0.88 0.82 0.99
World 0.55 0.52 0.48 0.45 0.42 0.40 0.47
EU = European Union, PRC = People’s Republic of China, US = United States.
a
The EU data reflect the changing membership of the bloc.
Note: Hectares of agricultural land per capita defined as arable land, land in permanent crops, and one-
third of land in permanent pasture.
Source: Fukase and Martin (2016).
Martin (2016) conclude that this may be temporary in the PRC’s case.
The working paper version of this study (Fukase and Martin 2014: 38)
also showed how difficult it is to change fundamental trade outcomes.
While final agricultural products are highly protected in Japan and the
Republic of Korea and policy makers emphasize self-sufficiency, it turns
out that self-sufficiency in maize, rice, wheat, and soybeans is around
25% because of feedstuff imports.
Recent work by Costinot and Donaldson (2014) pointed to very
large gains from trade within agriculture. They concluded that falling
transport costs within the US resulted in a 2.3% annual increase in
the total value of output over the period 1880–1920 and a 1.5% annual
increase over the period 1950–1997. These gains are of the same order
of magnitude as the extraordinary gains from total factor productivity
observed over these periods. Given the large differences in prices
between countries resulting from combinations of transport costs and
trade distortions (Anderson 2009), it might be expected that the income
gains from agricultural trade reform would be substantial. Laborde and
Martin (2012) note that, even though agriculture makes up only 10% of
world trade, the potential income gains from reform appear to make up
around 70% of total potential gains. This is primarily because distortions
in agricultural markets are so much higher and more variable (across
commodities and over time) than those for other products.
But factor endowments are not the only determinant of agricultural
trade. Research and development can also impact countries’ ability
to export agricultural products. Brazil has emerged as an agricultural
export powerhouse in large measure because of rapid productivity
improvements (Rada and Valdés 2012). The emergence of India as a
large exporter of agricultural products, despite a relatively small land
endowment, also reflects improved productivity.
Productivity Gains from Trade

In addition to the static gains from trade considered above, much recent
literature has examined trade policies’ productivity implications in
different sectors. Amiti and Konings (2007) found impacts in Indonesian
manufacturing. Similar findings are also evident for agriculture in
several studies, including Kolady, Spielman, and Cavalieri (2012) for
seeds in India; De Silva, Malaga, and Johnson (2014) for Sri Lanka;
and Hassine, Robichaud, and Decaluwe (2010) for Tunisia. There is
also considerable documentation of specific policy reforms that were
critical for productivity growth, such as the liberalization of inexpensive
irrigation pumps in Bangladesh in the 1980s (World Bank 1999).
Government retains an important quality-control role when trade in
agricultural goods and inputs is opened. Below-specification quality of
fertilizers and seeds appears to be a major expense for African farmers

(Bold et al. 2014). Regulatory reform needs to consider the possibility
that the use of inferior, illegally imported inputs is a consequence of
inappropriate standards or excessive regulations. WTO standards on
Technical Barriers to Trade and on Sanitary and Phytosanitary barriers
to trade are designed to balance the positive role of standards and the
risks that they will be used as hidden trade barriers.
Agricultural productivity growth is likely to have a particularly
powerful influence on poverty for several reasons. One is that growth
has the potential to directly increase the incomes of the poor, of whom
around half are farmers (World Bank 2008; Ravallion and Datt 1996).
Another is that agriculture in developing countries is particularly labor
intensive so that an increase in productivity is likely to increase the
wages of poor workers who are net sellers of labor (Loayza and Raddatz
2010). The third reason is that widespread agricultural productivity
growth is likely to lower the cost of basic foods, which make up a large
share of the poor’s expenditures, including poor farmers (Ivanic and
Martin 2016)
Substitution Effects
Trade policy will affect nutritional outcomes through substitution
effects as well as income effects. In many cases, these effects will have
the same sign. An increase in food prices that lowers a net food buyer’s
real income will reduce demand for food through both substitution and
income effects. However, the dependence of demand on substitution
effects means that some whose incomes do not fall below the poverty
line may slip into food insecurity following a rise in prices.
There may also be cases where food consumption and real incomes
move in opposite directions. A food price increase that raises the
incomes of poor people who are net food sellers has ambiguous effects
on consumption. The income effect increases food demand either
by increasing demand for the foods currently being consumed, or by
encouraging a shift toward foods regarded as superior, which likely
increases the resources needed to meet demand (Fukase and Martin
2016). It is therefore possible that such a rise in price would have
opposite effects on real incomes and on nutritional outcomes.
It is important to consider both income and substitution effects
when evaluating both the nutritional impacts and the impacts on
trading partners of trade policy responses to price shocks. Do and
Levchenko (forthcoming), for instance, argue that insulation against a
price increase should be seen as a social policy designed to protect the
poor. They consider a price increase in a two-person society in which a
poor person is a net buyer and a rich person a net seller. In this case, it is
possible to have a transfer policy that is equivalent to price insulation in

terms of income distribution; that is, a transfer from the net seller to the
net buyer. But the two are far from equivalent in their impacts
The income transfer policy increases demand for food in the country
by transferring income from the rich, whose marginal propensity to
consume food is almost certainly below that of the poor, to the poor,
who are likely to spend much more of this money on food. The price
insulation policy generates these two partially offsetting impacts, but
adds to this a substitution effect that increases the demand for food
by both rich and poor. Given the homogeneity of degree zero of the
Marshallian demand function, the price elasticity of demand for food
must be greater (in absolute value) than the income elasticity by the
sum of the cross-price elasticities (assuming gross substitutability). If
we consider only the poor person, the increase in demand due to the
substitution effect must be larger than that due to the income effect.
The price insulation policy removes the negative income effect to the
rich of having to pay for the transfer, and adds a substation effect for
the rich. The only uncertainty relates to the income effects of the price
insulation measure. If, for instance, insulation is achieved through an
import subsidy or a reduction in import duties that reduces revenues,
the need to finance this intervention will reduce food demand.
Impacts on Food Price Volatility

Another important impact of trade pertains to production diversification
and the consequent reduction in costs associated with output volatility.
To illustrate this, it is useful to begin with a small, isolated economy
producing and consuming a storable food commodity. A highly simplified
version of the model developed by Deaton and Laroque (1992) and
Cafiero et al. (2011) is represented in Figure 5.1. A vertical curve marked
S represents food availability. The position of this curve is determined
by the carry-in of food from the previous season, plus production for this
marketing season. This curve is vertical, reflecting the assumption that
output cannot adjust to price changes during the season.
Because food production is typically much more volatile than
consumer demand, we focus on this source of variability. The dashed
lines to the left and right of the supply curve by one standard deviation
of the output distribution give an idea of the dispersion. The demand
curve, marked D, consists of two regions. The first, steeper section of the
curve reflects a stockout situation in which high prices lead speculators
to believe that it will not be profitable enough to store food into the next
period and so sell all of their supplies. In this situation, the only way
that demand can meet changes in availability is by causing consumers
to eat less. Because consumer demand for food tends to exhibit little
Figure 5.1 Supply and Demand for a Storable Commodity, Region 1

D
S
Price
Quantity
D = demand, S = supply.
Source: Author.
response to price changes, large price changes are required to reduce

consumption to match availability.
The section of the demand curve below the kink reflects a situation
where storers believe it will be profitable to carry food into the next
season, and hence continue to hold stocks. Whenever availability
intersects the demand curve below the kink, food prices need to vary
relatively little when there are unexpected changes. This is because
the demand for storage is much more price responsive than the
demand for consumption. The situation for non-storable foods is the
same except that the entire demand curve looks like the steeper curve
in Figure 5.1.
If we move from a single, isolated market to one with many
supplying and demanding regions linked by low-cost transport, a key
change is that the coefficient of variation of output is likely to come
down substantially. If we further consider a move from a single, isolated
region with a coefficient of variation of output of ɐ to n integrated regions
with identical but independently distributed output linked by low cost
transport, then the coefficient of variation for output will decline to ɐ/ξ݊.
With, for instance, nine regions, the coefficient of variation falls by
a factor of three under these circumstances, greatly reducing the
frequency with which unexpected output falls will result in price spikes.
Obviously, if there is some correlation between output in the regions

linked by transport, the variance reduction will be somewhat smaller,
but the general principle that diversification reduces the risk of income
volatility from a given production portfolio remains.
Food security diversification can be very powerful. Burgess and
Donaldson (2010) find that connecting a district in India to the railway
network resulted in a very sharp decline—almost the disappearance—of
famines in that region. Interregional trade in this context was particularly
important because, as Donaldson (2014) explains, agricultural output
volatility was large and internal transport costs extremely high prior to
connection. However, this work illustrates the role of trade in reducing
the volatility of food prices and the risk of food insecurity. Ravallion
(1987) considered the role of international trade in famines in British
India, and concluded that it had a modestly favorable impact on reducing
the consumption impact of output shocks, an effect complemented by
domestic storage. He found no evidence of “slump famines” in which
the income decline associated with harvest failure reduces consumption
enough to increase exports.
A crude indication of the importance of international diversification
in reducing food price volatility builds on the extent to which it addresses
production risk, which, in turn, depends on the production distribution
across countries for a particular commodity. For rice, for example, the
Food and Agriculture Organization (FAO) of the United Nations reports
production in 117 countries in 2013. The enormous variation in the size
of these countries requires taking the international output distribution
into account. One simple way to do this is to use the numbers equivalent
of the Herfindahl Index, defined as the inverse of the sum of their market
shares squared. For rice in 2013, this index was 6.8. This implies that
international diversification reduces the production variance by a factor
of 6.8 and the average size of rice market price shocks by a factor of 2.6.
Wheat production is more widely distributed geographically, with a
numbers equivalent corresponding to 13.8 equal-sized countries in 2013.
This implies that international diversification reduces the variance of
price shocks associated with production shocks by a factor of 13.8 and
the average size of the price shocks resulting from production shocks by
a factor of 3.7.
Consideration of international diversification in production has
important policy implications. Severe price shocks are an inherent
feature of isolated economies and can be greatly mitigated by the
interregional and international diversification of production associated
with trade openness. Opening up to trade does not—as depicted in G-33
(2010)—result in increased exposure to price shocks. Unfortunately,
as we will see later in this chapter, there is a risk that trade policy
interventions designed to protect individual countries from price shocks

will, because of their beggar-thy-neighbor impacts, end up destabilizing
world prices and compromising the ability of trade to reduce volatility,
forcing each country to respond in the same way.
Dietary Diversity and Quality

Trade has considerable potential to improve food diversity and
quality, particularly in countries that are small and are agro-ecological
monocultures. This advantage is likely to be exploited most by higher-
income countries, where people have the spending power to diversify
their diets. If people are very poor, they will likely focus heavily on
starchy staples (Masters et al. 2016).
Remans et al. (2014) point to sharp differences between the
nutritional diversity of production and the food supply in many regions.
This is particularly evident for their measure of the functional diversity
of food, which rises very substantially, even for regions not very open to
trade, when refocusing from food production to access. This presumably
reflects a combination of imports of products in which regions lack a
comparative advantage, such as vegetable oils in South Asia, and exports
of commodities in which regions have a strong comparative advantage,
such as beverages in sub-Saharan Africa. The share of calories from
non-staples in production and consumption is much less divergent in
developing-country regions and appears more related to income level.
Only in high-income regions such as Europe and North America are
sharp differences observed.
Table 5.2 Differences between Nutritional Diversity

in Production and in the Food Supply
Nutritional Energy from

Composition Non-Staples
Production Supply Production Supply
South Asia 0.13 0.71 40 43
East Asia and the Pacific 0.12 0.71 47 44
Sub-Saharan Africa 0.05 0.71 32 34
Middle East and North Africa 0.08 0.82 47 46
Europe and Central Asia 0.08 0.80 21 52
North America 0.44 0.94 11 66
Latin America and Caribbean 0.08 0.80 57 55
Source: Remans et al. (2014, Table 1).
The link between openness to trade and food quality is much more
controversial. One would expect the higher incomes associated with
trade to result in dietary improvements—assuming consumers are
knowledgeable about what foods lead to better nutritional outcomes.
But many have raised concerns about the role of trade, and globalization
more generally, in creating nutritional problems, particularly those
associated with obesity (Hawkes, Chopra, and Frielin 2009).
One strand of this literature (and related media discussion) focuses
on the case of Pacific island countries (e.g., Gittelsohn et al. 2003; Cassels
2006; Watson and Treanor 2016). This literature frequently involves
claims that the pre-contact diet in these countries was a healthy mix
of carbohydrates from root crops with proteins from tropical fish. The
experience of Easter Island and New Zealand (Flannery 1994) raises
questions about the sustainability of such diets, particularly after the
dramatic population growth likely during the demographic transition.
Articles frequently raise concerns about the poor health outcomes
associated with imported foods such as mutton flaps and turkey tails,
and frequently advocate banning particular foods. The concerns about
obesity rates, diabetes, and other health concerns are indeed disturbing.
Evans et al. (2001) conclude that simply providing nutrition information
may not be enough to change diets, and advocate using trade policies.
But trade policy is clearly an indirect and inefficient means of improving
these diets.
Thow et al. (2011), in perhaps the most detailed discussion of
trade policies in this literature, raise concerns that protection to
domestic meat production in some countries has reduced production of
traditional foods, but advocate trade policy to remedy this by restricting
imports of less healthy foods. This set of prescriptions, together with
the evidence from past protection policies, reveals the problem of using
indirect trade measures to achieve nutritional goals. Discouragement
of unhealthy imports is likely to increase domestic production of this
type of product, while protection of “healthy” domestic products will
reduce consumption by raising their price. By contrast, the use of excise
taxes—which they also recommend—has the ability to reduce demand
for unhealthy products without increasing domestic production.
Changing diets to deal with malnutrition, and particularly the
problems associated with excessive intake of refined foods, sugar, and fat,
is particularly challenging. To some degree, disseminating appropriate
information is surely part of a good policy response. This may, however,
not always be enough, and taxation or behavioral economic approaches
may be needed to change outcomes. In this situation, Okrent and
Alston (2012) provide a framework for evaluating alternative price-
based policies, concluding that, within the range of feasible measures,
a uniform tax on calories would be much more efficient than indirect

approaches. Just and Gabrielyan (2016) emphasized the importance
of behavioral considerations and points to considerable promise of
“nudges” and other policies in influencing food choices.
5.1.2 Trade Policy and Food Security

Trade policy may have important impacts on achieving the SDGs.
The outcome depends heavily upon each country’s trade policies and
their interaction when the associated collective action problems are
considered. This section first considers the impacts of protection
changes, then turns to dynamic behavior currently used to stabilize
domestic prices. Finally, it reviews the potential impacts of the proposed
SSM, whose negotiation was endorsed at a recent WTO ministerial
meeting in Nairobi.
The simplest form of trade policy, and the one strongly favored by the
WTO, is ad valorem tariffs, which allow countries to protect particular
commodities without changing relative prices over time, and without
interfering with the price-stabilizing consequences of the production-
source diversification associated with trade openness. One question
for trade policy, addressed very briefly here because it is the subject of
another chapter in this volume, is the implications of reducing the ad
valorem protection for poverty. Following this, the discussion turns to
policies that affect protection measure variance.
Changing the Level of Protection

Considering the impacts of protection-level changes mandates
beginning with information about agricultural support. Some
discussions, such as McMichael (2014), begin from the perspective that
agricultural protection was reduced in the 1980s and 1990s when many
marketing boards were abolished or restructured. In fact, the average
rate of protection to developing-country agriculture in the 1980s was
strongly negative. During this period, taxation was sharply reduced and
developing countries have now moved to an average rate of assistance
that is positive (Anderson 2009).
There is certainly a risk that changes in trade policy, even if they
increase national income, could reduce the incomes of some groups. A
key question is whether this is likely to be widespread. If one accepts
the evidence that higher agricultural prices tend to reduce long-term
poverty (Jacoby 2015; Ivanic and Martin 2014b), then poor people in
countries that protect agriculture might be vulnerable. Since agricultural
protection raises production costs and lowers the prices received for
exports, it is likely that poverty would fall in export-oriented developing
countries, particularly those where agricultural land is broadly
distributed. Countries such as Cambodia and Viet Nam, in particular,

appear to be examples where higher food prices lower poverty in both
the short and the long run (Ivanic and Martin 2014b). If, as in Lederman
and Porto’s 2016 example of Mexico, higher food prices make the poor
worse off, then lower protection would lower poverty in importing
countries. Overall, the available literature appears to conclude that
agricultural liberalization would, on balance, lower poverty (Anderson,
Cockburn, and Martin 2010), but some complementary measures for
particular groups are likely needed.
A paper by Olper, Curzi, and Swinnen (2017) examined the link
between trade liberalization, health, and, more specifically, child
mortality over the period 1960 to 2010. Using a synthetic control method,
they find that child health outcomes improved following overall trade
liberalization in 19 of their sample countries, did not change significantly
in 19, and deteriorated in 3 countries. At the beginning of their sample
period, almost all developing countries taxed their agriculture
sectors, and subsequent rate reductions resulted in particularly large
improvements in child health outcomes.
In fact, it appears that most countries, and particularly developing
countries, seek to insulate their markets from the price shocks. In
contrast with ad valorem tariffs, this can affect the ability of countries to
benefit from the stabilizing consequences of production diversification.
Further, as we will see, the impact of this policy on prices depends
heavily upon the interaction with other countries’ policies.
Price Insulation
Policy makers in developing countries are very sensitive to changes
in food prices, and frequently adjust trade policies in response to
changes in the world market. To gain insights into this, we draw on
Ivanic and Martin (2014a), who analyze the response of domestic
prices to changes in world prices. A comparison of movements in
the World Bank’s food price index for internationally traded foods
with movements in a weighted average of the FAO’s domestic food
consumer price indexes reveals two striking features (Figure 5.2). One
is that when international prices increased rapidly, policy makers in
developing countries almost fully insulated their domestic markets.
The other feature is that the longer-term trends in the two series are
almost identical.
The prices of individual staple foods over the same period reveal that
this behavior is particularly clear for both rice and wheat (Figures 5.3
and 5.4). By contrast, there is much less insulation of domestic markets
for soybean, which is a major input into livestock feed, but a minor
expenditure by the poor (Figure 5.5). In all cases, however, there appears
to be transmission of the longer-term trend in international prices to the
Figure 5.2 Indexes of Staple Food Prices (%)

220
210
200
190
180
170
160
150
140
130
120
110
100
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Developing countries World price
Source: Based on data from World Bank (2015) and Food and Agriculture Organization (2015).
Figure 5.3 Price Insulation for Rice

3.5
2.5
1.5
0.5
0
Domestic World
Figure 5.4 Price Insulation for Wheat

3
2.5
1.5
0.5
0
Domestic World
Figure 5.5 Price Insulation for Soybeans

4
3.5
2.5
1.5
0.5
0
Domestic World
domestic market. This implies that countries return to their long-term

trend level of taxation of or support following shocks to world prices.
Ivanic and Martin (2014a) estimate the relationship between
protection levels and world prices using the model:
௪
ο߬ ൌ ߙǤ ሺ‫݌‬௧௪ െ ‫݌‬௧ିଵ ι
ͿнߚǤ ሺ߬௧ିଵ െ ߬௧ିଵ ሻ (1)
where ɒ is the log of the rate of protection defined as (1+t) where t is

the tariff equivalent of protection provided at a country’s border; ‫݌‬௪ is
the log of the world price; ߬ ι is the log of the rate of protection desired
in the absence of changes in world prices; Ƚis the insulation coefficient,
indicating the extent to which protection is used to offset the effects
of changes in world prices; and ߚ is the error-correction coefficient
indicating the extent to which policy makers adjust protection in
response to yearly gaps. Both Ƚ and ߚ should be less than unity in
absolute value or the system will be unstable, with any initial deviation
causing explosive deviations from equilibrium.
Key findings from the analysis by Ivanic and Martin (2014a) are
(i) that insulation is partial, with average trade-weighted coefficients
of insulation all substantially less than minus one in absolute value
(Table 3); and (ii) that the magnitude of insulation is larger for rice
and wheat, and for politically sensitive products such as sugar, than for
soybeans, (yellow) maize, and beef.
An important question is why policy makers might respond like this.
The inverse relationship between food price levels and protection rates
has been long observed (Johnson 1973), but the latter’s tendency to return
to their long-run level appears not to have received the same degree of
attention in the literature. One possible explanation for this behavior
Table 5.3 Error Correction Coefficients, Simple Averages
Ƚ Ⱦ
Rice –0.50 –0.36
Wheat –0.52 –0.31
Sugar –0.53 –0.20
Maize –0.35 –0.44
Soybeans –0.40 –0.46
Beef –0.39 –0.31
Poultry –0.34 –0.46
Source: Author.
is provided by recent work on the implications of food price changes

for poverty, especially in the context of the surges that can have such
dramatic effects because the poor spend a large fraction of their income
on food. This body of work (e.g., Headey 2014; Ivanic and Martin 2008)
shows that unanticipated food price increases can have serious, adverse
impacts for poverty (although Headey and Martin [2016] are concerned
about the reliability of evidence on the net purchasing position of poor
households), while sustained increases in prices might be helpful once
poor farmers’ marketable output has a chance to expand and higher food
prices are passed through into wage rates (Ivanic and Martin 2014b;
Jacoby 2015). Seen this way, it seems likely that the observed policy
responses make political sense for each individual country.
However, it must be remembered that the results discussed are
average responses by a wide range of developing countries, which account
for the vast majority of world agricultural production. This means that
much of the insulation that appears so effective to individual country
policy makers is actually undone by the intervention’s offsetting change
in world agricultural prices. While it can stabilize the internal price in
the region using it, it does this by destabilizing the price in other markets.
As shown in Anderson, Martin, and Ivanic (2016), the impact of this is to
raise the world price by a weighted average of the degree of insulation
in all markets. If the world price rises by $50 and each importer offsets
half of this increase by reducing its tariff by $25 and each exporter by
adding an export tax of $25, then the effect will be to raise the world price
by $25, leaving all domestic prices unchanged. If all countries attempt
to completely stabilize their domestic prices, as under the European
Union’s (EU) variable import levy system (Sampson and Snape 1980), the
market for that product becomes unstable. A $50 rise in the world price
would cause each country to reduce its border protection by $50, causing
another $50 rise in the world price, triggering another $50 decline in
border measures, causing another $50 rise in the world price.
On average, price insulation is completely ineffective in stabilizing
domestic prices. All it can ever achieve is to redistribute volatility, with
the countries that insulate more than the average, transferring some of
the volatility they would have faced to other countries. This creates a
collective action problem. Even if all countries recognize the problem,
there is an incentive for each to use this approach.
A key problem is that such intervention is contagious. Once some
countries insulate and the volatility of world prices increases, other
countries feel compelled to protect themselves. As noted by Martin and
Anderson (2012), the problem is analogous to that facing members of a
football crowd. Once some members of the crowd stand to get a better
view, others are forced to stand if they are not to lose their view. Since
some members of the crowd are shorter than others, many will likely end
up with a worse view. Returning to the real-world problem of volatile
food prices, the countries that are likely to draw the short stick—and
be unable to fully offset the impacts of higher prices—include many net
food importers, who frequently have low initial tariffs and insufficient
fiscal resources to pay import subsidies when world prices rise.
One possible satisfactory price insulation outcome might be to
export volatility from poor countries to rich ones, where consumers
spend much smaller shares of their incomes on food, and producers
have more options for dealing with price volatility. One challenge for
this is the very small and declining shares of rich countries in many food
markets. In rice, for example, the countries self-designated as developed
in agriculture accounted for only 2.5% of world rice production in 2013.
They do account for a larger share of the world wheat market at 30%.
Historically, of course, it was the rich countries that were the worst
users of price insulation, with the EU’s variable import levy perhaps the
most famous case. Fortunately, the Uruguay Round outlawed the use of
variable import levies and European policy has since been reformed to
remove this beggar-thy-neighbor policy.
Another possible satisfactory price insulation scenario might
be one where countries whose poor are most vulnerable to price
increases exported positive price shocks to countries where the poor
are less vulnerable. This need not necessarily be a transfer from the
poorer to the richer countries. Some relatively low-income countries
with abundant and widely distributed land holdings, and many poor
farmers who are net sellers of food, might be expected to welcome
price increases. In fact, countries like Viet Nam, where higher food
prices generally appear to reduce poverty, countered higher prices
with export restrictions during the 2006–2008 food price crisis.
When Anderson, Ivanic, and Martin (2014) reviewed the countries’
responses to this crisis, they found that these policies were ineffective
in reducing global poverty. The countries that insulated more than the
average transferred the price increase to those who insulated less, but
the reductions in poverty in the first were offset by increases in the
second. When each country’s intervention was considered in isolation,
however, it appeared that these actions were effective. This is, of
course, only one case study, and there might be other cases in which
price insulation is marginally effective. However, it seems clear that
such insulation is almost always going to be much less effective than it
appears to each individual observer.
The Proposed Special Safeguard Mechanism

The Nairobi Ministerial Declaration (WTO 2015) provides for an SSM to
be negotiated consistent with the Hong Kong, China Ministerial decision
(WTO 2005), which provides for temporary quantity and price-based

measures. While this negotiating mandate does not require that the
negotiated SSM should be based on the Doha Proposal (WTO 2008a,b),
the discussion is likely to return to that proposal. Proponents of this
mechanism see it as essential for food and livelihood security, and for
addressing the “incessant price fluctuations” believed to be associated
with openness to international markets (G-33, 2010: 2).
In assessing proposed trade rules such as this, it is important
to consider both the direct impact on the using countries, and the
indirect impact on those countries through the market. Many studies,
such as Valdés and Foster (2005) and Montemayor (2010), miss the
second impact by considering only the impact on individual countries
applying the safeguard. However, if a price-based safeguard policy
becomes available to all WTO developing countries, it will be available
on 77% of world agricultural production and over 97% for key food
products such as rice (Fukase and Martin 2016). In this context, the
beggar-thy-neighbor implications of this form of price insulation must
be considered. Fortunately, a number of studies that do take this into
account are now available. See, for example, Grant and Meilke (2009,
2010) and Hertel, Martin, and Leister (2010).
This has practical impacts in framing a safeguard rule. If a sharp
price decline led many developing countries to impose safeguards, then
the combined effect would be to magnify that decline. If, for instance,
under the Doha Proposal, an initial shock to world rice supplies caused
prices to fall 10% below the trigger, then all developing countries would
be eligible to impose an 8.5% duty to offset this decline. If both importers
and exporters responded in this way, this would push world prices down
by a further 8%, potentially setting in motion a second round of duty
increases designed to offset the now 18% decline in prices. Clearly, the
collective action problem associated with this measure’s widespread use
needs to be taken into account in considering global trade rules. Though
a minister using a safeguard might only consider its direct impact, doing
so is totally misleading when framing rules for global trade, whose role
is to take into account interactions between countries.
Because the issues and questions involved in designing both a price-
and a quantity-based safeguard differ sharply, it makes sense to consider
them in sequence, with the price-based measure considered first.
The Price-Based Safeguard

Three key parameters in a price-based safeguard are (i) the trigger level
below which countries may respond to a price decline; (ii) the insulation
coefficient or extent to which a duty may be used to offset a price decline;
and (iii) whether prices are shipment-by-shipment or based on a market
aggregate.
Figure 5.6 Special Safeguard Mechanism Duties

for Rice under the Doha Proposals (%)
80
70
60
50
40
30
20
10
0
1903
1908
1913
1918
1923
1925
1933
1938
1943
1948
1953
1958
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
2013
Source: Author.
The Trigger Level

The 2008 draft Modalities involved a trigger equal to 85% of a 3-year
moving average of prices. The frequency with which such a trigger will
allow duties to be imposed depends on a product’s ability to weather
supply shocks, with storable products such as rice and wheat being less
frequent, and non-storable products, where supply shocks frequently
result in severe price drops, being more frequent.
To assess the frequency with which such a measure would be
triggered, it is worth examining a long period of prices, such as the
Grilli–Yang price series since 1901. A quick calculation using rice prices
since 1901 suggests that, had the SSM been in effect, it would have been
triggered in 20% of years. Figure 5.6 shows the years and the duty rates
calculated without taking into account the depressing impact of the
duties on world prices. What is clear is that the duty would have been
triggered in a number of episodes of sharp price declines, such as 1931–
1934, 1976–1977, 1982–1985, and 2014–2015.
A key problem with the 3-year average as a basis for a trigger is its
arbitrariness. While the econometric evidence discussed in the previous
section indicates that policy makers adjust toward the long-run trend
of the world price as well as resisting short-run shocks, they do not do
so at the same rate as a 3-year average. For this reason, Montemayor
(2010) and Finger (2009) find that the SSM proposal frequently does
not trigger measures when it would be needed to preserve the observed
domestic price, and vice versa.
The Insulation Coefficient

Although the insulation coefficient of 0.85 under the Doha SSM Proposals
would allow substantial duties to be applied in periods of severe market
stress, such as 1931–1934 and 1976–1977, this would not be the end of
the matter. Because the SSM permits only importers to insulate, the
second-round fall in the world price associated with these duties would
likely be roughly half the duty rate. But this fall would provide scope
for a second-round increase in the duties as world prices fell further
below the trigger. Just as in 2008, when export restrictions and import
duty reductions/import subsidies caused a cumulative increase in
world prices, until many felt the market to be “on fire” (Slayton 2009),
cumulatively increasing duties could turn panic into rout as world prices
fell and continued to fall.
Cumulatively falling prices and rising duties is a particular problem
with a coefficient of insulation as high as 0.85. A rate so close to 1 leads
to enormous magnification of world price volatility. A key problem
with price insulation is that every individual policy maker knows that
volatility can only be reduced at the expense of other countries. This
collective action problem—like the trivial example of standing up in the
grandstand—would put pressure on policy makers to use the maximum
allowed degree of insulation of 0.85, even if they would have individually
been happy with something smaller. Such a high coefficient of insulation
has very adverse consequences for exporting countries, as well as the net
selling farmers within them, by creating risks of extremely depressed
prices persisting for extended periods.
From the previous section, it appears that policy makers not subject
to not any constraint, insulate against only half of a change in world
prices of wheat, rice, and sugar, and closer to a third for less sensitive
products like soybeans and maize. This suggests that having such a high
coefficient of insulation as 0.85 does not appear to be necessary even
for individual policy makers. Given that WTO rules are intended to
manage and reduce, rather than exacerbate, collective action problems,
it is extremely important to have a lower coefficient of insulation than
0.85. A coefficient of insulation of 0.5, for instance, would allow policy
makers to do what they have done historically in reducing price shocks
inside their markets, while greatly reducing the adverse impacts on
world markets. Focusing attention on this measure would also help
policy makers realize the collective action problems associated with
this type of intervention. Once policy makers became accustomed to
the role of a lower coefficient of insulation in mitigating price shocks, it

might be possible to negotiate a collective agreement. The price-based
SSM might serve an important function by building recognition of this
parameter, which is the price volatility negotiation counterpart of the
tariff binding in price level negotiations.
Market Prices vs. Shipment by Shipment

The draft Modalities (WTO 2008a) specify that a price-based safeguard
should be based on the price of each individual shipment. As Sampson
and Snape (1980) noted, such a policy creates incentives for collusion
and corruption. The exporter and the importer have an incentive to
over-invoice any shipment so that it will have a price above the trigger
and hence not incur the duty. Incentives for corruption of this type are
inherently undesirable. Further, they threaten policy effectiveness by
creating a situation in which duties are not collected even when the
market price is below the trigger.
To the extent that such a policy can be made to operate as intended,
another disadvantage is that it discriminates against lower-priced
imports, which may be particularly important in the diet of the poor.
While the trigger price is based on an average price over 3 years, the
shipment-by-shipment approach compares this average with the price
of a particular shipment. As noted by Gibson and Kim (2012) rice that
has attributes like desirable color, fragrance, and stickiness commands
a premium of 45% in Viet Nam over rice that is just as nutritious. Given
these large differentials, a shipment-by-shipment approach would lead
an SSM to be triggered more or less continuously for low-priced, but
nutritious foods likely to be favored by the poor.
Another concern with the shipment-by-shipment approach is that
it tends to discriminate against developing country exports. Finger
(2009: 34) examined imports of 25 different agricultural products into
six large developing countries and found that variations in unit prices
across suppliers would trigger duties in at least one country on 59%
of tariff lines, even without any variation in prices over time. Almost
two-thirds of these duties would be imposed against exports from
developing countries. The continuous triggering of the price-based
special agricultural safeguards (SSG) noted by Hallaert (2005) likely
results from its use of a shipment-by-shipment approach.
It seems clear that the import price used to trigger any price-
based SSM should be based on an average that is, as closely as possible,
comparable with that used to calculate the trigger. As in the case of the
EU variable levies, an average import price might be used. Alternatively,
price changes and triggers might be calculated based on the market
price for the primary variety of the good in a major supplying market—
such as, for example, Thai 5% broken price for rice or the Randfontein
maize export price. This is important partly to avoid incentives to
misrepresent import prices, partly to avoid discriminating against foods
favored by the poor, and partly to avoid discriminating against exports
from developing countries.
Quantity-Based Safeguards
The quantity-based SSM (Q-SSM) is based on the volume-based SSG
introduced in the Uruguay Round. The Doha Proposal (WTO 2008ab)
involves a trigger based on a 3-year moving average of imports, with
duties up to the higher of 50 percentage points, or 50% of the bound
rate. It would be challenging to administer because it requires keeping
track of imports through the marketing year, but can only be imposed
once the trigger has been reached. Importers cannot impose a Q-SSM at
the same time as a price-based measure, and must remove it after a year.
So it seems unlikely that a quantity-based measure would be used when
a price-based measure is available.
Any increase in imports when their prices have not fallen must be
caused by some change in the domestic market. In agriculture, the most
likely such domestic market disturbance is a poor harvest. Given the
lack of an injury test, the Q-SSM can be applied even in this situation.
The South Centre (2009) concludes that more than 85% of import
surges are not accompanied by declines in prices, suggesting that most
are driven by domestic shocks, such as declines in domestic production.
In a high-income country, the imposition of a duty in this situation has
potentially strong political support. Farmers’ incomes are reduced by
the decline in output and they can be compensated to some degree by
a higher price. However, the situation is completely different in most
low-income developing countries, where most poor farmers are close
to subsistence and many are net buyers of food. During a drought, many
are likely to be bigger-than-usual net buyers of food. Ivanic and Martin
(2014c) find that, for this reason, use of the Q-SSM as proposed would
increase, rather than reduce, poverty.
The Q-SSM also has the undesirable consequence of increasing the
overall volatility of consumer prices by raising the domestic prices of
imported goods unnecessarily when import prices are stable. By closing
markets to agricultural exporters, which are now primarily developing
countries, it would also increase the volatility of export returns. The
measure would also likely create within-season volatility and disorder
in the market planning to use this measure. If market participants felt
that the trigger was likely during the marketing year, there would be
a strong incentive to bring forward imports so that they could occur

before it was breached.
The SSM proposal in the Doha negotiations (WTO 2008a) would
allow the duty increases associated with the SSM to be large indeed. The
maximum duty allowed is related to the percentage increase in imports
relative to a 3-year average of imports, with 50% of the bound tariff,
or 50 percentage points, permitted when imports exceed 135% of this
average. Such a duty could be very large, with bound tariffs frequently
in the order of 150%, and applied rates much lower in developing
countries, where increases in applied rates of over 100 percentage
points would frequently be permitted. If imports were initially small,
these duties could be triggered by increases in imports that were quite
small as a share of consumption. If, for instance, initial imports were 5%
of consumption, the initial applied rate 10%, and the bound rate 150%,
an increase in imports of less than 2% of consumption would allow an
increase in duties of 215 percentage points.
The duty is permitted, but not required, and one possibility is that
policy makers might not impose the maximum duties in situations such
as this when imports are actually stabilizing the market by compensating
for a harvest shortfall. However, lobby groups of net selling producers,
who are typically much better organized than poor net buyers of food,
would likely pressure governments to use the rights provided to them by
the WTO, and it seems likely that this pressure would become intolerable
on a reasonably large number of occasions. Frequently, governments
are unaware of the true supply situation and might be panicked by an
apparently irrational surge of imports. The famines surveyed by Sen
(1981) almost all occurred in cases where imports were restricted based
on perceptions of adequate food supply.
It seems difficult to see how the Q-SSM could be adapted to
contribute to improving the food and livelihood security of the poor
in developing countries. A case might have been made that the SSG
introduced for developed countries in the Uruguay Round would
compensate farmers for poor harvests by raising the prices they receive.
But it is dangerous to transfer such a measure to the radically different
situation of developing countries, where many poor farmers are net
buyers of food, and many more may become so during times of output
decline and consequent import increases. While such a measure would
raise farm incomes in developed countries, where farmers are almost
always net sellers of food, this measure would likely reduce food security
in developing countries by raising prices when poor consumers, and
even poor farmers, are at their most vulnerable.
Conclusions
Achieving Sustainable Development Goal 2, which focuses on eliminating
hunger by 2030, will be a challenge. Taking advantage of the opportunities
created by trade is essential if this is even to be contemplated. Examining
the differences in endowments between countries shows the difficulty
involved in the absence of trade in agricultural products. Some agricultural
exporters, such as Brazil and the US, have twice the world average
endowments of agricultural land per person, while key agricultural
importers such as Japan and the Republic of Korea have only one-tenth of
the average amount of agricultural land. Clearly, some agricultural trade
is needed to deal with the vastly different endowments of land resulting
from geographic accidents. In addition to the simple differences in land
availability, there is also considerable heterogeneity within each country’s
agriculture, which creates opportunities for income gains from trade both
within and between countries.
Trade in agricultural inputs such as seeds also has important
potential to raise productivity. However, there is an important role for
government in ensuring the quality of the goods is as described. Recent
work suggests that poor quality of the available inputs is one reason why
farmers in some African countries are (correctly) reluctant to adopt
improved inputs. This can have serious adverse impacts on agricultural
productivity growth, which is unfortunate because this is a potentially a
powerful poverty reduction force.
When considering the impacts of trade reform for nutritional
outcomes, it is particularly important to take into account substitution
effects as well as income effects. A food price rise that lowers the real
incomes of a vulnerable group such as wage workers will have an
additional substitution effect on consumption of the affected goods and
may, for that reason, have a larger than anticipated impact on nutrition.
This difference is also very important when considering the impacts on
world food prices of trade measures such as export taxes.
Trade can generally be expected to increase dietary diversity, and
there is evidence that this is the case, particularly in the higher-income
countries. But many have raised concerns that consumers, particularly
in Pacific island countries, may choose fatty and high-sugar foods.
In general, providing information about the health implications of
such foods seems an important step. Indirect policy measures such as
protection are likely to create collateral damage, such as expanding local
production of undesired foods and reducing domestic consumption of
favored, locally produced foods. Where policy makers wish to change
nutritional outcomes, it is generally preferable to work with policy

instruments such as excise taxes or “nudges” that directly affect the
desired outcomes.
Reducing the level of agricultural protection from today’s levels
seems likely to reduce poverty rates and to improve nutritional outcomes.
This is because it would lower the overall cost of producing food and
raise returns in food-exporting developing countries where there are
frequently large numbers of net selling low-income farmers. However,
like all policies that work through changes in food prices, there would
likely be both winners and losers, necessitating measures to compensate
poor and vulnerable people disadvantaged by the change.
Policies that seek to stabilize domestic prices relative to world
market prices are very widely used in developing countries. While
these frequently seem very effective in protecting people in individual
countries from price shocks, it must be remembered that this is a beggar-
thy-neighbor situation that cannot stabilize prices overall, but merely
transfer volatility from one country to another. Only the countries that
insulate more than the average can stabilize their domestic prices. This
creates an unfortunate dynamic leading to excessive insulation and
greater volatility in world market prices.
The SSM currently under discussion at the WTO raises a number
of concerns. The price-based proposal previously discussed in the Doha
negotiations would allow an extraordinary degree of price insulation
(85%), would likely be triggered during sharp downturns in world prices,
and would greatly intensify them if used extensively. The quantity-
based proposal would also increase the volatility of world prices. But the
greatest concern with this measure would lie in its impact on domestic
markets where it would likely be triggered during years of domestic
supply disturbances and could sharply increase and destabilize food
prices, creating potentially serious food security risks for the poor.
References*
Amiti, M., and J. Konings. 2007. Trade Liberalization, Intermediate
Inputs, and Productivity: Evidence from Indonesia. American
Economic Review 97(5):1611–38.
Anderson, K. 2009. Distortions to Agricultural Incentives: A Global
Perspective, 1955–2007. Washington, DC: World Bank.
Anderson, K., J. Cockburn, and W. Martin. 2010. Agricultural Price
Distortions, Inequality and Poverty. Washington, DC: World Bank.
Anderson, K., M. Ivanic, and W. Martin. 2014. Food Price Spikes, Price
Insulation and Poverty. In J-P. Chavas, D. Hummels, and B. Wright,
eds. The Economics of Food Price Volatility. University of Chicago
Press for NBER.
Anderson, K., W. Martin, and M. Ivanic. Forthcoming. Food Price
Changes, Domestic Price Insulation and Poverty (When All Policy
Makers Want to be Above-Average). In P. Pingali and G. Feder,
eds. Agriculture and Rural Development in a Transforming World.
London: Routledge.
Bold, T., K. Kayuki, J. Svensson, and K. Yanagizawa-Drott. 2014. Low
Quality, Low Returns, Low Adoption: Evidence from the Market
for Fertilizer and Hybrid Seed in Uganda. CEPR DP10743. London:
Centre for Economic Policy Research.
Burgess, R., and D. Donaldson. 2010. Can Openness Mitigate the
Effects of Weather Shocks? American Economic Review: Papers &
Proceedings 100: 449–453.
Burnett, K., and S. Murphy. 2014. What place for international trade in
food sovereignty? The Journal of Peasant Studies 41:6, 1065–1084.
DOI: 10.1080/03066150.2013.876995.
Cafiero, C., E. Bobenrieth, J. Bobenrieth, and B. Wright. 2011. The
Empirical Relevance of the Competitive Storage Model. Journal of
Econometrics 62: 44–54.
Cassels, S. 2006. Overweight in the Pacific: Links between Foreign
Dependence, Global Food Trade, and Obesity in the Federated States
of Micronesia. Globalization and Health 2:10. doi:10.1186/1744-8603
-2-10.
Costinot, A., and D. Donaldson. 2014. How Large are the Gains from
Economic Integration? Theory and Evidence from U.S. Agriculture,
1880–1997. Mimeo. Massachusetts Institute of Technology.
Deaton, A., and G. Laroque. 1992. On the Behavior of Commodity Prices.
Review of Economic Studies 59: 1–23.
*
The Asian Development Bank refers to “China” as the People’s Republic of China and
to “Vietnam” as Viet Nam.
De Silva, N., J. Malaga, and J. Johnson. 2014. Trade Liberalization Effects

on Agricultural Production Growth: The Case of Sri Lanka. Journal
of Agricultural Economics and Development 3(9): 144–51.
Diaz-Bonilla, E. 2015. Lost in Translation: The Fractured Conversation
about Trade and Food Security. IFPRI Discussion Paper 01490.
Washington, DC: International Food Policy Research Institute.
Do, Q., and A. Levchenko (forthcoming). Trade Policy and Redistribution
when Preferences are Non-Homothetic, NBER Working Paper
23237, Cambridge: National Bureau of Economic Research.
Forthcoming in Economics Letters.
Donaldson, D. 2014. Railroads of the Raj: Estimating the Impact of
Transportation Infrastructure. Forthcoming in American Economic
Review.
Edelman, M., et al. 2014. Introduction: Critical Perspectives on Food
Sovereignty. The Journal of Peasant Studies 41:6, 911–931. DOI:
10.1080/03066150.2014.963568.
Evans, M., R. Sinclair, C. Fusimalohi, and V. Liavaa. 2001. Globalization,
Diet, and Health: An Example from Tonga. Bulletin of the World
Health Organization 79: 856–62.
Finger, J. M. 2009. A Special Safeguard Mechanism for Agricultural
Imports and the Management of Reform. Policy Research Working
Paper 4927. World Bank.
Flannery, T. 1994. The Future Eaters. New York: Grove Press.
Fukase, E., and W. Martin. 2014. Who Will Feed China in the 21st
Century? Income Growth and Food Demand and Supply in China.
Policy Research Working Paper 6926. World Bank.
Fukase, E., and W. Martin. 2016. Who Will Feed China in the 21st
Century? Income Growth and Food Demand and Supply in China.
Journal of Agricultural Economics 67(1): 3–23. Open access doi:
10.1111/1477-9552.12117.
G-33. 2010. Refocusing discussions on the Special Safeguard
Mechanism: Outstanding Issues and Concerns on its Design and
Structure. Submission by the G-33, Committee on Agriculture,
Special Session, World Trade Organization, TN/AG/GEN/30. 28
January.
Gibson, J., and B. Kim. 2012. Quality, Quantity, and Nutritional Impacts
of Rice Price Changes in Vietnam. World Development 43: 329–40.
Gittelsohn, J., H. Haberle, A. Vastine, W. Dyckman, and N. Palafox.
2003. Macro- and Microlevel Processes Affect Food Choice and
Nutritional Status in The Republic of the Marshall Islands. Journal
of Nutrition 133: 310S–313S.
Grant, J., and K. Meilke. 2009. Triggers, Remedies, and Tariff Cuts:
Assessing the Impact of a Special Safeguard Mechanism for
Developing Countries. Estey Centre Journal of International Law

and Trade Policy 10(1): 223–46.
Grant, J., and K. Meilke. 2010. The Special Safeguard Mechanism:
Previous Studies and Present Outlook. In W. Martin, and A. Mattoo,
eds. Unfinished Business: The WTOs Doha Agenda. CEPR and the
World Bank.
Hallaert, J. 2005. Special Agricultural Safeguards: Virtual Benefits and
Real Costs—Lessons for the Doha Round. IMF Working Paper
WP/05/131. International Monetary Fund.
Hassine, N., V. Robichaud, and B. Decaluwé. 2010. Agricultural Trade
Liberalization, Productivity Gain and Poverty Alleviation: A General
Equilibrium Analysis. Working Paper 10-22. Centre Interuniversitaire
sur le Risque les Politiques Economiques et l’Emploi.
Hawkes, C., M. Chopra, and S. Frielin. 2009. Globalization, Trade, and
the Nutrition Transition. In R. Labonte, T. Schrecker, C. Packer, and
V. Runnels, eds. Globalization and Health: Pathways, Evidence and
Policy. New York: Routledge.
Headey, D., and W. Martin. 2016. Food Prices, Poverty and Food Security
Annual Review of Resource Economics 8: 329–351.
Hertel, T., W. Martin, and A. Leister. 2010. Potential implications of a
Special Safeguard Mechanism in the World Trade Organization:
The Case of Wheat. World Bank Economic Review 24(2): 330–59.
Ivanic, M., and W. Martin. 2014a. Implications of Domestic Price
Insulation for Global Food Price Volatility. Journal of International
Money and Finance 42: 272–88.
____. 2014b. Short- and Long-Run Impacts of Food Price Changes on
Poverty. Policy Research Working Paper 7011. Washington, DC:
World Bank.
____. 2014c. Poverty Impacts of the Volume-Based Special Safeguard
Mechanism. Australian Journal of Agricultural and Resource
Economics 58(4): 607–21.
____. 2016. Sectoral Productivity Growth and Poverty Reduction:
National and Global Impacts. Mimeo. International Food Policy
Research Institute.
Ivanic, M., W. Martin, and H. Zaman. 2012. Estimating the Short-
Run Poverty Impacts of the 2010 Surge in Food Prices. World
Development 40(11): 2302–17.
Jacoby, H. 2015. Food Prices, Wages and Welfare in Rural India. Economic
Inquiry. 18 June 2015. DOI: 10.1111/ecin.12237.
Johnson, D. G. 1973. World Agriculture in Disarray. London: Fontana,
Collins.
Just, D., and G. Gabrielyan. 2016. Food and Consumer Behavior: Why the
Details Matter. Agricultural Economics 47S1: 73–83.
Kolady, D., D. Spielman, and A. Cavalieri. 2012. The Impact of Seed Policy
Reforms and Intellectual Property Rights on Crop Productivity in
India. Journal of Agricultural Economics 63(2): 361–384.
Laborde, D., and W. Martin. 2012. Agricultural trade: what matters in
the Doha Round? Annual Review of Resource Economics 4: 265–160.
____. 2016. Implications of Slowing Growth in Emerging Market
Economies for Hunger and Poverty in Rural Areas of Developing
Countries. IFPRI Discussion Paper 01554. Washington, DC:
International Food Policy Research Institute.
Laborde, D., W. Martin, and D. van der Mensbrugghe. 2011. Potential
Real Income Effects of Doha Liberalization. In D. Laborde and
W. Martin, eds. Unfinished Business: the WTOs Doha Agenda.
London: CEPR and World Bank.
Lederman, D., and G. Porto. 2016. The Price Is Not Always Right: On
the Impacts of Commodity Prices on Households (and Countries).
World Bank Observer 31(1): 168–97. doi:10.1093/wbro/lkv013.
Loayza, N., and C. Raddatz. 2010. The Composition of Growth Matters
for Poverty Alleviation. Journal of Development Economics 93: 137–51.
Martin, W., and K. Anderson. 2012. Export Restrictions and Price
Insulation during Commodity Price Booms. American Journal of
Agricultural Economics 94(2): 422–7.
Masters, W., et al. 2016. The Nutrition Transition and Agricultural
Transformation: A Preston Curve Approach. Background Paper
for Plenary Address, International Conference of Agricultural
Economists. Milan. August. Agricultural Economics 47S1: 97–114.
McMichael, P. 2014. Historicizing Food Sovereignty. The Journal of
Peasant Studies 41:6, 933–57. DOI: 10.1080/03066150.2013.876999.
Montemayor, R. 2010. Simulations on the Special Safeguard Mechanism:
A Look at the December 2008 Draft Agriculture Modalities. ICTSD
Issue Paper 25. Geneva.
Nickell, S. 1985. Error Correction, Partial Adjustment and All That: An
Expository Note. Oxford Bulletin of Economics and Statistics 47(2):
119–29.
Okrent, A., and J. Alston. 2012. The Effects of Farm Commodity and
Retail Food Policies on Obesity and Economic Welfare in the United
States. American Journal of Agricultural Economics 94(3): 611–46.
Olper, A., D. Curzi, and J. Swinnen. 2017. Trade Liberalization and Child
Mortality: A Synthetic Control Method. LICOS Discussion Paper
387/2017. KU Leuven.
Popkin, B. M. 2003. The Nutritional Transition in the Developing World.
Development Policy Review 21(5–6): 581–97.
Rada, N., and C. Valdes. 2012. Policy, Technology, and Efficiency of
Brazilian Agriculture ERR-137. Washington, DC: USDA, Economic
Research Service.
Ravallion, M. 1987. Trade and Stabilization: Another Look at British

India’s Controversial Foodgrain Exports. Explorations in Economic
History 24: 354–70.
Ravallion, M., and G. Datt. 1996. How Important to India’s Poor Is the
Sectoral Composition of Output? World Bank Economic Review
10(1): 1–25.
Remans, R., S. Wood, N. Saha, T. Anderman, and R. DeFries. 2014.
Measuring Nutritional Diversity of National Food Supplies. Global
Food Security 3: 174–82.
Sampson, G., and R. Snape. 1980. The Effects of the EEC’s Variable
Import Levies. Journal of Political Economy 88(5): 1026–1040.
Sen, A. 1981. Poverty and Famines: An Essay on Entitlement and
Deprivation. Oxford: Oxford University Press.
Slayton, T. 2009. Rice Crisis Forensics: How Asian Governments
Carelessly Set the World Rice Market on Fire. Working Paper 163.
Center for Global Development. March. Washington, DC.
South Centre. 2009. The Volume-Based Special Safeguard Mechanism:
Analysis of the Conditionalities in the December 2008 WTO
Agriculture Chair’s Texts. Analytical Note SC/TDP/AN/AG/9.
Geneva: South Centre.
Thow, A., P. Heywood, J. Schultz, C. Quested, S. Jan, and S. Colagiuri.
2011 Trade and the Nutrition Transition: Strengthening Policy for
Health in the Pacific. Ecology of Food and Nutrition 50:18–42.
Tinbergen, J. 1952. On the Theory of Economic Policy. Amsterdam: North
Holland.
Valdés, A., and W. Foster. 2005. The New SSM: A Price Floor Mechanism
for Developing Countries International Centre for Trade and
Sustainable Development (ICTSD). Geneva.
Watson, K., and S. Treanor. 2016. How Mutton Flaps are Killing
Tonga. http://www.bbc.com/news/magazine-35346493 (accessed
13 March 2016).
World Bank. 1999. Bangladesh Trade Liberalization: Its Pace and Impacts.
Report No. 19591-BD. Washington, DC: World Bank.
World Trade Organization (WTO). 2008a. Revised Draft Modalities
for Agriculture Committee on Agriculture, Special Session
TN/AG/W/4/Rev.4. 6 December.
WTO. 2008b. Revised Draft Modalities for Agriculture Special
Safeguard Mechanism Committee on Agriculture, Special Session
TN/AG/W/7. 6 December.
WTO. 2015. Special Safeguard Mechanism for Developing Country
Members Ministerial Decision of 19 December 2015, Ministerial
Conference, Nairobi. 15–18 December WT/MIN (15)/43 WT/L/978.
6
Trade and Women
Ben Shepherd and Susan Stone
6.1 Introduction
Achieving gender equality is an important part of the 2030 Sustainable
Development Goals (SDGs). Specifically, Goal 5 commits countries to
achieve gender equality and empower all women and girls. It is entirely
appropriate to give gender equality and the redressing of historical
and present discrimination high billing in the SDGs as women play a
central role in economic and social development. This chapter examines
trade as a means of economic empowerment for women in a developing
economy context. This perspective attempts to identify the scope for
trade to contribute to positive outcomes for women, as well as gain an
understanding of cases in which the opposite might be true, and the
kinds of complementary policies that—together with trade policy—can
help promote gender equality.
The problem of gender inequality in the workplace is a well-
established phenomenon (see OECD [2012] for a recent review).
The disparity runs across issues ranging from job choice to access
to, and control over, resources (notably credit), information, and
technologies (IANWGE 2011). These affect both developed and
developing economies. Levels of ownership, employment, and wages
are all lower for women (OECD 2012). According to the International
Labour Organization (ILO 2010), out of the 3 billion people employed
in 2008, 1.2 billion (40.4%) were women. Over the past 20 years, the
labor force participation rate for women has declined slightly, leading
to a decline in employment opportunities across the board (ILO 2016).
In that time, women have gravitated away from agriculture and moved
overwhelmingly into services. In 1995, approximately 42% of working
women were in agriculture. In 2015, that had fallen to 25%, with East
Asia experiencing the largest decline of more than 30 percentage
points (ILO 2016). Agriculture’s share in men’s employment fell as
well. However, while women went into services, men moved to both
118
Trade and Women119
industry and services. The share of women employed in services

increased from just over 40% in 1995, to well over 60% in 2015.
These statistics imply much about the opportunities afforded to
women through trade liberalization and access to international markets.
Given the large increase in the share of intermediates trade in the past
20 years, the downward trend in the share of female employment in
industry does not imply that women gain from these expanding trade
opportunities. There has also been concern that women’s gains from
trade liberalization are reversed as countries upgrade their industries to
higher value-added and more technologically sophisticated production.
This observation has been caused by the share of women in employment
having declined in these industries as they become more sophisticated
(Nordås 2003). However, at the same time, the wage gap between men
and women in the economy as a whole has narrowed in the East Asian
countries where industry upgrading has been most prominent (Lim
2000). Moreover, there is evidence of a negative correlation between
women’s share of employment and relative wages, indicating that as
the industrial structure changes toward higher value added, where
employment seems to be less gender-biased, the process may improve
women’s relative earnings (Nordås 2003).
In general, an enlargement in trade can increase the number of
jobs available for women. However, the quality of these jobs is less
clear. Black and Brainerd (2004) showed that increased competition
from trade benefits female workers by reducing an employer’s power
to discriminate. However, Berik et al. (2003), examining the trade
performance of the Republic of Korea and Taipei,China, found that
competition from trade is positively associated with age discrimination
against women. Finally, Busse and Speilmann (2006) found that the
concentration of females in export-oriented industries in special
economic zones can reduce bargaining power and result in lower wages
and employment opportunities than in the rest of the economy.
Another major trend in trade has been shown to have a differential
effect on women. The rise of global value chains (GVCs) has changed
trade patterns and increased opportunities for more countries
to engage in trade. For developing economies, entering a GVC
usually occurs at the lower end of value added. Thus, the associated
opportunities might also be more limited with respect to women.
Women have been concentrated in those manufacturing jobs that are
more labor intensive, such as in the textile and apparel industries. The
expansion of these industries has increased female employment (ILO
2016). Although not without problems, this kind of expansion can be
beneficial if it brings women into the formal labor force and out of
sectors like subsistence agriculture. However, even that is changing
as new technology, particularly in East Asia, has led to the global

defeminization of the manufacturing sector by shifting production
from more labor-intensive to more capital-intensive activities (Kucera
and Tejani 2014).
More generally, as GVCs tend to import more than average firms,
and importing firms tend to hire more women, it can be inferred that
GVCs hire more women. The data examined in the remainder of this
chapter tend to support that contention. But evidence shows that the
wage gap in these firms can be higher and some of the jobs created may
not have permanent contractual status.
While the growth of GVCs led to an increase in trade in intermediate
parts and components, more recently, trade growth in services has been
stronger than that in goods (UNCTAD 2014). This has the potential
to improve the opportunities of women who are overrepresented in
the services sector. While women are often engaged in services that
were traditionally considered non-tradable, that is changing as well,
as supply through the major General Agreement on Trade in Services
modes opens up, with the exception of Mode IV (temporary movement
of service providers).
Trade can affect women through a variety of channels. Since women
are consumers, they are affected by the relative price changes that trade
brings about. However, they are also producers, and are therefore liable
to be affected by the expansion or contraction of various sectors that
increased openness to trade can cause. In particular, trade can alter the
labor market incentives women face, and change the trade-off between
home-based and formal work. Increased openness can also alter the
incentives facing women traders, who often work informally. Changes
such as these have far-reaching social implications that are outside the
scope of this study. The purpose here is simply to elucidate different
ways in which trade can affect women’s growth and development
experiences.
To provide some preliminary data analysis on the issues that arise
in the context of trade and gender, we use the World Bank’s Enterprise
Surveys data set. The World Bank collects the data at the firm level
in over 100 developing and transition economies, covering more than
100,000 firms. In the standardized version of the data set, it is possible
to distinguish between firms that have at least one female owner and
those that do not, as well as to identify the proportion of employees who
are women. We use these splits in the data to examine the ways in which
developing country women participate in trade and to highlight some of
the potential questions that deserve further analysis.
The chapter proceeds as follows. The next section addresses
several ways in which increased openness to trade can affect women:
Trade and Women121
as consumers, as workers, as business owners, and as traders. Section

6.3 takes a preliminary look at the available empirical evidence, which
is scant; indeed, a major priority over the coming years should be
the examination of the links between gender and trade at a fine level
of disaggregation. The final section concludes and presents policy
implications.
6.2 Trade and Women: Potential Channels

Women interact with the global trading economy in many capacities.
The net effect of trade integration on particular groups of women
depends on the net outcome of a number of different effects. This point
has perhaps not been made clearly enough in the policy literature,
which tends to focus on interactions between women and trade on the
production side, most frequently looking at women as workers, and
sometimes as business owners. But women are also consumers—indeed,
there are more women consumers in any economy than producers, at
least in the market economy. Although consumption effects may be small
in individual terms, the net effect can be large. The following sections
consider several important ways that women can interact with the
trading economy and how their development outcomes can be affected.
6.2.1 Women Consumers

Women play an important role in all economies as consumers, including
of imported goods. National policies that seek to liberalize the trading
environment can therefore impact women through a consumption
channel, by changing the relative prices of goods they purchase. The
primary channel for consumption effects is through imports: increased
openness facilitates international trade, which should push down prices
and increase variety in import-competing industries. A secondary effect
occurs in export industries when markets open abroad through the logic
of reciprocity: prices can increase as a greater proportion of output is
shipped overseas. Women consumers can be affected by trade through
both channels, which are now discussed in more detail.
The import channel is well known from general trade theory. There
is extensive empirical evidence that trade openness can contribute to
lower prices and increased variety for consumers. These analytical
results were built up using representative consumer models that do not
distinguish between men and women. The general point is indeed true
for men and women alike, but its implications, particularly regarding
country contexts, can be very different depending on the consumption
patterns of men and women. Specifically, the price and variety effect
differentials for the typical consumption baskets of men and women
affect the relative distribution of gains from increased imports. To be
clear, increased trade openness benefits women as well as men in their
role as consumers, but the relative distribution of gains is also important.
Given the historical and current discrimination against women, it would
be consistent with the SDGs that when trade barriers are removed
selectively, as is typically the case, priority should be given to goods that
are more important in women’s consumption baskets.
Unfortunately, there is little data available on the consumption
baskets of women in developing countries. The standard data sources
are typically aggregated at the household level, and although they
may distinguish between female- and male-led households, they are
insufficiently granular to differentiate consumption patterns, which
could then be combined with information on trade flows and policy
measures to develop indicators of the potential consumption impacts of
increased openness on women.
Despite this paucity of data, one important example can make the
point: food. According to the Food and Agriculture Organization of
the United Nations, women tend to spend a higher proportion of their
income on food for the household than men do.1 Women consumers in
developing countries, therefore, have a particular interest in access to
low-cost, healthy, and nutritious food. However, world food markets are
notoriously distorted, including on the import side in many developing
countries. One effect of such policies is to push consumption prices up,
which has a disproportionate impact on women consumers. From a
gender equality standpoint, trade liberalization should emphasize food
markets. This emphasis coincides in most countries with the markets that
are most distorted, so it also makes sense from an efficiency standpoint.
This is one example of how trade can be leveraged to promote the SDGs,
in a way that is consistent with a policy stance that can also promote
sustained economic growth and development.
Tariff data from WITS-TRAINS reveal the level of trade restrictions
imposed on imported agricultural products relative to industrial goods,
using World Trade Organization classifications.
Figure 6.1 summarizes the WITS-TRAINS data by developing the
(low- and middle-income) region. All regions have higher tariffs on
agriculture than on non-agricultural products, which translates into
a greater burden of trade policy on women than on men due to their
different consumption patterns. The differences are often substantial.
1
See Food and Agriculture Organization. Women and Sustainable Food Security.
http://www.fao.org/docrep/x0171e/x0171e02.htm (accessed December 2016).
Trade and Women123
Figure 6.1 Simple Average Applied Tariff Rate

on Agricultural versus Non-Agricultural Products,
by Developing Region, Latest Available Year
25
20
15
10
0
East Asia Europe and Latin America Middle East South Asia Sub-Saharan
and Pacific Central Asia and Caribbean and North Africa
Africa
Region
Agricultural Non-Agricultural
Source: WITS-TRAINS.
For example, average tariffs on agriculture are at least double the level of
non-agricultural tariffs in South Asia, the Middle East and North Africa,
and Europe and Central Asia. Although many factors spur agricultural
protectionism around the world, including in high-income countries
excluded from the figure, one effect that deserves further attention in
the literature is the regressive effect these policies have on women.
The trade measures considered here are effectively an extra tax
burden imposed on women due to differences in consumption patterns.
Trade liberalization in agriculture would go some way toward removing
this differential. To the extent that trade liberalization is typically
selectively undertaken, it would be in line with the importance the
SDGs attach to gender equality to act swiftly to remove import measures
affecting agricultural products. This case demonstrates the potential for
good trade policy to promote the interests of women, again as consumers.
6.2.2 Women Workers
The most analyzed links between women and trade regards the
production side, specifically through the labor market. Women work in
a variety of trade-affected sectors, with corresponding implications for
the level of employment, relative wages, and the gender pay gap. The
key mechanism here is comparative advantage, so the remainder of this
section explores the ways in which its operation can have particular
implications for women workers.
As countries open to trade, they specialize according to comparative
advantage, a process that is reinforced by reciprocal market opening
abroad. Sectors with comparative advantage expand, while those with
comparative disadvantage contract. This process has implications
for women workers: if they tend to be concentrated in comparative
advantage sectors, relative demand for female labor will increase,
which can lead to higher levels of employment and income. If, on the
other hand, they are concentrated in sectors that contract as a result
of trade opening, demand will fall, which has implications for sectoral
unemployment and wages.
Of course, many factors can impede the operation of this mechanism,
or at least complicate the analysis of its effects on women workers.
One is informality. In many poorer developing countries, women are
concentrated in small-scale agriculture, where they typically work
informally. When labor is supplied outside formal market structures,
for example, within a household or extended family framework,
comparative advantage may not translate into income gains for women.
The distribution of gains from increased demand for output depends on
bargaining power within the household, which, in many countries, puts
women at a disadvantage. As a result, income gains may not be spent on
goods that women value, but may be channeled into areas that primarily
reflect men’s preferences. This dynamic highlights how complementary
policies are necessary to improve women’s position within the household
so that income gains can be distributed more consistently with gender
equality objectives. Empowering women is crucial from a labor market
standpoint.
A related labor market mechanism can be understood through
Stolper–Samuelson logic. Opening to trade will tend to increase the
relative price of the comparative advantage product, and thereby
increase the relative return of the factor used relatively intensively in
its production. The usual exposition of the theorem requires restrictive
circumstances to hold, but more complex models also exhibit variants
of this behavior. From the point of view of women workers, the logic
is important because it suggests that if female labor is used relatively
intensively in comparative advantage sectors that benefit from trade
opening, one result might be an increase in the female wage rate relative
to the male wage rate. To evaluate overall effects, there needs to be a
detailed consideration of comparative advantage and disadvantage
sectors and their corresponding use of female and male labor. It is
Trade and Women125
plausible that, at least in some countries, this logic may indeed play
out in practice. For example, light manufacturing, such as of garments
and apparel, is a comparative advantage sector in some lower-income
developing countries. The sector is known to be relatively intensive
in its use of female labor. By contrast, in those same countries, heavy
manufacturing may be a comparative disadvantage sector, but one
that is relatively intensive in its use of male labor. As a result, opening
to trade could plausibly put upward pressure on the female-to-male
wage ratio. Of course, such a result depends on unemployment and
underemployment not being too high, so that wage effects can be felt. In
the perhaps common situation where there is considerable slack in the
market for female labor due to unduly low participation rates, the effect
will be felt through increased employment instead.
Even where women are involved in the formal labor market and
stand to gain from increased demand due to the operation of comparative
advantage, discrimination may prevent those gains from being realized
by individual women. All countries exhibit a gender wage gap, i.e., a
difference in wages in men’s favor, after controlling for other factors. As in
the household case, women may be at a bargaining disadvantage in many
developing countries, which prevents them from effectively realizing
income gains. Notwithstanding this, the expansion of comparative
advantage industries that use female labor relatively intensively could still
increase labor demand and reduce unemployment and underemployment
among women, even if wages do not increase. Importantly, this dynamic
can promote women’s employment formalization, as they move out
of traditional occupations in the home and small-scale agriculture to
participate in other industries, such as light manufacturing and services.
From a gender equality standpoint, the formalization of women’s labor
is positive as it lays the foundation for increased bargaining power and
improved labor market outcomes. It is an important component in
broader attempts to empower women economically. However, women
start from a significant disadvantage in the labor market, so it is important
to develop complementary policies—including antidiscrimination
laws, and effective enforcement—that allow them to compete on an
equal footing. In saying this, we recognize that even the most advanced
economies still see evidence of gender discrimination, so the emphasis in
more traditional settings must be on improving women’s circumstances,
with a view to supporting the effective operation of the labor market in
an environment of liberalized trade.
It is also important to highlight a dynamic aspect of the labor
market analysis. Demand for labor varies according to skill level, and the
distribution of skills is different in the male and female populations, in
part due to discrimination in terms of women’s access to education and
training at all levels. As countries move up the income ladder, relative

demand for higher skilled labor is likely to increase, and opportunities
for those without skills are likely to become scarcer. As a result, it is
important to support women in their efforts to acquire comparable
levels of human capital to men. In many societies, that process has
many difficulties. Women face numerous challenges, from explicit
discrimination to domestic expectations and the timing of fertility
decisions. Supporting education for women and girls is a crucial part of
ensuring that they can take advantage of higher paying job opportunities
that arise as countries develop.
6.2.3 Women-Owned Businesses

Women are not only active in international trade as consumers and
workers, but also as business owners. In terms of traditional trade
models, they can be seen as the owners of capital, who benefit from
rental returns. As for the case of women workers, the crucial mechanism
here is specialization by comparative advantage, as well as the Stolper–
Samuelson logic: women-owned businesses in comparative advantage
sectors will tend to grow as opening to trade takes place, whereas those
in comparative disadvantage sectors will contract. Similarly, if women’s
capital holdings tend to be concentrated in comparative advantage
sectors, there is also the possibility that the real return might increase.
Both dynamics offer women business owners possible gains from trade,
in addition to valuable export opportunities that arise from market
opening abroad.
Again, the crucial issue for women business owners is the interplay
between their sectoral distribution and comparative advantage
patterns. However, it is important to bring more recent insights from
trade theory into play as well. Heterogeneous firm models emphasize
intrasectoral reallocations that take place as trade costs fall, from low
productivity firms to high productivity ones. Discrimination—both
explicit and implicit—can keep women entrepreneurs locked in low-
productivity firms, which are the most likely to suffer from foreign
competition as markets are opened. Another complementary approach
to enable women to take advantage of trade liberalization therefore
relates to the encouragement of female entrepreneurship, both in terms
of starting businesses, and their growth and development. Women
need to be encouraged to enter sectors based on the identification of
growth opportunities. Women-owned firms need access to finance to
allow them to develop—an area in which anecdotal evidence suggests
that men often perform better due to women’s difficulty in putting up
collateral and demonstrating creditworthiness to lenders.
Trade and Women127
6.2.4 Women Informal Cross-Border Traders

The preceding discussion has been general in scope. This final subsection
addresses a more detailed issue that has received considerable attention
in the policy literature relating primarily to African countries: women
informal cross-border traders. In many parts of Africa, borders are porous
and substantial informal trade takes place. Women are heavily involved
in this trade, for example by taking small amounts of merchandise across
borders multiple times in a day. The women involved in this kind of trading
activity are poor and located in border areas. The issue is that one particular
type of trade liberalization—improvements in trade facilitation—can have
negative implications for their activity, which provides them with income.
In addition, women informal cross-border traders are often subject to
harassment at border crossings, including sexual harassment.
The mechanism, in this case, is simple. Informal trade exists in part
because formal trade is relatively difficult and costly, with inefficient
border crossings and redundant documentary requirements. As formal
trade costs come down with improved trade facilitation, the incentive
for exporters to move their goods informally is correspondingly
less. Although this might be beneficial overall for the economy, the
implications for women informal cross-border traders can be negative.
They may lose all or part of their activity, which may represent the only
opportunity for employment outside the home.
Again, this case makes clear the need for complementary policies
to accompany trade liberalization, including nontraditional market
opening measures like trade facilitation. It is important that the gains
from reform be used in part to assist those who stand to lose as a result.
In the case of women informal cross-border traders, assistance could be
directed to supporting other economic activities outside the home or
improving educational opportunities to provide skills that would enable
them to work with formal traders.
6.3 Empirical Evidence

The previous section clarified how women interact with trade in several
ways. It is impossible to be categorical about an overall or unidirectional
relationship between women and trade because the result for particular
groups of women is different according to the effects that accrue to
them due to their different roles as producers, consumers, business
owners, and traders. Such ambiguity makes empirical research difficult,
but it is nonetheless striking that such an important issue should have
received so little attention in the literature. This situation will need to be
remedied in the coming years if the SDG period is to coincide with the
development of policies that ensure that women can benefit from trade.
The remainder of this section examines the empirical evidence that
is available on the implications of trade openness for women. Not all
the mechanisms reviewed in section 6.2 can be examined empirically as
data are often lacking. The next subsection provides a brief review of the
literature, and the following subsection presents some original results
from the World Bank Enterprise Surveys.
6.3.1 Findings from Previous Literature

The bulk of previous work on gender and trade focuses on labor market
issues. Exposure to international markets has been shown to improve
outcomes for workers in general, but not necessarily for women. In their
seminal work, Bernard, Jensen, and Lawrence (1995) showed that United
States (US) exporters pay higher wages and that this wage premium
goes to both production and non-production workers. The degree to
which this export wage premium accrues differently to men and women
is still unknown. Klein et al. (2013) found that German manufacturers
paid a premium to high-skilled workers while discounting low-skilled
workers’ salaries. To the extent that women are overrepresented in
lower-skilled jobs, we would expect to observe an increase in the wage
gap due to exporting. Indeed, Boler, Javorcik, and Ulltveit-Moe (2015)
found that exporting Norwegian firms exhibit higher gender wage gaps
than non-exporters, but found the effect only in skilled workers.
Black and Brainerd (2004) tested whether increased trade openness
induced employers to reduce discrimination against women by
estimating the differential effect of increased imports on concentrated
versus competitive industries. The results showed that after controlling
for skills, the gender wage gap narrowed more rapidly in concentrated
industries than in competitive industries, concluding that product
market competition drives out discrimination in the labor market since
it costs employers to continue discriminatory practices. However, other
studies have shown that competitive forces from trade liberalization
alone have limited impact on the wage gap between women and men
(OECD 2005).
Juhn, Ujhelyi, and Villegas-Sanchez (2012) examined the degree
to which trade liberalization under the North American Free Trade
Agreement induced exporting firms to update their technology in a
way that raised the relative wage and employment rate of women in
blue-collar occupations in Mexico. Using firm-level panel data between
1991 and 2000, they concluded that a firm in an industry experiencing
the average reduction in US tariffs of 5.2 percentage points increased
Trade and Women129
female employment share in blue-collar occupations by approximately

20% more than a firm experiencing zero tariff change. In terms of wage
bill share, the effects are even larger, with an average tariff reduction of
5.2 percentage points, causing a 24% increase in blue-collar women’s
relative wage bill. They attribute these results to the entry of exporting
firms that invested in new machinery and equipment, and this new
technology raised the productivity of blue-collar female workers.
In a similar study for Colombia, Ederington, Minier, and Troske
(2009) investigated whether firms in industries experiencing the greatest
reduction in tariffs increased the employment of female blue-collar
workers more than in industries that had little or no reduction in tariffs.
They use plant-level data from 1984 to 1991, during which Colombia
experienced an average tariff reduction of 31.4 percentage points. They
found empirical evidence that industries with reduced tariffs increased
their share of female plant workers by 6.9% compared with industries
with no change in tariffs. Similar to Black and Brainerd (2004), they
argued that this result stemmed from increasing competition, leading
existing plants to hire more women in Colombia. However, they also
showed that plants that employ more women tended to pay lower wages
than the industry average.
World Bank (2001) provided evidence that strong export-oriented
growth in Southeast Asia has strengthened gender equality over the last
50 years. Key export industries, such as textiles and electronics, rely
heavily on relatively unskilled, but generally literate, workers. To meet
this requirement, many countries in Southeast Asia have implemented
programs that urged basic education for all, and which particularly
benefited young women and girls. In 1970, women made up 26%–31% of
the labor force in Indonesia, Malaysia, and Singapore. By 1995, women’s
share in the labor force had risen to between 37% and 40% in those
countries.
UNCTAD (2004) showed women’s participation in export-led
industries, such as textiles, pharmaceuticals, food processing, electronics,
and toy production, has been strongly increasing in many developing
economies, reaching between 53% and 90% of the labor force in 2003.2
Many of these jobs in the light-manufacturing export sectors are new,
providing opportunities for women outside more traditional sectors.
But the reality is that women in low-income economies are more
often employed in subsistence agriculture, while men tend to be employed
more widely in export sectors, suggesting that greater openness to trade
2
Countries cited include Bangladesh, Cape Verde, the Dominican Republic,
Guatemala, Honduras, Jamaica, Kenya, the Republic of Korea, Malawi, Malaysia,
Mauritius, Mexico, Nicaragua, Pakistan, the Philippines, and Sri Lanka.
may lead to an increase in gender inequality (UNCTAD 2004). Indeed,

Berik et al. (2003) showed that greater trade openness in Taipei,China
between 1980 and 1990 was associated with a widening of the gender
wage gap. Here, import competition appears to adversely affect women’s
relative employment, leading to their loss of both opportunity and
bargaining power.
The existing literature shows that labor market dynamics are
complicated regarding gender and trade. There is considerable scope
for country-level particularities to play out. Going forward, the use of
highly disaggregated data will be important in identifying the different
mechanisms discussed in section 6.2. It will also be crucial to expand
research into the areas not yet examined empirically in any detail,
such as female consumption patterns and trade, and women informal
cross-border traders. More fundamentally, the mechanisms underlying
possible discrimination against women workers will need to be laid bare,
and policies developed to deal with the relevant factors. Boler, Javorcik,
and Ulltveit-Moe (2015) provided an example of the type of work that
is needed. As noted above, they found a gender wage gap in Norwegian
employer–employee data. They hypothesized that women may be
perceived as less-committed workers than men, which leads to de facto
discrimination. In this case, there is an exogenous shock that allows
the authors to test their contention: the lengthening of paternity leave,
which should balance the perception of commitment between male and
female workers. Indeed, they found that introducing this new policy
narrows the gender wage gap in exporters. The paper is instructive both
because of its research method, which postulates a concrete mechanism
for a previously observed effect, and its policy implications; there is
clearly a role for creative labor market interventions to help reduce de
facto discrimination against women workers.
6.3.2 World Bank Enterprise Surveys
The Enterprise Surveys dataset tracks the number of female production

and non-production workers at each firm, in addition to total employees.
That makes it possible to derive a measure of the proportion of each
business’ workforce that is made up of women. Figure 6.2 presents a
breakdown of that measure by firm type, looking at direct exporters,
indirect exporters (through a wholesaler), and firms that serve the
domestic market only. Clearly, internationalized firms have a higher
proportion of female employees than firms that do not export at all.
In part, this finding is due to sectoral composition effects—exporting
firms in many Enterprise Surveys countries are active in the textiles and
clothing sector, which is known to be intensive in female labor.
Trade and Women131
Figure 6.2 Share of Female Production and Non-Production

Workers, by Firm Type, All Countries and Years (%)
35
30.47 31.20
29.48
30
25
21.75
20
15
10
0
Direct Exporters Indirect Exporters Importers Domestic
Market Only
% Female Employees
Source: World Bank Enterprise Surveys.
It is also important to highlight that firms that import intermediate

goods also tend to employ a greater proportion of women. It is therefore
not only on the export side that firm internationalization can create
demand for female labor. Taking the exporting and importing results
together indicates that linking firms to international markets can be
one way of bringing women into the formal labor force and providing
them with wage income. Of course, this encouraging finding needs to
be tempered by a recognition of persistent gender wage gaps, even in
developed countries—an issue the Enterprise Surveys do not document.
Notwithstanding this caveat, the data nonetheless show that trade can
potentially be good for women workers, as comparative advantage
sectors take on more employees and draw them into the formal wage-
labor market.
Of course, it is important to be cautious in interpreting simple
averages, as in Figure 6.2. They represent observed differences only
and do not control for the intervening factors that may affect labor
demand. It is important to supplement them with econometric analysis
of the demand for female labor and its links to firm internationalization.
Results from such an analysis (see Shepherd and Stone [2013]) show
that internationalized firms indeed tend to be more intensive in their
Figure 6.3 Female Workers as a Share of the Total Number

of Workers, Simple Average by Sector (%)
Garments
Textiles
Food
Chemicals and pharmaceuticals

Other manufacturing
Sector
Electronics
Wood and furniture
Non-metalic and plastic materials

Metals and machinery
Leather
Auto and auto components
0 10 20 30 40 50 60 70
use of female labor, even after controlling for other relevant factors.
Of particular note is that the combination of importing, exporting, and
being foreign invested is associated with a higher proportion of women
in the workforce. This evidence suggests that participation in GVCs can,
under the right circumstances, be positive for women’s employment,
subject again to the issue of the gender pay gap, which cannot be
evaluated using these data.
As noted in section 6.2, it is also important to analyze the sectoral
distribution of female labor in developing countries, and to relate it
to possible comparative advantage sectors. In a study like this one, it
is not possible to analyze every country-sector combination. Instead,
we present average figures by sector across countries to provide some
first indications of the data. Figure 6.3 contains the results. It is not
surprising to see textiles and garments as the two sectors with the
highest proportion of female workers. As noted above, these sectors
are sources of comparative advantage in several developing countries,
which bodes well for the local female labor market as trade opens up.
As manufacturing activity becomes heavier, female labor use becomes
relatively less intensive. It is striking that in all sectors, except garments,
women represent less than half of employees on average in developing
country manufacturers. The data are consistent with a difficult labor
market for women, likely due to explicit and implicit discrimination.
Trade and Women133
By increasing labor demand, trade openness can potentially strengthen

labor markets, but, as noted above, it will be important to look closely at
the functioning of labor market institutions to ensure that women can
take jobs for which they are qualified.
The second area described in section 6.2 for which the Enterprise
Surveys have data is women-owned businesses. A descriptive analysis
of the data (Figure 6.4) suggests that women-owned firms are active in
international trade. Higher percentages of women-owned firms export
(directly and indirectly) than their counterparts with only male owners,
although the differences are not very large. Women-owned firms are
similarly more likely to be direct importers of intermediate inputs, which
tend to boost productivity and competitiveness. However, these firms
are slightly less likely to receive foreign direct investment. Based solely
on the descriptive statistics, it would appear that women-owned firms
compete successfully in international markets. But the understanding
needs to be nuanced by detailed econometric analysis that controls for
other factors.
Preliminary analysis using an econometric model of export behavior
that controls for factors like size and capital intensity suggests that
the picture is not as rosy as Figure 6.2 would suggest. In fact, women-
Figure 6.4 Percentage of Firms with at Least One Woman

Owner that Engages in International Activity, Compared
with Other Firms, All Countries and Years (%)
60
52.10
50
41.89
40
30 27.73
22.95
20
13.22
9.79 9.56 10.27
10
0
Direct Exporters Indirect Exporters Direct Importers FDI Recipients
Atleast One Woman Owner No Women Owners
FDI = foreign direct investment.

owned businesses export less directly in dollar terms than other firms,
even after controlling for intervening causes. However, performance for
indirect exports is not different to a statistically significant extent. This
finding suggests that women-owned businesses may be more reliant
on intermediaries like wholesalers to overcome some of the fixed costs
associated with exporting. Examples of such costs include information
costs on tastes and standards in the foreign market. Alternatively, the
econometric results could be consistent with women-owned businesses
having less well-developed international networks, hence the need
to go through a middleman, such as a wholesaler. In any case, these
preliminary results suggest that there is work to be done to boost the
ability of women-owned firms to compete successfully in international
markets, and in particular to make direct links with overseas buyers.
What are the factors constraining women-owned businesses in
their pursuit of international success? The Enterprise Surveys, which
asked respondents to cite their top three business constraints, provide
some suggestive information. For women-owned businesses, the most
commonly cited constraints are access to finance (16% of respondents),
practices of competitors in the informal sector (13%), and tax rates (13%).
By contrast, firms without at least one female owner list electricity (17%),
access to finance (15%), and tax rates (12%). These results suggest that
there is some overlap in terms of the policy agenda promoting women-
owned businesses in international markets. Women-owned firms, as
well as their male-owned counterparts, clearly see tax issues and access
to finance as crucial constraints on their ability to compete. There is a
clear agenda for regulatory reform in those areas in a way that promotes
inclusive growth. Importantly, though, women-owned businesses also
cite practices in the informal sector, perhaps because at their smaller
scale—and given their sector distribution—they are more subject to this
type of difficulty than male-owned businesses. The formality discussion
is one that has implications for women in a variety of settings, and these
results suggest that it is true for trade, too.
6.4 Conclusion: Making Trade Good for Women

This chapter has reviewed several economic mechanisms that connect
women with the global trading economy. Increasing trade openness
at home and abroad has implications for women in their capacities as
consumers, workers, business owners, and traders. It is impossible to
provide any general response to the question of whether trade is good
for women—its net impact is the result of a set of positive and negative
effects that play out differently in different country and sector contexts.
Trade and Women135
Given the complexity that arises when multiple economic

mechanisms are in play, there is a clear need for detailed empirical work
to parse their relative importance. It is striking that there is relatively little
such work that deals specifically with the case of women, and almost all
of it deals with labor markets. Additional evidence presented here shows
that women-owned businesses face difficulties in internationalizing, but
they nonetheless do so at an impressive rate. On the employment side,
there is clear evidence that internationalization can be good for women’s
job prospects. Of course, the gender pay gap is persistent around the
world and is an issue that needs further consideration in the context of
trade. There is mixed evidence on that front in the literature, and more
work is needed specifically in the developing country context.
There are several policy implications in these findings. The first
is to note that the gender aspects of trade are still poorly understood
and under-researched. There are few contributions in the academic
literature, while the policy literature has tended to focus on particular
issues, such as women informal cross-border traders, and has not fully
grappled with the available data. This study is an attempt to come to
a more complete understanding of the ways in which trade affects
women in developing countries, specifically with the aim of establishing
whether, and, if so, under what conditions, it can be a positive force for
gender equality in the context of SDG 5.
In reviewing the data on women-owned businesses, it is apparent
that informal practices represent a serious constraint for formal sector
businesses. The issue of informality is pervasive in developing economies,
particularly in low-income economies. Barriers to the formalization,
including trade, need to be addressed at the policy level. In some cases,
administrative procedures are unnecessarily burdensome, which
discourages entrepreneurs from formalizing. Employment laws can also
be an issue, as can tax rates and administration. Regulatory reform that
is effective—in that it achieves important social goals—and efficient—in
that it does so at minimum economic cost—would be welcomed in many
developing countries. Women-owned businesses, as well as women in
the workforce, would stand to gain from these types of reforms.
Another issue relates to the role of GVCs in development. There is
evidence that the cluster of activities associated with GVC participation
is associated with more intensive use of female labor, although there is,
of course, a sector composition issue playing out, particularly through
textiles and clothing-related activities. Nonetheless, identifying policies
that support women’s engagement with GVCs promises to be beneficial
for trade as well as gender equity.
As in the case of health, there is evidence that there is scope for
“win–win” solutions in gender and trade: policies that are good for
women, and that also serve to boost engagement with international

markets. In many cases of relevance to developing countries, there
is good reason to believe that opening to trade can benefit significant
groups of women, particularly those employed (or potentially employed)
in comparative advantage industries. However, there is also the scope
for losses to accrue to particular groups. It is, therefore, important to
pay heightened attention to the design of complementary policies that
can support women in their multiple engagements with international
markets. Addressing discrimination in labor markets, as well as in
business operation and financing, are key. It is also important to support
the education and training opportunities of women and girls so that they
can take advantage of opportunities that require a certain degree of skill.
These measures are consistent with a liberal approach to trade, as well
as with a more general posture in favor of gender equality.
Trade and Women137
References
Berik, G., Y. Rodgers, Y. van der Meulen, and J. E. Zveglich. 2003.
International Trade and Wage Discrimination: Evidence from East
Asia. Policy Working Paper. Washington, DC: World Bank.
Bernard, A. B., J. B. Jensen, and R. Z. Lawrence. 1995. Exporter, Jobs
and Wages in US Manufacturing: 1976–1987. Brooking Papers on
Economic Activity.
Black, S. E., and E. Brainerd. 2004. Importing Equality? The Impact
of Globalization on Gender Discrimination. Industrial and Labor
Relations Review 57(4).
Boler, E. A., B. Javorcik, and K. H. Ulltveit-Moe. 2015. Globalization:
A Women’s Best Friend? Exporters and the Gender Wage Gap.
CEPR Discussion Paper No. 10475. London: Centre for Economic
Policy Research.
Busse, M., and C. Spielmann. 2006. Gender Inequality and Trade. Review
of International Economics 14(3): 362–379.
The Economist. 2005. The Conundrum of the Glass Ceiling. 21 July.
http://www.economist.com/node/4197626 (accessed December 2016).
Ederington, J., J. Minier, and K. R. Troske. 2009. Where the Girls Are:
Trade and Labor Market Segregation in Colombia. University of
Kentucky, April.
International Labour Organization (ILO). 2010. Women in Labour
Markets: Measuring Progress and Identifying Challenges.
Geneva: ILO.
____. 2016. Women at Work, Trends 2016. Geneva: ILO.
Juhn, C., G. Ujhelyi, and C. Villegas-Sanchez. 2012. Men, Women, and
Machines: How Trade Impacts Gender Inequality. NBER Working
Paper No. 18106. Cambridge, MA: National Bureau of Economic
Research.
Klein M. W., C. Moser, and D. M. Urban. 2013. Exporting, Skills and
Wage Inequality. Labour Economics 25: 76–85.
Kucera D., and S. Tejani. 2014. Feminization, Defeminization, and
Structural Change in Manufacturing. World Development 64:
569–582.
Lim, J. Y. 2000. The Effects of the Asian Crisis on the Employment of
Women and Men: The Philippine Case. World Development 28:
1285–1306.
Nordås, H. K. 2003. Is Trade Liberalization a Window of Opportunity
for Women? Staff Working Paper ERSD, August.
Organisation for Economic Co-operation and Development (OECD).
2005. Trade and Gender, Trade Policy Working Paper No. 24.
Paris: OECD.
____. 2012. Closing the Gender Gap: Act Now. Paris: OECD Publishing.
http://dx.doi.org/10.1787/9789264179370-en
Shepherd, B., and S. Stone. 2013. Global Production Networks and
Employment: A Developing Country Perspective. Trade Policy
Paper No. 154. Paris: OECD.
United Nations Conference on Trade and Development (UNCTAD).
2004. Trade and Gender: Opportunities and Challenges for Developing
Countries. New York and Geneva: United Nations.
____. 2014. Key Statistics and Trends in International Trade 2014. Geneva:
UNCTAD.
United Nations Inter-Agency Network on Women and Gender Equality
(IANWGE). 2011. Gender Equality & Trade Policy, Resource Paper.
Women Watch. http://www.un.org/womenwatch/feature/trade
/gender_equality_and_trade_policy.pdf (accessed December 2016).
World Bank. 2001. Engendering Development through Gender Equality
in Rights, Resources, and Voice. Washington, DC. World Bank.
____. 2004. The Impact of International Trade and Gender Equality,
PREM Notes No. 86. Washington, DC: World Bank.
7
Can Trade Benefit
Employment?
Paul Vandenberg
7.1 Introduction
For more than 4 decades, globalization has been a major force shaping
economies throughout the developed and developing worlds. It has
offered new opportunities for economic growth, but also greater
competition, increased instability in some areas, and heightened
pressures on countries and firms to adapt to technologies and market
conditions. The debate about the benefits and drawbacks of increased
integration has been lively and will no doubt continue. It will do so as
new trade agreements are signed in some regions and as a new wave
of protectionist sentiment may (potentially) stall liberalization or raise
barriers in others.1 In this context, prudent governments have sought
the best ways to manage the process and harness the benefits of trade.
In this period of globalization, the international community
agreed to a set of development goals to focus the attention and efforts
of governments and international assistance agencies. The aim of the
Millennium Development Goals (MDGs), agreed upon in 2000, was to
improve the welfare of people in the developing world by setting goals
1
Canada and the European Union (EU) signed the Comprehensive Economic and Trade
Agreement in October 2016, eliminating 98% of tariffs. The Trans-Pacific Partnership
Agreement (TPPA or TPP) was signed by 12 Pacific Rim countries in February 2016.
These agreements suggest continued global trade liberalization. However, the incoming
administration in the United States (US) (2017–2020) appears to be protectionist,
which may affect ratification of the TPP and the conclusion of negotiations for the
US-EU Transatlantic Trade and Investment Partnership (TTIP). The World Trade
Organization (WTO) recorded that an average of 15 trade-restrictive measures were
introduced per month in the year ending mid-October 2015 (WTO 2016). The number
of trade-liberalizing measures was 19 per month during the same period. However,
there remains a large stockpile of restrictive measures (2,557) introduced since 2008.
139
that were specific and in most cases measurable. As the date for the
achievement of the MDGs drew near, the international community took
stock of what had been accomplished, and agreed in 2015 on a new set of
goals, called the Sustainable Development Goals (SDGs).
Increased trade is not one of the SDGs, and there are few references
to trade in the SDG document. Trade, however, can be a powerful
“enabler” supporting the achievement of the goals. The question is how
to ensure that the process of global integration aids the achievement
of the SDGs. Trade allows countries to specialize, and it can raise
productivity, promote growth, and create jobs, but this is not automatic.
We might thus expect trade to contribute to the achievement of the SDGs
if it is sustained and accompanied by appropriate adjustment policies.
This chapter focuses on the employment aspects of the SDGs. The
attention is, therefore, on Goal 8, which seeks to “promote sustained,
inclusive and sustainable economic growth, full and productive
employment and decent work for all.” Sectors often need to adjust to
trade liberalization, with the government playing a role in cushioning
impacts and supporting employment transitions. Thus, we are interested
not only in the impact of trade on employment, but also the effect of
worker adjustment policy. Our analysis is guided therefore by the
following questions: (i) will increased trade support the employment
objectives of the SDGs?, and (ii) what role might government play in
facilitating employment transitions resulting from trade?
The chapter is organized as follows. Section 7.2 sets out the
employment aspects of the MDGs and the SDGs. Section 7.3 considers
the conceptual and theoretical links between trade and employment.
Section 7.4 reviews the empirical literature on the links and seeks to
tease out and differentiate the conditions and policies under which
trade has improved employment outcomes from cases in which negative
outcomes have resulted. Section 7.5 brings together the policy issues,
and a brief final section concludes the chapter.
7.2 Employment in the MDGs and the SDGs

7.2.1 Employment in the MDGs
Employment was not part of the original MDGs set in 2000, but a target
with specific indicators was added 8 years later. The target, under the
first goal of reducing extreme poverty and hunger, called on countries
to “achieve full and productive employment and decent work for all,
including women and young people.” This target had four indicators:
(i) the growth rate of labor productivity; (ii) the ratio of employment to
population; (iii) the working poverty rate (share of employed persons
Can Trade Benefit Employment?141
living below the poverty line); and (iv) the vulnerable employment rate
(share of own-account workers and contributing family workers in total
employment). No specific quantitative targets were set (e.g., that the
working poverty rate should be halved by 2015), and thus there could be
no verification of whether the targets were achieved.
Three of the four indicators clearly show which direction they
should move to improve employment; for the other indicator, it is not
clear. Thus, labor productivity should rise and the working poverty
rate and the level of vulnerable employment should fall. However, the
employment-to-population ratio is problematic because positive and
negative factors can move the ratio in the same direction. For example,
people staying in school longer (a good thing) depresses the rate, but so
does a higher unemployment rate (a bad thing). The rate can depend
heavily on the female labor force participation (because they decide
whether to engage in paid work or in unpaid household and family care),
and can vary with a country’s level of economic development.
The evidence suggests that there were movements in the right
direction during the MDG coverage period (1991–2015). The working
poverty rate moved in the right direction as the share of employed
persons living on less than $1.25 per day fell dramatically from 1991
(Figure 7.1). It did so in line with a similar decline in the general
poverty rate, which was the key MDG target. In East Asia, the share
of the working poor fell from 68% to 3%, and in Southeast Asia from
Figure 7.1 Share of Employed Persons Living

on Less than $1.25 per Day (%)
80
70
60
50
40
30
20
10
0
Sub-Saharan Oceania South Asia Southeast East Asia Latin Developing
Africa Asia America Regions
1991 2015 Projected
Source: United Nations (2015b).

50% to 17%. Progress was also made in reducing the share of workers in
situations of vulnerable employment (own-account and unpaid family
workers). The global share dropped from 55% to 45%, although the
ratio remains high for sub-Saharan Africa and South Asia, where it is
about 75%. The absolute number of vulnerable workers rose during the
MDG period from 1.25 billion to 1.45 billion (United Nations 2015b). In
summary, between 1991 and 2015, the world experienced a significant
decline in the share of the working poor and a noticeable fall in the share
of vulnerable employment, and this occurred during a period of rapid
globalization, including increased trade and lower barriers to trade.
However, we would need more detailed analysis to understand whether
globalization aided these improvements.
As noted, the employment-to-population ratio is a more problematic
indicator. The ratio varies considerably from 43% in North Africa to
68% in East Asia and Oceania (Figure 7.2). During the MDGs’ period
from 1991 to 2015, it rose by 6 percentage points in East Asia and fell by
5 percentage points in Latin America and the Caribbean. Globally, the
ratio fell in five regions, rose in three regions, and stayed the same in one
region in the same period. As noted, it is not clear whether increases or
decreases are good or bad.
None of the four MDG employment indicators were carried over
to the SDGs; instead, they appear to have been replaced by indicators
capturing similar aspects of employment. The employment-to-
population ratio was replaced by the unemployment rate, a less
Figure 7.2 Employment-to-Population Ratio (%)
80
70
60
50
40
30
20
10
0
Sub-Saharan Oceania South Asia Southeast East Asia Latin Developing Developed
Africa Asia America Regions Regions
1991 2015 Projected
Source: United Nations (2015b).

Table 7.1 Share of Persons Employed in the Informal Sector

in Total Nonagricultural Employment
Country Year Share (%) Country Year Share (%)

Armenia 2009 10.2 Malaysia 2012 11.1
2012 9.9 2013 13.2
2013 10.1 Nepal 1999 73.3
Georgia 1999 6.9 Pakistan 2002 70.0
India 2005 68.8 2004 70.0
2010 67.5 2010 72.7
2012 65.7 Philippines 2008 72.5
Indonesia 2009 64.8 Sri Lanka 2009 50.5
Kazakhstan 1995 11.7 Thailand 2013 32.2
Kyrgyz 2003 24.2 Turkey 2013 21.7
Republic
2009 59.2
Source: International Labour Organization (2015b).
ambiguous indicator, although still problematic in the case of poor

countries that lack social security and where underemployment can be
high. The unemployment rate can often reflect the situation of the urban
middle class that can afford to be unemployed. Vulnerable employment
was replaced by informal employment in the SDGs. Informal
employment has experienced both increases and decreases across
countries in recent years, and in Asia it remains high in India, Pakistan,
and the Philippines (Table 7.1). The working poverty rate and the labor
productivity rates were not carried over, whereas the growth rate of real
gross domestic product (GDP) per person employed was added; all three
of these indicators relate, directly or indirectly, to workers’ income.
7.2.2 Employment in the SDGs
There are 17 SDGs. Each goal has several targets, and each target is
associated with one or more measurable indicators. The latter allow for
the tracking of progress over the 15-year period. The issue of employment
is concentrated in Goal 8, which is to “promote inclusive and sustainable
economic growth, employment and decent work for all.” The goal has 12
targets, of which 8 include a mention of employment; and those 8 targets
are linked with a total of 11 indicators. The targets and indicators are
provided in Table 7.2.
The coverage is broader than the MDGs, with an emphasis on the
quality of employment and the identification of several specific groups
Table 7.2 Targets and Indicators for SDG 8
Goal 8: Promote sustained, inclusive and sustainable economic growth,

full and productive employment and decent work for all.
Targets Indicators
8.2 Achieve higher level of economic 8.2.1 Annual growth rate of real GDP per
productivity through diversification, person employed
technological upgrading and
innovation, including through a
focus on higher value added and
labor-intensive sectors
8.3 Promote development-oriented 8.3.1 Proportion of informal employment
policies that support productive in nonagriculture employment,
activities, decent job creation, by sex.
entrepreneurship, creativity
and innovation, and encourage
the formalization and growth of
micro, small and medium-sized
enterprises including through
access to financial services
8.5 By 2030, achieve full and 8.5.1 Average hourly earnings for
productive employment and decent female and male employees, by
work for all women and men, occupation, age and persons with
including for young people and 8.5.2 disabilities
persons with disabilities, and equal Unemployment rates, by sex, age
pay for work of equal value and persons with disabilities
8.6 By 2020, substantially reduce 8.6.1 Proportion of youth (age
the proportion of youth not in 14–24 years) not in education,
employment, education or training employment or training
8.7 Take immediate and effective 8.7.1 Proportion and number of children
measures to eradicate forced age 5–17 years engaged in child
labor, end modern slavery and labor, by sex and age
human trafficking and secure the
prohibition and elimination of the
worst forms of child labor, including
recruitment and use of child
soldiers, and by 2025 end child
labor in all its forms
8.8 Promote labor rights and 8.8.1 Frequency rates of fatal and
promote safe and secure working nonfatal occupational injuries, by
environments for all workers, sex and migrant status
including migrant workers, in 8.8.2 Increase in national compliance of
particular, women migrants and labor rights (freedom of association
those in precarious employment and collective bargaining) based on
International Labour Organization
textual sources and national
legislation, by sex and migrant
status
continued on next page
Table 7.2 continued
Goal 8: Promote sustained, inclusive and sustainable economic growth,
full and productive employment and decent work for all.
Targets Indicators
8.9 By 2030, devise and implement 8.9.1 Tourism direct GDP as a proportion
policies to promote sustainable of total GDP and in growth rate
tourism that creates jobs and 8.9.2 Number of jobs in tourism
promotes local culture and industries as a proportion of total
products jobs and growth rate of jobs, by sex
8.b By 2020, develop and 8.b.1 Total government spending in
operationalize a global strategy for social protection and employment
youth employment and implement programs as a proportion of the
the Global Jobs Pact of the national budgets and GDP
International Labour Organization
GDP = gross domestic product.
Note: Only targets and indicators from Goal 8 related to employment are provided.
Sources: United Nations (2015, 2016a).
within the labor force. Three targets focus on job creation (“full and
productive employment,” “labor-intensive sectors,” and jobs in tourism)
and in one of these there is a call for gender wage equality (“equal pay
for work of equal value”). There is one specific target dedicated to
youth and two other targets that mention young people. High levels of
youth unemployment have been a major concern for the international
community over the past decade and are perceived to contribute to
social unrest. One of the targets calls for the promotion of labor rights
and safe working conditions; another focuses on formal instead of
informal employment.
The dark side of employment practices is addressed in the
SDGs, with targets for eradicating forced labor, child labor, modern
slavery, and human trafficking. The sole indicator for this target is
for child labor. And the final target in Goal 8 includes a call for the
implementation of the Global Jobs Pact of the International Labour
Organization (ILO). Indeed, the employment targets reflect rather
closely the agenda of the ILO.
Employment issues are not limited to Goal 8 as there are numerous
other references to work and jobs in the introductory sections of the
United Nations document and in other goals and targets. Goal 4, on
education, is related to employment, notably Target 4.4 that governments
should “by 2030, substantially increase the number of youth and adults
who have relevant skills, including technical and vocational skills, for
employment, decent jobs and entrepreneurship.” Goal 5, on gender
equality, calls for countries to “recognize and value unpaid care and
domestic work” and to provide supportive public services and social
protection policies in that regard (target 5.4).
Furthermore, Goal 10, on inequality, encourages countries to
implement “wage and social protection policies [to…] progressively
achieve greater equality” (target 10.4). There is also a call for the
promotion of “orderly, safe, regular and responsible” migration (target
10.7) that implicitly relates to employment, since a key aspect of
intercountry people movement is labor migration. While there are few
numerically defined targets in the SDGs, there is one for labor migration,
which targets a reduction in the cost of sending remittances to less than
3% of the value of the money sent, and the elimination of remittance
corridors where transmission costs are above 5% (target 10c). These
targets are to be achieved by 2030.
7.3 Concepts and Trends in the Link between

Trade and Employment
7.3.1 Employment and the Gains from Trade
Labor has been an integral part of trade theory since David Ricardo
devised the theory of comparative advantage nearly 200 years ago.
According to the theory, the gains from trade arise because of differences
in labor productivity. The subsequent development of trade theory
explained patterns of trade based on factor abundance, with labor, along
with capital, a key factor in the discussion. The impact of trade on the
returns to factors of production has provided the connection between
trade and wages. Indeed, trade theory has focused more on the impact
of trade on wages than on the level of employment. Much of trade theory
assumes full employment before and after liberalization, despite shifts
in deployment during the period of transition.
Trade brings into competition producers from different countries
that vie for a share of an expanded market. This competition enables
more efficient producers to wrest market share from less efficient ones
and for countries to specialize. One of the oldest, most powerful, and
nonobvious concepts in economics is that while there may be winners
and losers following trade opening, the net benefit for each country
is positive. This is Ricardo’s theory of comparative advantage and it
holds even in situations in which one country has higher productivity
(i.e., absolute advantage) in producing the two goods that it trades with
another country. Each country benefits from specializing in the good in
which it has a comparative advantage. At the country level and for both
(or all) countries, welfare is always increased as a result of trade.
Trade theorists have sought to build on this base concept by
explaining what determines a country’s comparative advantage.
While Ricardo based his theory on (unexplained) differences in labor
productivity, the Heckscher–Ohlin theorem, formulated in the 1920s
and 1930s, states that a country will have a comparative advantage
in, and therefore export, the goods that use intensely the country’s
abundant factor. Here we begin to see the connection between trade and
employment, as labor is a key factor of production. Through expanded
trade, the price of goods produced with the abundant factor will rise in
the exporting country and will raise returns to this factor. Therefore, in
a labor-abundant country, trade will expand the demand for labor and
raise the wage. The labor-abundant country will have had a lower wage
to begin with, so the wage rises, while it will fall in the country where
labor is relatively scarce.
The model of factor abundance initially did not explain the actual
patterns of trade, notably for the United States (US), resulting in
Leontief’s famous paradox that the US should be exporting capital-
intensive goods but was, in fact, exporting labor-intensive ones.
Subsequent analysis weakened or eliminated the paradox; notably,
when labor was differentiated into skilled and unskilled labor (Krugman
and Obstfeld 2009). Wood (1995) went further in proposing a three-
way distinction between illiterate, literate but unskilled, and skilled
labor, and argued that differences in workforce skills were the defining
characteristic of traded goods. Capital was left out of the model because
it, unlike labor, is internationally mobile.
Factor abundance also had a greater impact in determining trade
between developed and developing countries than among developed
countries. Low-income countries specialized in goods produced with
low-cost, low-skilled labor, such as textiles and clothing, and assembly
operations, ranging from plastic toys to electronics (Hanson 2012).
The production and export of these goods by advanced countries have
declined considerably, with these countries exporting complex goods
with high capital content, including human capital. Factor abundance
may also explain some of the shift from manufacturing into primary
exports for resource-rich countries in Latin America and elsewhere
following trade liberalization. We return to the empirics below.
Whereas classical trade theory modeled inter-sectoral trade, a new
stream of theory, developed in the late 1970s and early 1980s, sought
to account for the large share of intra-sectoral trade in global trade,
particularly between advanced countries (Krugman 1979). These models
incorporated more realistic assumptions about production structure
and consumer preferences, in particular by adding economies of scale

and product differentiation based on monopolistic competition. The
new trade theory was more focused on explaining the empirical reality
of intra-sector trade than on shifts to post-liberalization changes and
thus has probably no more and possibly less to say about employment
than traditional trade theory.
In the early 2000s, a stream of analysis developed that derived
from new empirical findings on the considerable heterogeneity among
firms and, in particular, productivity differences between exporting
and non-exporting firms (Bernard and Jensen 1999). This “new–
new” trade theory sought to explain the differences between firms
producing the same or very similar goods in the same country (Melitz
2003). Opening to trade exposes these differences and results in the
expansion of more productive firms and an increase in the overall level
of industry productivity. This intra-industry expansion and contraction
has implications for job creation and job destruction. As Jansen and
Lee (2007) noted, this may ease transition as job movements within
the same industry tend to be easier than those between industries
because skills may be similar and information about opportunities
more available.
Thus, classical, new, and new–new trade theories have had relatively
little to say about net employment. The theories assume full employment
in pre- and post-liberalization periods and have recognized, but not
been concerned about, the transition between the two. Transitions
are assumed, implicitly or explicitly, to be immediate and frictionless.2
Where theory has had much more to say is on wage levels. In a country
with abundant low-skilled labor, the real wage of low-skilled workers
should rise. This should benefit the many workers in developing
countries that are attracted to export industries. But at the same time, the
real wage of high-skilled workers should fall. This may be problematic
because countries in the developing world seek to produce and export
higher value goods, which in turn require a more skilled labor force. For
industrialized countries, the process predicted by theory is somewhat
less problematic, but challenging nonetheless. These countries export
goods with a higher capital and skills content that requires (and rewards)
skilled workers. The downside is that this reduces demand for less-
skilled workers and puts downward pressure on their wages, which are
major policy concerns in the US and similar countries. The challenge
there is to upgrade the skills of low-skilled workers.
2
For example, Krugman (1979) assumes full employment, although he does discuss
intra-country labor migration.
In terms of the SDGs, standard trade theory provides more direction

on the quality of work (notably on wages) than on the quantity. In
particular, theory may not provide much insight on whether increased
trade will help countries achieve the goal of full employment or the
target of low unemployment. In terms of the quality of employment,
theory suggests that poor and unskilled workers in developing
countries—the countries that are the focus on the SDGs—may gain, and
those in developed countries may lose as a result of trade. Theory gives
us relatively little direction, however, on other aspects of employment
quality, such as decent working conditions, forced and child labor,
women, youth, and workers with disabilities, and how these might be
improved or eliminated through trade.
7.3.2 Adjusting to Comparative Advantage
There are trade theorists who have sought to model the transition process
in terms of how it affects employment. Since the late 1990s, several
theories have been put forward on the effect of trade on unemployment
by incorporating theories of job search, and worker/employer matching as
part of labor market efficiency. However, this work is still in its infancy and
has generated results that are sometimes ambiguous and tend to confirm
employment outcomes that are already suggested by the standard theories
of comparative advantage and factor abundance. Experts working in this
area have themselves noted quite recently that “the role that globalization
plays in enhancing or hampering the performance of the labor market is
not well understood” (Davidson et al. 2012: 429).
Davidson, Martin, and Matusz (1999) developed a model of trade
that includes unemployment generated from search costs and frictions
(i.e., “search unemployment”). A key basis for comparative advantage is
differences in search technologies and break up rates. The model assumes
that a larger country has a more efficient labor market and therefore a
lower long-term rate of unemployment. The model indicates that when
a large, capital-abundant country like the US trades with a small, labor-
abundant country (i.e., in the developing world), unemployment in the
former will increase.
Moore and Ranjan (2005) developed a similar model, but comparative
advantage is tied directly to differences in factor endowments, notably
differences in skilled and unskilled workers. The result is that trade
opening results in reduced unemployment for skilled workers, but
increased unemployment for unskilled workers. The model is viewed
from the perspective of a developed country, such as the US, and thus
generates results similar to what would be expected for the theory of
factor abundance.
Davidson et al. (2012) drew on new–new trade theory and the

important differences between exporting and non-exporting firms
to develop a model of labor transition. The authors assumed an initial
situation of “cross-skill matching” (CSM), a type of skills mismatch in
which some high-skilled workers are employed in low-tech firms prior to
trade opening, resulting in underemployment.3 As a result of trade, CSM
may decline as an industry moves to a system of “ex-post segmentation”
(EPS), in which the more productive exporting firms can pay higher
wages and attract high-skilled workers away from low-tech firms. Low-
tech firms lose out and their segment shrinks, reducing the bargaining
power and wages of low-skilled workers. The model appears designed
from an industrial country perspective as the assumption is that high-
skilled, high-tech industries will benefit from trade. The results are
in line with the Heckscher–Ohlin theory as it applies to an advanced
country in that high-skilled workers will benefit and the low skilled will
lose. It is possible that the system does not transition from CSM to EPS
and skill mismatches persist. Furthermore, liberalization affects not
only exporters, but also import-competing firms and industries. Import
competition can reduce the earnings gap between high- and low-tech
firms and shift the labor market situation to CSM, if it was initially at EPS.
Dutt, Mitra, and Ranjan (2009) presented a model that can account
for whether trade is based on productivity differences, following Ricardo,
or on differences in factor endowments, as suggested by Heckscher–
Ohlin. Their model predicts that differences in factor endowments will
result in a decrease in unemployment in a labor-abundant country and
an increase in a labor-scarce country, results that would be expected
from the underlying trade model. The higher unemployment is based
on search friction and exists only in the short term. However, the
authors show that trade based on differences in productivity will reduce
unemployment unambiguously, that is, for either a labor-scarce or labor-
abundant country. Trade will result in a rapid reallocation of labor from
low to high productivity firms through aggressive job search efforts and
effective job posting. Their empirical evidence suggests productivity
differences have a greater role in explaining trade than endowments, and
thus overall unemployment is expected to decline with trade opening.
Helpman, Itskhoki, and Redding (2010) developed a model with
heterogeneity in firm productivity, following Melitz (2003), and labor
market friction. As a result of trade opening, more productive firms will
hire more skilled workers to whom they are willing to offer a higher
wage. However, more intensive screening and higher wages will limit
3
The model is based on a single high- or low-skilled manager for each firm, although
the manager is said to be representative of high- and low-skilled workers in the firm.
the extent of new hiring and will tend to raise overall unemployment.
At the same time, net hiring will be affected by labor market tightness
and can either support an overall increase in unemployment or result in
a decrease, thus leaving the results ambiguous. Helpman and Itskhoki
(2010) developed a similar model that focuses on differences in labor
market frictions between homogeneous and differentiated goods
sectors.4 If labor market rigidities, which give rise to friction, are higher
in the differentiated sector, the unemployment rate will rise as a result
of trade opening. However, the unemployment rate will fall if friction is
lower initially or decreases over time.
Much of the analysis has sought to figure out how easy or difficult it
might be for workers to move from declining to rising industries. New
jobs might require different skills and moving to a different location.
Moving jobs means knowing where the new jobs might be found and
requires adequate information. Finally, labor market institutions might
have a role in shaping the types of transitions to be made. Generous
unemployment and social benefits might dull the incentives for workers
to transition quickly, as might a lack of wage flexibility.
Wood (1995) suggested that flexibility in the US might result
in lower wages, but little or no increase in unemployment for low-
skilled workers. In contrast, in Europe, where social and labor market
institutions were more developed and there is less flexibility, workers in
declining industries were more likely to face a period of unemployment,
instead of lower wages.
7.3.3 Changes in Comparative Advantage
Comparative advantage is not static but changes over time. This is true of
both advanced countries, such as the US and those in Europe, and even
more so for countries in the process of developing and industrializing.
Just as trade opening accentuates comparative advantage and causes
shifts in demand for workers and their skills across sectors and firms, so
too do changes in comparative advantage. Indeed, improvement in the
skill level of labor is one of the important sources, along with technology,
of change in comparative advantage. As a result, the types of goods and
services that countries export will change over the course of the 15-year
coverage period of the SDGs and will do so even if there is no further
liberalization of trade regimes.
4
In the differentiated sector, firms are heterogeneous such that they have power in the
product market (monopolistic competition) and bargain with workers for wages in
the labor market.
In earlier work, Das (1998) noted significant changes in revealed

comparative advantage (RCA) in Asia between 1980 and 1993, when
considerable structural change was taking place. Across the four large
Association of Southeast Asian Nations (ASEAN) countries, the RCA
was high, but fell significantly in mineral- and agricultural-intensive
exports.5 Meanwhile, the RCA was lower, but rose roughly fivefold in
each of the categories of technology-intensive, capital-intensive, and
human capital-intensive exports. For a more advanced economic group
of newly industrializing economies in East Asia, the RCA was low and
remained so in agriculture and minerals, but was higher and increased
further in technology-intensive and capital-intensive sectors.6 The most
significant change in this group was in the labor-intensive sectors, where
the RCA fell by more than half. Clearly, the countries were moving up
the value chain in goods production and altering their comparative
advantage.
Using a significantly longer time frame and focusing on workers’
skills, Wolff (2003) found important changes in the content of US exports
and imports. In the half-century from 1947 to 1996, US comparative
advantage was in high cognitive and interactive skills and low in motor
skills; furthermore, the gap in terms of the exports and imports that
embody these skills widened over time. Exports were over time high
in the employment of knowledge and data workers, whereas the labor
content of imports stressed goods workers. This gap, too, increased over
time. Following the Leontief paradox, imports were more capital- and
machinery-intensive than US exports; in this case, however, the gap
fell over time. Somewhat surprisingly, the research and development
content of imports surpassed that of exports during this 50-year period.
Conceptually and empirically, higher value goods correlate with
higher economic growth (Hausmann, Hwang, and Rodrik 2007). Thus,
countries seeking to grow faster will try to alter their comparative
advantage in the direction of higher value goods, commonly expressed
as efforts in “moving up the value chain.” There remains considerable
debate, however, regarding the extent to which a country should
conform to its existing comparative advantage or defy it and engineer a
move to a more sophisticated level. Justin Lin, former chief economist
at the World Bank, has taken the former position, whereas Ha-Joon
Chang, an industrial policy advocate, has argued for the latter (Lin and
Chang 2009).
5
The four ASEAN countries are Indonesia, Malaysia, the Philippines, and Thailand.
6
The four newly industrializing economies are Hong Kong, China; the Republic of
Korea; Singapore; and Taipei,China.
7.3.4 Global Production Shifts in Manufacturing

The distribution of manufacturing has seen a significant shift over
the past 25 years. “Industrialized” countries are so named because of
their industrial activity, including manufacturing. But an increasing
proportion of manufacturing is taking place in the developing or
“industrializing” world. The share of global manufacturing produced in
developing countries doubled from 18% to 36% between 1990 and 2014
(UNIDO 2015). Much of that increase is due to the People’s Republic of
China (PRC), which by itself accounts for half of total manufacturing
in developing countries, rising from 16% to 51% over the same period
(UNIDO 2015). These shifts have been facilitated by trade and have
resulted in job creation in developing countries and a redistribution of
global manufacturing employment.
The shifts result from the increased competitiveness of
manufacturing in developing countries, but are also caused by changes
in the nature of global production. Firms from developed countries have
moved production offshore to take advantage of lower costs, including
wages, and in some cases also to be closer to markets. Offshoring has
been facilitated in no small measure by the expanded (geographic)
coverage, use, and functionality of the internet, which has made the
coordination of global value chains (GVCs) and production networks
possible. For example, the Apple iPhone is designed in the US, its key
components are produced in East Asia (the Republic of Korea, Japan,
and other countries) and the final product is assembled in the south of
the PRC. The phones are marketed and sold not only in those countries,
but also elsewhere.
Increased foreign direct investment (FDI) flows to developing
countries and the geographic fragmentation of production based on
GVCs are likely to affect the gains from trade and employment in two
ways. First, the shifts create manufacturing jobs in developing countries.
This is good for those countries, although it will negatively affect jobs
in developed countries. Second, the fracturing of production may result
in an intensification of specialization and some change in its nature.
Comparative advantage takes place “across tasks rather than industries,”
according to recent thinking on how GVCs affect trade (Shingal 2015).7
Nonetheless, increased specialization can, according to standard trade
theory, help to raise productivity, welfare, and economic growth, which
in turn can have a positive effect on job creation.
7
The implications for trade theory of a shift from industries to “tasks” may already be
partly accounted for by the recent emphasis on modeling intra-sector trade and the
even more recent emphasis on firm heterogeneity.
Furthermore, because GVCs intensify comparative advantage, the

same trade-adjusting effects apply but at a deeper level, of occupations
instead of industries. Job losses and job creation will be experienced as
globalization increases. The process can generate unemployment that
can be alleviated with the adjustment of workers and their skills, just as
in standard models. However, low-skilled workers may be affected most
in both developed and developing countries (IMF 2013).
The countries that will gain will be those that can attract investment
that exploits the country’s competitive advantage. FDI will be attracted
by industrial sites that are well serviced by utilities and infrastructure
and provide access to a pool of workers with the requisite skills.
However, because production is part of GVCs, equally important will be
the capacity and the procedures to move goods quickly and efficiently
into and out of the country. The PRC’s export processing zones have
provided these supporting arrangements and help to explain why the
country has been so effective in attracting investment. This investment,
in turn, has greatly expanded export-based manufacturing employment.
7.3.5 Outsourcing Services

The services sector is the most significant of the three main sectors
in nearly all countries. In addition, its importance, in terms of both
output and employment, continues to grow. Globally, services account
for two-thirds of total value added, with a higher share in high-income
countries. The share of the workforce employed in the services sector
was 63% in developed countries in 1991, and is estimated to reach 75%
in 2017. The share in developing countries is lower, but still significant.
Services’ share of global employment is estimated to surpass 50% for the
first time in 2017 (ILO 2015b).
Services exports have also been rising. In 1991, 21% of exports both
globally and for the high-income countries were services. By 2014,
that figure had risen to 26% in high-income countries (a 21% increase)
and 23% globally (Figure 7.3). In recent decades, services trade has
been bolstered by the rapidly expanded use and functionality of the
internet. Call centers offering support services to clients far away
have expanded enormously since the 1990s, driven by significant wage
differentials. Billing, client account management (e.g., credit cards),
and medical transcription are other services traded that are not based
on direct voice interaction. Some developing countries have excelled
in services exports; the sector accounts for 31% of exports for the
Philippines and 33% for India (World Bank 2016). Both countries have
built significant business process outsourcing (BPO) sectors in recent
decades, although they also have large populations working overseas
(mode 4).
Figure 7.3 Services Sector Share of Total Exports (%)
30
25
20
15
10
0
1991 2001 2011 2014
High-income countries World
Source: World Bank (2016).
Services are different from goods; likewise, trade in services differs

from goods trade. Goods are tangible objects that move physically across
borders. Services are activities rendered by a supplier to a client, and
therefore the supplier and the client often engage in direct interaction.
Services are normally divided into four modes, depending on how, and
indeed where, that interaction takes places. The four modes are as
follows: (i) the supplier creates the service in its country and sends it
to a client abroad (e.g., engineering drawings); (ii) the client moves to
another country to receive the service (e.g., tourism); (iii) the supplier
sets up a presence in a foreign country (e.g., a foreign bank); and (iv) a
person supplying the service moves to the country of the client (e.g.,
a migrant construction worker). All services are potentially tradable
because the supplier or the client can move to provide or receive the
service in another country.
Only in the first mode is the service itself moving across the
border, and while it may move in physical form (e.g., a hard copy of
engineering drawings), it often moves electronically in nonphysical
form. In the other cases, there is a movement of people or investment.
Given differences in the nature of goods versus services, the barriers to
trade are also different. Goods can be controlled by tariffs and physical
restrictions (quotas), along with nontariff barriers. Tariffs do not apply
to services, except those sent in physical form, but instead services are
controlled by limiting the movement of people and investments, and

by regulations restricting the right of foreigners to conduct business.
Copeland and Mattoo (2008) argued that domestic regulation
of sectors plays a strong role in determining trade access, as opposed
to tariffs, as in the case of goods. However, they do find that standard
approaches to modeling trade in goods can be useful for modeling
services. This includes welfare gains and losses as a result of trade
opening, and how comparative advantage stemming from factor
endowments can help explain the structure of a country’s services trade.
The employment implications of services trade vary according
to the mode. Mode 1 activity, in which the service moves across the
border (i.e., without people needing to move), is similar to goods trade;
liberalization should see specializations between trading countries
and demand for labor (and wages) increasing in subsectors with a
comparative advantage and decreasing in less competitive subsectors.
Whether this plays out in reality remains to be seen, however. India’s
penetration into the BPO services market has created jobs in India, but
whether the US has been able to provide more high-end services to
India requires empirical verification. The adjustment costs need to be
considered, as in goods trade. “Bangalored” service workers may need
assistance to retrain for new jobs.8
For other modes, the impact on employment may be more direct. In
mode 4, workers move across the border to provide services and form
a source of worker migration, which is considerable in some countries,
such as the Philippines and Tajikistan, where jobs are scarce. Mode 3
involves services FDI that will create local employment and has similar
employment ramifications as goods FDI. However, mode 3 normally
also involves the movement of some senior and professional staff to run
the foreign affiliates. The two key employment adjustment issues are
(i) whether workers from a domestic firm are now shifting to foreign
affiliates (in the same country), and (ii) whether services previously
filled through mode 1 are now being filled through mode 3 and are thus
causing a shift of jobs from the service firm’s country of origin to the
country of the new branch office.
Copeland and Mattoo (2008) considered the case of a lawyer
moving to another country to provide legal services. As a one-way
movement, there is an employment and welfare gain to the receiving
country and a loss to the sending country, although if remittances are
sent or carried back, the loss to the sending country may be minimized.
8
The term “Bangalored” refers to job loss due to a service function being outsourced
to a location in another country, such as Bangalore, a major hub for India’s BPO
industry.
Why the example is modeled as only one-way instead of two-way trade

as in the case of goods examples is not clear, and a two-way trade model
may alter the relative gains and losses.
Van der Marel (2011) developed and tested a model of comparative
advantage in services trade. A basic premise of the model is that
services are different from goods in terms of the factors that determine
competitiveness. Services require high-skilled workers and information
and communications-related capital and are also more dependent on
quality regulatory and governance factors. Mid-skilled workers can
also be a supporting factor for services trade. Part of the intuition is that
trust, for contract enforcement and to meet more detailed consumer
requirements, can play an important role, but of course is hard to
measure and therefore hard to test. Employment effects, aside from the
importance of skill levels, are not provided in the model, nor are the
transitional elements when a country opens up and liberalizes services
trade with other countries.
7.4 Evidence on Employment and Job Quality

under Liberalized Trade
As trade openness has increased during recent decades, a look at the past
provides insights into how further openness may affect employment
during the SDG period. Empirical research in this regard can present
major methodological challenges as it involves isolating the effects of
trade openness from other policy and environmental variables. As a
result, some of the better examples are those in which a major new trade
deal has been implemented and in which economists have attempted to
measure the employment impacts.
The other challenge in assessing empirical evidence is to draw out
the qualitative side to see what changes have occurred in wage levels
and the relative demand for skilled and unskilled labor. As we saw, this
impact is highlighted in trade theory more so than the quantitative
impacts. In this section, we survey some of the evidence on both the
quantitative and qualitative aspects of more open trade.
7.4.1 Employment Levels

Some researchers have analyzed data on a large cross-section of countries
to consider the relationship between openness (or protectionism) on
the one hand and the unemployment rate on the other. Dutt, Mitra,
and Rajan (2009) tested the correlation between trade protection and
unemployment across 92 countries, finding a positive and significant
correlation; that is, countries with a less liberal trade regime have higher
unemployment. Their results are robust across specifications, with and
without instrumental variables.
Felbermayr, Prat, and Schmerer (2009) generated similar results
using a similar approach for two samples of countries. They estimated a
sample of 20 Organisation for Economic Co-operation and Development
countries from 1980 to 2003 using 5-year averages, and then a larger
set of 62 countries from 1990 to 2006, also using 5-year averages. They
found that open countries have lower unemployment rates and analyzed
the long-run effects by netting out the short-term effects of business
cycles. They further found that employment is affected via total factor
productivity and that differences in institutions do not appear to affect
trade openness impacts on the labor market. This is interesting given that
some commentators conclude that the difference in European (higher)
and US (lower) unemployment stems from Europe’s more complex and
restrictive labor market institutions.
Along with studies examining a large group of countries, other
studies have focused on single countries or pairs of countries for more
specific effects. In particular, the lowering of trade barriers, along with a
revolution in the use of information and communications technology to
coordinate the fragmentation of production into GVCs, has allowed large
enterprises to shift production from developed to developing countries.
This has allowed for increases in manufacturing employment in poorer
countries and a decline in richer countries. Nowhere is this change more
evident that in the PRC.
The PRC joined the World Trade Organization (WTO) in late 2001
and was given until late 2006 to fulfill its commitments. Data from the
later part of the commitment period and extending afterward show a
significant increase in manufacturing jobs. Employment in the sector rose
by 20 million workers in only 4 years, from 56.7 million in 2004 to 77.3
million in 2008. While tracking jobs related to exports is difficult because
an enterprise may produce for both the domestic and international
markets, estimates suggest that employment in manufacturing related to
exports rose from 15.0 million to 17.3 million over the same period (Cai
and Du 2014). Export-oriented manufacturing has been more labor-
intensive than domestic manufacturing, and indeed, one of the factors
attracting foreign firms to set up in the PRC is the ability to take advantage
of low-cost labor. Dividing 30 manufacturing subsectors into quintiles
from least to most export oriented, Cai and Du (2014) found that the most
export-oriented quintile used 3.5 times more workers per unit of capital
than the least export-oriented quintile. Wages have been rising rapidly,
however, and as a result, the capital intensity across both exports and
domestically oriented sectors increased between 2004 and 2008. The
PRC has also been making efforts to rebalance somewhat from foreign
to domestic demand, and as a result, the share of production destined for
exports has declined over time.
The flip side of this is the negative employment impacts on
manufacturing in the US and other developed economies. Autor
et al. (2013) found a range of negative employment impacts on US
manufacturing workers that have faced a surge in competition from
the PRC. Tracking workers between 1992 and 2007, they found that
workers in these industries had lower earnings over time and were more
likely to leave the labor force and accept social security than workers
in industries not affected by competition from the PRC. Workers in
industries that faced competition from the PRC were less likely to stay
with the same employer and more likely to leave their subsector or the
manufacturing industry entirely. Low-wage workers were much more
affected than high-wage workers, who were less likely to be laid off
and experienced only a minimal loss in earnings when transitioning to
other firms. The differences were substantial. A worker in a subsector
at the 75th percentile of trade exposure to the PRC had income that
was 46% below that of a worker in a subsector at the 25th percentile of
trade exposure. Overall, the number of workers in US manufacturing
has fallen dramatically over 2 decades, from 18.3 million in 1991 to 11.4
million in 2011 (Autor et al. 2013).
In 1990, the US and Mexico agreed to enter into a free trade
agreement (FTA). As a result, the Canada–US Free Trade Agreement was
expanded into the North American Free Trade Agreement (NAFTA) in
1994. The agreement was the subject of considerable debate, particularly
as to whether it would threaten US jobs. Hinojosa-Ojeda et al. (2000)
estimated employment effects with US job losses amounting to 37,000
annually as a result of increased trade with Mexico, and 57,000 annually
as a result of trade with Canada for the period 1990–1997. These are
considered small given that the US economy creates 200,000 jobs each
month.9
9
Several years earlier, in 1989, the Canada–US FTA came into effect. Comparing the
pre-FTA period of 1980–1986 to the FTA period of 1989–1996, Trefler (2004) focused
on the impacts in Canada and found a 5% decline in overall Canadian manufacturing
employment (about 100,000 jobs). However, he suggested that these losses were
short term as there was no change in Canada’s employment rate between 1988
and 2002 of 62%. Furthermore, manufacturing employment rose overall by 9.1% in
Canada during the same period, whereas it fell in the US, Japan, and some other
industrialized countries. The FTA also generated significant labor productivity gains
of 14%–15% in most-impacted, import-competing, and export-oriented industries.
In import-competing sectors, the gains were mostly the result of the exit of low-
productivity plants, as suggested by new–new trade theory. Overall welfare in Canada
probably increased, according to the study.
In Mexico, the creation of NAFTA in 1994 resulted in a large increase

in manufacturing employment in the maquiladora, an export-oriented
platform established in 1965 that benefited from the new trade deal. An
estimated 800,000 manufacturing jobs were created in the maquiladora
between 1994 and 2000, at which point employment peaked. Thereafter
employment fell, but was still 550,000 higher in 2003 than before
NAFTA. Non-maquiladora manufacturing jobs fell dramatically during
the tequila (peso) crisis of 1994–1995, but recovered significantly and
also peaked in 2000. They fell again thereafter, and by 2003, non-
maquiladora employment was about 1.3 million, or about 100,000 fewer
than before NAFTA.
7.4.2 Sector Shifts
There are also important trade-induced effects on employment between

the PRC and Hong Kong, China. Many of the latter’s manufacturing
firms in clothing and textiles, plastic toys, watches, and electronics
moved to the mainland from the late 1970s to take advantage of lower
wages and in response to competition from emerging producers in the
Republic of Korea; Taipei,China; and elsewhere. This shift was the result
of competition, but also the opening to trade and investment by the PRC,
notably in neighboring Guangdong province. The share of manufacturing
in GDP in Hong Kong, China fell from just under 25% in 1980 to only
1.3% by 2014. The fall in employment was even more dramatic, with
the manufacturing sector employing 46% of the workforce in 1980, but
dwindling to less than 4% by 2009.10
As is well known, Hong Kong, China shifted its own and other
manufacturing firms operating in the PRC. Services firms also support
the domestic economy, both in externally oriented activities, such as
finance, logistics, and tourism, as well as domestic activities, such as the
hospitality sector. Regarding trade, the decline in manufacturing has
meant a decline in merchandise exports and an increase in imports to
the point where nearly all locally consumed goods come from abroad.
This merchandise deficit imbalance is more than offset by high services
exports, with the latter's share in GDP more than doubling from 9.3%
in 2000 to 19.9% in 2009 and tripling in real terms. With imports of
goods and exports of services, the island is a net exporter overall, and
net exports accounted for 7.2% of GDP in 2009 (Vere 2014).
10
The figures for 1980 for GDP and employment shares are from Tao and Wong (2001).
The GDP share for 2014 is from the World Bank (2016), and the employment share
for 2009 is from Vere (2014).
The workforce has followed this structural change, with services

accounting for 88% of total employment in 2009. Unemployment has
generally been low during the long structural transformation over the
past 3–4 decades, although it hit a high spell following the East Asian
financial crisis. The jobless rate ranged between 5% and 8% from the
crisis until the mid-2000s, but has declined since then and has been
below 3.5% since 2011 (World Bank 2016). The structural changes have
been felt more in terms of wage levels than employment levels. Inflation
in the latter part of the 2000s resulted in a decline in real wages for low-
skilled workers, while high-skilled workers have done well. This has led
to increased wage inequality over the entire workforce.
Whereas Hong Kong, China moved out of manufacturing, Indonesia
was unable to attract increased investment in that sector despite
abundant low-wage labor (Aswicahyono et al. 2014).11 Garments and
textiles were key areas of export competitiveness and employment
growth in Indonesia in the 1980s, and by 1990 accounted for 25% of total
employment. Together with wood and furniture, these light industries
accounted for just below 50% of total employment. Following the Asian
crisis of 1997, the country was not able to maintain this momentum
despite a large supply of unskilled and low-skilled labor available from the
countryside. Investment and exports from these sectors were stifled by
a weak investment climate, poor infrastructure, currency appreciation,
and labor market regulations that reduced flexibility and pushed up
costs. The country was less appealing to foreign investors, who focused
elsewhere, including the PRC and Viet Nam. Export growth shifted to
chemicals and heavy industries that were much less employment-rich.
By 2009, the share of employment in light manufacturing fell to 31%, and
in the textiles and garments subsector to 17%. Much of the employment
has shifted to low-skilled services. The unemployment rate since the
Asian crisis has been decidedly higher than in precrisis years, peaking at
11.2% in 2005, but falling gradually to 6.2% in 2014 (World Bank 2016).
The figures mask considerable underemployment in a country without
unemployment insurance or adequate social security. The Indonesian
case illustrates how weak export performance and barriers to investment
in labor-intensive export sectors can hurt employment outcomes.
Efforts have also been made to estimate the effects on employment of
two significant trade and investment deals. Carrere, Grujovic, and Robert-
Nicoud (2015) estimated the possible effects of increased liberalization
under the Transatlantic Trade and Investment Partnership (TTIP) and
the Trans-Pacific Partnership (TPP). They found that the TTIP will likely
11
This paragraph on Indonesia draws extensively on that source.
result in a 1.1% increase in US unemployment from a base of 5.9% and

a fall in most European countries, with the exception of Belgium, Italy,
and the Netherlands. Those countries that will see an unemployment rise
have high frictions due to firm adjustments. The deal should raise wages
in all countries, according to the results. For the TPP, the unemployment
rate is estimated to fall for all countries participating in the agreement and
to rise slightly in countries that are not included. All participant countries
would also see a rise in real wages, while in other countries the wages are
expected to fall, but the change is likely to stay close to zero.
7.4.3 Quality of Jobs, including Formal versus Informal

Employment
SDG 8 calls for countries to decrease informal nonagricultural
employment. Theoretically, it is unclear what impact trade might have
on informality. On the positive side, there may be factors that encourage
formalization as firms are better organized and put on a stable footing to
improve labor conditions to compete against imports and to export. On
the negative side, trade puts pressure on firms to cut costs and they do
so by shifting work from their own or their suppliers’ formal operations
to informal enterprises. Research has found mixed evidence on the link
between trade and informality.
Goldberg and Pavcnik (2003) examined the impact of trade opening
in the 1980s and 1990s on informal employment in Colombia and Brazil.
They found no relationship in the case of Brazil; trade opening neither
increased nor decreased informality. For Colombia, they found weak
evidence that informality increased, but this depended on labor market
institutions, with the increase in informality occurring after reforms
that increased labor market flexibility and prior to trade reform. The
impact of trade openness may depend on each country’s economic
structure. However, differences have also been found in studies of
the same country. Early work by Maloney (1998) indicated that trade
opening in Mexico after 1990 resulted in a shift of workers from the
formal to the informal economy. However, more recent work by Yahmed
and Bombarda (2016) found that formal employment increased relative
to informal employment and self-employment in the tradable sector
following the enactment of NAFTA.
The impact of trade on more egregious labor conditions, such as
child and forced labor, which are part of SDG 8, has been less studied.
Edmonds and Pavcnik (2004) found a negative relationship between
trade openness and child labor, suggesting that greater trade is
associated with lower levels of child labor. This association is significant
when country income level is not considered. When it is, the magnitude
of the relationship falls substantially and the correlation becomes
insignificant, suggesting that the level of child labor is determined by

country income level, not openness to trade. This result holds when
estimating different country groups, considering trade between high-
and low-income countries, and focusing on the exports of low-skilled
goods from low-income countries. The results may support the idea that
the welfare gains from trade, by raising country income, may contribute
to reducing child labor.
SDG 8 also calls for the elimination of forced labor, modern slavery,
and human trafficking. The ILO estimates that there are 21 million people
in forced labor, 90% of which is in the private economy and 10% under
state control, for example in prisons under conditions that contravene
ILO standards or under military and rebel groups. Of the 90% of forced
labor in the private economy, 22% comprises sexual exploitation, and
the remaining 68% is found in various sectors, including agriculture,
construction, domestic work, and manufacturing (ILO 2012).12 The
author is not aware of any studies that have sought to test the link
between trade and forced labor.
7.5 Role of Policy

Greater trade openness will provide opportunities in many developing
countries for greater productive specialization that should boost
efficiency and support welfare. However, theory and evidence suggest
that the benefits of trade will not accrue without important shifts in the
sector composition of output and exports across individual countries.
These shifts will raise employment demand in rising sectors and reduce
demand in declining ones. A major role of policy is to support these
transitions so that workers are aware of where the new jobs are and are
given the opportunity to acquire the skills to secure those jobs.
7.5.1 Labor Market Policies

A country’s labor market policies can support the trade adjustment
process and ease the transition of workers from declining to rising sectors.
Policies and regulations that create a flexible labor market are particularly
important. These measures reduce the expense for employers of laying-
off workers in declining sectors and ease the hiring process in expanding
sectors. Workers, too, require transition mechanisms. These include
labor market information systems about contemporary vacancies and
long-term labor and skills demands that are best provided through an
12
The ILO estimate is derived from data for 2002 and 2011.
active and accessible public employment service. Knowing that new

jobs are being created and where they can be found is important for
workers who realize they need to shift jobs. In addition, information can
be provided on opportunities to re-skill or up-skill, supported by career
counseling. Finally, making employment benefits or entitlements, such as
pensions, portable can reduce the risks for workers making a proactive
decision to switch sectors. These general labor market policies can be
enhanced by specific trade adjustment assistance.
7.5.2 Trade Adjustment Assistance

Governments can lower adjustment costs through programs that assist
workers in transitioning from declining to expanding sectors or firms.
Such support is justified on both efficiency and distributional grounds.
The net gain from trade to the economy as a whole will be higher if
the cost is reduced. At the same time, however, adjustment involves
private costs that fall disproportionately on a relatively small number
of workers. Government interventions to reduce these costs will thus
moderate the distributional effects.
There are multiple ways in which support can be provided. The most
direct is assistance to workers who lose their jobs (or otherwise suffer)
from increased import competition. This is discussed further below.
Other types of support target producers who face import competition,
either enterprises, including small and medium-sized enterprises, or
farmers. Here the support may be directed to increase competitiveness,
if possible, or switch product lines, including alternative crops to grow
or livestock to raise.13 Successful programs may move a firm or sector
from competing against imports to exporting itself.
Assistance for workers can be provided in several ways: (i) income
support, such as extended or supplemented unemployment benefits;
(ii) assistance to retain access to health care or other social security
programs; (iii) job search support to help workers find reemployment;
and (iv) retraining to increase the employability of workers in other
jobs or sectors. The first two are passive labor market policies, and the
latter two are active labor market policies. In some cases, these worker-
oriented programs are bundled together with enterprise assistance
under the same legislation or umbrella program.
The two best-known programs in the developed world are
respectively the US Trade Adjustment Assistance program and the
13
Taipei,China provides an interesting case of agricultural adjustment. When the
sugarcane industry declined, the government supported the development of an orchid
industry, which has become the largest exporter in the world by volume. Rodrik (2004)
described some aspects of this shift and the support it was given by industrial policy.
European Globalization Adjustment Fund (EGF) of the European Union

(EU). Programs also operate in Canada, Mexico, and Australia.
The US has a long history of supporting workers affected by
liberalized trade. A program set up by President John Kennedy under the
Trade Expansion Act of 1962 offered passive assistance to workers. Active
assistance in the form of retraining was added under the Trade Act of 1974.
Trade adjustment assistance has taken various forms and been included
in other trade legislation and programs. The workers’ component is
called Trade Adjustment Assistance for Workers and supports job search,
training, and income support. The program applies to those who have lost
their jobs due to business closure from import competition or due to the
offshoring of production. The income support component can support
both the unemployed and those workers who experienced a reduction in
wages or working hours. An annual average of over 85,000 workers were
certified for assistance from 2012 to 2014 (DOL 2015).
In Europe, the EGF was established in 2007 and has been extended
to operate until 2020. It focuses solely on workers and does not provide
support to firms to stay in business or to restructure to meet import
competition. Funds are available from the EGF and can be accessed for
programs proposed and organized by member states. The EGF will fund
up to 60% of the cost of a program, with the remaining 40% provided by
national governments. In some cases, other EU funds may provide some
of the additional funding. The focus is on mass layoffs as a result of a
firm closure due to the offshoring of the operations to another country.
A minimum of 500 workers needs to be laid off by a firm, a group of
firms in a value chain, or in a sector or neighboring regions. It supports
the costs of programs on job search, career counseling, coaching, (re)
training, and education. It can also help unemployed workers set up
small businesses. Funds can be used to provide training allowances,
subsistence allowances, and relocation allowances. However, they
cannot be used to cofinance unemployment benefits (EU 2014).
In its first 7 years of operation (2007–2013), the EGF provided
funding to support 50,264 laid off workers across the EU. Denmark
received the most support, with assistance provided to 9,390 workers.
Given the large size of the EU workforce spread across a large number
of member countries (28), the assistance may seem small.14 However,
countries may have their own trade adjustment programs that are not
funded by the EGF.
14
Over a period of 7 years, 50,264 workers across 28 states means an average of 360
workers were assisted per country per year. Eight of the 28 states did not apply for
assistance, including several countries that joined the EU near the end of the 7-year
period. The EGF also supports workers affected by the global financial crisis of
2008–2009. An additional 55,942 workers were assisted in this regard (EU 2014).
7.5.3 Design and Implementation of Trade Agreements

Trade agreements can be designed in such a way as to cushion the
impact on workers and businesses. One category of measures gives
signatories time to adjust to an impending liberalization. A second
category provides safeguards in trade agreements to protect workers
following implementation.
Agreements that provide for a gradual reduction in trade barriers allow
time either for firms to upgrade to face the competition or for programs to
assist workers to transition. Early announcement of the agreement, with
implementation to follow, also provides adjustment time. These measures
can cushion the impact of liberalization and can give players a head start
in adjusting to the changes (Francois, Jensen, and Peters 2011).
Trading partners are increasingly including labor provisions in
trade agreements. The provisions are designed to protect workers as
countries open up to more intense trade interaction. They can help to
prevent a “race to the bottom,” in which countries might seek to gain a
competitive advantage through low labor standards.
The inclusion of such provisions has grown rapidly over the past
2 decades (ILO 2015). In 1995, only four trade agreements globally
included labor provisions—a decade later, that figure had jumped more
than fivefold to 21, and further to 58 by mid-2013 (Figure 7.4). Of course,
the number of trade agreements in place has also risen over the past
2 decades. Still, the 58 agreements represent just under a quarter of the
248 trade agreements that were in force and notified to the WTO. Out of
190 countries that are signatories to trade agreements, some 120 are party
to at least one agreement that includes labor provisions. In addition,
the number of agreements with labor provisions has accelerated in
recent years. During 2011–2015, a total of 57% of new trade agreements
contained labor provisions, which is nearly double the share (31%) in
the previous 5-year period.15
Most of these provisions focus on cooperation and monitoring,
or what the ILO calls “promotional” elements. Still, about 40% of
agreements include compliance and enforcement mechanisms with
specific economic measures that can be taken if a party is in breach of
the provisions. NAFTA, which came into effect in 1994, was the first
agreement to include a compliance mechanism. The use of a dispute
mechanism is rare, and only one case, involving recourse to economic
sanctions, has gone to arbitration. In other instances, matters may be
discussed and resolved beforehand (ILO 2016).
15
This analysis is based on 77 new trade agreements signed during 2006–2010 and
54 agreements in 2011–2015 (ILO 2016).
Figure 7.4 Bilateral and Regional Trade Agreements

with Labor Provisions (number of agreements)
70
60
50
40
30
20
10
0
1990 1995 2000 2005 2010 2013
Conditional Promotional
Source: ILO (2015a).
It may be difficult to determine whether labor provisions are having

an impact on labor market outcomes, given both the recent nature of
many provisions and the difficulty in determining causality. A recent
study by the ILO (2016) found that the provisions were linked to higher
labor force participation, especially for women, but did not appear
to impact other variables, including wages, the share of vulnerable
employment, and the gender gap in these two variables. The study found
that labor provision did not lead to a deterioration in standards and did
not prompt trade diversion to countries with lower standards. Thus,
labor provisions may be playing a role in preventing a race to the bottom
and providing general support to SDG 8.
7.5.4 Skills and Education to Enhance the Benefits

from Trade
The trade adjustment programs that some governments have put
in place are generally reactive. They may include measures that are
considered active labor market policy, but because they provide
support when workers are already affected or about to be affected by
trade-related sector adjustment, they are reacting to changes in labor
demand. Governments can take a more proactive approach by both
building comparative advantage and anticipating shifting skill demands.
Labor is an important aspect of building comparative advantage

in trade. As labor markets tighten and as income and wages rise, less-
developed countries, especially middle-income ones, need to secure
new aspects of competitiveness in the global marketplace. A failure to do
so may result in getting caught in the middle-income trap. That is, they
may lose competitiveness in lower-value (low-wage) goods and yet not
be able to move to higher-value activities in which higher productivity
can compensate for rising wages. While the ability to raise product value
and productivity is influenced by a myriad of factors at the enterprise
level, human resources are one of the key elements.
Therefore, securing the benefits from trade, both at the level of
aggregate welfare and in terms of generating positive labor market
outcomes, may require an active and anticipatory approach to education
and skills training. For middle-income countries and those striving to
achieve middle-income status, this requires a broad-based improvement
in the human capital of the workforce and those who will be entering
the workforce in the future. For high-income countries, which are not
particularly the focus of the SDGs but whose labor markets are affected by
trade, this means greater anticipation of future skills needs. In particular,
developed countries are losing competitiveness in certain areas of
manufacturing and need to transition their workforce skills profiles to
higher-value services, including those that are at either end of the product
value chain. These ends of the value chain include research, development,
design and prototyping in the product development stage, and marketing,
distribution, and service support at the post-production stage.
Countries that are more attuned to shifting skill requirements and
that can be proactive instead of reactive are more likely to maximize the
gains from trade and generate labor market outcomes that support the
employment aspects of the SDGs.
7.6 Conclusion
In the transition from the MDGs to the SDGs, the international
community expanded the agenda and the targets for governments and
development partners to achieve over the next 15 years. Employment
issues, which were a late addition to the MDGs, receive full treatment
with more relevant indicators in the new goals. SDG 8 dedicates
considerable attention to employment, not only in calling for full
employment, but also in improving labor market conditions in terms
of reducing informality and gender disparities, eliminating forced and
child labor, and improving labor rights. It is a challenging agenda, albeit
one that offers very few quantified targets.
At the same time, there is little mention of trade in the SDGs. This
may be because the benefits of freer trade, as part of the broader process
of globalization, are highly controversial in the public mind, especially
in regions hard hit by import competition. It may also be that trade is
considered a means rather than an end or goal. In any event, economists
and some policy makers have provided evidence that the gains from
specialization are very real, even if unevenly distributed.
Labor is a particularly relevant aspect of the freer trade debate
because the process of specialization, as a result of trade, causes sectors
to adjust and reduces the demand for labor in some firms and sectors
and increases it in others. The net employment benefit is sometimes
difficult to calculate. Indeed, concerns about the possible negative
employment impacts are behind a rising tide of protectionist sentiment
in societies around the globe. New trade deals continue to be signed,
but other proposed agreements may be in jeopardy. Further global trade
liberalization during the 15-year period of the SDGs is far from certain.
In this chapter, we have reviewed part of the extensive literature
on trade and employment. The purpose has been to see whether that
literature, both theoretical and empirical, provides clues as to if and how
increased trade can contribute to the achievement of the employment-
related SDGs. What is clear is that the aggregate welfare gains from
trade are as relevant today as they were when Ricardo first formalized
his theory 2 centuries ago. Since then, the discussion has been about
the distribution of those gains in terms of skilled and unskilled labor
and between countries that are more labor- or more capital-abundant.
Mainstream trade theory typically assumed full employment and
immediate reallocation and, therefore, had less to tell about employment
and unemployment than about wages. However, more recent theory
has taken a closer look at the process of reallocation and built models
that suggest that the speed of (re)matching workers and employers is
related to the labor institutions that encourage job movement and the
information channels available about vacancies.
The empirical evidence is vast and difficult to summarize. The
effects on employment quantity are bedeviled by methodological
issues, including how long to measure the effects from the start of a
trade agreement; controlling for other factors that have an impact on
employment; and offering one-sided (i.e., only one country) assessments
of a bilateral or multilateral deal. Nonetheless, the cross-country
evidence does suggest that greater trade openness is correlated with a
lower rate of unemployment. Thus, trade can help to support the full
employment target of the SDGs.
It is unclear from the evidence whether freer trade will increase,
decrease, or have no effect on the level of informal employment.
Domestic labor and enterprise policy may be important in addressing

this concern. There is evidence that greater openness is correlated with
a lower incidence of child labor, but the country income level appears to
be a more significant factor in reducing child labor. Research does not
appear to have been carried out on whether trade impacts the level of
forced labor, another area of concern in the SDGs.
Governments have several policy instruments at their disposal to
generate positive employment benefits from trade. These include trade
adjustment programs and efforts to anticipate skill demand and train
school-leavers and workers for employment in emerging sectors. In
addition, there has been a rapid increase in labor provisions in trade
agreements in recent years. These are correlated with higher labor force
participation and may help to maintain standards and avoid a race to the
bottom.
References
Aswicahyono, H., D. Brooks, and C. Manning. 2014. Exports and
Employment in Indonesia: The Decline in Labor-Intensive
Manufacturing and the Rise of Services. In Trade and Employment in
Asia, edited by N. Khor and D. Mitra. Abingdon, United Kingdom, and
New York: Asian Development Bank (ADB) and Routledge, 176–203.
Autor, D., D. Dorn, G. Hanson, and J. Song. 2013. Trade Adjustment:
Worker Level Evidence. NBER Working Paper No. 19226. Cambridge,
MA: National Bureau of Economic Research. http://www.nber.org
/papers/w19226 (accessed 30 December 2016).
Bernard, A., and J. B. Jensen. 1999. Exceptional Exporter Performance:
Cause, Effect or Both? Journal of International Economics 47: 1–25.
Cai, F., and Du Yang. 2014. Exports and Employment in the People’s
Republic of China. In Trade and Employment in Asia, edited
by N. Khor and D. Mitra. Abingdon, UK, and New York: Asian
Development Bank and Routledge, 120–141.
Carrere, C., A. Grujovic, and F. Robert-Nicould. 2015. Trade and Frictional
Unemployment in the Global Economy. Spatial Economics Research
Center, Discussion Paper 189. London: Spatial Economics Research
Center.
Copeland, B., and A. Mattoo. 2008. The Basic Economics of Services
Trade. In A Handbook of International Trade in Services, edited by
A. Mattoo, R. Stern, and G. Zanini. New York: Oxford University
Press, 84–129.
Das, D. K. 1998. Changing Comparative Advantage and the Changing
Composition of Asian Exports. The World Economy 21(1): 121–140.
Davidson, C., F. Heyman, S. Matusz, F. Sjoholm, and S. C. Zhu. 2012
Liberalized Trade and Worker-Firm Matching. American Economic
Review, 102(3): 429–434.
Davidson, C., L. Martin, and S. Matusz. 1999. Trade and Search Generated
Unemployment. Journal of International Economics. 48: 271–299.
Department of Labor, United States (DOL). 2015. Trade Adjustment
Assistance for Workers Program: Fiscal Year 2014. Report to the
Committee on Finance of the Senate and the Committee on the
Ways and Means of the House of Representatives. Washington,
DC: DOL.
Dutt, P., D. Mitra, and P. Ranjan. 2009. International Trade and
Unemployment: Theory and Cross-National Evidence. Journal of
International Economics 78: 32–44.
Edmonds, E., and N. Pavcnik. 2004. International Trade and Child
Labor: Cross-Country Evidence. NBER Working Paper No. 10317.
Cambridge, MA: National Bureau of Economic Research.
European Union (EU). 2014. European Globalisation Adjustment Fund:

Solidarity in the Face of Change. Pamphlet.
Felbermayr, G., J. Prat, and H. J. Schmerer. 2011. Trade and
Unemployment: What Do the Data Say? European Economic Review
55(60): 741–758.
Francois, J., M. Jensen, and R. Peters. 2011. Trade, Adjustment Costs and
Assistance: The Labour Market Dynamics. Paris: OECD. http://www
.oecd.org/site/tadicite/48133815.pdf (accessed 30 December 2016).
Goldberg, P., and N. Pavcnik. 2003. The Response of the Informal Sector
to Trade Liberalization. NBER Working Paper 9443. Cambridge,
MA: National Bureau of Economic Research.
Hanson, G. 2012. The Rise of Middle Kingdoms: Emerging Economies in
Global Trade. Journal of Economic Perspectives 26(2): 41–64.
Hausmann, R., J. Hwang, and D. Rodrik. What You Export Matters.
Journal of Economic Growth 12: 1–25.
Helpman, E., and O. Itskhoki. 2010. Labor Market Rigidities, Trade and
Unemployment. Review of Economic Studies 77(3): 1110–1137.
Helpman, E., O. Itskhoki, and S. Redding. 2010. Inequality and
Unemployment in a Global Economy. Econometrica 78(4): 1239–1283.
Hinojosa-Ojeda, R., D. Runsten, F. De Paolis, and K. Nabil. 2000. The U.S.
Employment Impacts of North American Integration after NAFTA:
A Partial Equilibrium Approach. North American Integration and
Development Center, Research Report No NAID-RR-010-00. Los
Angeles: University of California at Los Angeles (UCLA).
International Labour Organization (ILO). 2012. ILO Global Estimate of
Forced Labour: Results and Methodology. Geneva: ILO.
____. 2015a. Social Dimensions of Free Trade Agreements. Geneva: ILO.
____. 2015b. World Employment and Social Outlook, Trends 2015, Supporting
Data Sets. http://www.ilo.org/global/research/global-reports/weso
/2015/lang--en/index.htm (accessed 30 December 2016).
____. 2016. Assessment of Labour Provisions in Trade and Investment
Arrangements. Geneva: ILO.
International Monetary Fund (IMF). 2013. Trade Interconnectedness: The
World with Global Value Chains. Washington, DC: IMF. https://www
.imf.org/external/np/pp/eng/2013/082613.pdf (accessed 30 December
2016).
Jansen, M., and E. Lee. 2007. Trade and Employment: Challenges for
Policy Research, Geneva: World Trade Organization and ILO.
Krugman, P. 1979. Increasing Returns, Monopolistic Competition
and International Trade. Journal of International Economics 9(4):
469–479.
Krugman, P., and M. Obstfeld. 2009. International Economics: Theory
and Policy. Delhi: Dorling Kindersley.
Lin, J., and H.-J. Chang. 2009. Should Industrial Policy in Developing
Countries Conform to Comparative Advantage or Defy it? A Debate
between Justin Lin and Ha-Joon Chang. Development Policy Review
27(5): 483–502.
Maloney, W. 1998. The Structure of Labor Markets in Developing
Countries: Time Series Evidence on Competing Views. World
Bank Policy Research Working Paper 1940. Washington, DC:
World Bank.
Melitz, M. 2003. The Impact of Trade on Industry Reallocation and
Aggregate Industry Productivity. Econometrica 71(6): 1695–1725.
Moore, M., and P. Ranjan 2005. Globalization and Skill-Biased
Technological Change: Implications for Unemployment and Wage
Inequality. Economic Journal 115: 341–422.
Rodrik, D. 2004. Industrial Policy for the 21st Century. John F. Kennedy
School of Government, Harvard University, mimeo.
Shingal, A. 2015. Labour Market Effects of Integration into GVCs:
Review of the Literature. Swiss Programme for Research on Global
Issues for Development, R4D Working Paper 2015/10. http://www
.r4d-employment.com/wp-content/uploads/2014/09/GVC.pdf
Tao, Z., and R. Wong. 2001. Hong Kong: From an Industrialized City to
a Center of Manufacturing-Related Services. Mimeo. Hong Kong,
China: University of Hong Kong.
Trefler, D. 2004. The Long and the Short of the Canada–U. S. Free Trade
Agreement. American Economic Review 94(4): 870–895.
United Nations Industrial Development Organization (UNIDO). 2015.
Industrial Development Report 2016: The Role of Technology and
Innovation in Inclusive and Sustainable Industrial Development.
Vienna: UNIDO.
United Nations. 2015a. Transforming Our World: The 2030 Agenda
for Sustainable Development. Resolution adopted by the General
Assembly on 25 September 2015, 70th session, 70/1. http://www.
un.org/ga/search/view_doc.asp?symbol=A/RES/70/1&Lang=E
____. 2015b. The Millennium Development Goals Report 2015. New York:
United Nations. http://www.un.org/millenniumgoals/2015_MDG
_Report/pdf/MDG%202015%20rev%20(July%201).pdf (accessed
30 December 2016).
____. 2016a. Report of the Inter-Agency and Expert Group on Sustainable
Development Goal Indicators. Economic and Social Council.
Statistical Commission 47th Session, 8–11 March. http://unstats
.un.org/unsd/statcom/47th-session/documents/2016-2-IAEG
-SDGs-Rev1-E.pdf (accessed 30 December 2016).
____. 2016b. Sustainable Development Goals: 17 Goals to Transform Our

World. http://www.un.org/sustainabledevelopment/economic-
growth/ (accessed 1 July 2016).
van der Marel, E. 2011. Determinants of Comparative Advantage in
Services. Working paper, Group d’Economie Mondiale. LSE Research
Online. Paris: LSE. http://eprints.lse.ac.uk/38993/1/Determinants_
of_comparative_advantage_in(LSERO).pdf (accessed 30 December
2016).
Vere, J. 2014. Trade and Employment in Hong Kong, China: Towards
a Service Economy. In Trade and Employment in Asia, edited by
N. Khor and D. Mitra. Abingdon, UK, and New York: ADB and
Routledge, 142–175.
Wolff, E. 2003. Skills and Changing Comparative Advantage. Review of
Wood, A. 1995. North–South Trade, Employment and Inequality: Changing
Fortunes in a Skill-Driven World. Oxford: Oxford University Press.
World Bank. 2016. World Development Indicators (WDI) http://
databank.worldbank.org/data/reports.aspx?source=world-
development-indicators (accessed 15 September 2016).
World Trade Organization (WTO). Annual Report 2016. Geneva: WTO.
Yahmed, S. B., and P. Bombarda. 2016. Gender, Informal Employment
and Trade Liberalization in Mexico. Mimeo. https://afse2016.
sciencesconf.org/99374/document (accessed 1 July 2016).
8
Trade and Inequality
Shujiro Urata and Dionisius A. Narjoko
8.1 Introduction
Increasing inequality has been a very serious concern for many people
including policy makers and researchers in the world. Thomas Piketty’s
book, Capital in the Twenty-First Century,1 which analyzes the growing
asset inequality in developed countries, sold over 1.5 million copies (as of
January 2015) throughout the world. One of the most contentious issues
in the United States (US) Presidential election is the growing income
gap between the rich and the poor. According to Saez (2015), the share
of income held by the richest 1% of the population in total increased
from 8.95% in 1978 to 21.24% in 2014 in the US.
Increasing inequality has been a serious issue in the developing
countries as well. The People’s Republic of China (PRC) and India, two
rapidly growing economies, have been reportedly experiencing increases
in inequality. In terms of economic growth, the PRC and India have been
regarded as successful cases, but in terms of quality of economic growth
they appear to suffer from such problems as growing inequality and
environmental problems. It is not only the PRC and India that are faced
with growing inequality, but other developing countries as well.
Achieving equitable and balanced growth is important for the
people, society, and government. Growing inequality would lead to
social unrest and political instability, which in turn would undermine
economic growth. Indeed, recognizing the importance of reversing
the trend of increasing inequality in developing countries, the United
Nations has included reducing inequality as one of 17 Sustainable
Development Goals.2
1
The original French version was published in 2013. The English translated version
was published in 2014 (Piketty 2014).
2
See the following UN website for the Sustainable Development Goals.
http://www.un.org/sustainabledevelopment/sustainable-development-goals/
(accessed 20 February 2017).
175
Figure 8.1 Trade–Gross Domestic Product Ratios (%)

70
60
50
40
30
20
10
0
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
Developing countries OECD member countries
OECD = Organisation for Economic Co-operation and Development.

Source: Computed from the World Bank, World Development Indicators online (accessed 16 April
2016).
While the world has been witnessing growing inequality in recent

decades, it is also experiencing rapid economic globalization through
international trade and investment, particularly in the form of foreign
direct investment (FDI). The share of trade (exports + imports) in
gross domestic product (GDP) (trade–GDP ratio) for developing and
developed countries increased more or less continuously from the late
1960s through 2014 (Figure 8.1). Specifically, the trade–GDP ratios for
developing and developed countries increased from 29.9% and 36.9% in
1980 to 51.3% and 45.7% in 2000, respectively, and then further to 55.2%
and 55.3% in 2014. Major drivers of the increase in trade–GDP ratios
include trade and FDI liberalization, and reduction in transportation
costs by technological progress and deregulation in transportation
services sectors.3
Growing inequality and rapid globalization have been observed
in tandem; as such, globalization has often been accused of worsening
3
See, for example, Hummels (2007) about the reduction in trade cost.
Trade and Inequality177
inequality. Indeed, anti-globalists, many of whom are concerned with

growing inequality, have held a number of demonstrations against the
meetings organized by the World Trade Organization, the World Bank,
the International Monetary Fund, and other international organizations
as well as developed countries such as G-7 Summits, which are
considered to have promoted globalization.
Considering the discussions and observations above, the purpose
of this chapter is to examine the impacts of globalization, particularly
in terms of international trade, on inequalities in developing countries.4
Inequality is found in many forms, including income inequality, wage
inequality, asset inequality, regional inequality, gender inequality,
generational inequality, and others. We analyze the impacts of
international trade on inequalities from the following perspectives.5
In section 8.2, we examine the impacts of international trade from the
global perspective. Specifically, we first analyze inequalities between
developing and developed countries, and then global inequalities, which
are measured as if the world is treated as one country or one entity. In
section 8.3, we turn to within-country income inequality, while in section
8.4 we analyze wage inequality, which is a major component of income
inequality, in depth. In section 8.5, regional inequalities within countries
are examined. The final section, section 8.6, concludes the chapter by
summarizing the findings and providing several policy implications.
8.2 Inequality from the Global Perspective

Inequality from the global perspective can be examined in several ways.
One may compare a country’s average per capita income with that of
another, and examine whether the gap has widened or narrowed over
time. In this approach, the unit of comparison is a country or a group
of countries such as developing and developed countries. Another
approach is to consider all the people in the world as individuals or
world citizens and measure inequality among them. The measured
inequality may be considered as the global inequality. In this section,
both approaches are used to learn more about inequality in the world.
One may find global inequality decomposed into cross-country equality,
4
For developing countries, consumption rather than income is a better indicator of
measuring inequality because many households are engaged in self-employment
and self-consumption, which are not captured by the statistics on income. But most
studies use income or wage statistics rather than consumption statistics because of
the limited availability of consumption data.
5
See Goldberg and Pavcnik (2007) and Goldberg (2015) for a survey of the literature.
which is investigated in section 8.2.1 and within-country inequality,

which is examined in section 8.3.
8.2.1 Inequality between Developing and Developed

Countries
Inequality between the rich (developed) countries and the poor

(developing) countries has been a contentious issue for many decades.
International trade has been considered to play an important role
in influencing this inequality. Some observers argue that developed
countries exploit developing countries via a trading system where
developing countries export primary products such as natural resources
to developed countries while importing industrial products. According
to this view, since the terms of trade of primary products as compared
to industrial products tend to worsen over time (Prebisch–Singer
hypothesis),6 trade widens inequality between the developed and
developing countries.
However, there has been a totally opposing view, which argues
that trade is an engine of economic growth,7 able to reduce inequality
if developing countries successfully expand it. Expansion of exports
enables the developing countries to earn foreign exchange, with which
they can import raw materials, intermediate goods, capital goods,
technology, and other items. Export expansion also enables exporting
firms to benefit from economies of scale and improve productivity.
As seen in the above discussions, the impacts of trade on economic
growth can be positive and negative. Considering this, we review the
empirical studies that examined trade and economic growth, with a
focus on the relationship between developing and developed countries.
Dollar (2005) compared per capita GDP growth of the developing
and developed countries from the 1960s through the 1990s for about 100
countries using data obtained from the Penn World Tables, and found
that growth rates gradually declined in developed countries while
accelerating in developing countries. During the 1960s, the growth of
member countries of the Organisation for Economic Co-operation and
Development (OECD) was about twice that of developing countries.
During the 1970s and 1980s, the growth of developed countries declined
significantly while that of developing countries remained more or less at
around the same level. The 1990s saw a dramatic increase in developing
6
On the Prebisch–Singer hypothesis and its validity, see, for example, Harvey et al.
(2010).
7
See, for example, the World Bank (1993).
countries’ growth, while developed countries’ growth continued to

decline. Indeed, the growth rate of developing countries was twice that
of developed countries in the 1990s.
A similar pattern of the reversal of GDP per capita growth rates
between developed and developing countries in the 1990s can be
seen in Figure 8.2. The data are taken from the World Bank’s World
Development Indicators. After a substantial decline from the 1970s to
the 1980s, the developing countries’ GDP per capita growth rate began
to increase in the 1990s and then it increased remarkably in the 2000s.
By contrast, the OECD countries’ GDP per capita growth rate declined
continuously from the 1980s to 2014. Indeed, there is a wide divergence
in the average annual GDP per capita growth rates for the 2000–2014
period between the developing countries at 4.5% and OECD countries
at 0.9%. These developments resulted in the narrowing of the GDP per
capita gap between them. GDP per capita of developed countries was
24 times as high as that of developing countries in 1970, but the gap
declined to 15 times in 2014.
A comparison of developing and developed countries’ per capita
GDP growth revealed that inequality between them declined in recent
Figure 8.2 Gross Domestic Product per Capita Growth Rates

for Developed and Developing Countries (%)
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1970–1980 1980–1990 1990–2000 2000–2014
Developing countries OECD member countries

Source: Computed from the World Bank, World Development Indicators online (accessed 16 April
2016).
decades, especially in the 2000s. Recognizing the increasing trend of the

trade–GDP ratio during the period shown in the previous section, one
may argue that trade contributed to the rise in per capita GDP growth
rates, particularly for the developing counties, thus contributing to the
narrowing gap. The validity of this assertion should be examined by
conducting rigorous statistical analyses. Several empirical studies have
been conducted to examine the impacts of foreign trade on economic
growth during the last 2 decades, but no conclusive evidence has been
presented yet. We review several important studies on this subject below.8
A typical growth regression has growth rate in terms of per capita
GDP as the dependent variable and it has its initial level and a wide variety
of control variables including trade and investment as explanatory
variables. One of the early studies was the World Bank (1993). Using
data covering 88 countries for 1960–1985, they conducted a regression
analysis of the determinants of real per capita GDP growth and found
that trade–GDP ratio had a significantly positive impact. Many studies
found significant positive correlations between per capita GDP growth
rate and trade–GDP ratio.9 However, several econometric problems
concerning growth regression, including the problems of endogeneity
and correlated individual effects, were pointed out.10
Several studies dealt with these problems. Frankel and Romer (1999)
investigated the impact of international trade on per capita income by
8
The issue of the impact of trade on economic growth has also been analyzed from
the trade policy perspectives. For such studies, the main issue is whether trade
liberalization promotes economic growth. There have been a large number of
empirical studies on this issue. The results from growth regression analyses vary
depending on the indicators of trade policy, types of regressions methods, periods
of analysis, and others. In one of the most influential papers on this issue, Sachs and
Warner (1995) found that trade liberalization promoted economic growth. Wacziarg
and Welch (2008) extended the Sachs and Warner study by dealing with criticisms
and showed positive impacts of trade liberalization on economic growth. For critical
discussions of the previous studies based on growth regressions, see, for example,
Rodríguez and Rodrik (2001) and Rodríguez (2007), which did not find a trade
liberalization growth-promoting effect. Major criticisms include incorrect indicators
of trade policy and inappropriate econometric treatment. Some opponents of growth
regressions, which include Srinivasan and Bhagwati (1999), advocate country-level
case studies. The result of country case studies such as Krueger (1978) in general
support outward-oriented trade policy for achieving economic growth. It should
be noted that the study of trade policy on economic growth and the study of trade
openness (trade/GDP) on economic growth are closely related, but their meaning
is different. One obvious reason for the difference is that trade liberalization, for
example, reduction in tariff rates, does not necessarily increase the trade/GDP ratio
because the tariff rate is only one factor among many, such as the exchange rate.
9
See Winters (2004) for a survey.
10
See Caselli et al. (1996) on these points.
dealing with the endogeneity problem in that countries whose incomes

are high for reasons other than trade may trade more. Analyzing the
data from 150 countries for 1985 by using the instrumental variable
estimation method, Frankel and Romer found that trade has a positive
impact on income, although the estimated coefficient was moderately
statistically significant. Dollar and Kraay (2004) conducted a regression
analysis by adopting instrumental variables estimation to deal with the
endogeneity problem and by taking the differences of the variables
to deal with the problem of correlated individual effects. In their
analysis, the explanatory variables include lagged growth, changes in
trade volumes, and changes in policy and non-policy variables affecting
growth.11 The results of the estimation analyzing the growth rates in the
1980s and the 1990s for roughly 100 countries found that the change in
trade volume had a positive and significant impact on growth.
Despite several attempts to deal with the problems raised by the
critics, these authors do not seem to be successful in dealing with those
problems. Rodríguez (2007) reviewed some major studies including
Dollar and Kraay (2004) and found that these studies did not deal with
the problems successfully. Rodríguez asserted that one of the reasons
why it is so hard to reach definitive conclusions regarding the trade–
growth link is the complex web of interrelationships that is involved in
the determination of a nation’s income. Rodríguez pointed out geography
and institutions, which would affect trade as well as economic growth.
As such, these factors need to be considered in the regression analysis.
Another issue raised by Rodríguez is the period of analysis. Using
the more recent data covering the 1990–2003 period rather than the
1980s and 1990s as in the earlier studies, Rodríguez performed a first-
difference regression analysis, similar to the approach adopted by Dollar
and Kraay (2004). He also added more control variables such as those
associated with institutions, and found trade/GDP ratio to be mostly
positive, but statistically insignificant.
A brief survey of the previous studies on the impacts of trade on
economic growth revealed that the strong positive impacts found in
early studies turned out to be not robust. The results of the survey are
not encouraging for the proponents of trade-promoting policies, and
the impacts of trade and economic growth need to be analyzed further.
Goff and Singh’s 2013 study on the impacts of trade on poverty in Africa
showed possible perspectives that need to be considered to discern
the impacts of trade on growth. Analyzing the panel data covering
30 African countries over the period 1981–2010, they found that impacts
11
Specifically, institutional quality government consumption, monetary policy, and
political stability.
of trade on poverty were negative, meaning that trade increases poverty,

except in countries where finance sectors are deep, education levels
are high, and governance is strong. These findings point to the need
for accompanying policies/institutions to trade-promoting policies to
achieve economic growth. With these policies, reallocation of resources
from less productive sectors to more promising ones will be enhanced,
resulting in economic growth.
Although earlier empirical studies analyzing macroeconomic
variables have shown mixed results of the impacts of trade on economic
growth, various reasons for possible positive impacts have been pointed
out in discussions on this issue. One of the most important reasons is
the productivity-enhancing effects of trade, i.e., exports and imports.
This relationship was detected in earlier studies using macro as well
as sectoral data, but the lack of appropriate theory and necessary
data precluded researchers from establishing the causal relationships
empirically.12 It was the advent of the heterogeneous firm and trade
model, developed by Melitz (2003), and the availability of firm-level
data that enabled researchers to discern how expanding trade and/or
trade liberalization affects the aggregate economy. Several studies have
found that exporting resulted in an improvement in productivity of
exporting firms, or the presence of the “learning by exporting” effect.13
The sources of exporting firms’ productivity-enhancing effect may
include economies of scale and acquisition of advanced technology in
foreign markets, which may be obtained by exporting. Increased imports
are found to contribute to increase local firms’ productivity. Amiti and
Konings (2007) argued that trade liberalization in Indonesia raised local
firms’ productivity by enabling them to use a greater variety of imported
intermediate inputs. We will come back to this issue, when we discuss
wage inequality.
8.2.2 Global Inequality
In this section, we examine the allied impact of globalization and

how global inequality has changed in recent decades. According to
Bourguignon and Morrisson (2002), global inequality rose from 1820 to
1980, as their estimates of the global Gini coefficient increased from 50
to 65 during that period. For the period after the 1980s, various estimates
have been made with mixed results in terms of the direction of the
12
For example, see Alcalá and Ciccone (2004).
13
The studies that detected “learning by exporting” effect include, for example,
Aw et al. (2000), Girma et al. (2004), De Loecker (2007), and Hahn and Park (2010).
change. Bhalla (2002) estimated the global Gini coefficient and found
that it declined from 67 in 1980 to 64 in 2000. Sala-i-Martin (2002) also
found a decline. By contrast, Bourguignon and Morrisson found the Gini
coefficient to remain at 65.7 in 1980 and 1992, while Milanovic (2002)
found an increase of about 3 Gini points from 62.5 in 1988 to 65.9 in
1993, which is followed by a decline of 1 Gini point in the next 5 years
and by an increase of 1 point by 2002.14 Based on these calculations,
Milanovic observed a fluctuating Gini coefficient from the 1980s to
2002. Bourguignon (2016) reported that global inequality declined after
2000. These observations show that global inequality worsened from
the 19th century to around 1980, but it remained about the same level or
improved from the 1980s through around 2010.
The impact of globalization on global inequality may be analyzed by
decomposing global inequality into two components: inequality in mean
incomes between poor and rich countries, and within-country income
distributions. If globalization, in the form of, for example, an increase
in the trade–GDP ratio reduces the mean income gap between poor
and rich countries and it reduces within-national income distributions,
then global inequality is likely to be reduced. A comparison between the
rich and poor countries in terms of changes in per capita GDP (Figure
8.2) and the changes in trade–GDP ratios (Figure 8.1) shows that per
capita GDP growth was accompanied by globalization. Coupled with
the observation in the next section that the impacts of globalization on
within-national income distribution are mixed, one is tempted to argue
that globalization contributed to narrowing global inequality. However,
this assertion cannot be supported if one remembers that in section
8.2.1 the earliest studies have shown that the impacts of globalization on
economic growth are also mixed. These observations and discussions
indicate that the impact of globalization on global inequality cannot
be conclusively determined. More studies on these two issues need to
be conducted to see if and how globalization affected global equality/
inequality.
8.3 Within-Country Income Inequality

Many studies have found that within-country inequality increased in
both developed and developing countries in recent decades.15 Before we
14
This calculation is reported in Milanovic (2006).
15
Jaumotte et al. (2013) provided the information from the 1980s to around 2003.
See also Goldberg and Pavcnik (2007) for the cases of several developing countries.
examine whether globalization, particularly in terms of international

trade, has contributed to this, we comment on the changes in trade–
GDP ratios and Gini coefficient for selected developing countries in East
Asia from the 1980s to 2012. It should be noted that the Gini coefficient
is available for a limited number of countries for certain years, making
cross-country, time-series comparisons difficult.
Figure 8.3 shows the trade–GDP ratios and Gini coefficients
for nine countries in East Asia, for which both are readily available.
Concerning the trend in the trade–GDP ratios, all the countries in the
figure showed substantial and continuous increase through the end of
the 1990s although many countries experienced a decline toward the
end of the 1990s because of the Asian financial crisis. Entering the
21st century, two divergent trends appeared. One group of countries,
including Cambodia, the PRC, India, the Lao People’s Democratic
Republic, Thailand, and Viet Nam continued to increase the trade–GDP
ratios, while the other group consisting of Indonesia, Malaysia, and the
Philippines experienced a reversal in the trend and recorded a decline
in the trade–GDP ratios.
Turning to the Gini coefficient, we find that the PRC is the only
country that exhibited a continual and substantial increase from the
early 1980s to 2010, as the index increased sharply from 27.69 in 1984 to
42.06 in 2010. India, Indonesia, and Viet Nam showed an upward trend in
the 21st century after experiencing a relatively stable trend. By contrast,
Cambodia, Malaysia, the Philippines, and Thailand showed a downward
trend in the 21st century after experiencing a slight upward trend. These
casual observations appear to find a strong positive correlation between
trade–GDP ratio and inequality only in the case of the PRC. For other
countries, such relationships cannot be found for the entire period of
examination, although they can be detected for certain subperiods.
Many studies have addressed the issue related to the impact of
globalization on within-country income inequality for various countries.
Most of these studies examined the impact on wage inequality rather
than income inequality.16 Wage inequality is closely related to income
equality, because wages are a dominant part of income for many
workers. However, they are different because many people receive
unearned income, such as profits from investments. There are relatively
few studies that examine the relationship between globalization and
within-country income inequality as a whole for individual countries.
Several cross-country econometric studies have been conducted, as will
be discussed below.
16
See section 8.4 for the discussions on globalization and wage inequality.
Figure 8.3 Trade–Gross Domestic Product Ratios

and Gini Index for Selected East Asian Countries
Cambodia PRC India
70
160 60
60
140
50
120 50
40
100 40
80 30
30
60
20 20
40
10 10
20
0 0 0
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Indonesia Lao PDR Malaysia
120 100 250
90
100 80 200
70
80
60 150
60 50
40 100
40 30
20 50
20
10
0 0 0
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
The Philippines Thailand Viet Nam
120 160 180
140 160
100
120 140
80 120
100
100
60 80
80
60
40 60
40 40
20
20 20
0 0 0
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
1986
1989
1992
1995
1998
2001
2004
2007
2010
GINI index Trade-GDP ratio
GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, PRC = People’s Republic of China.
Source: Computed from the World Bank, World Development Indicators online (accessed 16 April 2016).
One useful theoretical framework that may be applied to explain

the relationship between trade and income distribution is the Stolper–
Samuelson theorem derived from the Heckscher–Ohlin trade model.
According to the Stolper–Samuelson theorem, trade liberalization
leads to an increase in the price of abundant factors because it expands

the production and exports of associated products and reduces the
production of scarce factor-intensive products as a result of an increase
in imports of the latter. Let us assume that there are two types of
labor—skilled and unskilled—and developing countries are abundantly
endowed with unskilled labor. Under such a circumstance, developing
countries’ trade liberalization will expand exports of unskilled labor-
intensive products and imports of skilled labor-intensive products,
which in turn increases demand for unskilled labor and reduces demand
for skilled labor. Assuming that labor’s income comes from wages, one
could show that an expansion of foreign trade would improve income
distribution in developing countries as it would increase the wages of
unskilled workers while it would reduce those of skilled workers.17
We review the existing country-level and cross-country studies
on the impacts of globalization on within-country income inequality.
Country-level studies analyze the trends of various variables, including
income distribution, globalization, employment, development policies,
and others, while cross-country studies use statistical methods. Let us
begin with country-level studies and then turn to cross-country studies.
Goldberg and Pavcnik (2007) analyzed the impacts of globalization
on within-country inequality in developing countries covering the
period from the 1980s to around 2000. For the economies they analyzed,
that is, Argentina; Brazil; Chile; Colombia; Hong Kong, China; India;
and Mexico, the share of trade to GDP increased and income inequality
measured by Gini coefficient was either stable or increased during
the 1980s and 1990s. These developments are not consistent with the
Stolper–Samuelson prediction discussed above. Noting the difficulty
in establishing a causal link between expanded trade and growing
inequality, partly because of the difficulty in considering other factors
such as the changes in macroeconomic environment, and adoption of
various policy reforms other than trade policy, Goldberg and Pavcnik
concluded that evidence has provided little support for the conventional
wisdom (Stolper–Samuelson theorem) that trade openness in
developing countries would favor the less fortunate (at least in relative
terms).18 According to Goldberg and Pavcnik, one of the decisive factors
is constrained labor mobility, which limited sectoral reallocation. They
also argued that the mechanisms through which trade affects income
distribution are country-, time-, and case-specific, implying the need for
case studies.
17
Detailed discussions on wage inequality will be presented in section 8.4.
18
Goldberg and Pavcnik (2007: 77).
Mah (2013) analyzed the impact of globalization on income

inequality in the PRC. Globalization is captured by the trade–GDP ratio
and FDI inflows–GDP ratio, while income inequality is measured by two
ratios: one is the average income of the top 10% divided by that of the
bottom 10%, and the other is the average income of the top 10% divided
by that of the bottom 40%. Applying the dynamic ordinary least squares
method to the time-series data covering 1985–2007, Mah found that
increases in the trade–GDP ratio had a strong positive effect on income
inequality, regardless of the measure, while the effect of FDI inflows
was found to be mixed. These findings appear consistent with the casual
observation made earlier, showing the rising trend of trade–GDP ratio
and increasing inequality in the PRC.
Pal and Ghosh (2007) analyzed the trend of income and consumption
inequality from the 1980s to early 2000s in India. Noting the mixed
evidence on the direction of change in income inequality during the
1990s, the period of economic reform, which was obtained from various
studies, they presented other researchers’ studies that showed an
increasing inequality in terms of expenditure and consumption. Pal and
Ghosh argued without conducting a statistical analysis that fiscal policy,
financial reform, liberalization of foreign and domestic investment,
and trade liberalization all contributed to increasing inequality, as they
favored the allocation of fiscal as well as financial resources from the
poor to the rich. On the impact of trade liberalization, they argued that
it had negative impacts on agriculture, which employs low-income
workers, while it only benefited a small portion of the manufacturing
sector, resulting in growing inequality.
All the studies surveyed above did not support the Stolper–
Samuelson prediction. The findings of Ragayah (2008) on the case of
Malaysia are different. Ragayah (2008) found that Malaysia’s income
inequality declined during the 1976–1990 period, but it increased
after 1990. Ragayah argued that differences in the pattern of exports
between these two periods played an important role in its impacts on
income inequality. Rapid growth during the 1976–1990s was largely
attributable to rapid expansion of labor-intensive exports, which
provided employment for many, thereby contributing to the decline in
income inequality. The situation changed as a labor shortage emerged
in the 1990s. To maintain its global competitiveness, Malaysia upgraded
its industrialization from one that is labor-intensive to one that is
capital- and technology-intensive. Consequently, this new development
strategy altered industries’ labor demand pattern toward skilled and
highly educated workers, resulting in increasing income inequality. The
massive entry of unskilled foreign labor into the Malaysian economy
enhanced this trend by dampening their wages. Ragayah’s findings are
very interesting and consistent with the Stolper–Samuelson theorem in

that globalization reduced income inequality when Malaysia was a low-
income developing country, while worsening it when Malaysia became
a middle-income country.
Let us turn to the cross-country analysis. Anderson (2005) provided
a review of cross-country econometric studies of the effect of openness
on within-country inequality.19 The studies that Anderson reviewed
covered the period up to the mid-1990s. Specifically, he examined the
results of the studies that statistically tested the validity of the following
three hypotheses: (1) greater openness raises overall inequality in all
countries; (2) greater openness reduces overall inequality in developing
countries, but increases overall inequality in developed countries;
(3) the effects of greater openness on overall inequality vary, depending
on country factor endowments. Reviewing the studies, Anderson came
up with the following broad conclusions on the three hypotheses: there
is almost no support for the first hypothesis, while there is conflicting
evidence regarding the second hypothesis. Some studies found that
greater openness does reduce inequality in developing countries, but
others found no significant effect of openness on inequality at any
level of economic development. There is qualified support for the third
hypothesis. Specifically, some studies found that the effect of openness on
inequality increases as countries’ human capital endowments increase.
This finding appears to indicate that openness increases inequality as the
level of economic development rises and it is consistent with Ragayah’s
finding on Malaysia. One of the problems of many of these studies is the
omission of possibly important variables such as technology and FDI,
which are likely to impact income inequality. Jaumotte et al. (2013) took
on this problem by explicitly introducing technology, FDI, and several
other variables in their econometric analysis.
Jaumotte et al. (2013) conducted a detailed statistical analysis
of the impacts of globalization on within-country income inequality.
Their data set included 51 countries (20 developed and 31 developing)
over 1981–2003, and they observed that income inequality rose in most
countries during that period. They found that the income of the poorest
groups increased, suggesting that inequality increased in the upper
parts of the distribution in most countries. Their empirical analysis
revealed that trade liberalization (increase in trade–GDP ratio as well
as a decline in tariff rates) is associated with lower income inequality,
while increased financial openness is associated with higher income
19
The measure of inequality differs among the studies, but the Gini index and the share
of the poorest quintile in national income are used in many studies.
inequality. The combined contribution of increasing trade and financial

flows to rising inequality is slightly positive in the case of all countries and
slightly negative for developing countries. It is noteworthy that exports,
particularly agricultural exports, contribute to reducing inequality. Tariff
reductions are found to reduce inequality. Jaumotte et al. argued that
tariff reductions affected goods that are disproportionately consumed
by the poor. Among different types of international financial flows,
inward FDI is revealed to increase inequality. According to Jaumotte et
al., this finding may reflect the phenomenon that FDI mostly takes place
in relatively higher skill- and technology-intensive sectors, thereby
increasing the demand for, and wages of, more skilled workers.
In contrast to the inequality-reducing impacts of trade, Jaumotte et
al. found that technological progress increased inequality. This finding
is consistent with an observation that technological progress increases
the demand for skilled workers. We will analyze this issue more in
detail in the next section on wage inequality. Based on a decomposition
analysis of the change in inequality based on their estimation results,
Jaumotte et al. found that the contribution of technological progress was
positive (increasing inequality) and very large, while the contribution of
globalization (trade and financial flows) was negative and very small in
the case of developing countries.20
In this section, we examined the impacts of globalization,
particularly in the form of increasing international trade, on within-
country income inequality. We first observed somewhat different recent
changing patterns of trade–GDP ratios and within-country income
inequality for some countries from the patterns observed for the period
up to the early 2000s. Some countries saw a decline in trade–GDP ratios,
while some countries registered a decline in within-country income
inequality. These findings indicate the need for more empirical studies
on this subject using more recent data.
A survey of empirical studies revealed somewhat different patterns
between the country-level studies and cross-country studies. Some
country-level studies showed that an increase in trade–GDP ratios
worsened inequality, while some country-level studies did not detect
significant impacts of trade on income distribution. Cross-country
studies found that trade improved income distribution, although the
impacts are rather small. These mixed results of the impacts of trade on
income inequality indicate the need for more analyses.
20
For developed countries, contributions of globalization and technological progress
were found to be positive. The magnitude of the contribution of technological
progress is more than twice as large as that of globalization (Jaumotte et al. 2013).
8.4 Wage Inequality

The question about globalization and wage gaps came after an
observation of two different, but not necessarily mutually exclusive
facts, that is, an increase in skilled intensity in many countries during
the 1980s and 1990s and implementation of trade reforms in these
countries during these periods. The two coincidentally happened at
the same time. Studies on Latin American countries found that skill
premium in Mexico (Cragg and Epelbeum 1996), Colombia (Attanasio
et al. 2004), Argentina (Gasparini 2004), and Brazil (Gasparini 2003) all
increased by at least 10% for a 5- or 10-year period within the 1980s and
1990s. The increase in Mexico is the largest among all and it suggests the
strongest potential link between globalization and wage inequality; the
country implemented major trade reforms in the 1980s and continued
by implementing further reforms to increase FDI and facilitate cross-
border outsourcing (Cragg and Epelbeum 1996).
In this section, we review theoretical explanations of the possible
role of globalization in affecting the wage gap in developing countries
and then present recent empirical findings on this relationship in
8.4.1 Increasing Wage Gap in Developing Countries:

Theoretical Explanations
Goldberg and Pavcnik (2007) pointed out that the shift in demand for
skilled workers is the main reason for a widening wage gap, or skill
premium, observed in developing countries. While the demand-shift
mechanism is clear, it is not so clear how the demand curve shifts. There
are then questions about which factors cause demand to shift and how
this occurs.
The neoclassical Heckscher–Ohlin model is not always able
to explain the skill premium trend and pattern, especially those in
developing countries. The Stolper–Samuelson theorem derived from
the Heckscher–Ohlin model predicts that distributional changes
in developing countries, which usually are endowed with unskilled
workers, should favor unskilled workers more than the skilled ones
in the event of trade liberalization. This theorem therefore predicts a
lower gap in wage between skilled and unskilled workers.
The Stolper–Samuelson theorem, however, contradicts the fact
of an increasing wage gap over time. There are at least three potential
explanations for this according to Goldberg and Pavcnik (2007). First,
one may extend the basic Heckscher–Ohlin model, which is built upon
a two-sector and two-factor framework, to include the third factor

(e.g., natural resources) or an additional sector (non-traded goods)
that requires skilled workers for production. Further, it is assumed that
natural resources complement skilled workers. If, suppose, a country
has abundant natural resources, the extended Heckscher–Ohlin model
predicts that trade creation in favor of an expansion in the natural
resources sector increases the demand for skilled workers, which is
translated to an increase in wage of skilled workers. The demand (and
hence the wage) of unskilled workers meanwhile declines.
Second is the case where large tariff reduction is applied to
unskilled labor-intensive sectors. In developing countries, these sectors
producing typically are highly protected for various reasons (mainly for
political economy, i.e., as a major source of employment). Cuts in tariffs
reduce the demand for unskilled workers and thus reduce the wage of
the workers. Kumar and Mishra (2008) provided some evidence from
major trade liberalization in India in the early 1990s, in which tariff
reductions were disproportionately large in labor-intensive sectors. An
increase in the wage gap was observed in these sectors.
Third, there is a shift in the distribution of comparative advantage
across countries, with the emergence of the PRC or other developing
countries that have comparative advantage in unskilled labor-intensive
sectors. This pushes more advanced, or middle-income, countries,
such as those in Latin America in the 1980s, to move their pattern of
comparative advantage toward goods with higher skill intensity.
Other alternative explanations not in the context of the Heckscher–
Ohlin model have been put forward in the literature. The first is the
outsourcing or product-sharing theory of Feenstra and Hanson (1996,
1997). The model they developed shows that FDI increases demand for
skilled labor and thus increases skill premium. This model emphasizes
the growing importance of trade in intermediate inputs, partly because
of FDI. In the model, relative demand for skilled labor is increased
because production of relatively skill-intensive intermediate inputs is
shifted to these countries. While the shift can be characterized as less
skill-intensive from the perspective of a developed country, it is skill-
intensive from the perspective of a developing country.
It is useful to make some comments on the difference between
traditional trade theory and the one suggested by Feenstra and Hanson.
The main difference comes from different expectations of how
globalization changes production of skill-intensive intermediate inputs.
The former expects a decline in production because many intermediate
inputs are replaced by imported ones. Feenstra and Hanson’s theory,
meanwhile, predicts that domestic production is increased because
now many of the inputs are produced locally by outsourced firms.
The magnitude and direction of globalization’s impact on wage

premiums thus depends on the changes in production of skill-intensive
intermediate inputs.
The second explanation is often termed skill-biased technological
change (SBTC). SBTC argues that the technology used in many
developing countries has become more advanced over time, inducing
an increase in the demand for skilled workers. The process that brings
in advanced technology to these countries, however, is not random.
It depends on openness, that is, technology transfer from overseas or
more developed countries is facilitated by a more open trade and/or a
more liberal investment regime. Technology, therefore, is endogenous to
openness, and this is how globalization is responsible for the skilled-bias
technological change (Goldberg and Pavcnik 2007).
Two mechanisms reflecting endogeneity are provided by Wood
(1999) and Acemoglu (2003). The first is “defensive innovation,” as Wood
termed the response. He hypothesized that intensified competition
from imports may induce firms to engage in research and development
(R&D) activities that they have little incentive to undertake before trade
liberalization (Goldberg and Pavcnik 2007). The second mechanism,
suggested by Acemoglu (2003), comes from imports of machinery or
other capital goods that are complementary to skilled workers. In this
model, trade liberalization reduces the price of the machinery and
capital goods and therefore increases the imports of these goods. This
results in an increase in the hiring of skilled workers for the operation of
the more advanced technology installed by imported inputs.
8.4.2 Increasing Wage Gap: Findings of Empirical Studies

on Developing Countries
A recent study by Amiti and Cameron (2012) provides some support
for the Stolper–Samuelson theorem in explaining skill premium in
developing countries, by examining the effects of tariff reduction on
wage skill premium in Indonesian manufacturing. Amiti and Cameron
examined the effects of output and input tariffs separately, and they
found that a cut in input tariffs reduced skill premiums among firms that
imported intermediate inputs. Relative demand for skilled labor was
lowered because imports replaced domestic production of relatively
skill-intensive intermediate inputs.
Aldaba (2013) also found a declining wage gap in the Philippines’
manufacturing sector as an impact of trade liberalization introduced
by the Association of Southeast Asian Nations Free Trade Agreement.
The finding is robust when the impact was tested using effective and
nominal rates of protection. Aldaba suggested that, given more intense
foreign competition after trade liberalization, import-substituting

firms may have decided to concentrate on the low value-added stage
of the production process that requires relatively less-skilled workers.
However, the results of Amiti and Cameron, which are consistent
with the prediction of trade theory, contrast with the findings from
other studies. There is evidence from these studies that globalization
increases skill premiums, not only in developed countries, but also in
Several studies support the SBTC hypothesis. Galiani and
Sanguinetti (2003), for example, observed a positive relationship
between import penetration ratios, which increased from 5.7% in the
early 1990s to 19% in 1999, and hourly earnings of college graduates in
Argentina. An increase in the demand of skilled workers is suggested to
have come from an increase in imported goods.
In terms of support for outsourcing theory, Kohpaiboon and
Jongwanich (2013), using plant-level data from Thai manufacturing,
examined the effects of both the engagement with global production
networks and the reductions in tariffs on wage skill premiums within
firms. They particularly focused on the effects of engagement with
global production networks, arguing the growing concern in developing
countries’ policy makers that participating in global production sharing
could trap their enterprises in using low-skilled or low-quality workers
and outmoded technology. The study found that the engagement with
global production networks increases wage skill premiums in skill-
intensive firms, contrary to the concern of policy makers. Their finding
suggests that the firms in production networks restructure using more
advanced technology.
Thangavelu (2013) came up with findings along the same lines.
Using enterprise-level data of Viet Nam’s manufacturing, he found that
firms adopting new technologies and restructuring their organization,
as a response to a liberalized trade and investment regime, were likely
to experience a wage gap increase between skilled and unskilled
workers.
One may argue that the widening wage gap is partly due to an
increase in exports, because of a more open trade regime globally. Global
and regional production networks have been constructed actively
by multinational corporations in East Asia. Under the production
networks the magnitude of trade, both exports and imports, expanded
significantly, contributing to the increased wage gap. Kohpaiboon and
Jongwanich, as well as Thangavelu and Aldaba support this argument.
All of them found that a widening wage gap was evident in more skilled
sectors, which are also export-oriented sectors at the same time. This
is consistent with Bernard and Jensen’s 1997 study that observed an
increase in exporting plant employment, which in turn is found to have

contributed to an increase in demand for skilled labor.
Several studies confirm the hypothesis of endogenous technology
in the SBTC theory. Attanasio, Goldberg, Pavcnik (2004) showed for
Colombia that the increase in skill intensity over time after trade
liberalization was observed in all industries and the liberalization was
found to affect the so-called “industry premium” in wage determination
(the premium is associated with anything but workers or industry
characteristics). Their finding is consistent with the prediction of SBTC.
In addition, Attanasio, Goldberg, Pavcnik (2004) documented that the
increase in demand for skilled labor in Colombia was largest in the
sectors that experienced the largest tariff cuts.
The point about endogenous technology through R&D mechanisms
was made by Hahn and Choi (2013) in the case of manufacturing in the
Republic of Korea. They examined the effects of output and input tariff
reductions on within-plant wage skill premiums in manufacturing plants
in the Republic of Korea, and they found that output tariff reduction
interacts differently with plants’ R&D and investment behaviors in
affecting skill premiums. Specifically, output tariff reduction increases
wage premiums in R&D-performing plants while it reduces wage
premiums in plants making facility investments. One story behind the
results is that, although both R&D and facility investments may respond
to changes in profit opportunities due to output tariff reductions, R&D
raises relative demand for skilled workers while facility investment,
an activity of increasing production capacity, raises the demand for
unskilled workers.
Meanwhile, for the case of the PRC, Anwar and Sun (2012)
supported the competition channel that induces investment in
technology through Wood’s 1999 defensive innovation mechanism.
Anwar and Sun showed that the extent of the wage gap increased by
about 50% over only 6 years, from 2000 to 2006, and they explained
much of it as the impact of competition forces from imports that
pushed firms to hire more skilled workers. This seems to have been
facilitated by an increase in the proportion of private firms; in their
study, private ownership variable was found to have been positively
related with the wage gap.
The defensive innovation competition channel is also found in the
case of Indonesian manufacturing. Using data of medium-sized and
large establishments, Takii and Narjoko (2013) examined how greater
exposure to international trade and FDI affects the extent of skill
premiums in wage and employment intensity. They found that tariff cuts
have led local plants with low imported input shares, as well as non-
importing plants, to hire more skilled workers. This was likely a result
of the plants’ efficiency measures taken in response to more competitive

pressure from foreign competition.
To sum up, evidence seems to point to rising within-country
inequality that results from rising wage gaps comes from the creation,
or existence, of more sophisticated goods produced domestically.
Technology transfer is behind this phenomenon, working in various
ways proposed by all nontraditional trade theories (i.e., subcontracting/
product-sharing theory and SBTC). Here, unlike traditional trade
theory, and because of production networks across countries, trade
liberalization allows importation of advanced machineries that
eventually increase skilled worker demand. This is the key difference;
if traditional theory is adopted, importation only replaces goods initially
produced domestically; there is only a weak element of technology
transfer in the importation. Evidence also seems to indicate that
in countries where production networks are not strong, such as in
Indonesia and the Philippines, trade liberalization tends to behave
more in line with predictions of traditional theory; in these countries,
for example, trade liberalization seems to purely substitute products, or
intermediate input, initially produced domestically.
8.5 Regional Inequality

Widening regional income inequality has been reported in many
countries. Some of the most frequently reported cases include the
PRC and India. The problem of regional inequality is a big concern
for many, mainly because of its social and political impacts. Growing
regional inequality would result in imbalances in the level of economic
development between and among the regions, which, in turn, would
increase social and political tensions, possibly resulting in deterring
overall economic growth. Globalization is often accused of worsening
regional inequality, mainly because the timing of rapid globalization
coincides with growing regional inequality in several countries, including
the PRC and India. However, coincidence does not mean causality. In
other words, we cannot be sure if globalization has deteriorated regional
inequality, unless we undertake rigorous empirical analysis.
Let us briefly review what economic theory tells us about
globalization and regional inequality. According to spatial economics,
the location of economic activities is mainly determined by the benefits
and costs of agglomeration and transportation costs. Think of a firm
deciding the location of its operation. It would choose to locate in an
urban area where many firms are if it thinks the benefits of agglomeration
in terms of ease of access (including transportation cost) to sales and
procurement networks, as well as to various kinds of information,

such as on technology and market, outweigh the costs, such as traffic
congestion and the high cost of land. If the reverse is the case, then it
would locate in a rural area.
Recognizing these forces, the question then is whether globalization
tends toward or against agglomeration. This depends on various factors,
including the kinds of activities promoted by globalization and the
location of ports and airports (infrastructure), which become gateways
for connecting domestic economic activities to global economic activities.
If globalization leads to an increase in agricultural production, which
does not generally gain benefits from agglomeration, then economic
activities will spread to rural areas, thus contributing to reductions
in regional inequality. On the other hand, if globalization leads to an
increase in manufacturing, which gains benefits from agglomeration,
then economic activities are likely to be clustered in urban areas,
contributing to regional inequality. These discussions indicate that one
cannot know if globalization increases or reduces regional inequality
a priori. The outcome depends on various factors, some of which are
given above. In this section, we discuss the studies on Brazil, the PRC,
India, Indonesia, and Mexico.
Zhang and Zhang (2003) observed an increase in regional inequality
in the PRC from 1986 to 1998, as the provincial Gini coefficient increased
from 19 to 26, reflecting booming coastal regions in contrast to sluggish
inland regions. Using the provincial data covering 1986–1998, Zhang and
Zhang estimated a model that quantitatively decomposes the effects of
the variables listed below on regional inequality. Their findings show
the contribution of these variables as follows: domestic capital (75.1%),
foreign capital (8.1%), education (–8.0%), foreign trade (11.1%), inland/
coast (3.8%), and other factors (9.9%). Based on these findings, Zhang
and Zhang concluded that globalization through foreign trade and FDI
played an important role in worsening regional inequality in the PRC.
They argued that this finding contrasts with the standard trade model
that implicitly assumes integrated factor markets, and their finding can
be explained by the PRC factor markets having been rather segmented.
Because of this segmentation, most gains from globalization have gone
to the coastal parts of the country, leading to widening regional disparity.
Pal and Ghosh (2007) examined regional (interstate) inequality in
India from the 1980s through the early 2000s, in addition to vertical
inequality discussed in section 8.3. They found that regional inequality
worsened during the 1990s. Specifically, the ratio of the per capita net
state domestic product of the richest state, Punjab, to that of the poorest
state, Bihar, increased from around 3 in the late 1980s to 4.7 in the early
2000s. The interstate Gini coefficient increased from around 16 in the
late 1980s to around 23 in the late 1990s. Although Pal and Ghosh did
not discuss explicitly the causes of increasing regional inequality, they
seemed to argue that the same factors that contributed to increasing
vertical inequality also contributed to increasing regional inequality. In
other words, trade liberalization was argued to be one of the factors that
led to increasing regional inequality.
Daumal (2013) also found a substantial increase in regional inequality
in India from the 1980s to the early 2000s. Specifically, the regional Gini
coefficient increased from 16.0 in 1980 to 17.7 in 1990, and to 25.6 in 2003.
The trade (exports + imports)/GDP ratio increased from 15% in 1980
to 40% in 2003. Applying the error correction model to the time-series
data, Daumal found that trade openness contributed positively to the
increase in regional inequality. This finding matches the assertion made
by Pal and Ghosh. Daumal argued that during the 1980–2003 period,
India’s exports shifted from agricultural to manufacturing products,
resulting in higher growth of the richer manufacturing region relative to
the poorer agricultural region. Daumal also pointed out that opening the
country in the 1990s led to high economic growth in the coastal region,
as this instigated an agglomeration effect.
Daumal (2013) also analyzed the case of Brazil, where the trade–GDP
ratio increased from approximately 17% in the late 1980s to about 30%
in the early 2000s. Unlike India, Brazil did not experience an increase in
regional inequality. Indeed, regional inequality declined as the regional
Gini coefficient declined from 27.3 in 1985 to 23.8 in 2003. Daumal’s time-
series analysis showed that trade openness had a statistically significant
negative impact on regional inequality. She attributed her finding to
a large part of Brazilian exports consisting of agricultural products,
which are grown in relatively poor regions. Furthermore, she observed
that trade liberalization in Brazil led to relocation of some industrial
activities to peripheral regions.
Resosudarmo and Vidyattama (2006) analyzed the regional income
disparity in Indonesia. Using data covering the 1993–2002 period, they
observed that regional income disparity is quite severe compared with
other developing countries, including the PRC and India. However, they
found a conditional convergence in regional income per capita growth
from their statistical analysis. They also found that trade openness
contributed positively to regional income per capita growth, resulting
in reducing regional inequality. Resosudarmo and Vidyattama did not
explain their finding.
Aroca et al. (2005) examined the changes in regional inequality over
the period marked by trade liberalization (the accession to the General
Agreement on Tariffs and Trade in 1986 and the establishment of the
North American Free Trade Agreement [NAFTA] in 1994) in Mexico.
The authors observed a tremendous increase in disparity, which was

realized in the form of creating several income clusters, thereby creating
a “south” (low-income region) and a “north” (high-income region) in
Mexico. What is notable is that these income clusters do not map to
geographic regions, except the north region, which is directly on the
US border. They found that the substantial divergence occurring in the
1985–2003 period is not related to the consolidation of a faster-growing
northern block, but that only the south shows covarying growth rates.
They argued that two likely explanations for the divergence occurring
after trade liberalization are the sustained underperformance of
the southern states, beginning before NAFTA, which affected local
agricultural industries, and, to a lesser extent, the superior performance
of an emerging convergence club in the north-center of the country.
An examination of the studies on the impact of international trade
on regional inequality revealed that the impacts are mixed in that in
some cases (Brazil and Indonesia) expansion in trade contributed to a
reduction in regional inequality, while in other cases (the PRC, Indonesia,
and Mexico) trade expansion increased regional income inequality. The
different impacts are largely attributable to the composition of trade
and the location of industry. If exports of agricultural products, which
are grown in the poorer regions, increase, then regional inequality will
slacken. On the other hand, if exports of manufactured products, which
are produced in the relatively rich urban regions, increase, then regional
inequality will increase. It was also found that limited labor mobility has
a negative impact on regional inequality.

We analyzed the impacts of globalization, particularly in the form of
international trade, on inequalities from various perspectives. In terms
of theory, increased trade is shown to have both positive and negative
impacts on inequalities. In terms of global inequalities, increased
trade can widen or reduce the gap between developing and developed
countries, while increased trade can improve or worsen within-country
income inequalities, wage inequalities, and regional disparities.
Our review of the empirical studies found that an increase in
developing countries’ trade openness appears to have contributed to
narrowing the development gap vis-à-vis developed countries, while
its impacts on income gaps between developing countries are not clear.
The impacts of increased trade or trade liberalization on within-country
inequalities are found to be mixed. In some cases, trade liberalization
improved wage inequality, while in other cases, the opposite pattern was
observed. Similar mixed patterns are found for regional inequalities.

These mixed findings are consistent with the theoretical predictions
also being mixed. One of the problems in empirically discerning the
impacts of trade openness on inequalities is the difficulty of isolating the
impacts of trade on inequality when many other factors, including labor
market conditions, inflow of capital, and policy reforms are at work.
Furthermore, as Goldberg and Pavcnik (2007) argued, the mechanisms
through which globalization affected inequality are country-, time-, and
case-specific, implying the difficulty in obtaining a general pattern. It
is warranted then to conduct more empirical studies on the subject,
particularly by using micro-data on trade, production, and employment
at firm and household levels, which have become available for an
increasing number of countries in recent years.
Having discussed trade’s ambiguous impacts, we have realized
that it is one of many factors that affect inequality. This is particularly
the case for countries where trade accounts for a small part of their
economic activities. Two important factors that affect inequality include
discriminatory educational systems and labor market imperfection.
Educational systems that discriminate against the poor and labor market
regulations that limit the mobility of labor would result in widening
wage/income inequality.
Recognizing the importance of ameliorating inequalities in order
to achieve a stable social and political environment, an important
precursor to sustainable economic growth, the government needs to
implement policies to deal with the problems noted above. Specifically,
the government should improve the quality of labor by providing
education and training. Given developing countries’ increasing demand
for skilled labor, augmenting its supply would reduce income inequality,
at least compared with the case where the skilled labor quantity remains
constant. One needs to stress the importance of a well-functioning and
flexible labor market, where workers with improved skills can find and
obtain appropriate jobs.21
It is important to note that the government should redistribute
income to achieve balanced growth. Specifically, the government should
provide social safety nets for workers that are negatively impacted
by trade liberalization and/or increased imports. Social safety nets,
including income compensation, education, and training, would
not only reduce the negative impacts on the workers, but also limit
worsening inequalities. Safety nets should be provided temporarily not
permanently, because its task is to reduce the adjustment cost. Finally,
21
On these points, see Bolaky and Freund (2008), and Chang et al. (2009).
progressive income tax systems and inheritance tax systems should

be adopted to redistribute income from the rich to the poor. Having
discussed the need to introduce redistributive tax systems and realizing
that excessively high tax rates would deter economic growth, the
government should apply appropriate tax rates that balance equity and
economic growth.
References*
Acemoglu, D. 2003. Patterns of Skill Premia. Review of Economic Studies
70(2): 199–230.
Alcalá, F., and A. Ciccone. 2004. Trade and Productivity. Quarterly
Journal of Economics 119(2): 613–646.
Aldaba, R. 2013. Impact of Trade Liberalization on Wage Skill Premium
in Philippine Manufacturing. In Impact of Globalization on Labor
Market, 1st ed., edited by C. Hahn and D. Narjoko. ERIA Research
Project Report 2012, No. 4.
Inputs, and Productivity: Evidence from Indonesia. American
Economic Review 97(5): 1611–1638.
Amiti, M., and L. Cameron. 2012. Trade Liberalization and the Wage
Skill Premium: Evidence from Indonesia. Journal of International
Economics 87(2): 277–287.
Anderson, E. 2005. Openness and Inequality in Developing Countries:
A Review of Theory and Recent Evidence. World Development 33(7):
1045–1063.
Anwar, S., and S. Sun. 2012. Trade Liberalisation, Market Competition
and Wage Inequality in the PRC’s Manufacturing Sector. Economic
Modelling 29(4): 1268–1277.
Attanasio, O., P. Goldberg, and N. Pavcnik. 2004. Trade Reforms and
Wage Inequality in Colombia. Journal of Development Economics
74(2): 331–366.
Aw, B. Y., S. C. Chung, and M. J. Roberts. 2000. The World Bank Economic
Review 14(1): 65–90.
Bernard, A., and J. Jensen. 1997. Exporters, Skill Upgrading, and the
Wage Gap. Journal of International Economics 42(1–2): 3–31.
Bhalla, S. 2002. Imagine There is No Country. Washington, DC: Institute
for International Economics.
Bolaky, B., and C. Freund. 2008. Trade, Regulations, and Income. Journal
Bourguignon, F. 2016. Inequality and Globalization: How the Rich Get
Richer as the Poor Catch Up. Foreign Affairs. January/ February.
https://www.foreignaffairs.com/articles/2015-12-14/inequality
-and-globalization (accessed 20 February 2017).
Bourguignon, F., and C. Morrisson. 2002. Inequality among World
Citizens: 1820–1992. American Economic Review 92(4): 727–744.
*
The Asian Development Bank refers to “China” as the People’s Republic of China and
to “Vietnam” as Viet Nam.
Caselli, F., G. Esquivel, and F. Lefort. 1996. Reopening the Convergence

Debate: A New Look at Cross-Country Growth Empirics. Journal of
Economic Growth I(3): 363–389.
Chang, R., L. Kaltani, and N. V. Loayza. 2009. Openness can be Good
for Growth: The Role of Policy Complementarities. Journal of
Development Economics 90(1): 33–49.
Cragg, M., and M. Epelbaum. 1996. Why has Wage Dispersion Grown in
Mexico? Is it the Incidence of Reforms or the Growing Demand for
Skills? Journal of Development Economics 51(1): 99–116.
Daumal, M. 2013. The Impact of Trade Openness on Regional Inequality:
The Cases of India and Brazil. International Trade Journal 27(3):
243–280.
De Loecker, J. 2007. Do Exports Generate Higher Productivity? Evidence
from Slovenia. Journal of International Economics 73(1): 69–98.
Dollar, D. 2005. Globalization, Poverty, and Inequality since 1980. The
World Bank Research Observer 20(2): 145–175.
Dollar, D., and A. Kraay. 2004. Trade, Growth, and Poverty. Economic
Journal 114(493): F22–F49.
Feenstra, R. C., and G. H. Hanson. 1996. Globalization, Outsourcing, and
Wage Inequality No. w5424. Cambridge, MA: National Bureau of
Economic Research.
Frankel, J. A., and D. Romer. 1999. Does Trade Cause Growth? American
Economic Review June: 379–399.
Galiani, S., and P. Sanguinetti. 2003. The Impact of Trade Liberalization
on Wage Inequality: Evidence from Argentina. Journal of
Girma, S., D. Greenaway, and R. Kneller. 2004. Does Exporting Increase
Productivity? A Microeconometric Analysis of Matched Firms.
Review of International Economics 12(5): 855–866.
Goff, M. L. and R. J. Singh. 2013. Does Trade Reduce Poverty? A View
from Africa. World Bank Policy Research Working Paper 6327.
Washington, DC: The World Bank.
Goldberg, P. K. 2015. Introduction. In Trade and Inequality, edited by
P. K. Goldberg. Cheltenham, United Kingdom: Edward Elgar.
Goldberg, P. K., and N. Pavcnik. 2007. Distributional Effects of
Globalization in Developing Countries. Journal of Economic
Literature 45(1): 39–82.
Hahn, C., and Y. Choi. 2013. Trade Liberalization and the Wage Skill
Premium in Korean Manufacturing Plants: Do Plants’ R&D and
Investment Matter? In Impact of Globalization on Labor Market,
1st ed., edited by C. Hahn and D. Narjoko. ERIA Research Project
Report 2012, No. 4.
Hahn, C., and C. Park. 2010. Learning-by-Exporting in Korean

Manufacturing: A Plant-Level Analysis. Korea and the World
Economy 11(3): 459–492.
Harvey, D. I., N. M. Kellard, J. B. Madsen, and M. E. Wohar. 2010. The
Review of Economics and Statistics 92(2): 367–377.
Hummels, D. 2007. Transportation Costs and International Trade in the
Second Era of Globalization. Journal of Economic Perspectives 21(3):
131–154.
Jaumotte, F., S. Lall, and C. Parageorgiou. 2013. Rising Income Inequality:
Technology, or Trade and Financial Globalization? IMF Economic
Review 61(2): 271–309.
Kohpaiboon, A., and J. Jongwanich. 2013. Global Production Sharing
and Wage Premium: Evidence from Thai Manufacturing. In Impact
of Globalization on Labor Market, edited by C. Hahn and D. Narjoko.
ERIA Research Project Report 2012, No. 4.
Krueger, A. O. 1978. Foreign Trade Regimes and Economic Development:
Liberalization Attempts and Consequences. Cambridge, MA:
Ballinger.
Kumar, U., and P. Mishra. 2008. Trade Liberalization and Wage Inequality:
Evidence from India. Review of Development Economics 12(2): 291–311.
Mah, J. S. 2013. Globalization, Decentralization and Income Inequality:
The Case of China. Economic Modelling 31: 653–658.
Melitz, M. J. 2003. The Impact of Trade on Intra-Industry Reallocations
and Aggregate Industry Productivity. Econometrica 71(6): 1695–1725.
Milanovic, B. 2002. The World Income Distribution, 1988 and 1993: First
Calculations based on Household Surveys Alone. Economic Journal
112(476): 51–92.
____. 2006. Global Income Inequality: What It Is and Why It Matters.
World Bank Policy Research Working Paper 3865. Washington, DC:
World Bank.
Pal, P., and J. Ghosh. 2007. Inequality in India: A Survey of Recent
Trends. United Nations DESA Working Paper 45.
Piketty, T. 2014. Capital in the Twenty-First Century. Harvard University
Press [translated by A. Goldhammer].
Ragayah, H. M. Z. 2008. Income Inequality in Malaysia. Asian Economic
Policy Review 3(1): 114–132.
Resosudarmo, B. and Y.Vidyattama. 2006. Regional Income Disparity in
Indonesia: A Panel Data Analysis. ASEAN Economic Bulletin 23(1):
31–44.
Rodríguez, F. 2007. Openness and Growth: What Have We Learned?
DESA Working Paper No.51. Department of Economic and Social
Affairs, United Nations.
Rodríguez, F., and D. Rodrik. 2001. Trade Policy and Economic

Growth: A Skeptic’s Guide to the Cross-National Evidence. In
NBER Macroeconomics Annual 2000, edited by B. S. Bernanke and
K. Rogoff. Cambridge, MA: National Bureau of Economic Research.
Saez, E. 2015. Striking it Richer: The Evolution of Top Incomes in the
United States (Updated with 2014 preliminary estimates). Mimeo.
UC Berkeley.
Sala-i-Martin, X. 2002. Disturbing “Rise” of Global Income Inequality.
New York, NY: Columbia University.
Srinivasan, T. N., and J. Bhagwati. 1999. Outward-Orientation and
Development: Are Revisionist Right. Center Discussion Paper
No. 806. Economic Growth Center, Yale University.
Takii, S., and D. Narjoko. 2013. Revisiting How Globalization Affects
Wage Skill Premium in Indonesian Manufacturing. In Impact
of Globalization on Labor Market, 1st ed., edited by C. Hahn and
D. Narjoko. ERIA Research Project Report 2012, No. 4.
Thangavelu, S. 2013. Trade, Technology, Foreign Firms and Wage Gap:
Case of Viet Nam Manufacturing Firms. In Impact of Globalization
on Labor Market, 1st ed., edited by C. Hahn and D. Narjoko. ERIA
Research Project Report 2012, No. 4.
Wacziarg, R. and K. H. Welch. 2008. Trade Liberalization and Growth:
New Evidences. World Bank Economic Review 22(2): 87–231.
Winters, L. A. 2004. Trade Liberalization and Economic Performance:
An Overview. Economic Journal 114(493): F4–F21.
Wood, A. 1999. Openness and Wage Inequality in Developing Countries:
The Latin American Challenge to East Asian Conventional Wisdom.
In Market Integration, Regionalism and the Global Economy, edited
by R. Baldwin, D. Cohen, A. Sapir, and A. Venables. Cambridge,
New York, and Melbourne: Cambridge University Press, pp.153–181.
PART II
Sustainable Growth
9
Trade and Environment
Dale Andrew
9.1 Introduction
This chapter examines how trade can promote Sustainable Development
Goal (SDG) 15—“Life on Land”—and what the limitations of trade are
as a means of implementing it. Of the 17 SDGs, SDG 15 concerns the
terrestrial environment and land-based renewable natural resources.
Nine targets (15.1–15.9), followed by three means of implementation
(15.a–15.c),1 are subsumed under the goal. Despite the deceptively
short title “Life on Land,” the nine targets plus the three means of
implementation cover a vast array of environmental issues: ecosystems
(wetlands, drylands, mountains); natural resources (forests, genetic
resources); environmentally sensitive issues (land degradation, invasive
species, wildlife trafficking); and solutions thereto (reforestation,
biodiversity accounting, pursuit by local communities of sustainable
livelihood opportunities). As the objective of this chapter is to understand
the potential, and limitations, of trade in contributing to SDG 15, our
comments have been organized by means of implementation—15.a, 15.b,
and 15.c—rather than surveying all 12 targets.
9.2 How Does the Traditional Analysis of Trade

and Environment Apply to Trade in Natural
Resources?
Before discussing existing and proposed uses of trade to promote the
terrestrial environment via SDG 15, we begin with background on how
the interaction of trade and environment has traditionally been analyzed.
1
The full text of SDG 15 and the associated targets appear in the Appendix below.
207
The classical framework for examining links between trade and

the environment posits that liberalization leads to scale, structure
(sometimes called composition), and technique changes, each
with environmental impacts of a different extent and nature.2 The
questions to be studied under such a framework are the following:
(i) whether increased economic activity from trade will lead to negative
environmental effects (scale effect); (ii) what might be the new mix of
dirty or clean goods traded and processes used (composition effect);
and (iii) whether cleaner (or dirtier) technologies will be diffused (via
a technique effect). Attempts to incorporate this conceptualization
into quantitative work have focused on the effects, via prices, of the
removal of tariffs for manufactured goods.3 Trade in land-based natural
resources—the subject of SDG 15—is usually subject to low tariffs, but
can face nontariff measures, which do not lend themselves easily to
quantification in price-based economic models. Matching changes
in trade flows with environmental data is even more difficult as such
data are patchy in coverage. In addition, they are collected at national
levels, whereas environmental effects are generally local, particularly
those arising from natural resource extraction and use. Even more
important, environmental policy boils down to laws and regulations
and how they are implemented by institutions, both nationally and at
the subnational level. Environmental policy reflects the specificities
of the biome, ecosystem, and environmental medium addressed. They
also respond to the social and political priorities of a state’s polity. If the
scale, composition, and technique effects are difficult to translate into
environmental impacts for the manufacturing sector, they are not well
designed to illuminate how regulatory policies and their implementation
will react to liberalized trade in natural resources.
The mushrooming of regional trade agreements (RTAs) since the
mid-1990s prompted fears that increased trade and trade-induced
growth would be detrimental for the environment. This fear was
essentially an expression of the scale effect: more trade would lead to
more pollution and natural resource depletion. Defenders of freer trade
claimed that it would shift the product mix and bring better techniques
to relieve the increased pressure on air, water, and soil. To clarify what
was likely to happen, or had happened, environmental assessments
became mandatory, first in the United States (US) and Canada, and later
in the European Union (EU) and other European countries.
2
See OECD (1994), OECD (2000), and Grossman and Krueger (1993).
3
See Peters (2011), which matches GTAP (trade database) with emissions of carbon
dioxide, but not local environmental effects.
Trade and Environment209
These reviews adopted various methodologies. Some reviewed

the effects of past trade liberalization to inform the future, while
others predicted how trade would affect the environment following
liberalization.4 Because prediction exercises were potentially so vast,
scoping (to circumscribe which aspects of trade liberalization would
be examined) and screening (looking at potential hotspots, either
geographically, e.g., at border crossings, or by environmental medium)
streamlined the exercise to manageable proportions. Where weak
points were identified, the reviews recommended flanking policies to
accompany trade liberalization with the objective of mitigating the
negative aspects and strengthening the positive ones associated with
greater trade flows.
One result of the scoping and screening was a tendency for the
reviews to emphasize sectors, focusing on agriculture including
forestry, fisheries, and timber, or services sectors such as tourism.
In a few cases, this led to separate language in the trade agreement
on sector issues, or an annex thereto. For example, an annex in the
US–Peru Free Trade Agreement is on illegal timber trade.5 The free
trade agreement between the People's Republic of China and Peru
includes provisions on mining, while that between the PRC and Costa
Rica includes those on agriculture. The environmental chapter in the
EU CARIFORUM Economic Partnership Agreement concludes with
a summary list of cooperation priorities, including facilitation of such
voluntary schemes as labeling and accreditation, and facilitation of
trade in timber and wood products from legal and sustainable sources.
In other trade agreements, a separate implementation mechanism or
an Environment Committee has established a work program on sector
issues.
Some RTAs, in recognition of a general lack of data or the scope of
the interrelationships between trade and growth and environmental
effects, mandated a monitoring role.6 The complex relationships between
4
George (2014b) listed the environmental assessments of RTAs carried out by Canada,
the US, and the EU. Lists for earlier years can be found at http://www.oecd.org
/trade/oecdtradeandenvironmentworkingpapers.htm
5
The US–Peru Trade Promotion Agreement. Annex 18.3.4: Annex on Forest Sector
Governance. https://ustr.gov/sites/default/files/uploads/agreements/fta/peru
/asset_upload_file953_9541.pdf
6
The Commission on Environmental Cooperation was set up in an environmental
side agreement with the North American Free Trade Agreement. In the case of the
US–Central America Free Trade–Dominican Republic trade agreement, the
Organization of American States has been used to carry out technical assistance and
monitor these activities. An independent audit of the monitoring roles undertaken
for US RTAs can be found in US Government Accountability Office (2014).
increased trade and impacts on the environment were also checked by

testing a series of hypotheses, such as the “race to the bottom” or the
pollution haven hypotheses.7
In sum, despite the theoretical literature, the questions posed by
trade and environment policy makers when negotiating new agreements
have rarely focused on assessing scale, composition, and technique
effects. As the interaction of the various effects is in the end an empirical
question, without adequate environmental data at local level, the focus
of negotiators was to study regulatory effects. How adequate were
existing environmental regulations? Was national regulatory capacity,
particularly the institutional structure, resilient enough to adapt to the
environmental challenges arising from the new trade patterns?
9.3 Trade as a Means of Implementation in

Regulating for Sustainability Outcomes
The word trade is not used in the title of SDG 15, nor does it appear in
the text of the associated nine targets. On the other hand, the following
three means of implementation under SDG 15 are trade-relevant:
15.a Mobilize and significantly increase financial resources

from all sources to conserve and sustainably use biodiversity
and ecosystems
15.b Mobilize significant resources from all sources and at all

levels to finance sustainable forest management and provide
adequate incentives to developing countries to advance such
management, including for conservation and reforestation
15.c Enhance global support for efforts to combat poaching

and trafficking of protected species, including by increasing the
capacity of local communities to pursue sustainable livelihood
opportunities
Trade can help to (i) generate financial resources from all sources
(15.a), (ii) provide incentives (15.b), and (iii) increase the capacity of
communities to pursue sustainable livelihood opportunities (15.c). The
question then becomes how to operationalize the various means of
implementation and increase their effectiveness. Examples of innovative
7
See Chapters 2 and 3 in Frankel (2009).
interventions promoting sustainable trade in natural resource products,

including biodiversity products and wildlife species, are set out below.
These are significant and growing. However, with few exceptions, they
remain fairly limited. Problems have arisen in attempts to scale up and
extend the initiatives’ overall sustainability. Serious reflection among
environmental nongovernment organizations (NGOs), firms, and,
more recently, certain governments is currently under way. In the final
section, it will be suggested that building on experience needs to be
complemented with novel approaches to scale up sustainable outcomes
and make a greater contribution to the fulfillment of the SDG 15 targets.
9.3.1 Evolving Attitudes about Trade in Environmentally

Sensitive Products
Promoting international trade has in the past been considered at odds—
even intrinsically harmful—for natural resources and environmentally
sensitive products. Trade was perceived as the driving force for the
depletion and even extinction of wildlife and thus had to be strictly
controlled. Trade policy instruments, such as quotas and even import
bans, bolstered conservation by curtailing the international exchange
of environmentally sensitive products. For example, on the grounds
of biodiversity loss caused by poaching and exports of a few of the
“charismatic” mega-species, the conservation movement was behind the
adoption of an international convention to restrict trade in endangered
species. The Convention on International Trade in Endangered Species
of Wild Fauna and Flora (CITES) was adopted in 1976. Based on US
conservation laws, it is also known as the Washington Convention.
Viewed from this historical perspective, using trade and trade policy to
promote sustainable management of natural resources and ecosystem
products, as targeted under SDG 15, might appear to be difficult, or even
nigh impossible.
International attitudes have evolved since the Earth Summit held in
Rio de Janeiro in 1992. Agenda 21 adopted at the Rio Summit incorporated
the principles of sustainable consumption and sustainable production.
It also gave birth to three environmental conventions, including
the Convention on Biological Diversity (CBD). In this convention,
conservation and sustainable use are balanced as two separate goals.
Many of the CBD initiatives to halt biodiversity loss—such as offsets, “no
net loss,” and payments for ecosystem services8—are national approaches
8
See (OECD 2010) for a survey of environmentally effective and cost-effective systems
of payments for ecosystem services (PES); none of these involve international trade.
that do not involve international trade.9 The CBD has since developed its
tool kit and today is cooperating with a series of trade-friendly initiatives
to promote conservation and sustainable use. Which lessons can be drawn
from trade-relevant activities in biodiversity environmental agreements
about trade’s potential role in promoting SDG 15 targets?
In assessing how trade can contribute to promoting sustainable
outcomes for the terrestrial environment, as well as its limitations,
this chapter examines two separate and, until recently, distinguishable
paths. The first group takes a regulatory approach that relies on laws
and institutions for implementation and enforcement. That is, it is
governmental and has a mandatory character. The second involves
standards used by private actors—NGOs, firms, farms, mills, etc. Some
prefer referring to these as private sustainability standards (PSS),
and others as voluntary sustainability standards (VSS). As they are
nongovernmental and voluntary in nature, we will use VSS to emphasize
their non-mandatory nature.
Of the two sets of approaches that use trade as a lever to finance the
sustainable management of biodiversity and ecosystems, the first involves
sales of wildlife or natural products, either directly or as inputs to a
manufactured product. Since nature-based goods can be overharvested,
they are often subject to regulation. To remain sustainable, trade in
biodiversity products harvested from nature must, on the supply side,
respect species-specific biological factors. Governance issues involving
traders and institutions are also critical, as is careful attention to market
drivers.
The second approach, based on VSS, is widely used in the case of
internationally traded commodities such as coffee and other beverage
items, palm oil, soy, and timber. Producers, importers, or distributors
work with a technical body, often in a “roundtable” multi-stakeholder
group, to develop standards prescribing the sustainable production
(or harvesting) practices for the commodity in question. In turn, the
plantations, farms, or other enterprises opting to use these standards are
submitted to auditing by independent third parties.
Each of these two approaches to support trade in natural resource
products, and their limitations, is discussed below in sections 9.4
and 9.5.10
9
Under the CBD, the Nagoya Protocol on Access and Benefit-Sharing, adopted in 2010,
has trade-relevant aspects, as does the Cartagena Protocol on Biosafety adopted in
2000.
10
Certain international commodities such as timber can be farmed as well as harvested
from the wild. Sustainable international trade in timber can be facilitated both by
certifying voluntary standards and through laws and legal-binding regulations at
national and international level. See section 9.6.
9.4 Mandatory Regulations: Governmental

Involvement in Regulating for Sustainability
In this section, we examine the family of initiatives involving trade
to promote sustainability that are based on laws and mandatory
regulations.
As discussed above, the 1992 Earth Summit ushered in the concept
of sustainable use in international environmental texts. Opened for
signature at the Summit and entering into force the following year,
the CBD is an international treaty for the conservation of biodiversity,
the sustainable use of the components of biodiversity, and the equitable
sharing of the benefits derived from the use of genetic resources. In
Article 2, the Convention defines sustainable use as
the use of components of biological diversity in a way and at

a rate that does not lead to the long-term decline of biological
diversity, thereby maintaining its potential to meet the needs
and aspirations of present and future generations.11
It is significant of the evolving consensus in the conservation and

sustainable use debate that the Agenda for 2030 adopted in September
2015, setting out the universally agreed SDGs, makes extensive
references to sustainable use. In SDG 15, sustainable use appears in the
overall chapeau in SDG 15 and in targets 15.1 and 15.a.
SDG 15: Protect, restore and promote sustainable use of

terrestrial ecosystems, sustainably manage forests, combat
desertification, and halt and reverse land degradation and halt
biodiversity loss
15.1 By 2020, ensure the conservation, restoration and

sustainable use of terrestrial and inland freshwater ecosystems
and their services, in particular forests, wetlands, mountains
and drylands, in line with obligations under international
agreements
11
CBD. Article 2. https://www.cbd.int/convention/articles/default.shtml?a=cbd-02
The CBD Preamble is also relevant, stating, “Reaffirming also that States are
responsible for conserving their biological diversity and for using their biological
resources in a sustainable manner.” https://www.cbd.int/convention/articles
/default.shtml?a=cbd-00

and ecosystems
15.c Enhance global support for efforts to combat poaching

and trafficking of protected species, including by increasing the
capacity of local communities to pursue sustainable livelihood
opportunities [emphasis added]
9.4.1 Legal, Traceable, and Sustainable Trade:

40 Years of CITES
Is trade inherently sustainable use-friendly? Or can it be crafted to

produce such results? Since certain resolutions adopted by the parties
to CITES recognize the benefits of trade, some members argue that this
is the case. Species-based conservation approaches were insufficient to
halt the decline of many populations in the wild, and trade was cast as
the villain threatening the survival of many of the charismatic mega-
fauna. Conservation movements successfully advanced their cause in
the 1960s and early 1970s, leading to the adoption of CITES. CITES was
structured to approach conservation via restricting imports and exports
of endangered species of wild plants and animals. Even though it was
clear that international trade was not the only threat, CITES was set up
to focus on trade; it does not address other key causes of biodiversity loss
such as land conversion of natural habitats. Dating from 1975, that is,
17 years before the Rio Earth Summit, the Convention does not contain
the term “sustainable use.” Nonetheless, since its inception, CITES
has been advancing cautiously toward sustainable use, with several
key resolutions being passed and the CITES Secretary-General often
speaking of “legal and sustainable use” or of the Convention’s role in
“regulating for legal, sustainable and traceable trade in wildlife” (WTO
and CITES 2015).
The three appendixes to the Convention offer varying protection
levels. Species listed on Appendix I and taken from the wild are
prohibited from entering international commercial trade. Exceptions
exist for cases where ranching or breeding in captivity is allowed and
specimens are then returned to the wild. Species listed on Appendix II
that are taken from the wild may be traded if such trade is legal,
sustainable, and traceable. Exporting countries must first make a “non-
detriment” finding concerning such Appendix II specimens. Guidance
recommends that socioeconomic factors also be taken into account,
but, in the end, biological findings on the species take precedence.

National jurisdictions may enlist the cooperation of other parties for
species that they determine need protection and that they decide to
place on Appendix III. International trade that is legal and traceable
in such species is allowed. A major development in CITES was the
issuance of its general guidance document adopted at Conference
of the Parties (COP) 16 in 2013. Strategic Vision: 2008–2020 contains
references to CITES’ contribution to sustainable use.12 This is most
relevant to Appendix II specimens, which represent 96% of species
covered by the Convention.
In a clear manifestation of the shift away from solely focusing on
illegal trafficking, and toward operationalizing sustainable use and trade,
CITES set up the Working Group on CITES and Livelihoods. Developed
with support from the Organization of American States, a handbook
has been developed to help stakeholders make rapid assessments of the
impacts of listing species on a CITES Appendix, as well as guidelines on
how to mitigate negative impacts (OAS 2015).
The key operational mechanism of CITES is the system of permits
and certificates to track shipments of CITES-listed specimens. Member
state management authorities cooperate to match import with export
permits. Over the 40 years of its existence, CITES has made progress
in combating corruption and associated mafia crime involved in
lucrative wildlife trade through the institutionalized cooperation, not
only with national customs authorities, but also with organizations
such as INTERPOL. One recent concrete advance involves fighting
fraudulent documentation for shipments (paper permits were simply
photocopied multiple times, exceeding permissible export quotas) and
accompanying corruption by instituting the use of electronic forms that
were developed in conjunction with the World Customs Organization.
The CITES Secretary-General, John Scanlon, has recently stated
that the use of such forms “. . . offers a taste of the future for CITES
implementation, where CITES trade processes are fully electronic”
(CITES 2011).
A high profile and controversial case is that of the black rhinoceros,
which are farmed in southern Africa. They breed easily in captivity
12
“CITES vision statement: Conserve biodiversity and contribute to its sustainable
use by ensuring that no species of wild fauna or flora becomes or remains subject
to unsustainable exploitation through international trade, thereby contributing to
the significant reduction of the rate of biodiversity loss and making a significant
contribution towards achieving the relevant Aichi Biodiversity Targets.”
https://www.cites.org/eng/res/16/16-03.php
and their horns can be harvested; their horns grow back at a rate of 0.9
kilogram per year following best practices. Despite relatively favorable
biological attributes of the species, Save the Rhino, an NGO dedicated to
saving the rhino, states that it carefully assesses governance and market
aspects as well the biological attributes. Concerning the market and
governance aspects on the supply and the demand side, Save the Rhino
believes that
. . . more detail [is needed] on how a trade in rhino horn will

be regulated and how the proponents would ensure that
income generated goes back into rhino conservation efforts.
Other pre-conditions include getting a better grip on the
abuse and corruption that are contributing to the present
high levels of illegal trade, auditing horn stockpiles and
increasing the database of horn DNA samples . . . Without
stringent monitoring, there are risks that a legal trade could
serve as a route for the illicit tracking of rhino horns. On
the demand side, the main producing country still needs
to establish a credible trading partner. . . . Being a credible
trading (importing) partner will entail a much higher level of
law enforcement and political will to combat the illegal trade
in rhino horn than has been evidenced so far. How will rising
affluence in other Asian countries affect the demand for rhino
horn? (Save the Rhino 2013).
Their statement underscores the need for balancing species-

specific biological attributes, demand-side (actual and potential) market
drivers, and governance aspects, not only in the range state, but also in
the importing countries. In the end, a resolution to allow greater trade
in rhino horn from range states with sound management practices
was debated and rejected at the CITES COP 17 held in South Africa in
September 2016.
Illegal wildlife trade has taken on international proportions also
with its increased link to organized crime. A recent Organisation for
Economic Co-operation and Development (OECD) report finds that the
networks involved in wildlife trafficking between sub-Sahara Africa and
Asia are of particular concern from a security policy perspective due to
their associations with listed terrorist organizations (OECD 2016: 72).
The CITES Secretariat and the United Nations Office on Drugs and
Crime are partners in the International Consortium on Combatting
Wildlife Crime, alongside INTERPOL (INTERPOL 2016), the World
Bank, and the World Customs Organization. The Consortium is chaired
by the CITES Secretariat (ICCWC 2013).
9.4.2 CITES and the Livelihoods of Local Communities

SDG means of implementation 15.c has two distinct parts:
(i) combating poaching and trafficking of protected species,13 and
(ii) including by increasing the capacity of local communities to
pursue sustainable livelihood opportunities.
In large part due to discontent on the part of range states,14 CITES

established the Working Group on CITES and Livelihoods in recognition
of the heavy dependence of rural communities on wild species for their
livelihoods.15 The working group was given the mandate to develop
tools for sustainable implementation of CITES listings, the mitigation
of negative impacts, and the enhancement of positive opportunities for
rural communities. This corresponds precisely to the second part of SDG
15.c: increasing the capacity of local communities to pursue sustainable
livelihood opportunities. CITES trade regulation mechanisms opened
a bit further, a reflection of the considerable distance traveled by the
Convention since 1975.
An impressive success story concerns a seriously threatened species
and the livelihoods of a local community living at 4,000 meters elevation
in the Andes. The vicuña, whose hair is considered the finest of natural
wools, had been listed as an endangered species under Appendix I. This
meant that trading vicuña products was illegal. Rampant poaching of the
animal had led to near extinction of the species. Unless CITES changed
13
The first part of target 15.c is duplicative of another target under SDG 15. Target 15.7
reads, “Take urgent action to end poaching and trafficking of protected species of flora
and fauna, and address both demand and supply of illegal wildlife products.” The text
of 15.7 is more complete with its reference to “flora and fauna” and its injunction to
address “both the demand and supply of illegal wildlife products.” This is significant
since CITES permits are essentially supply-side in nature. Underscoring demand-
side measures shows recognition of their complementary nature to import and export
permitting. Campaigns can curtail demand by promoting substitutes, not taken from
the wild. Or demand promotion can also be used if the biological and governance
factors contribute to putting an increased legal supply on the market that can be traded
to finance conservation measures to ensure the protection of the species in question.
14
In the early 1990s, Zimbabwe was on the verge of withdrawing from CITES. Its
influence by remaining a member is described in “Zimbabwe and CITES: influencing
the international regime.” See Hutton and Dickson (2000).
15
In southern Africa, community-based natural resource management (CBNRM) has
a long tradition in practicing management of natural resources, including wildlife,
through local governance structures at the villages, and was one of the inspirations
for the Working Group on CITES and Livelihoods. At a 2011 symposium, the
Secretary-General of CITES expressed his view that “CBNRM is not a panacea . . .
but it is one viable option to explore when determining how to achieve more effective
implementation of the Convention.”
the vicuña’s status, the local communities would not be allowed to trade
the animal’s hair. CITES partially granted a trade ban variance in 1987
for certain herds and later down-listed all of Peru’s vicuña population.
Management of the herds through regular shearing made the animals of
no interest to poachers: “a shorn vicuña is a saved vicuña.”16 CITES parties
made a similar decision later to transfer from Appendix I to Appendix II
the vicuña population of Ecuador, for the exclusive purpose of allowing
international trade in wool sheared from live vicuñas and in cloth and
items made thereof, including luxury handicrafts and knitted articles.
Another example can be found on the side of flora. CITES had
carefully regulated Candelilla wax, derived from an eponymous shrub in
northern Mexico. Traded for use in lipsticks, the CITES-listed product
is now considered to be managed according to best practices. Retailing
is allowed, with some 20,000 Mexican farmers making a living from
production and trade in the wax.
As parties to CITES recognize the potential impacts on livelihoods
of rural communities17 of their decisions,18 associations of indigenous
communities have become active in following CITES deliberations to
assess the implications for their biodiversity-based livelihoods. Groups
such as the Canadian Inuit have increased their influence in CITES
discussions. This has not been without controversy. At previous COPs,
for example, the proposal by the US delegation to place the polar
bear on Appendix I was not adopted.19 This issue opposes the US and
16
See Lichtenstein, G. 2011. Use of Vicuñas (Vicugna vicugna) and Guanacos (Lama
guanicoe) in Andean countries: Linking community-based conservation initiatives
with international markets. In In CITES and CBNRM, Proceedings of an international
symposium on “The relevance of CBNRM to the conservation and sustainable use of
CITES-listed species in exporting countries,” ed. M. Abensperg-Traun, D. Roe, and C.
O’Criodain. See also the video CITES and Vicuñas: A Conservation Journey. https:
//www.youtube.com/watch?v=ROnMnfBDUQ4 (accessed 22 March 2017).
17
For CITES, “rural communities” include indigenous and local communities.
18
A recent regional trade agreement broke ground by referring to indigenous
communities in its text. The parties reiterate their commitment to, subject to national
legislation, respecting, preserving and maintaining the knowledge, innovations,
and practices of indigenous and local communities embodying traditional lifestyles
relevant for the conservation and sustainable use of biological diversity, and encourage
the equitable sharing of the benefits arising from the utilization of such knowledge,
innovations and practices. Article 20.13: Trade and Biodiversity from the Trans-
Pacific Partnership Agreement (2016).
19
Transfer from Appendix II to Appendix I of Ursus maritimus (polar bear) was voted
down by the parties in 2013. The proposal had been expected to be tabled again at
COP 17 in September 2016 but was withdrawn after debate in the Animals Committee.
See also IUCN Red List of Threatened Species page on Ursus maritimus (http://www
.iucnredlist.org/details/22823/0) for details on the use and trade and differing range
state policies concerning the polar bear.
Canada, reflecting differences in conservation NGOs and indigenous

communities. In the case of the polar bear, the International Union for
Conservation of Nature and Natural Resources (IUCN) Red List states,
“Loss of Arctic sea ice due to climate change is the most serious threat to
polar bears throughout their circumpolar range.” CITES’ mechanisms
are designed to regulate trade when it is determined to be a significant
factor threatening the species. Other biodiversity conventions20
focus on other causes of biodiversity loss such as habitat destruction,
overexploitation, degradation, illegal harvest and trade, pollution, and
climate change.
9.4.3 Facilitating Sustainable Trade in Wildlife Products:

Support from the International Trade Centre, BioTrade,
and Union for Ethical BioTrade
The primary emphasis in CITES is to ensure that international trade
does not threaten the survival of species. Permits and certificates are
used to regulate international trade in the listed species. Technical
assistance activities have focused on capacity building in the national
management authorities to strengthen the implementation of
regulatory responsibilities under the Convention. Even today, if “legal
and sustainable use” or “legal, traceable and sustainable trade” have
become part of the Convention’s parlance, CITES still does not speak
of promoting international trade. Other members of the UN family,
such as the International Trade Centre (ITC) and the UN Conference
on Trade and Development (UNCTAD) BioTrade, and offshoots like the
Union for Ethical BioTrade (UEBT), have stepped in to complement the
regulatory activities of CITES with a view to facilitating trade in nature-
based biodiversity products, including wildlife.
Promoting sustainable trade from the point of view of providing
incentives for the conservation of endangered species is complex.
A decision to allow trade to promote sustainable use needs to be
carefully evaluated along the lines of the (i) species-specific biology;
(ii) governance structures in place, and incidence of corruption—game
wardens, policing, and customs authorities; and (iii) both actual and
potential market demand when it has been repressed.21 Farming of
the Nile crocodile for their hides and meat has been a CITES success
20
The seven biodiversity-related conventions are (i) CBD, (ii) CITES, (iii) Wetlands
(Ramsar), (iv) Migratory Species, (v) Plant Genetic Resources, (vi) World Heritage,
and (vii) Plant Protection. For the full names and a short description of each
convention, see CBD Biodiversity-related Conventions. https://www.cbd.int/brc/
21
These factors are spelled out in detail in Cooney et al. (2015).
story. Once down-listed to Appendix II, the species could be farmed by

borrowing eggs from the wild, as long as a certain share was returned
after hatching. The species-level biological factors (each female lays
dozens of eggs) and a strong consumer market demand were particularly
favorable in overcoming doubts about potential governance issues.
Crocodile farms are a thriving business in South Africa, Zimbabwe,
Zambia, and Kenya, which have the largest farms, bringing huge profits
to the ranch owners.
The ITC has supported an important project on trade in python
skins that are used in handbags, shoes, and other fashion accessories.
The value of the skins is estimated to be around $1 billion per annum,
and the extent of illegal trade in python skins is estimated to be equal
to that of the legal trade. In cooperation with the ITC, a BIOTRADE
report, with financial backing from Gucci and other major fashion
brands, has made suggestions for an effective traceability system
involving the tagging of skins. The challenge would be for such a
scheme to collect data on species, place, and date of capture and of
slaughter, gender, and length. Many of these proposed techniques
such as permitting, electronic tracing, tagging, and farming are derived
from experience gained in promoting sustainable trade in CITES-
listed species. The trade-friendly lessons from CITES have spread to
facilitate trade in other wildlife species.
The BioTrade Initiative was set up in 1996 under the auspices
of UNCTAD to support the implementation of the Convention on
Biological Diversity (CBD). In line with CBD objectives, it responds to
the trade-related aspects of CBD Article 10 on sustainable use, Article
11 on incentive measures, Article 15 on access to genetic resources, and
Article 8( j) on traditional knowledge. The initiative can be termed a
matchmaker between developing country firms and northern firms. It
now has 20 years of experience in leveraging trade as an incentive for the
incorporation of conservation and sustainable use criteria into private
sector initiatives, and works with governments in 21 biodiversity-rich
countries. As an intergovernmental organization, UNCTAD generally
starts with government trade promotion agencies and the Ministry of
Environment with a view to identifying national biodiversity-based
companies. Personal care products, fashion, nature-based tourism,
medicinal plants, natural fibers, as well as wildlife products have
been the focus of the BioTrade initiative. In 2011, sales of BioTrade
beneficiary organizations amounted to $4.1 billion. In 2013, turnover
was deemed to be $5.2 billion (Reiter 2015). The BioTrade Facilitation
Programme launched its third phase in late 2015, with the aim of
offering poor people a viable economic opportunity from nurturing
their biological resource endowments. The overall objective is to
mainstream BioTrade in relevant multilateral, regional, and national

processes and strengthen the policy and regulatory environment for
BioTrade sectors.
The aim of the UEBT, founded in 2007, is to promote ethical
bio-trade practices by offering its business members independent
verification, technical support, and networking opportunities for
biodiversity-based innovation and sourcing. This association currently
stands at 40 companies—mostly in cosmetics, pharmaceuticals, and
food—and 20 affiliates. In 2015, these companies had a joint turnover
of just over €4 billion. UEBT helps companies negotiate the regulatory
minefield of trading with local producers around the world, while
ensuring that benefits reach all of those involved, particularly holders of
genetic resources in the developing world. Rather than certification, the
UEBT offers its members verification—that is, audits to establish that
the private firms are operating in accordance with the Ethical BioTrade
Standard (based on the seven BioTrade principles, the first two of which
are conservation and sustainable use of biodiversity) (UNCTAD 2007).
The UEBT philosophy behind the verification is to replace a pass or
fail type audit with a detailed assessment of a member’s biodiversity
management system and the progress being made vis-à-vis the work
plan. The process also involves an impact assessment standard aligned
with the code of impacts of the ISEAL Alliance,22 of which UEBT is a
member. In exchange for verification, member companies may append
the UEBT logo, as well as other sustainability seals for which they have
been certified.
Examples of UEBT member activities include (i) a Colombian
company trading a blue colorant for food and cosmetics from the fruit of
the Genipa americana; (ii) a large Swiss company producing hundreds
of natural cosmetics and pharmaceuticals that has targeted use of
80% plant-based raw materials from organic and biodynamic cultures
and a biodiversity management system that ensures traceability; (iii) a
company in Burkina Faso specialized in shea butter for cosmetics
working with female producers organized in cooperatives; and (iv) a
Vietnamese company, the largest traditional medicine producer in
Viet Nam, focusing on improving practices for the sourcing of its
natural ingredients and the research and development of medicinal
plants.
22
The ISEAL Alliance’s “Code of Good Practice for Assessing the Impacts of Social
and Environmental Standards” helps standards systems to better understand the
sustainability results of their work, as well as the effectiveness of their programs.
See ISEAL Alliance. Impacts Code. http://www.isealalliance.org/our-work/defining
-credibility/codes-of-good-practice/impacts-code
Measured in terms of global trade flows, initiatives like the ITC,

BioTrade, and UEBT pale in significance to the many billions of dollars
of trade derived from other terrestrial flora and fauna, such as timber,
coffee, soy, and palm oil. If these initiatives, based on legal regulation,
are currently marginal in the overall picture for the conservation and
sustainable use of biodiversity, what is their potential to contribute
significantly more? Proponents are looking for ways to ratchet up their
impact in terms of global trade in not dissimilar ways as voluntary
standards movements are talking about increasing overall impact
through adopting a more holistic approach to agriculture and rural
development.
9.5 The Voluntary Path: Sustainability

Standards-Cum-Certification

and ecosystems
Voluntary sustainability standards (VSS), combined with

certification procedures, were set in motion in the 1970s,23 and became
popular as a concrete approach to fostering sustainability following
the Rio Conference in 1992 and adoption of Agenda 21. A congruence
of different factors explains the turn to voluntary, nongovernmental
schemes. NGOs were disappointed with governments’ refusal to agree
to more international conventions, such as that on forests. Other
important factors include the belief that the private sector was more
closely attuned to production issues and to consumer tastes and the
distaste of several large OECD governments for developing regulations.
From only a handful in 1970s and 1980s, these have grown to more than
500, as cataloged in recent reports. This section focuses on the use of
standards and certification to promote production, consumption, and
trade in sustainably managed agricultural commodities. It provides a
brief overview on how they have progressed since the Earth Summit as
well as the bumpy road they are currently traveling.
The number of environmental labeling and information schemes
(ELIS) was recently cataloged at 544 in a 2013 OECD study (Gruère
23
An exception is the organics movement that dates back to Rudolf Steiner’s writings
in 1924.
2013), based on a data set managed by Ecolabel Index24 together with

those discussed in OECD reports. Most of the phenomenal growth
in ELIS occurred between the late 1990s and 2010. There are many
ways to categorize the schemes. The 2013 OECD study dissected
the universe of 544 ELIS in a dozen different ways. Most pertinent
for this discussion concerns the environmental focus area and mode
of governance and ownership, as well as the type of auditing and
verification (first, second, or third party). In terms of environmental
focus, the relative shares of schemes attributed to biodiversity (11%)
and natural resources (20%) had dropped in 2012 from the nearly one-
half of total schemes in 1990, due to the increase over this period in
energy and climate-related schemes. In terms of modes of governance,
nonprofit voluntary schemes clearly dominate over the 32-year period
studied.
Credibility of the standards, as measured by type of auditing and
verification, reveals that while third-party certifiers (independent,
arms-length accredited bodies) represent about two-thirds of the total
universe studied, second-party audited or verified schemes (performed
by a party other than the producing firm, but with a user interest in the
products, such as traders, retailers, or consumers) increased significantly.
As discussed below, access to schemes at an affordable price and the
quality of certification are currently among the most debated issues in
the voluntary standards world.
Some figures often used as measures of VSS success are set out here
for the highly traded commodities—coffee, palm oil, and soy25 (those that
have been the focus of extensive standards activity). According to the
State of Sustainable Markets compiled by the ITC, Research Institute
of Organic Culture (FiBL), and International Institute for Sustainable
Development (IISD) (ITC 2015), VSS-compliant areas that were planted
or harvested for nine commodities and the focus of the 14 standards
surveyed continued to show exceptional growth in 2013 and 2014. The
Roundtable on Sustainable Palm Oil showed a thirtyfold increase of its
area between 2008 and 2014, and at that point covered some 15% of the
global oil palm area.
The State of Sustainability Initiatives (Potts 2014) estimated an
impressive 41% growth overall for trade in the group of VSS-compliant
commodities studied, outpacing by far the 2% growth in the conventional
commodity markets. In that review, coffee, cocoa, and palm oil held the
24
Ecolabel Index is the largest global directory of ecolabels, “currently tracking 465
ecolabels in 199 countries, and 25 industry sectors” (as of mid-November 2016).
http://www.ecolabelindex.com/
25
As forests are the focus of SDG target 15.b, timber is discussed below in section 9.6.
top places in 2012 for market penetration compared with their rankings
in 2008. Standard-compliant coffee, which led in terms of market
penetration, reached a 40% market share of global production in 2012
(up from 15% in 2008). Other commodities with significant market
shares in 2012 include cocoa (22%, up from 3% in 2008) and palm oil
(15%, up from 2% in 2008).
This incredible success of VSS-compliant commodities in
penetrating markets—national and international—also explains why
observers are pessimistic about the degree to which they can continue
along the same path. Now facing saturated markets, they are the victims
of their own success.
There are a number of consequences of the VSS-compliant
no longer being a niche market phenomenon. For a number of the
“successful” VSS-compliant commodities, supply is beginning to, or
already has, exceeded the market demand for the sustainable variety.
The excess ends up being sold as uncertified, exerting downward
pressure on prices. With the withering of the price premiums,
producers in a market-driven scheme begin to cut costs on the
investments made to ensure their commodity is sustainably grown
or harvested. This is another consequence of what Jason Potts of the
IISD termed the Sustainability Paradox (Potts et al. 2014, Box 4.1). The
reliance of such initiatives on market forces leaves the distribution of
supply (and benefits) to those who can provide compliant goods at the
lowest cost. These tend to be the more well-off producers who have
already absorbed the costs of transitioning to sustainable practices.
The unintended outcome is that VSS are gaining traction in regions
and markets where they are needed least. For some internationally
traded commodities such as timber, for which market access is
increasingly conditioned by certification to a forest management
standard, the producer may have no choice but to absorb the costs,
even in the absence of a price premium, or lose market. In such cases,
the “voluntary” in VSS effectively becomes a mandatory standard (UN
Forum on Sustainability Standards [UNFSS] 2016).
The outlook for further growth is dampened by market surveys of
consumers that often reveal that sustainability is an important, but not a
dominant factor in decisions to buy. A recent OECD study (Vringer et al.
2015), for example, underscores a certain split focus of consumers. They
reply in surveys that sustainability is important to them, but apparently
not when confronted with higher prices. The lack of price incentive tilts
their decision in favor of the lower-priced product, leaving promotion
of the collective good to others. In other words, the “warm glow” effect
of consumers’ values does not necessarily carry over to their buying
decisions.
Another key consideration is that stakeholders are increasingly

demanding that the actual environmental impact be verified and
measured. Sunken costs were spent in developing standards and
logos; recurrent expenditures for auditing and other verification costs
to assess conformity to receive certification are even greater. Those
having financed the development of the VSS want to know whether
the costs are having a real impact. Recent reviews conclude that while
standards have contributed to a change in farming and harvesting
practices, few evidence-based peer-reviewed studies are available to
answer the questions about outcome or impact (Steering Committee
of the State-of-Knowledge Assessment of Standards and Certification
2012). Existing studies tend to be incomplete, and embrace a host of
methodologies, and hence are not comparable. They have generally not
built in counterfactuals. The ITC/FiBL/IISD experts conclude in The
State of Sustainable Markets (ITC 2015) that
. . . the degree to which they are improving farm performance

remains largely unknown. The absence of consistent data on
field level impacts for many standards is one obvious bottleneck
to making such determinations.
According to the ISEAL Alliance, the situation of collecting data and

reports on impacts on actual outcomes (as opposed to outputs) is improving.
A special website has recently been launched collecting documentation
on impacts: www.sustainabilityimpactslearningplatform.org
9.5.1 Accomplishments and Challenges of Voluntary

Sustainability Standards
Generally, the VSS system has served business interests well. Firms
have shifted the emphasis over recent years away from statements of
their corporate social responsibility and their public image in terms of
support to sustainable development. A more recent approach integrates
VSS-compliant commodities into supply chains to fully embrace this
risk management tool. Recourse to VSS as a key tool for managing
their supply chains is no longer a matter of simply burnishing “green”
credentials for the public, but has become an integral part of a business
model designed to protect their reputation and trademarks—often a
sizeable part of a company’s assets.
At the same time, complaints are rife that there are too many
standards—they are overlapping, duplicative, and bureaucratic (UNFSS
2016). Certain business-to-business standards require more than one
certification, even if in principle they are “voluntary.” For example,
GlobalGAP may require certification from UTZ, Rain Forest Alliance,

and Fairtrade, and organic standards, in parallel, for the product to gain
access to supermarkets.
An obvious response would be to find common denominators
and simplifying to meta-standards, or to keep the range of standards,
but work toward mutual recognition of those that are similar or have
the same objective.26 Such attempts have run into difficulties and
progress has been slow. Reasons include the pride of authorship factor
from NGOs that have spent years and enormous sums to develop the
standards. Certification to verify adherence to the standard is often a
lucrative source of income for large NGOs. Multiplicity of standards
and the related confusion and overlap also tend to fuel donor-funded
capacity-building projects implemented by NGOs. While willing to
promote discussions on process, including promoting consultations with
representative stakeholders and the review of drafts, many stakeholders
do not wish to negotiate the substance of the standards which have
become “holy grail.” Any movement to harmonize has always been
difficult in the standards world. On the other hand, greater hope has been
put in establishing mutual recognition protocols where there has been
some limited progress, for example, in the case of organics standards.
Ulrich Hoffmann27 concludes:
If one attempts to grossly evaluate the effect of PSS in moving

towards truly sustainable markets and associated production
and consumption patterns, one must realistically conclude
that such standards are one, not unimportant tool whose real
impact should however not be overrated.
More than one observer surveying and following the standards

world has set the bar at approximately 15%–20% as the limit for
voluntary sustainability standards to penetrate markets.28 Such a
prediction is commodity- and market-dependent of course, as well as a
function of the national consumer market and its growth potential. The
point is not the precise figure, but the ambient pessimism about VSS as a
panacea. We are far from the optimistic and enthusiastic support for this
26
In the case of timber, the Programme for the Endorsement of Forest Certification
(PEFC) is bringing some 40 national standards together under one meta-standard.
27
A former UN official, Hoffmann is one of the founding fathers of the UNFSS and
the FAO/IFOAM/UNCTAD International Task Force on Harmonization and
Equivalence in Organic Agriculture.
28
See also UNFSS Discussion Paper no. 6, which elaborates on this issue: http://unfss
.org/documentation/discussion-paper-series/
market-based and consumer-driven means to bring sustainable

management to commodity production that was evident when VSS were
launched some 20 years ago.
All too often the impression is created that the failure to mainstream
VSS-compliant production is caused by lack of efficient management
of those schemes or insufficient capacity-building support, when the
principal reason to get past the 15%–20% bar is the lack of any progress
on internalization of environmental and social costs of conventional
production, starting with the removal of misplaced subsidies (see Policy
Coherence section below).
Another view from one of the strongest supporters of the standards-
cum-certification model is revealing:
Companies have supported sustainability standards and

certification over the last fifteen years to be leading tools in
driving a market-based solution to improved social, economic
and environmental production, using the power of consumer
choice and globalizing supply chains to incentivize farmers
and enterprises to improve their practices. . . . However,
standards systems and their stakeholders recognise that even
with impressive growth and impact, the scale of the challenges
that we are collectively seeking to address means that we are
unlikely to achieve the transformation we need with a model
that recognises better practices at the scale of the individual
farm or production unit [rather than at the landscape scale]
(ISEAL Alliance 2016).
9.5.2 The Certification Industry
Another aspect of a growing disappointment with the system concerns

the conformity assessment segment of VSS, sometimes referred to as
assurance schemes. Conceived as the linchpin of the standards model,
auditing and certifying are needed to validate the whole operation.
Independent third parties inspect a unit using a testing protocol and
then pronounce in a pass or fail manner whether a production unit is
conforming with the standard. But their image has been tarnished by
a number of allegations of unfair pricing, cursory inspections, and, in
some cases, corruption.
The power and influence the specialized services industry exerts
has been a cause for complaint, as their activities are often no longer
consistent with the founders’ philosophy. Some of the largest certifiers
dominate conformity assessment activities simply by their reputation,
and convince retailers to insist with producers and exporters to use

their services. The reality is that often local consultants are used to
perform the auditing in the producing countries. Using locally based
experts is in most cases the best solution since they know conditions
best. Even though such experts are often actually undertaking the
verification, retailers refuse to take the “word” on verification directly
from developing country-based firms (Rundgren 2015). In sum, the
certification industry, including the accreditation business, which sets
the norms and decides who may audit and certify, has been accused of
abusing its market power and engaging in anticompetitive practices.
Concentration and consolidation also increase the tendencies to cut
corners and cheat. The informal trust building, which was formerly an
integral characteristic of the organics sector, has often been replaced by
paperwork and official licenses. This has led the governments of some
countries—for example, Denmark and Finland—to take over inspection
and certification. Others have intervened to set the level of fees for
certification.
In the end, an assessment of VSS effectiveness depends on one’s
perspective and the commodity in question (Halle 2014: 14–16). There
are, however, some clear trends. Businesses are generally pleased in
having found a management tool to reduce quality risks in supply chains
and reputational risk to their firm. Consumers should in principle
benefit from on-product logos to help guide them in buying sustainable
products, however defined. And if occasionally consumers are victims
of “greenwashing,” i.e., false claims about the environmental qualities
of a product, they have recourse to consumer protection laws, at least
in developed countries. At the ground level, actual environmental
outcomes have been documented to a limited extent, as discussed
above. This is a disappointment for environmental NGOs and donors in
OECD countries who have poured millions into the development and
operationalization of the schemes.
Developing country producers are frustrated in cases of compliant
supply outstripping demand and subsequent withering of price
premiums. Price differentials for sustainable commodities do not
necessarily revert to the grower (Potts and Sanctuary 2010). Benefits
are not evenly distributed along the supply chain, and certain actors can
use their market power to bargain with suppliers and buyers to increase
their share of the benefits. Certification costs are burdensome and limit
access for smallholders, although progress has been made in the case of
organics schemes, where group or regional certification schemes have
opened access to smallholders.
Developing country governments have recently been able to bring
their point of view to international organizations such as UNFSS, which
was founded in reaction to the concern that developing producers’ voices

were not being heard and to document the uncertainty on the schemes’
market access effects. UNFSS is currently setting up national platforms
on effective VSS use. A national platform in India was launched in April
2016, and the launching of such platforms in Brazil and the PRC is being
planned.
For trade to strengthen its role in promoting VSS as a means toward
sustainable outcomes in commodity production and fulfillment of
SDG 15 targets, other challenges that need to be addressed include the
following:
(i) The more demanding and sophisticated the standards, the
greater the tendency to limit sourcing to a relatively small
number of better-off and well-managed producers benefiting
from good infrastructure.
(ii) VSS have not always been demand-driven; rather, donors and
environmental and developmental NGOs have been primary
advocates without sufficient developing country governmental
and business support to national producers. The flip side is
that such standards are not financially sustainable, and when
donor support is discontinued they are likely to disappear.
9.5.3 Other Voluntary Approaches Involving Trade

in Natural Resources
Zero Deforestation Pledges

Another private sector approach to linking exports of internationally
traded commodities to the improvement of sustainable management
practices has been the growth in zero or no deforestation pledges.
Palm oil and soy have been the focus of international attention because
the clearing of land in tropical areas in response to demand for these
commodities is a driver of deforestation. Along with soy and palm oil,
beef and wood fiber for paper and pulp for export are considered the top
four drivers of deforestation.
The type and coverage of the zero deforestation pledges vary.
Some are across-the-board no deforestation, some may be net pledges
(clearings offset by plantings), while many are commodity-specific
pledges (Bregman et al. 2015). In the Amazon region, the Working Group
on Soy (GTS) of producers, traders, environmental NGOs (including the
World Wildlife Federation and Greenpeace), and financiers worked
out the Soy Moratorium. This initiative, which has been continuously
renewed since its inception in 2006, prevents major traders who
are signatories from selling soy that may be linked to deforestation.
Figure 9.1 Global Export Values for Important

Forest Risk Commodities
Palm oil
$34 Billion
Beef and leather

$14 Billion
Soy
$56 Billion
Timber and paper

$33 Billion
Source: Forest500. www.forest500.org
Monitoring by the GTS in 73 municipalities that cover the quasi-totality

of the area of soy produced in the Amazon is widely credited as a major
factor in the reduction of deforestation in the Brazilian Amazon. In fact,
this voluntary private-led initiative has been analyzed as outperforming
the legally mandated Brazilian Forest Code.29
Nestlé had already announced a zero deforestation pledge in May
2010 and has followed through by ensuring its palm oil plantations
in Indonesia are uniquely located on lands cleared before that date.
The palm oil trading giant, Wilmar, made an anti-deforestation
promise in 2013. Unilever and Marks & Spencer have made general
deforestation commitments. The Amsterdam Declaration in Support
of a Fully Sustainable Palm Oil Supply Chain by 2020 was signed by
the governments of Germany, Netherlands, the United Kingdom, and
Denmark to back a joint European company commitment to support
100% sustainable palm oil in Europe by 2020.
29
Butler, R. 2015. Brazil’s soy moratorium dramatically reduced Amazon deforestation.
Mongabay. 23 January. https://news.mongabay.com/2015/01/brazils-soy-moratorium
-dramatically-reduced-amazon-deforestation/. On the other hand, a high rate of
conversion of the cerrado (savanna grasslands) to soy proceeded over this period. See
Poynton, S. 2014. Wilmar’s “no deforestation” goal could revolutionise food production.
The Guardian. 29 January. http://www.theguardian.com/sustainable-business/wilmar
-no-deforestation-commitment-food-production
ISEAL Alliance reports that the number of various kinds of such

pledges has grown to some 300 (ISEAL Alliance 2016).
Policy Coherence
The expression policy coherence does not appear under SDG 15. It
can however be found under SDG 17, which is considered to be the
overarching goal insofar as it sets out various means of implementation
applying to all the SDGs. Target 17.14 reads: “enhance policy coherence
for sustainable development.” This is usually understood to be a synonym
for removing perverse incentives, among other things, for reducing
funding to economic activities that go against recognized public policy
goals. Targets under two other SDGs address subsidy reform directly,
e.g., 14.6 prohibiting certain forms of fish subsidies and 12.c rationalizing
inefficient fossil fuel subsidies.30
In a recent study (McFarland, Whitley, Kissinger 2015), the UK
Overseas Development Institute identified 48 subsidies, and was able
to estimate the value of half of them, revealing that reducing emissions
from deforestation and forest degradation (REDD+) funding is
eclipsed, specifically by domestic agriculture and biofuels subsidies.
It is clear, they conclude, that REDD+ money to keep forests standing
will not have much impact unless the real drivers of deforestation,
including subsidies that lead to forest loss, are addressed. The authors
call on donors and private investors to identify opportunities to phase
out or reform current subsidies that encourage forest loss. The UN
Environment Programme Financial Initiative has been working
with three countries—Peru, Ecuador, and Indonesia—to understand
how subsidies to agriculture are contributing to deforestation
(UNEP 2015).
30
SDG 12.c: Rationalize inefficient fossil-fuel subsidies that encourage wasteful
consumption by removing market distortions, in accordance with national
circumstances, including by restructuring taxation and phasing out those harmful
subsidies, where they exist, to reflect their environmental impacts, taking fully into
account the specific needs and conditions of developing countries and minimizing
the possible adverse impacts on their development in a manner that protects the
poor and the affected communities.
SDG 14.6: By 2020, prohibit certain forms of fisheries subsidies which contribute
to overcapacity and overfishing, eliminate subsidies that contribute to illegal,
unreported and unregulated fishing and refrain from introducing new such subsidies,
recognizing that appropriate and effective special and differential treatment for
developing and least developed countries should be an integral part of the World
Trade Organization fisheries subsidies negotiation.
9.6 Forests: Straddling the Certifiable and the

(Il)Legal
15.b Mobilize significant resources from all sources and at
all levels to finance sustainable forest management and
provide adequate incentives to developing countries to
advance such management, including for conservation and
reforestation
Under SDG 15, forests are mentioned no fewer than four times, once
in the text of overriding Goal 15 itself, then under two separate targets,
15.1 and 15.2, and finally in means of implementation 15.b. Why do forests
occupy such a prominent place?
Classified into three groups—boreal, temperate, and tropical—
forests englobe complex ecosystems with varied environmental, social,
and economic attributes. Over 1 billion people depend on forest and
non-timber forest products for their livelihoods (Chao 2012). Issues
of national pride and sovereignty associated with forests mean that
international discussions run up against strong sensitivities. These
technical and political issues explain why it has never been possible to
adopt an international convention on forests. They have, however, been
the focus of numerous nonbinding international initiatives and texts.
Although environmentalists pushed for an international convention, the
document adopted at the Earth Summit at Rio in 1992 was a Statement
of Forest Principles.31 This was the first global consensus reached on the
sustainable management of forests.
More recently, in the New York Declaration on Forests agreed at
the UN Climate Summit in September 2014, companies, governments,
NGOs, and indigenous groups endorsed ambitious targets of cutting
forest loss and restoring degraded forests (Gulbrandsen and Fauchauld
2015). Among the trade-related measures were commitments to take
steps to eliminate commodity-driven deforestation from their supply
chains. Some of the commodity-specific zero deforestation pledges were
discussed above in section 9.5.
With the adoption of the Paris Agreement at COP 21 in December
2015, forests have taken on even greater importance. Deforestation
and forest degradation is the second leading contributor to global
31
The full name is the Non-Legally Binding Authoritative Statement of Principles for a
Global Consensus on the Management, Conservation and Sustainable Development
of All Types of Forests.
warming, responsible for some 15% of global greenhouse gas

emissions. This makes the loss and depletion of forests a major issue
for climate change. Despite their importance in terms of greenhouse
gas emissions, the role of forests had not been included in earlier UN
Framework Convention on Climate Change texts. Their prominent
place in the COP 21 Agreement has been heralded as a major step
forward, as it recognizes not just the need to reduce emissions
from deforestation and degradation, but also forests’ major role in
sequestrating carbon and thus in contributing to the overall two-
degree target.
Even if trade in timber is not explicitly mentioned in the COP 21
text, the links to trade are important. Forest-related emissions come
largely from logging or clearing trees for agriculture, such as soy and
palm oil, and cattle ranching, two-thirds of which are export-oriented.
In the words of the Forest Carbon Partnership Facility, “With all the
services that forests provide both to humanity and the natural world,
there is now widespread understanding of a simple yet profound fact—
that forests are more important left standing than cut.”32 The Paris
Agreement calls for endorsement of policies that conserve standing
forests and also sustainably manage forests and enhance carbon
stocks.33
9.6.1 REDD+: Results-Based Payments
Although the acronym REDD+ itself doesn’t appear in the Paris

Agreement, the COP 21 text uses the exact definition of REDD+ both in
Finance paragraph 55 and Article 5 on forests.34 REDD+, standing for
32
Forest Carbon Partnership Facility (FCPF) (2010), p. 2. The FCPF is housed in the
Carbon Finance Unit of the World Bank.
33
Note that this mirrors the elements in SDG 15.2, the text of which is in the Annex
below.
34
Finance 55. Recognizes the importance of adequate and predictable financial resources,
including for results-based payments, as appropriate, for the implementation of policy
approaches and positive incentives for reducing emissions from deforestation
and forest degradation, and the role of conservation, sustainable management
of forests and enhancement of forest carbon stocks; as well as alternative policy
approaches, such as joint mitigation and adaptation approaches for the integral and
sustainable management of forests; while reaffirming the importance of non-carbon
benefits associated with such approaches; encouraging the coordination of support
from, inter alia, public and private, bilateral and multilateral sources, such as the Green
Climate Fund, and alternative sources in accordance with relevant decisions by the
Conference of the Parties; [emphasis added]
countries’ efforts to “reduce emissions from deforestation and forest

degradation, and foster conservation, sustainable management of forests,
and enhancement of forest carbon stocks,” was designed as a scheme based
on rewards for results, also termed results-based payments. Beneficiaries
are required to show that their forest conservation programs have reduced
emissions before they receive funds. Originally, REDD+ was to rely mainly
on voluntary carbon markets, but with the slow development of these
markets and low-carbon prices, incentives were not strong to attract
participants. Other sources of finance were necessary.35 These have been
forthcoming in the form of significant aid money from, e.g., Norway, other
bilateral donors, and the World Bank’s Forest Carbon Partnership Facility.
9.6.2 Certification of Voluntary Standards for

Sustainable Timber
The Forestry Stewardship Council (FSC) was set up in 1993. The forest
certification initiative had strong input from environmental NGOs.
Originally a global standard setter, it now manages a series of national
standards that adapt FSC international standards. It can be viewed as
a “top down” approach. It works with national forestry agencies and
accredits national certifying bodies. The FSC standard has a focus on
the environmental pillar of sustainable development, i.e., sustainable
forest management and biodiversity, genetically modified organism
prohibition, and soil attributes. Set up in 1999, the Programme for
the Endorsement of Forest Certification (PEFC), the other major
certification scheme, is “bottom up” on the other hand. It works with
national certification systems in 40 member countries and acts as a
Article 5 1. Parties should take action to conserve and enhance, as appropriate, sinks
and reservoirs of greenhouse gases as referred to in Article 4, paragraph 1(d), of the
Convention, including forests.
2. Parties are encouraged to take action to implement and support, including through
results-based payments, the existing framework as set out in related guidance and
decisions already agreed under the Convention for: policy approaches and positive
incentives for activities relating to reducing emissions from deforestation and forest
degradation, and the role of conservation, sustainable management of forests and
enhancement of forest carbon stocks in developing countries; and alternative policy
approaches, such as joint mitigation and adaptation approaches for the integral and
sustainable management of forests, while reaffirming the importance of incentivizing,
as appropriate, non-carbon benefits associated with such approaches. [emphasis added]
35
See Angelsen et al. (2012) for a detailed discussion of the technical, social, and
political aspects of REDD+, including ramifications of its financing moving from
carbon markets to donor money.
mutual recognition scheme. It also provides group certification to

smallholders, which makes it attractive to small forest owners.
Both FSC and PEFC now have “due diligence” provisions including
Chain of Custody certification that offer assurances that timber sold with
the respective approval can be traced from the forest through successive
stages of processing to the consumer. This is to minimize the risk that
shipments include wood from unknown, illegal, and controversial
sources. Due diligence and chain of custody certification have become
important in view of the European Union Timber Regulation (EUTR)
(see below) that now requires European timber importers to use a due
diligence system. For actors all along the supply chain, this is a crucial
risk management strategy. The FSC is a full member of the ISEAL
Alliance.36 The PEFC is an association member of the International
Accreditation Forum.37
Between 9% and 10% of the total forest area of 4 billion hectares
worldwide is certified by FSC and PEFC (combined). That certified
area in fact represents closer to 30% of the productive forests, that is,
excluding national parks and other protected areas. Some 90% of total
certified hectares are of temperate and boreal forests—those located in
North America or Europe. In terms of area certified by the FSC, Brazil
and the Republic of Congo were among the top 10 countries in 2015.
Under the PEFC scheme, the top 10 countries were all in North America
and Europe; the PRC was number 11, and Malaysia number 12. Overall,
tropical forests represent 10% of the area certified by the two bodies.38
9.6.3 Beyond Certification
Sustainability standards backed by certification have their share of critics.

Various challenges are discussed above in section 9.5. As certification
has become big business, it has, in the eyes of some critics, promoted a
mentality of “ticking the box” rather than promoting deep transformations
based on a holistic approach to ensure sustainable management of the
natural resource. In part this is a manifestation of the natural progression
of the “standards paradox” discussed earlier. As more and more of the
36
See ISEAL Alliance. Forest Stewardship Council Organisations. http://www
.isealalliance.org/online-community/organisations/forest-stewardship-council?page=2
37
See International Accreditation Forum. Association Members. http://www.iaf.nu
/articles/Assoc_Mem_by_Name/128
38
These statements are based on statistics provided by the PEFC; areas certified by
both bodies continue to grow.
commodity becomes standard(s)-compliant, supply outstrips demand for

the “green” variety, causing downward pressure on prices and reduction
of the price premiums. In turn, sustainability investments are reduced
and corners are cut, strengthening the tendency toward a “ticking of the
boxes.” Even worse, cheating and corruption may occur. Certifiers who are
known to be less stringent or can be bought off are called in. In such cases,
trade loses its incentivizing role based on market-based instruments,
as had been envisaged. No longer a driver for improved management
practices, the standards-cum-certification model according to these
critics is reduced to a race for the piece of paper.39 Examples tend to be
cited for organic agriculture and the VSS for heavily traded agricultural
(non-timber) products.
Frustration with the process has had various consequences: some
NGOs who were instrumental in originally developing standards have
moved on, in some cases forming consultancies to work directly with the
larger firms such as Unilever or Nestlé, with the objective of negotiating
transformational change in the firm’s behavior (Greenpeace 2016).
This may have been successful in the case of large firms that have made
commitments at the highest level to these transformational changes
to sustainable supply chains. Others have lobbied governments to step
back into the business of regulating and setting stiffer standards. And
some governments have taken over the certification business (Denmark
and Finland in the case of organics).
9.6.4 Legislating against Illegal Logging and Illicit Trade
Global exports of timber and forest products in 2013 were valued by

the Food and Agriculture Organization (FAO) and the UN Economic
Commission for Europe at $246 billion. The UN Environment
Programme has put a price tag on illegal logging and forest crime at
between $30 billion and $100 billion a year, and estimates that in certain
countries, 50%–90% of the wood is harvested or traded illegally.
In the absence of international regulation of the timber trade,40 key
timber-consuming countries have in recent years passed legislation to
39
Poynton (2015) describes in passionate terms how many standards plus certification
schemes have in his view gone wrong. He advocates an alternative model based on
values, transparency, transformation, and verification. LeBaron and Lister (2016)
have similar criticisms. They found that audits come down to fostering a “checklist”
audit compliance mentality and are ineffective tools for detecting, reporting, or
correcting environmental and labor problems in supply chains.
40
The number of listed species of timber has increased from 18 at CITES’ beginnings
in 1975 to a few hundred after COP 16 held in 2013. Decisions taken at COP 17 in
September 2016 added stricter provisions for certain species of timber, particularly
rosewoods. See International Centre for Trade and Sustainable Development, 2016.
prohibit the import of illegally harvested or transshipped timber.41 The

EUTR, the US Lacey Act, and the Australian Illegal Logging Prohibition
Regulation (Schloenhardt 2008) all take roughly similar approaches to
combating imports of illegal timber.
The EUTR went into effect on 3 March 2013. Its three main
obligations are to (i) require EU traders who place timber products
on the EU market for the first time to exercise due diligence to ensure
that timber products marketed are legitimate; (ii) prohibit European
importers from placing illegally harvested timber or their products
on the EU market; and (iii) ensure that economic operators have a
traceability obligation, that is, they maintain records of their suppliers
and customers (European Commission 2016b).
Under the US Lacey Act, trade is prohibited in wood products
manufactured from illegally harvested and traded timber. Infractions
are punishable with heavy fines. The US has also worked to include
provisions on illegal logging in bilateral and regional trade agreements.
Currently, the US government is cooperating with Peru to implement
obligations in the forest sector annex to the US–Peru Trade Promotion
Agreement.42
9.6.5 Legal Reform in Producing and Exporting Countries
The EU Forest Law Enforcement, Governance and Trade (FLEGT)

Action Plan, adopted in 2003, focuses on negotiating Voluntary
Partnership Agreements (VPAs) with the twofold aim of addressing
legality and sustainability in the timber sector. A VPA is a legally binding
trade agreement between the EU and a non-EU timber-producing
country. To date, six VPAs have been signed and another nine are being
negotiated, mostly with African and Southeast Asian countries. Since
2003, and despite the six VPAs currently in place, no shipment of “green
lane” timber to the EU had been made as of mid-2016.
Criticism of FLEGT has been strong due to slow progress and
its heavy procedural aspects. The EU and FAO, offering technical
assistance to the VPA talks, explain that long negotiations stem from the
revamping of the producing country’s legal system and the concomitant
need for strengthening government agencies’ capacity—issues that go to
the heart of national governance, including issues of fighting corruption.
Indonesia and Viet Nam have to address the further problem of closing
41
See WTO Committee on Trade and Environment Records in 2014 and 2015:
WT/CTE/M/57, 58 and 59.
42
US–Peru Trade Promotion Agreement. Annex 18.3.4: Annex on Forest Sector
Governance. https://ustr.gov/sites/default/files/uploads/agreements/fta/peru/asset
_upload_file953_9541.pdf
the loophole of timber transiting from illegally logged sources elsewhere

in the region to EU destinations to meet compliance with the EUTR.
The political and technical dialogues are bringing reform, but slowly.
An in-depth independent evaluation of FLEGT and the VPAs was
released in early May 2016. It finds that FLEGT has contributed to
improved forest governance and reduced demand for illegal timber in
the EU. The three pillars of FLEGT are to work along with (i) the supply-
side in producer countries (governance reforms and licensing); (ii) the
demand-side in consumer countries (public procurement policies,
private sector initiatives, and finance and investment safeguards); and
(iii) trade agreements—to link and incentivize (i) and (ii). The VPAs
have helped countries address governance issues, increase participation
and transparency, and start legislative reforms. FLEGT licenses are
required to export legal timber into the EU. As none have been issued
so far, the incentivization from trade has been lacking according to the
independent evaluation (European Commission 2016a).
Additional challenges to be addressed include the importance
of other drivers of deforestation, such as conversion of forest to
agriculture, that are not always tied to exports of timber. The in-depth
evaluation makes a number of recommendations, such as involving
the private sector more; focusing on non-VPA countries in order to
effectively address illegal logging and trade at the global level; and
adding obligations arising from international initiatives, such as climate
change. In the latter context, the need to develop relations with REDD+
was underscored.
9.6.6 Synergies between Certification and Illegal

Logging Laws
Increasingly, it is being recognized that the two approaches—regulatory
and voluntary—have the potential to create synergies. “Due diligence”
is now required by both certification systems—FSC and PEFC—within
their chain of custody requirements. This is an ongoing process, not
a one-off prerequisite, and can help reassure traders that they may be
in compliance with the EUTR when operating within the EU market.
Investigation into the legal regime and origin of the timber therefore
becomes part of a risk management strategy for the importer who would
otherwise face potential sanctions under EU legislation. Synergies are
also created by using the practical experience of certification standards
such as the FSC in implementing traceability schemes that are useful in
legal reform in VPA countries.
Synergies can also be imagined from the practical experience of
undertaking in-depth audits to meet the standards in implementing
traceability schemes. These are essential in reforming timber legislation

in VPA or other producing countries. The voluntary certification
schemes that have been operational for many years now are fulfilling
the requirements of consumer countries’ promotion of trade in legally
harvested and shipped timber.
9.7 Moving Forward to Strengthen Trade-

Related Initiatives for Sustainable Use
As discussed above, voluntary initiatives have been successful when
measured by market penetration. This dynamism using a market-
based instrument has not carried through to the satisfaction of all
stakeholders. Frustration exists at certain levels—producers, NGOs,
developing country governments, and consumers, but not everyone.
Business has learned to adapt the VSS-cum-certification model by
moving away from a simple expression of corporate social responsibility
to make it one component in a multifaceted business model. Businesses
have successfully integrated it in their risk management strategies
throughout the supply chain to protect reputational and other assets.
Currently there are discussions about how to revitalize the VSS-
cum-certification model. Research leaders in the standards world are
calling for innovation to address weak points and expand sustainability
standards to support landscape approaches (Molenaar 2015). The
change in direction is anchored by solid experience with the past.43
Instead of working plot by plot or at farm or mill level, an entire area
would be monitored. The task would be facilitated with mapping
and satellite technology to determine sustainability at a meta level.
Instead of a detailed pass or fail type audit on the ground, verification
would examine progress made in accordance with a more far-reaching
management system. Governments would make a reappearance, usually
at the local or regional level (ISEAL Alliance 2016).
The big question remains about financial incentives, that is, how
to incentivize producers to adopt and maintain more sustainable
practices (OECD 2013). From an agricultural point of view, this
traditionally means productivity gains and diversification. Will the
consumer accept buying the “green” good simply based on claims that
landscape management systems have been “verified”? Will they accept
a system based on “things are getting better,” rather than commodity
43
Forest management certification systems based on ISO 17021 use monitoring to
expand certification and include smallholders.
production units that are audited according to strict testing protocols

as done previously? And what happens to the smallholder? How
could a new system involve more competitive market safeguards or
government intervention to limit anticompetitive practices by certain
certification firms?
The voluntary zero deforestation pledges would on the surface
appear to fit well with the objective of maintaining and restoring
forests through REDD+. Further commitments from timber-producing
countries under the Nationally Designated Commitments, adopted
under the COP 21 agreement on climate change to protect and restore
forests, will need to be matched with financial incentives. Learning from
the past slow uptake, the results-based-payments approach needs to be
strengthened. Policy coherence (eliminating perverse subsidies) could
be a helpful complement, but it is easier to espouse than realize. Years of
hard work on fossil fuel subsidy reform has now led to peer reviews for
a few G20 and Asia-Pacific Economic Cooperation countries.
Any revisions in voluntary approaches will still necessarily need a
conformity assessment or assurance component. Consumers, donors,
environmental watchdogs, and others must be reassured, and validation
of the risk management strategies of business must be allowed. But
processes that encourage a one-dimensional compliance or a checklist
mentality need to be avoided. Lessons need to be drawn also to ensure
that the certification industry no longer engages in anticompetitive
practices. Governments that have the competition policy tools to
intervene and correct imbalances should investigate allegations.
Tools to support a sustainable use and sustainable trade approach
have been developed including under CITES since the CBD was born
at the Earth Summit in 1992. A number of success stories have been
inspired by CITES-type mechanisms. At the same time, these programs
remain comparatively small relative to trade in the big international
commodities such as palm oil, soy, beef, and forest products. UNCTAD’s
launching of an initiative to mainstream support into BioTrade in
bilateral and multilateral donor programs is welcome. But can this be
expected to remain more than marginal?
A further complication pertains to environmental crime. Due to
links to organized crime and terrorist organizations in certain regions
and for certain products, trade in nature-based goods has once again
become suspect. Therefore, increased support for sustainable use and
sustainable trade will need to prove itself, not only to environmental
groups, but also to law enforcement authorities. Organized crime is
using helicopters and Kalashnikovs, and is ahead of the curve in using
information technology and globalized transport routes. Meanwhile,
enforcement agencies are struggling to increase their resources. Legal,
nature-based trade will have to prove itself to be “whiter than white,”

and emerging techniques such as e-permitting, tagging, and other
traceability systems need to be generalized.
Perhaps the truly herculean effort will be on the forests front. On
the one hand, there is the continued need to facilitate the $100+ billion
legal trade through certification, including chain of custody processes
together with the reform of logging laws. On the other hand, REDD+ has
to be incentivized to let trees stand and play their role as carbon sinks.44
REDD+ was given a new lease on life at COP 21. It has a long way to go
to catch up as the various certification schemes are forging ahead and
sustainable timber areas being certified by double-digit growth figures.
The debate will continue between keeping a tree standing to play its
role in sequestrating carbon and selling it as timber. Actors will need to
be convinced that the timber traded originates from legal sources and
sustainably managed stands.
In view of the challenges voluntary and mandatory schemes
have been facing, it is an opportune time to be innovative. Indeed, as
discussed above, voluntary standards leaders are already thinking in
terms of expanding their horizons beyond the farmer’s plot to promote
sustainability schemes for entire landscapes.
9.7.1 Trade Facilitation Agreement for Environmentally

Sensitive Goods and Relevant Services
What could be a possible role for a Trade Facilitation Agreement (TFA) for
environmentally sensitive goods and relevant services? The idea has a firm
precedent in the TFA agreed at the World Trade Organization (WTO)
Ministerial Conference in Bali in 2012.45 Such an agreement would be
“intergovernmental plus,” that is, with significant participation from
local communities, NGOs, and business. It is important to distinguish
the notions of promoting trade and facilitating it. The aim of the WTO
TFA is to “expedite the movement, release and clearance of goods,
including goods in transit”—i.e., that part of trade after exporter and
importer have concluded the business deal (Rosenow 2015; OECD
2015). For example, as CITES-permitting and related wildlife laws are
relatively complex, using TFA-type techniques could help facilitate the
process. Components for consideration inspired by the current TFA
would address the following:
44
See Sukhdev (2015) for ideas on promoting synergies.
45
The TFA entered into force on 22 February 2017 after the WTO obtained the needed
acceptance from 110 members.
ƀǇ Border procedures to accelerate movement through customs. The

techniques of the single-window system, electronic permits,
data authentication, tracking and traceability systems, etc.
would simplify procedures and cut down corruption.
ƀǇ Cooperation among government agencies involved. Today they
too often are operating as separate units. Thus, trade, customs
(including inspection and criminal units), and wildlife officials
(such as CITES management authorities) would be required to
work together.
ƀǇ Regulatory cooperation on trade in relevant services. These
services, which facilitate the movement of goods, including
transport (international and domestic), logistics, and customs
brokers, would also figure prominently.
ƀǇ Strong role for technical assistance agencies and other bilateral
and multilateral donors. As with the WTO TFA, developing
countries would only be subject to the disciplines when they
declared themselves ready to accept them.
Under a separate window of the proposed agreement, VSS could

be kept under review by a loose, arms-length coalition of select
stakeholders—governments of producing and consuming countries, the
private sector, NGOs, traders, and certifiers. The GTS (Working Group
on Soy) is an example of a multi-stakeholder process that has succeeded
in stopping deforestation through a voluntary and negotiated process.
In this case, the “return of governments” to the game would validate the
process.
The lessons of 20 years of voluntary standards show that it is not a
question of either/or, but of benefiting from both an active private and
governmental presence. As stated in a recent discussion piece of private
standards and the WTO: “Reification of the old-fashioned distinction
between public and private ordering fails to address the realities of 21st
century governance” (Mavroidis and Wolfe 2016).
Reuniting suspicious actors will not be easy. Witness the difficulties
the EU is having with FLEGT to promote timber sector reform through
VPAs, despite the tremendously attractive carrot for producers
of opening a “green lane” procedure into the EU market. Pride of
authorship by certain large NGOs who wrote and are operating many of
the sustainability standards for internationally traded commodities will
not necessarily be in favor of increasing government involvement. Will
the large corporations that are already out in front want to lose a first-
mover advantage?
For the idea to move forward, a testing ground could prove useful
between sympathetic trading partners. Such an opportunity might
take the form of a regional trade agreement46 between two natural

resource-dependent economies that understand the crucial importance
of maintaining the future sustainability of their resource base while
providing nature-generated revenues for current generations.
This should be an idea worth pursuing to strengthen the positive
accomplishments of both voluntary standards and more than 40 years
of international experience in regulating wildlife trade.
46
Provisions about VSS in RTAs are relatively recent: Article 3.2(g) of the sustainable
development chapter in the Canada–EU Comprehensive Economic and Trade
Agreement provides, “Encouraging the development and use of voluntary schemes
relating to the sustainable production of goods and services, such as eco-labelling and
fair trade schemes.”
References
Angelsen, A., M. Brockhaus, and W. D. Sunderlin. 2012. Analysing
REDD+: Challenges and choices. Edited by L. Verchot. Bogor,
Indonesia: Center for International Forestry Research.
Bregman, T. P. et al. 2015. Achieving Zero (Net) Deforestation
Commitments: What it means and how to get there. Oxford, UK:
Global Canopy Programme. http://forest500.org/sites/default
/files/achievingzeronetdeforestation.pdf
Butler, R. 2015. Brazil’s soy moratorium dramatically reduced Amazon
deforestation. Mongabay. 23 January. https://news.mongabay.
com/2015/01/ brazils-soy-moratorium-dramatically-reduced
-amazon-deforestation/
Chao, S. 2012. Forest Peoples: Numbers across the world. Moreton-in
-Marsh: Forest Peoples Programme.
Convention on International Trade in Endangered Species of Wild
Fauna and Flora (CITES). 2011. From paper permits to electronic
technologies for better tracing wildlife trade in a globalized
economy. Press Release. https://www.cites.org/eng/news/press
_release.shtml (accessed 22 March 2017).
Cooney, R. et al. 2015. The trade in wildlife: a framework to improve
biodiversity and livelihood outcomes. Geneva: International Trade
Centre.
European Commission. 2016a. Evaluation of the EU FLEGT Action
Plan (Forest Law Enforcement Governance and Trade) 2004–2014.
Commissioned by the European Commission through the European
Forest Institute. http://ec.europa.eu/europeaid/evaluation-eu-flegt
-action-plan-forest-law-enforcement-governance-and-trade
-2004-2014_en
____. 2016b. Evaluation of Regulation (EU) No. 995/2010 of the European
Parliament and of the Council of 20 October 2010 laying down the
obligations of operators who place timber and timber products on
the market (the EU Timber Regulation). Commission Staff Working
Document SWD/2016/033 final. http://eur-lex.europa.eu/legal
-content/EN/TXT/?uri=CELEX%3A52016SC0033
____. 2016c. Trade Sustainability Impact Assessment of the Free Trade
Agreement between the European Union and Japan: Final Report.
Brussels. http://trade.ec.europa.eu/doclib/docs/2016/may/tradoc
_154522.pdf Sustainability Impact Assessments for the prospective
or negotiated trade agreements can be found on the European
Commission’s Directorate General for Trade. http://trade.ec.europa
.eu/doclib/cfm/doclib_section.cfm?sec=168&link_types=&dis=20
&sta=21&en=40&page=2&langId=EN
Forest Carbon Partnership Facility. 2010. http://www

.forestcarbonpartnership.org/sites/forestcarbonpartnership.org
/files/Documents/PDF/Sep2010/New%20FCPF%20brochure%20
--%20low%20resolution%20051809_0.pdf
Frankel, J. 2009. Environmental Effects of International Trade. Expert
Report No. 31 to Sweden’s Globalisation Council. Stockholm.
George, C. 2011. Regional Trade Agreements and the Environment:
Monitoring Implementation and Assessing Impacts: Report
on the OECD Workshop. OECD Trade and Environment
Working Papers 2011/02. Paris: OECD Publishing. http://dx.doi
.org/10.1787/5kgcf7154tmg-en (accessed 22 March 2017).
____. 2013. Developments in Regional Trade Agreements and the
Environment: 2012 Update. OECD Trade and Environment
.org/10.1787/5k43m4nxwm25-en
____. 2014a. Environment and Regional Trade Agreements: Emerging
Trends and Policy Drivers. OECD Trade and Environment
.org/10.1787/5jz0v4q45g6h-en
____. 2014b. Developments in Regional Trade Agreements and the
Environment: 2013 Update. OECD Trade and Environment
.org/10.1787/5jz0v4qcg9zw-en
Greenpeace. 2016. Cutting Deforestation Out of the Palm Oil Supply Chain.
http://www.greenpeace.org/international/Global/international
/publications/forests/2016/gp_IND_PalmScorecard_FINAL.pdf
(accessed 22 March 2017).
Grossman, G. and A. Krueger. 1993. Environmental Impacts of a North
American Free Trade Agreement. In The US-Mexico Free Trade
Agreement, edited by Garber, P. M. Cambridge, Massachusetts:
MIT Press.
Gruère, G. 2013. A Characterisation of Environmental Labelling and
Information Schemes. OECD Environment Working Papers No. 62.
Paris: OECD Publishing. http://dx.doi.org/10.1787/5k3z11hpdgq2
-en
Gulbrandsen, L. and O. Fauchald. 2015. Assessing the New York
Declaration on Forests from a trade perspective. Biores 9(4): 4–7.
Halle, M. 2014. Globally Joined: Environment and Trade: A synthesis of
ENTWINED research. Stockholm. http://entwined.ivl.se/download
/18.3b172370144f561e6f815eb/1396332028379/Entwined_Synthesis
.pdf
Hutton, J. and B. Dickson, eds. 2000. Endangered Species Threatened
Convention: the past, present and future of CITES. London: Earthscan.
International Centre for Trade and Sustainable Development. 2016.

CITES Hosts Largest-Ever Meet, Takes Key Wildlife Trade Decisions.
13 October. http://www.ictsd.org/bridges-news/bridges/news/cites
-hosts-largest-ever-meet-takes-key-wildlife-trade-decisions
International Consortium on Combating Wildlife Crime (ICCWC). Annual
Report 2013. https://cites.org/sites/default/files/eng/prog/iccwc/
ICCWC_Annual_Report_2013-WEB.pdf (accessed 22 March 2017).
International Trade Centre (ITC). 2015. The State of Sustainable Markets:
Statistics and Emerging Trends. Geneva: ITC.
INTERPOL. 2016. UNEP-INTERPOL report: value of environmental
crime up 26%. 24 June. http://www.interpol.int/News-and-media
/News/2016/N2016-073 (accessed 22 March 2017).
ISEAL Alliance. 2014. Setting Social and Environmental Standards:
ISEAL Code of Good Practice. Version 6.0. https://www
.isealalliance.org/sites/default/files/ISEAL%20Standard%20
Setting%20Code%20v6%20Dec%202014.pdf
____. 2016. How sustainability standards can contribute to landscape
approaches and zero deforestation commitments. http://www
.isealalliance.org/sites/default/files/ISEAL_Standards%20
_Contributions_to_Landscape_Approaches_April16_Final.pdf
Kasterine, A., R. Arbeid, O. Caillabet, and D. Natusch. 2012. The Trade in
South-East Asian Python Skins. Geneva: ITC.
Klintman, M. 2016. A Review of Public Policies relating to the Use of
Environmental Labelling and Information Schemes (ELIS). OECD
Environment Working Papers No. 105. Paris: OECD Publishing.
http://dx.doi.org/10.1787/5jm0p34bk7hb-en
LeBaron, G. and J. Lister. 2016. Ethical Audits and the Supply Chains of
Global Corporations. SPERI Global Political Economy Brief No.1. http
://speri.dept.shef.ac.uk/wp-content/uploads/2016/01/Global-Brief-1
-Ethical-Audits-and-the-Supply-Chains-of-Global-Corporations.pdf
Mavroidis, P. C. and R. Wolfe. 2016. Private Standards and the WTO:
Reclusive No More (March). Robert Schuman Centre for Advanced
Studies Research Paper No. RSCAS 2016/17.
McFarland, W., S. Whitley, and G. Kissinger. 2015. Subsidies to key
commodities driving forest loss: Implications for private climate
finance. ODI Working Paper. London: Overseas Development Institute.
https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications
-opinion-files/9577.pdf
Molenaar, J. W. et al. 2015. The role of VSS in scaling sustainability
in smallholder dominated agricultural sectors. White Paper 4.
Commissioned by the International Finance Corporation,
Aidenvironment, NewForesight, and the International Institute for
Environment and Development. www.sectortransformation.com
NEPCon. 2012. Comparative analysis of the PEFC system with FSC

Controlled Wood requirements. Prepared for the FSC International.
http://www.fsc-uk.org/preview.comparative-analysis-of-the-pefc
-system-with-fsc-controlled-wood-requirements.a-257.pdf
1994. Methodologies for Environmental and Trade Reviews. OCDE/
GD(94)103. Paris.
____. 2000. Assessing the Environmental Effects of Trade Liberalisation
Agreements: Methodologies. OECD Proceedings of a workshop
held in October 1999. Paris.
____. 2010. Paying for Biodiversity: Enhancing the cost-effectiveness of
Payments for Ecosystem Services. Paris: OECD Publishing. DOI:
http://dx.doi.org/10.1787/9789264090279-en
____. 2012. Illegal Trade in Environmentally Sensitive Goods. OECE
Trade Policy Studies. Paris: OECD Publishing. http://dx.doi
.org/10.1787/9789264174238-en
____. 2013. Scaling-up Finance Mechanisms for Biodiversity. Paris: OECD
Publishing. http://dx.doi.org/10.1787/9789264193833-en
____. 2015. Aligning Policies for a Low-carbon Economy. Paris: OECD
____. 2015. OECD Trade Facilitation Indicators: An overview of available
tools. www.oecd.org/trade/facilitation/indicators.htm
____. 2016. Illicit Trade: Converging Criminal Networks. OECD Reviews
of Risk Management Policies. Paris: OECD Publishing. http://www
.oecd.org/gov/risk/charting-illicit-trade-9789264251847-en.htm
Organization of American States. 2015. Handbook on CITES and
Livelihoods. Washington, DC. https://cites.org/sites/default/files
/eng/prog/Livelihoods/Guia_Parte1_CITES_eng_final.pdf
Peters, G. P. et al. 2011. Constructing an environmentally extended multi-
regional input-output table using the GTAP Database. Economic
Systems Research 23(2): 131–152. http://dx.doi.org/10.1080/09535314
.2011.563234.
Potts, J. 2012. Mitigating Climate Change: Leveraging the Potential
of Voluntary Standards in the Agriculture and Forestry Sectors.
ENTWINED Issue Brief 11. Stockholm. http://www.iisd.org
/pdf/2012/mitigating_climate_change_ag_forestry.pdf
Potts, J. et al. 2014. The State of Sustainability Initiatives Review 2014:
Standards and the Green Economy. Winnipeg: International Institute
for Sustainable Development. http://www.iisd.org/library/state
-sustainability-initiatives-review-2014-standards-and-green
-economy
Potts, J., and M. Sanctuary. 2010. Sustainable Markets are Growing –
Is Sustainability Keeping Pace? A Perspective on Sustainable Coffee
Markets. ENTWINED Issue Brief 03. Stockholm. http://entwined.ivl

.se/download/18.488d9cec137bbdebf9480003733/1350484548543
/IssueBrief3+low.pdf
Poynton, S. 2014. Wilmar’s ‘no deforestation’ goal could revolutionise
food production. The Guardian. 29 January. http://www.theguardian
.com/sustainable-business/wilmar-no-deforestation-commitment
-food-production
Poynton, S. 2015. Beyond Certification. http://www.tft-earth.org/wp
-content/uploads/2015/11/Beyond-Certification.pdf
Prag, A., T. Lyon, and A. Russillo. 2016. Multiplication of Environmental
Labelling and Information Schemes (ELIS): Implications for
Environment and Trade. OECD Environment Working Papers No. 106.
Paris: OECD Publishing. http://dx.doi.org/10.1787/5jm0p33z27wf
-en (accessed 23 March 2017).
Programme for the Endorsement of Forest Certification (PEFC). 2016.
Enabling Sustainability in Forest Management: PEFC’s unique
approach to forest certification. http://www.pefc.org/images
/documents/ brochures/Enabling_Sustainability_in_Forest
_Management.pdf
Reiter, J. 2015. Briefing on implementing the Sustainable Development
Goals: Trade in Biodiversity-based goods and services. Opening
remarks by Deputy Secretary-General of UNCTAD. Geneva.
25 November.
Rosenow, S. 2015. Implementing the Trade Facilitation Agreement
(World Trade Organization). Chapter 4. In Aid For Trade at a Glance
2015: Reducing Trade Costs for Inclusive, Sustainable Growth. OECD
and WTO.
Rundgren, G. 2015. Certified Organic: Reducing Barriers to Developing-
Country Exports of Conformity Assessment Services. http://www
.grolink.se/Resources/studies/513_Trade_in_Organic_certification
_OECD_paper.pdf
Save the Rhino. 2013. Reigniting the debate on a legal trade in rhino horn.
March. https://www.savetherhino.org/latest_news/news/604
_reigniting_the_debate_on_a_legal_trade_in_rhino_horn (accessed
22 March 2017).
Schloenhardt, A. 2008. The illegal trade in timber and timber products
in the Asia–Pacific region. Research and Public Policy Series No. 89.
Canberra: Australian Institute of Criminology. http://www.aic.gov
.au/media_library/publications/rpp/89/rpp089.pdf
Steering Committee of the State-of-Knowledge Assessment of Standards
and Certification. 2012. Toward sustainability: The roles and limitations
of certification. Washington, DC: RESOLVE Inc. http://www.resolv
.org/site-assessment/files/2012/06/Report-Only.pdf
Sukhdev, P. et al. 2015. REDD+ and a Green Economy: Opportunities for

a mutually supportive relationship. UN-REDD Programme Policy
Brief 01.
Trans-Pacific Partnership Agreement. http://www.tpp.mfat.govt.nz/
Union for Ethical BioTrade. www.ethicalbiotrade.org
United Kingdom Department for Environment, Food & Rural Affairs.
2015. UK Government Timber Procurement Policy: Results of the
Evaluation of Category A Evidence: Forest Certification Schemes.
London.
United Nations Conference on Trade and Development (UNCTAD).
2007. UNCTAD BioTrade Initiative: BioTrade Principles and Criteria.
United Nations Environment Programme (UNEP). 2015. Government
Subsidies for Agriculture May Exacerbate Deforestation, says
new UN report. 3 September. http://web.unep.org/government
-subsidies-agriculture-may-exacerbate-deforestation-says-new
-un-report
United Nations Forum on Sustainability Standards (UNFSS). 2016.
Voluntary sustainability standards: today’s landscape of issues
& initiatives to achieve public policy objectives: Part 1: Issues.
https://unfss.files.wordpress.com/2012/05/unfss-report-issues-1
_draft_lores.pdf
US Government Accountability Office. 2014. Free Trade Agreements:
Office of the U.S. Trade Representative Should Continue to
Improve Its Monitoring of Environmental Commitments. Report to
Congressional Requesters, November, GAO-15-161. Washington, DC:
United States Government Accountability Office. www.gao.gov
/assets/670/666782.pdf
US Trade Representative. 2016. Summary of the Trans-Pacific
Partnership Chapter 20 on the Environment. https://ustr.gov/sites
/default/files/TPP-Chapter-Summary-Environment.pdf
Vorhies, F. 2016. The SDGs, the trade in wild goods and services and
CITES. A discussion note prepared for a side-event at the 66th
meeting of the CITES Standing Committee.
Vringer, K. et al. 2015. Sustainable consumption dilemmas. OECD
Environment Working Papers No. 84. Paris: OECD Publishing.
http://dx.doi.org/10.1787/5js4k112t738-en
World Trade Organization (WTO). 2010. World Trade Report 2010
Trade in Natural Resources. https://www.wto.org/english/res_e/
booksp_e/anrep_e/world_trade_report10_e.pdf
WTO and CITES. 2015. Enhancing Cooperation for Sustainable
Development. https://cites.org/sites/default/files/i/news/2015
/CITES_WTO_Brochure_72.pdf
Appendix
Sustainable Development Goal 15 and the 12 Targets
Protect, restore and promote sustainable use of terrestrial ecosystems,

sustainably manage forests, combat desertification, and halt and reverse
land degradation and halt biodiversity loss
15.1 By 2020, ensure the conservation, restoration and sustainable
use of terrestrial and inland freshwater ecosystems and their services,
in particular forests, wetlands, mountains and drylands, in line with
obligations under international agreements
15.2 By 2020, promote the implementation of sustainable
management of all types of forests, halt deforestation, restore degraded
forests and substantially increase afforestation and reforestation globally
15.3 By 2030, combat desertification, restore degraded land and soil,
including land affected by desertification, drought and floods, and strive
to achieve a land degradation-neutral world
15.4 By 2030, ensure the conservation of mountain ecosystems,
including their biodiversity, in order to enhance their capacity to provide
benefits that are essential for sustainable development
15.5 Take urgent and significant action to reduce the degradation of
natural habitats, halt the loss of biodiversity and, by 2020, protect and
prevent the extinction of threatened species
15.6 Promote fair and equitable sharing of the benefits arising from
the utilization of genetic resources and promote appropriate access to
such resources, as internationally agreed
15.7 Take urgent action to end poaching and trafficking of protected
species of flora and fauna and address both demand and supply of illegal
wildlife products
15.8 By 2020, introduce measures to prevent the introduction and
significantly reduce the impact of invasive alien species on land and
water ecosystems and control or eradicate the priority species
15.9 By 2020, integrate ecosystem and biodiversity values into
national and local planning, development processes, poverty reduction
strategies and accounts
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
15.a Mobilize and significantly increase financial resources from all

sources to conserve and sustainably use biodiversity and ecosystems
15.b Mobilize significant resources from all sources and at all levels to
finance sustainable forest management and provide adequate incentives
to developing countries to advance such management, including for
conservation and reforestation
15.c Enhance global support for efforts to combat poaching and
trafficking of protected species, including by increasing the capacity of
local communities to pursue sustainable livelihood opportunities
10
Trade and Climate Change
Andrew Prag
10.1 Introduction
Sustainable Development Goal (SDG) 13 addresses climate change
mitigation and adaptation, but explicitly “acknowledg[es] that the
United Nations Framework Convention on Climate Change is the
primary international, intergovernmental forum for negotiating
the global response to climate change.”
It is, however, less detailed than many of the other SDGs, and is
noticeably brief on issues around reduction of greenhouse gas (GHG)
emissions. This is understandable, given that the SDGs were developed
at the same time as countries were negotiating a new international
agreement on climate change. Now that the Paris Agreement on climate
change has been finalized, SDG 13 can be seen as rather subservient to
the strong commitments made in that agreement on both mitigation
and adaptation, as well as the subsequent transparency and review
processes.
Nevertheless, it is valuable to consider how trade and trade
liberalization policies may help or hinder action on climate change,
including achievement of SDG 13. The substance of this chapter is
based on two chapters of a major 2015 study, Aligning Policies for
a Low-Carbon Economy (OECD–IEA–NEA–ITF 2015). That study
recognizes that climate change policies do not operate in isolation
and that other policy areas can strongly influence whether climate
objectives are achieved, and at what overall cost. The report provides a
broad diagnosis of how various policy measures and regulations may be
misaligned and negatively interacting with climate change policies. The
misalignment approach is also reflected in SDG 13 through the second
of the three targets: “Integrate climate change measures into national
policies, strategies and planning.” Alignment and interaction of policies
is therefore a useful lens through which to address the role of trade in
achieving SDG 13.
252
Trade and Climate Change253
10.2 Trade and Greenhouse Gas Emissions

International trade influences global GHG emission patterns in several
ways. The environmental impacts of trade have often been framed in
terms of their scale, composition, and technique effects (Grossman
and Krueger 1993; Copeland and Taylor 2003). When applied to
GHGs, the scale effect refers to changes due to the increased activity
from trade—including increased transport—which usually leads to
increased emissions. The composition effect refers to changes in a
country’s emissions profile as relative prices and resource allocation
between sectors adjust in response to international trade. As trade
increases, some sectors will expand and others will contract in line
with a country’s comparative advantage, which could lead to either an
increase or decrease in its overall emissions intensity, all else constant.
The technique effect refers to improvements in emissions intensity due
to production innovations, such as through the international diffusion of
lower-carbon goods and services via trade. Policy settings can influence
how trade, through these three effects, influences GHG emissions.
International trade also acts to move “virtual emissions” around
the world, “embedded” in traded products. Usually, GHG emissions
are attributed to countries on a territorial production basis, so that
all emissions physically released within a country’s borders count
toward that country’s inventory. However, emissions generated in
the production of exported goods (or intermediate products) will
essentially be “consumed” in another country. This presents a challenge
for emissions accounting. If national emissions were instead to be
calculated on a consumption basis, i.e., including estimates of emissions
released during the production of imported goods consumed within the
territory, this would paint a different picture, though it is technically
challenging (Box 10.1).
Another means by which trade influences GHG emissions is as
a vector for “carbon leakage.” The interconnectedness of the global
economy through trade means that countries’ core climate policies do not
operate in isolation. Short-term costs imposed by climate policies could
lead to “carbon leakage” in cases where imports of carbon-intensive
goods increase in response to more stringent mitigation efforts.
Energy-intensive firms in many countries remain concerned that if
domestic climate-related regulation is misaligned with the stringency
of regulation in other countries, this will harm competitiveness at the
firm and sector level and could lead to industrial flight to countries with
less stringent climate regulation. This could be either through altered
balance-of-trade flows or through relocation of production capacity.
Box 10.1 Traded Emissions: Calculating Emissions

Based on Production and Consumption
A comparison of countries’ production and consumption emissions can be visualized
using data from the Organisation for Economic Co-operation and Development
(OECD)’s input–output tables combined with International Energy Agency (IEA)
data on carbon dioxide emissions. Intellectually, it might appear more appropriate to
consider consumption-based emissions when assessing countries’ efforts to reduce
greenhouse gas (GHG) emissions. If perfect information were available, it would be
interesting to determine how a global carbon budget could be carved up based on the
real emissions influenced by the consumption in each country. This would in theory
remove any concerns about “carbon leakage” (see below) and would allow each
country to take responsibility for the emissions its economic activity really generates.
In practice, at least two issues need to be considered.
First, even though it can be claimed that a country is responsible for the emissions
along global production chains generated by its economic activity, that country’s
capacity to influence emissions intensity abroad is limited. This is where an international
agreement on territorial emissions continues to play an important role. Second, all
GHG data are far from perfect, and agreeing on methods for measuring and comparing
consumption-based emissions remains challenging (Lenzen et al. 2013; Nakano et al.
2009; Peters et al. 2011). Nevertheless, estimates such as those presented in the figure
below provide a useful illustration of the importance of international trade for GHG
emissions allocation. The data resemble those presented for net export and import by
region in the Intergovernmental Panel on Climate Change’s Fifth Assessment Report
(Agrawala et al. 2014).
Figure 10.1 GHG Emissions of Selected Countries

on a Production and Consumption Basis
Gt CO2
PRC
US
Consumption-based 2011
EU28 Production-based* 2011
Consumption-based 1995
Production-based* 1995
India
Japan
* Production-based estimates after reallocation of emissions from
Russian non-resident final expenditures on fuel.
Federation
0 1 2 3 4 5 6 7 8
EU = European Union, GHG = greenhouse gas, PRC = People’s Republic of China, US = United States.
Source: Authors based on Organisation for Economic Co-operation and Development input–output tables
and International Energy Agency carbon dioxide emissions data. See www.oecd.org/sti/inputoutput/co2
Emissions reduction efforts would also be undermined, as part of the

avoided emissions would now occur somewhere else. This potential
carbon leakage to “pollution havens” has been much discussed in the
literature (for examples, see Condon and Ignaciuk 2013; Arlinghaus
2015).
So far, there is not much evidence that climate policies have led to
carbon leakage. A recent review of empirical studies found very little
evidence of sector-level competitiveness effects arising from carbon
pricing systems implemented to date (Arlinghaus 2015). While the
literature is in broad agreement that the European Union (EU) Emissions
Trading System (ETS) has stimulated some emissions abatement, no
causal link could be established between carbon pricing—including the
EU ETS and a range of carbon taxes—and carbon leakage. For carbon
taxes, while abatement through decreases in energy intensity was found,
only very small impacts on competitiveness were identified (Arlinghaus
2015). Further, no causal effects of the system on employment, output,
or international trade have been found; observed employment decreases
are more likely due to the financial crisis and the decades-long gradual
shift away from manufacturing in OECD countries (Warwick 2013; Pilat
et al. 2006).
Further, the evolution of domestic energy prices will also influence
the industrial competitiveness landscape (IEA 2013; Flues and Lutz
2015). The cost of climate policy is one of many factors in this picture:
energy costs, labor costs, exchange rates, transport costs, product
specialization, and local demand markets and regulations are important
determinants of industrial competitiveness (IEA 2013; ECF 2014).
The absence of competitiveness effect evidence to date can,
however, be challenged on the grounds that future emissions reductions
will need to be much higher than implemented so far, with higher costs
and possible trade distortions as a result. This, of course, hinges on the
relative ambition of climate policies in different countries, including
how the Nationally Determined Contributions (NDCs) are implemented
and how they evolve. NDCs are national mitigation plans for the post-
2020 period, submitted to the Paris Agreement. While not explicit on
trade, the Agreement contains a transparency and ambition mechanism
designed to increase trust between countries on the relative ambition of
their actions (Box 10.2).
Despite these various emissions pattern influences, trade itself is
not the climate villain. International trade does of course have direct
emissions implications due to GHG emissions from transport (as
well as other direct environmental impacts, such as invasive species
in containers and ballast water). But when the life-cycle emissions
of goods are considered, a different picture may emerge. Comparing
life-cycle emissions means looking at the GHGs produced at all stages

of a product’s life, such as production, transport, end use, and disposal.
If the production process in another country is much less emissions-
intensive than in the country where the good is to be consumed, then
overseas production may still have lower emissions, despite those
from international transport. How a product is produced is often more
important than where it is produced. This can be an important factor
where policies are designed to favor local production over imported
products on environmental grounds.
Further, the principles of free trade and comparative advantage
suggest that over the long term, free and fair trade should lead to a more
efficient (and resource-efficient) outcome for the same level of economic
output, assuming that climate-related externalities are correctly priced
everywhere. In 2050, feeding 9 billion people all striving for wealthier
lifestyles will be less resource-intensive with free trade than it would be
without it, again assuming that GHG externalities are correctly priced.
The problem is that not all GHG emissions are yet correctly priced.
This means that it is important to assess how international trade is likely
to affect global GHGs, and where policy misalignments could lead to
higher emissions.
The rest of this chapter examines how trade policies may be
misaligned with countries’ objectives on climate change. First, it looks
for misalignments within international trade agreements and trade
Box 10.2 Trade and the Paris Agreement

The conclusion of the Paris Agreement in 2015 is a landmark in international
cooperation on climate change. The hybrid nature of the agreement—a
universal commitment to limit warming accompanied by country-determined
action plans—allows for countries to steadily increase their ambition while
subject to an international transparency and review process. Interestingly,
the word “trade” is not mentioned in either the Paris Agreement or the
accompanying technical decision by the Conference of the Parties. The
underlying text in the original Framework Convention on Climate Change
(agreed in 1992) can be assumed still to hold: “Measures taken to combat
climate change, including unilateral ones, should not constitute a means
of arbitrary or unjustifiable discrimination or a disguised restriction on
international trade.” This mirrors the principles in international trade law
discussed below, although the World Trade Organization agreements do not
include any specific mention of climate change. The bottom-up nature of
country commitments made under the Paris Agreement makes it ever more
important that international trade law does not act to prohibit governments in
pursuing legislation aimed at achieving ambitious climate goals.
Source: Author.
rules themselves. It then focuses on where domestic policies, including

those intended to foster green growth, may be hindering the diffusion of
low-carbon goods through international trade. Finally, the role of policy
in improving trading system resilience in the face of physical climate
impacts is briefly considered.
10.3 Potential Misalignments with International

Trade Rules
The international trade regime includes rules agreed multilaterally
under the World Trade Organization (WTO), rules agreed bilaterally
or plurilaterally through regional trade agreements (RTAs), and
jurisprudence from prior disputes relating to trade rules. Taken as a
whole, does the trade regime act to restrict governments’ ability to pursue
ambitious climate policies? The following sections suggest that, in general,
the trade regime is not in itself misaligned with climate objectives.
Multilateral Agreements under the World Trade

Organization
The WTO’s primary agreement governing goods trade, the General
Agreement on Tariffs and Trade (GATT) 1994, does not in itself
prevent countries from pursuing climate policies. The GATT lays out
the core principles for free trade. Key among these are the principles
of nondiscrimination between “like products” from different trading
partners (most-favored-nation treatment) and between “like products”
of foreign and domestic origin (national treatment). The question of
whether products that differ only in the way they are produced, such as
differences in GHG emissions during production, should be considered
“like products” has been extensively debated by commentators and in
ongoing WTO case law.
However, the GATT also allows for countries to justify policies
on environmental (and other) grounds through Article XX, even if the
measures partly violate one or more of the core principles.1 Although the
1
If a policy measure related to climate change mitigation seeks exemption from goods
trade rules as a necessary measure for the low-carbon transition, the measure must
satisfy the content of one of the paragraphs of Article XX. In most environmental
cases, this means the measure must be “relating to the conservation of exhaustible
natural resources” or be “necessary to protect human, animal or plant life or health.”
The measure seeking exemption must also satisfy the chapeau of the article, that
is, not to constitute an “arbitrary or unjustifiable discrimination between countries
where the same conditions prevail” or a “disguised restriction on international trade.”
exemptions do not specifically mention climate change (the text dates

from 1947), there is no clear evidence that the GATT itself has acted to
discourage countries from pursuing policies relating to climate change.
In the few instances that WTO case law has tested whether climate
change is an appropriate reason for justification under Article XX,
opinions have generally been favorable (Tran 2010).
Several of the more specific WTO agreements are also relevant
to policies and measures targeting climate change objectives. One
particular example is the Agreement on Subsidies and Countervailing
Measures (SCM). Subsidies for the deployment of low-emitting
technology have been one of the few policy tools readily available for
governments seeking to take fast action on the low-carbon transition,
given the barriers often faced when seeking to implement carbon
pricing systems.
In general, the WTO Dispute Settlement Mechanism has
allowed for jurisprudence to build up on an as-needed basis, with
the application of trade rules to particular cases being clarified
through emerging case law, including for measures related to climate
change. In the case of subsidies, the dispute settlement process
can lead to authorized, unilateral trade remedies adopted by WTO
members. Remedies such as antidumping and countervailing duties
are legitimate, WTO-sanctioned responses to injuriously dumped or
subsidized imports.2 Recently, unilateral remedies have been applied
in two directions within the same low-carbon industry. For example,
the United States (US) first imposed antidumping and countervailing
duties on finished solar panels from the People’s Republic of China
(PRC). In response, the PRC imposed similar measures on polysilicon
precursors from the US. The result of this escalation is reduced
overall trade and increased costs in the supply chain (see review of
studies in OECD 2015). Although policy options for de-escalating
trade remedies exist,3 the costs incurred all across value chains and
the uncertainty created for investors reinforce the importance of
2
For countervailing duties, the implementing party must demonstrate that “specific”
subsidies were provided that caused “injury” to the domestic complaining industry
before countervailing duties can be imposed. Export subsidies and local content
subsidies, which are generally prohibited, are deemed specific. Other subsidies, it
must be shown to be limited to a specific company or industry, or group of companies
or industries. Subsidies that are not prohibited, are not specific, or do not cause
injury are permissible under WTO rules.
3
These include reductions in the level of the duty imposed (not seeking to counter the
full value of the dumping), reducing the scope (e.g., to the specific product or import
value) or targeting only companies with a dominant anticompetitive market position
(Wu and Salzman 2014; Swedish National Board of Trade 2013).
ensuring that domestic subsidies are designed in accordance with

WTO principles, including the SCM.
Regional Trade Agreements
Outside of the WTO, governments have for many years pursued

bilateral or plurilateral trade and investment agreements, often with
the aim of creating closer ties with trade partners or moving toward
deeper regional economic integration. Increasingly, these RTAs include
specific environmental provisions (or environmental side agreements)
that can be used to encourage more stringent environmental action
(OECD 2007; George 2014). For example, provisions can include
agreements to not weaken environmental laws to seek increased
international investment, and agreements to ensure that judicial
enforcement is available (e.g., the Peru–US agreement and the
agreement between the Central American countries, the Dominican
Republic, and the US; see US GAO 2014 for a review). The effectiveness
of these provisions depends on their degree of ambition, the extent
to which they are binding, the stringency of their enforcement, and
the nature and extent of cooperation between or among the parties to
implement the provisions.
More recent RTAs aim to tackle behind-the-border barriers to
trade in a more profound way than the WTO’s Agreement on Technical
Barriers to Trade. As well as chapters related to the environment or
sustainable development, these RTAs tend to include provisions on
regulatory cooperation aiming to streamline regulations to reduce the
cost of doing business internationally. Although this cooperation may
cover environmental regulations, including those relevant to climate
change mitigation, it does not impede each party’s sovereign right to
regulate. Concerns have also been raised that investor protection clauses,
if included in RTAs where all parties have robust domestic investor
protection laws, the outcome could be detrimental to climate change
policy measures (if international investors use that facility to challenge
domestic climate policies). However, investor protection clauses have
been used in international agreements for many years and no conclusive
evidence of this effect has been documented (Australian Productivity
Commission 2010; Tietje et al. 2014; BIAC 2015).
Environmental Goods Trade Liberalization
Increased trade in environmental goods can help to mitigate

environmental problems while also supporting economic growth.
Most OECD countries have, over time, reduced their import tariffs
for environmental goods, including those relevant to climate change

mitigation. However, formal tariff-based trade barriers still exist for
environmental goods, in particular outside the OECD area, with the
result that the diffusion of some technologies important for addressing
GHG emissions is hindered and costs in those countries are higher
than they should be.
The prospect of a multilateral agreement at the WTO with
commitments on environmental goods tariffs has been discussed many
times since 2001, so far with little progress in formal negotiations
(Steenblik 2005; Sauvage 2014). Progress has been made outside of the
WTO on a plurilateral basis. The Asia-Pacific Economic Cooperation
(APEC) countries took a leading role in environmental goods trade by
agreeing on the APEC List of Environmental Goods and committing to
reduce applied tariff rates of the listed products to 5% or less by the end
of 2015. In 2014, a group of WTO members, including OECD and non-
OECD countries (among them the PRC), commenced new plurilateral
negotiations toward an Environmental Goods Agreement that is likely
to include goods that are important for climate change mitigation (or
are components thereof ). If concluded successfully, such an agreement
could potentially be formalized under the WTO in due course. Technical
challenges remain, including reaching agreement on which goods
should be considered for tariff liberalization, given that many goods also
have clearly non-environmental uses and are not separately identified
in the Harmonized System, the international classification and coding
system used to track international trade (Steenblik 2005; Sauvage 2014).
Nontariff barriers (NTBs) also hinder environmental goods
dissemination, sometimes to a larger extent than tariff barriers. These
include, for example, burdensome customs procedures, testing and
certification requirements, and local-content requirements (LCRs),
such as those described under the domestic measures section below.
Although the current negotiations on trade in environmental goods
cover only tariffs and not NTBs, successful conclusion of an agreement
on reducing tariffs for environmental goods would potentially pave the
way for a future agreement extending to NTBs.
10. 4 Misalignments Arising Through Domestic

Policies Related to Trade
Within the framework of the international trade regime, the trade
effects of some domestic policies can have an important bearing on
their effectiveness to support the low-carbon transition. These policies

are examined in this section.
“Local-Content Requirements” for Renewable Energy
As part of their recovery from the financial crisis, many countries have
implemented various forms of industrial policy, albeit often under
different names (Evenett et al. 2009; Warwick 2013).
A number of these newly introduced policies aim to promote green
growth through the stimulation or creation of domestic industries
manufacturing low-carbon power generation equipment. This trend has
been referred to as the rise of “green industrial policy” (e.g., Wu and Salzman
2014; Rodrik 2013). Such measures may initially appear to be beneficial for
the low-carbon transition. But various analyses have highlighted that if
the measures are designed to be overly restrictive of international trade,
they are likely to lead to higher prices for both domestic and international
suppliers, with the overall effect of hindering uptake.
Box 10.3 considers the specific and highly visible example of LCRs
for renewable energy equipment. These can be considered a policy
misalignment for the low-carbon transition because they can raise
the overall costs of downstream activities (e.g., installation). OECD
work indicates that LCRs have hindered both competitiveness and
international investment in solar photovoltaics and wind energy.
The increasingly globalized nature of value chains for wind and solar
technology means that intermediate products cross borders many times.
LCRs are usually intended to support midstream manufacturers, and the
resulting market distortions can increase costs for actors further down
the value chain. If these actors are in the same country, the policy may
have a net negative effect for the domestic sector it is trying to support.
Overall, such policies are likely to raise costs all across the production
chain (Bahar et al. 2013; OECD 2015).
The risk of higher overall costs also exists in relation to other
trade-impacting “behind the border” measures in the same sectors.
These include measures with more direct trade implications (such as
local-equity requirements and export quotas), and those that deter
international investment and therefore lead to overall less-efficient
supply chains (e.g., national standards that favor domestic producers or
more informal measures that favor local enterprises over foreign ones).
The prevalence of these measures, and the WTO disputes associated
with them, highlights the need for policy makers to better align and take
a more holistic approach to trade and investment policies in order to
support the low-carbon transition.
Box 10.3 Local-Content Requirements

in Renewable Energy Markets
Local-content requirements (LCRs) have increasingly been used to
support renewable energy. Organisation for Economic Co-operation and
Development (OECD) research shows that LCRs linked to wind and solar
photovoltaics have been planned or implemented in at least 21 countries,
including 16 OECD countries, mostly since 2009. LCRs are typically imposed
as a precondition for access to financial support schemes such as feed-in
tariff (FiT) programs or as part of eligibility requirements in renewable energy
public tenders. Some countries have also designed LCRs as eligibility criteria
for direct financial transfers such as subsidized loans and loan guarantees
from government agencies and national development banks, as in Brazil. In
some cases, such as in India, different LCR ratios are used depending on
the technology in downstream installations (OECD 2015; OECD et al. 2013;
Bahar et al. 2013).
To highlight the effects of LCRs on international investment, OECD
empirical analysis indicates that while FiT policies play an important role in
attracting international investment in solar photovoltaics and wind energy,
LCRs have a detrimental effect on global international investment flows in
these sectors and hinder FiT policies when attached to them. The estimated
detrimental effect of LCRs is slightly stronger when both domestic and
international investments are considered. This indicates that LCRs do not
have positive impacts on domestic investment flows (OECD 2015). At the
same time, recent OECD Computable General Equilibrium modeling has
shown an array of expected negative impacts of LCRs on trade across different
sectors (Stone et al. 2015).
The rise of LCRs for renewable energy has led to at least five WTO
disputes since 2010, highlighting the importance that governments place
on new renewable energy industries. The most recent high-profile example
concerned the National Solar Mission in India.
The Jawaharlal Nehru National Solar Mission, launched in 2009, uses
a competitive bidding process for new solar power tenders. The mission
is planned over three phases from 2012 to 2022, with the original aim of
20 gigawatts (GW) of on-grid capacity and 2 GW of off-grid solar installations.
In 2015, this target was increased to 100 GW.
Under Phase I (2010–2013) of the National Solar Mission, developers had
to abide by a 60% LCR for projects using photovoltaic crystalline silicon (c-Si)
cells and a 30% LCR for solar thermal and concentrated solar power, to qualify
for the 25-year power purchase agreement with a fixed FiT. Photovoltaic
modules using thin-film technology were exempted from the 60% LCR, unlike
projects using photovoltaic panels with c-Si technology. Since October 2012,
only locally manufactured photovoltaic modules can qualify for the “Off-Grid
and Decentralized Solar Applications” support scheme (which provides a
capital subsidy of 90% of the benchmark cost for solar-photovoltaic power
projects below 100 kilowatts).

Box 10.3 continued
During Phase II (2013–2017), the auction for 750 megawatts of photovoltaic

capacity included a mandatory LCR, to be eligible to receive Viability Gap
Funding. Under international pressure, the LCR was reduced in scope to cover
only a part of the total capacity auctioned. Nevertheless, by 2017, more than
1 GW will have been awarded with the LCR. Against this backdrop, the US filed
a complaint against India at the WTO. In February 2016, the WTO Dispute
Settlement Body ruled that the LCR was not compliant with the WTO TRIMs
agreement, and in September 2016 the Appellate Body upheld the ruling.
This ruling added further precedent to a previous example of a successful
WTO challenge against an LCR introduced by the Canadian province of
Ontario in connection with its FiT subsidy scheme. In that case, the LCR was
found to be in breach of the General Agreement on Tariffs and Trade, and the
Agreement on Trade-Related Investment Measures commitments, though
the FiT scheme itself was not found to be in breach of the Agreement on
Subsidies and Countervailing Measures.
Sources: As cited in text, and for WTO disputes, see www.wto.org/english/tratop_e/dispu_e
/cases_e/ds412_e.htm and www.wto.org/english/tratop_e/dispu_e/cases_e/ds456_e.htm
10.5 Barriers to Trade in Services

Over time, the global importance of trade in services has risen
significantly. Global value chains and highly streamlined international
logistics networks have made international deployment of services a
key part of modern trade. The value created by services as intermediate
inputs now represents over 30% of the total value added in manufactured
goods. The international trade regime addresses services trade through
the General Agreement on Trade in Services (GATS), agreed in 1994.
However, negotiations on specific liberalization commitments under
the agreement have faltered over time and many barriers to trade in
services remain in the form of domestic regulations.4 Some of these are
important for the low-carbon transition.
Trade in services is important for climate change mitigation in a
number of ways. In general, more efficient services sectors contribute
to improving productivity and enhancing competitiveness in
4
Progress is being made on a plurilateral basis. In 2013, a group of 23 WTO members
started plurilateral negotiations on a specific Trade in Services Agreement that
follows GATS principles and aims to establish commitments between signatories in
areas such as licensing, financial services, telecoms, ecommerce, maritime transport,
and professionals moving abroad temporarily to provide services.
manufacturing as well as in services sectors themselves (OECD 2014).

Greater productivity will often lead to lower energy use and emissions
intensity. Also, as economies become ever more interconnected through
value chains, a trend toward “servicification” can be identified, with
companies increasingly turning to provision of services attached to the
delivery of goods. For example, a jet engine manufacturer is more likely
to lease its engines to airlines, and an industrial turbine manufacturer is
more likely to lease its turbine. This usually leads to better maintenance
and performance of the equipment, resulting in lower fuel use and
lower emissions. It is also likely to lead to better overall utilization
rates of physical capital, thereby contributing to a more energy-efficient
economy. But to be effective, this “servicification” of the economy
requires smooth international trade in services (Swedish National Board
of Trade 2014).
Concerning specific technologies important for climate change,
such as renewable energy, its deployment is dependent on a wide
range of services, many of which are imported and are not necessarily
strictly environmental in nature, particularly in the context of
developing countries. Business services, telecommunications services,
and construction and related engineering services figure prominently
(Steenblik and Geloso Grosso 2011). Low-carbon goods tend to be
newer, high-tech goods requiring highly skilled personnel to install,
operate, and maintain. Training of local users can also be important.
Overall, this means that widespread diffusion of such technologies,
particularly in developing countries, is likely to be more affected by
barriers to services trade than “conventional,” more highly emitting
goods.5 Finally, services that are traditionally considered to be
“environmental services,” such as pollution remediation, may also be
important for climate mitigation.
Tracking and understanding trade in services is difficult due to
data constraints. Recently, the OECD developed the Services Trade
Restrictiveness Index (STRI) to shed light on barriers to services trade
across different sectors and countries (Box 10.4). Although it has not
developed an index specifically for environmental services, those for
other service industries highlight where some countries could do more
to remove barriers to services trade that would support low-carbon
transition. Steenblik and Geloso Grosso (2011) documented examples
5
Exceptions do, of course, exist, such as technologies to convert coal to liquids and
for extracting and refining oil sands, both of which involve higher life-cycle GHG
emissions than producing petroleum from many conventional wells.
of all four modes of services trade identified in GATS6 being relevant

to climate change. These range from consulting services for energy
efficiency (Mode 1), to ecotourism services consumed abroad (Mode 2),
to the establishment of foreign subsidiaries to manage low-carbon
projects (Mode 3), to temporary movement of personnel such as to
carry out wind turbine repairs (Mode 4). The Swedish National Board
of Trade (2014) identified a list of services indispensable to trade in
environmental goods; these also cover all four modes, but with Mode 3
(commercial presence) and Mode 4 (natural movement of persons)
predominating.
Box 10.4 Services Trade Restrictiveness Index

Since 2014, the OECD has been tracking barriers to services trade across
countries and sectors through the Services Trade Restrictiveness Index
(STRI). The STRI contains a regulatory database of laws and regulations in
existence today, and composite indexes that quantify identified restrictions
across five standard categories, with values between zero and one. A score
of zero corresponds to complete openness to trade and investment, while
being completely closed to foreign services providers yields a score of one.
The STRI provides a unique diagnostic tool, generating a picture of
services restrictiveness at the national level and by sector, covering 18 sectors
in 40 countries. It allows benchmarking for individual countries and relative to
global best practices, and enables countries to quickly see where the outlier
restrictions are and where potential bottlenecks exist.
For the first time, comprehensive and comparable information is available
for policy makers to scope out reform options and assess their likely effects; for
trade negotiators to clarify those restrictions that most impede trade; and for
businesses to understand entry requirements for foreign markets. The knock-
on consequences for downstream users of these services are demonstrable.
The STRI in combination with the OECD–World Trade Organization’s Trade
in Value Added–Global Value Chain database are powerful tools for further
analysis of regulatory spillovers in global value chains and the interdependence
between sectors in an interconnected and increasingly digital world.
6
Mode 1, cross-border trade (the supplier is not present in the country in which the
service is supplied); Mode 2, consumption abroad (an individual travels to a foreign
country where the service is supplied); Mode 3, commercial presence (a service is
supplied through a subsidiary established in the host country); Mode 4, movement of
natural persons (an individual travels abroad to supply a service in a host country or
to work as an intra-corporate transfer under Mode 3).
Box 10.4 continued
Figure 10.2 shows an example of STRI data for engineering services, a key service
area relevant to climate change technology. Engineering services are labor-intensive,
particularly at the high-skill level. Therefore, measures categorized under “Restrictions
to movement of people” have the strongest impact in the restrictiveness levels for
these services. The other policy category that affects the degree of restrictiveness in
engineering services relates to “Restrictions on foreign entry.” Some countries maintain
ownership restrictions on the basis of qualifications and licensing, at times coupled with
residency and licensing requirements for board members and managers of engineering
firms. More open services markets improve competitiveness and productivity both in
the services sectors in question and downstream industries using services as inputs.
Engineering services underpin infrastructure and the smooth functioning of essential
public services. Hence, promoting the cost-effectiveness and quality of these services
can represent a source of economic growth and create significant spillover effects.
Figure 10.2 Services Trade Restrictiveness Index

by Policy Area: Engineering Services
0.6
0.5
0.4
0.3
0.2
0.1
0
BEL
ESP
EST
AUS
AUT
BRA
CAN
PRC
CZE
DEU
FRA
NZL
SVK
SVN
ZAF
TUR
CHE
GBR
ISL
ISR
CHL
DNK
KOR
POL
PRT
GRC
HUN
IDN
IND
IRL
RUS
JPN
MEX
NOR
SWE
US
FIN
ITA
LUX
NLD
Restrictions on foreign entry Restrictions to movement of people Other discriminatory measures

Barriers to competition Regulatory transparency Average
STRI = Services Trade Restrictiveness Index.

Note: The STRI indexes take values between zero and one, one being the most restrictive.
Source: OECD. 2014. Services Trade Restrictiveness Index: Policy Brief. Paris: OECD. www.oecd.org/tad/
services-trade/STRI%20Policy%20Brief_ENG.pdf
10.6 Resilience of the Modern Trade System

to Climate Change
Modern global value chains (GVCs) have become increasingly
international, connected, and reliant on domestic policies that are open
to international trade and fair to international investors. Intermediate
goods may cross borders many times in their journey from primary
material to finished goods. Expedient movement of goods, machinery,
and people is essential to ensure that the global production machine has
a sufficient supply of services and materials to keep it running smoothly.
Recent work on GVCs (OECD 2013) points out that, increasingly,
the “just-in-time” nature of value chains makes them quite vulnerable to
external shocks. The OECD defines global shocks as “rapid-onset events
with severely disruptive consequences covering at least two continents”
(OECD 2011). One example, not climate-related, is the earthquake and
tsunami in Japan in 2011, which had considerable knock-on effects on
the global electronics and automotive industries. Another example is
flooding in Thailand in 2012, which, at its peak, covered areas accounting
for 45% of the world’s manufacturing capacity of computer hard disk
drives and led to global disruptions, not only in the computer industry,
but also in the automotive industry (OECD 2013).
Events such as flooding and severe storms are likely to intensify due
to climate change, thus increasing the systemic risk inherent in GVCs.
Companies are already responding by complementing “just-in-time”
with “just-in-case” contingency plans and seeking trade-offs between
cost minimization and security of supply. Companies are seeking to
diversify risks geographically and between different suppliers, and there
is some evidence of a trend toward “back-shoring” or “near-shoring”
with GVCs being splintered into shorter chains. The OECD has helped
countries understand their vulnerability to shocks via the TIVA database
(OECD, WTO, and UNCTAD 2013), and is helping governments to
better understand GVC risks through the G20-OECD Framework for
Disaster Risk Management and the OECD Principles for Country Risk
Management (OECD 2013).
When considering alignment issues in national strategies for climate
change adaptation and resilience, it will be increasingly important to
consider how each country’s position and role in GVCs, and the national
policies shaping the participation of firms in those value chains, could
be developed to ensure resilience in the face of increasingly frequent
and severe weather-related shocks.
References
Agrawala, S. et al. 2014. Regional Development and Cooperation. In
Climate Change 2014: Mitigation of Climate Change. Contribution
of Working Group III to the Fifth Assessment Report of the
Intergovernmental Panel on Climate Change. Cambridge, United
Kingdom and New York, United States (US): Cambridge University
Press. www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3
_ar5_full.pdf
Arlinghaus, J. 2015. Competitiveness Impacts of Carbon Pricing: A Review
of Empirical Findings. OECD Environment Working Papers No. 87.
Paris: OECD Publishing. http://dx.doi.org/10.1787/5js37p21grzq-en
Australian Productivity Commission. 2010. Bilateral and Regional Trade
Agreements, Productivity Commission Research Report. Melbourne,
Australia: Commonwealth of Australia. www.pc.gov.au/__data
/assets/pdf_file/0010/104203/trade-agreements-report.pdf
Bahar, H. et al. 2013. Domestic Incentive Measures for Renewable Energy
with Possible Trade Implications. OECD Trade and Environment
Working Papers No. 2013/01. Paris: OECD Publishing. http://dx.doi
.org/10.1787/5k44srlksr6f-en
Business and Industry Advisory Committee (BIAC). 2015. Investor-
State Dispute Settlement: An Indispensable Element of Investment
Protection. Business and Industry Advisory Committee to the
OECD. www.investmentpolicycentral.com/sites/g/files/g798796
/f/201502/BIAC%20FIN%2015-01%20ISDS%20paper.pdf
Condon, M., and A. Ignaciuk. 2013. Border Carbon Adjustment and
International Trade: A Literature Review. OECD Trade and
Environment Working Papers No. 2013/06. Paris: OECD Publishing.
http://dx.doi.org/10.1787/5k3xn25b386c-en
Copeland, B., and M. Taylor. 2003. Trade and the Environment: Theory
and Evidence. Princeton, US and Oxford, UK: Princeton University
Press.
European Climate Foundation (ECF). 2014. Europe’s Low-Carbon
Transition: Understanding the Challenges and Opportunities for
the Chemical Sector. Brussels: European Climate Foundation.
http://europeanclimate.org/wp-content/uploads/2014/03/ECF
-Europes-lowcarbon-Transition-web1.pdf
Evenett, S. J. et al. 2009. Effective Crisis Response and Openness:
Implications for the Trading System. In Effective Crisis Response and
Openness: Implications for the Trading System, edited by S. J. Evenett
et al. London: Centre for Economic Policy Research, 249–262.
Flues, F., and B. J. Lutz. 2015. Competitiveness Impacts of the German
Electricity Tax. OECD Environment Working Papers No. 88. Paris:
OECD Publishing. DOI: http://dx.doi.org/10.1787/5js0752mkzmv-en
George, C. 2014. Developments in Regional Trade Agreements and

the Environment: 2013 update. OECD Trade and Environment
.org/10.1787/5jz0v4qcg9zw-en
Grossman, G., and A. Krueger. 1993. Environmental Impacts of a North
American Free Trade Agreement. NBER Working Paper No. 3914.
Cambridge, MA: National Bureau of Economic Research.
International Energy Agency (IEA). 2013. World Energy Outlook 2013.
Paris: International Energy Agency. http://dx.doi.org/10.1787/weo
-2013-en
Lenzen, M. et al. 2013. Building eEora: A Global Multi-Regional Input-
Output Database at High Country and Sector Resolution. Economic
Systems Research 25(1): 20–49.
Nakano, S. et al. 2009. The Measurement of CO2 Embodiments in
International Trade: Evidence from the Harmonised Input-Output
and Bilateral Trade Database. OECD Science, Technology and
Industry Working Papers No. 2009/03. Paris: OECD Publishing.
http://dx.doi.org/10.1787/227026518048
2007. Environment and Regional Trade Agreements. Paris: OECD
____. 2011. Future Global Shocks: Improving Risk Governance. Paris:
OECD Publishing. http://dx.doi.org/10.1787/9789264114586-en
____. 2013. Interconnected Economies: Benefiting from Global Value Chains.
Paris: OECD Publishing. http://dx.doi.org/10.1787/9789264189560-en
____. 2014. Services Trade Restrictiveness Index: Policy Brief. Paris:
OECD. www.oecd.org/tad/services-trade/STRI%20Policy%20Brief
_ENG.pdf
____. 2015. Overcoming Barriers to International Investment in
Clean Energy. Paris: OECD Publishing. DOI: http://dx.doi.org
/10.1787/9789264227064-en
OECD/ITF. 2015. ITF Transport Outlook 2015. Paris: OECD Publishing.
http://dx.doi.org/10.1787/9789282107782-en
OECD–IEA–NEA–ITF. 2015. Aligning Policies for a Low-Carbon
Economy. Paris: OECD Publishing. DOI: http://dx.doi.org
/10.1787/9789264233294-en
OECD, WTO, and UNCTAD. 2013. Implications of Global Value Chains
for Trade, Investment, Development and Jobs. Paper prepared for
the G20 Leaders Summit. Saint Petersburg (Russian Federation).
www.oecd.org/sti/ind/G20-Global-Value-Chains-2013.pdf
Peters, G. P. et al. 2011. Constructing an Environmentally Extended
Multi-Regional Input–Output Table using the GTAP Database.
Economic Systems Research 23(2): 131–152. http://dx.doi.org/10.1080
/09535314.2011.563234
Pilat, D. et al. 2006. The Changing Nature of Manufacturing in

OECD Economies. Science, Technology and Industry Working
Papers No. 2006/9. Paris: OECD Publishing. http://dx.doi.org
/10.1787/308452426871
Rodrik, D. 2013. Green Industrial Policy. Grantham Research Institute
project on Green Growth and the New Industrial Revolution.
www.sss.ias.edu/files/pdfs/Rodrik/Research/Green-growth-and
-industrial-policy.pdf
Sauvage, J. 2014. The Stringency of Environmental Regulations and
Trade in Environmental Goods. OECD Trade and Environment
.org/10.1787/5jxrjn7xsnmq-en
Steenblik, R. 2005. Liberalising Trade in “Environmental Goods”:
Some Practical Considerations. OECD Trade and Environment
.org/10.1787/888676434604
____. 2009. Green Growth, Protectionism, and the Crisis. In Effective
Crisis Response and Openness: Implications for the Trading System,
edited by S. J. Evenett et al. London: Centre for Economic Policy
Research. pp. 249–262.
Steenblik, R., and M. Geloso Grosso. 2011. Trade in Services Related
to Climate Change: An exploratory analysis. OECD Trade and
Environment Working Papers No. 2011/03. Paris: OECD Publishing.
http://dx.doi.org/10.1787/5kgc5wtd9rzw-en
Stone, S., J. Messent, and D. Flaig. 2015. Emerging Policy Issues:
Localisation Barriers to Trade. OECD Trade Policy Papers No.
180. Paris: OECD Publishing. DOI: http://dx.doi.org/10.1787
/5js1m6v5qd5j-en
Swedish National Board of Trade. 2013. Effects on Trade and Competition
of Abolishing Anti-Dumping Measures: The European Union
Experience. Stockholm: Kommerskollegium. www.kommers.se
/Documents/dokumentarkiv/publikationer/2013/rapporter/
report-effects-on-trade_webb.pdf
____. 2014. Making Green Trade Happen: Environmental Goods and
Indispensable Services. Stockholm: Kommerskollegium. www
.kommers.se/Documents/dokumentarkiv/publikationer/2014
/Making-Green-Trade-Happen_webb.pdf
Tietje, C., T. Buatte, and F. Baetens. 2014. The Impact of Investor-
State-Dispute Settlement (ISDS) in the Transatlantic Trade and
Investment Partnership. Study prepared for the Minister for
Foreign Trade and Development Co-operation. The Netherlands.
www.rijksoverheid.nl/ bestanden/documenten-en-publicaties
/rapporten/2014/06/24/the-impact-of-investor-state-dispute
-settlement-isds-in-the-ttip/the-impact-of-investor-state-dispute
-settlement-isds-in-the-ttip.pdf
Tran, C. 2010. Using GATT, Art XX to Justify Climate Change Measures
in Claims under the WTO Agreements. Environmental and Planning
Law Journal 27: 346–359. http://ssrn.com/abstract=1676105
United States Government Accountability Office (US GAO). 2014. Free
Trade Agreements – Office of the U.S. Trade Representative Should
Continue to Improve its Monitoring of Environmental Commitments.
Report to Congressional Requesters. November, GAO-15-161.
Washington, DC: US GAO. www.gao.gov/assets/670/666782.pdf
Warwick, K. 2013. Beyond Industrial Policy: Emerging Issues
and New Trends. OECD Science, Technology and Industry
Policy Papers, No. 2. Paris: OECD Publishing. http://dx.doi.org
/10.1787/5k4869clw0xp-en
Wu, M., and J. Salzman. 2014. The Next Generation of Trade and
Environment Conflicts: The Rise of Green Industrial Policy.
Northwestern University Law Review 108: 401–474. http://scholarship
.law.duke.edu/faculty_scholarship/3320
11
Trade and Sustainable Fisheries
U. Rashid Sumaila
11.1 Introduction
Fish stocks1 support livelihoods and enhance the food security and
incomes of millions of people while supporting vital ecological systems.
However, overfishing, pollution, climate change, unsustainable trade
and globalization, and illegal and unreported fishing are threatening the
long-term sustainability of fisheries worldwide.
The United Nations’ Sustainable Development Goal 14 (SDG 14)
highlights how marine resources are a crucial component of the world’s
vital natural resources, which, if managed effectively, can contribute
significantly to reducing hunger and poverty in the world’s most
vulnerable populations.
In every continent of the world, fisheries are a key part of the “blue
economy” and trade in fish and fish products play a vital role since it is
extensive, with significant exports flowing from developing to developed
countries. Imports are dominated by the markets of the European Union
(EU), Japan, the United States (US), and the People’s Republic of China
(PRC), whose trade policies have a significant impact on fisheries trade
and sustainability.
The purpose of this chapter is to explore the conditions under
which trade in fishery resources can contribute to meeting key SDG
components, that is, poverty reduction and reducing hunger through
inclusive and sustainable growth. The goal is to demonstrate to the
international development community and policy makers, especially in
developing countries, the conditions under which trade policy in fish
and fish products can be designed to help them achieve their sustainable
development goals.
Given that fish and fisheries products are among the most traded
commodities in the world, the point of departure for this paper is that
1
I will primarily be focusing on marine fish stocks, but most of the discussion in this
contribution would also apply to aquaculture and freshwater fish stocks.
272
Trade and Sustainable Fisheries273
trade in fish and fish products has the potential to contribute to the
SDGs’ realization, but only if its benefits are promoted while its costs
are minimized.
Private and public actors have tried to use trade-related measures
to tackle development and environmental challenges around oceans
and fisheries (e.g., Sumaila et al. 2016; Bellman et al. 2016). Multilateral
efforts include agreement on port state measures to stop fish caught
by illegal, unreported, and unregulated (IUU) fishing from entering
trade (Young 2015; Hosch 2016), and negotiations on disciplines on
harmful subsidies via the World Trade Organization (WTO) (Tipping
2016). The threat of bans by major importers appears to have had some
success in motivating exporting countries to address their vessels’ IUU
fishing. Private food safety standards have proliferated, and growth of
private sustainability standards is increasingly attracting the attention
of governments (Bellman et al. 2016).
Trade-related measures can help to address the challenge of
sustainable oceans and fisheries use, but will need to be part of coherent
policy frameworks including improvements to management and
governance of fisheries resources at all levels, and institute policies that
would ensure that fishers and fishing communities are not left behind.
In this paper, unlike in the other fish trade papers (e.g., Asche, Roheim,
and Smith 2016; Bellman et al. 2016), I will take a broader approach to
identifying policies that need to be in place for trade in fish and fisheries
to support the implementation of the SDGs.
11.2 Fish Trade and the Sustainable

Development Goals
Fish and fisheries are economically and socially important, with impacts
that must be managed effectively if we are to meet the ambitious goals of
the SDGs. Fisheries worldwide currently catch about 130 million tons of
fish a year, both reported and unreported (Pauly and Zeller 2016), which
in 2015 dollars generates about $180 billion annually (applying price
information in Sumaila et al. 2007, and Swartz et al. 2013). Using the
average global multiplier, a measure of the economic impact of a dollar
of landed value of fish sold at the dock (Dyck and Sumaila 2010), marine
fisheries create economic impacts of an estimated $500 billion a year. Of
the total amount of fish supplied, about 40% was marketed live, fresh,
or chilled, while 46% was processed in frozen, cured, or other prepared
forms for human consumption, with the remaining 14% allocated to
non-food uses (FAO 2012).
Fisheries are particularly important in developing countries where

they support numerous small-scale artisanal and subsistence fishers,
who often provide crucial food supplies, sustain regional economies, and
support the social and cultural values of the areas (Béné et al. 2010; Teh
and Sumaila 2011). These sectors are crucial to the livelihoods of people
living in many coastal communities around the world. The share of the
total fish production that is exported increased significantly from 25%
in the mid-1970s to nearly 40% in 2011, reflecting the sector’s growing
degree of integration in the global economy (FAO 2012). In recent
years, liberalization policies, technological innovations, improvements
in processing, packaging, and transportation, as well as changes in
distribution and marketing have further accelerated this trend, while
facilitating the emergence of complex supply chains in which goods
often cross national boundaries several times before final consumption
(Sumaila et al. 2014; Bellmann et al. 2016).
As stated in Sumaila et al. (2016a), developing countries account
for more than 50% of all fisheries exports in value terms (60% in
volume). The PRC, India, Indonesia, Thailand, Viet Nam, and Chile
are among the leading players. Overall, net exports of fish and fish
products from developing countries largely exceed those of agricultural
commodities such as rice, meat, sugar, or coffee (FAO 2012). In terms
of export markets, developed countries have traditionally represented
a major outlet, with roughly two-thirds of developing countries’
exports directed to them. A growing share of these exports consists
of processed fishery products prepared from imports of raw fish that
are processed and reexported. This reexport phenomenon reflects
the growth of global value chains and how low-cost processing means
fish may be caught in one part of the world, processed in another, and
consumed in a third.
Figure 11.1, taken from Sumaila et al. (2014), presents the average
share of fisheries in total exports for the top exporting least developed
countries (LDCs) and Small Island Developing States (SIDS) between
1990 and 2009. The figure demonstrates the importance of fisheries
to these countries’ economies. We see that in countries such as the
Seychelles, the Maldives, Cape Verde, or Mozambique, fisheries
represented up to 50% of total merchandise exports, with this share
going up to 60% or even 75% in certain years. This very high reliance
on fisheries resources suggests these countries may be particularly
vulnerable should the health of the fish stock decline as a result of
overfishing, or should the fish stock move as a result of climate change
(Sumaila et al. 2011; Cheung et al. 2013), severely undermining the
Figure 11.1 Share of Fisheries Exports in Total Exports in Top

Share of fisheries in total exports (%) LDCs and SIDS Exporters (%, 1990–2009)
80
70
60
50
40
30
20
10
0
pu la
Su Fiji
a
Gr mar
Jam aiti
ew itius
mb a
da oa
ago
d T en
B ia
Ga ar
lad ia
My elize
Ug ada
Gu da
a N aur ba
c
Ta yana
Ba egal
esh
Se nds
zam rde
Ma Sam s
So Mau ique
ia
on ania
Ca aldiv s
Mo e Ve es
am
aic
Ca uine
bli
ma
an Ango
M elle
mb
Ba nzan
c
od
an Yem
an
M Cu
H
gas
ob
en
an
Isla
rin
n
ha
lom rit
b
ych
Re
ng
p
Se
nic
ad
pu
nid
mi
Pa
Do
Tri
Max. Min. Avg.
Avg. = average, LDCs = least developed countries, Max. = maximum, Min. = minimum, SIDS = small
island developing states.
Source: Sumaila et al. (2014); based on FAO Stats and WTO Tariff and Trade Databases.
SDGs of poverty reduction (SDG 1) and hunger reduction (SDG 2) while

sustaining marine ecosystems (SDG 14).
The leading fish importing countries in value terms are the US, Japan,
and Spain. On the other hand, the PRC and Japan are the top importers in
terms of quantity and value, respectively (Sumaila et al. 2014).
Figure 11.2 shows the value of global trade flows by regions. The
EU, the US, and Japan are highly dependent on imports for their
consumption (Swartz et al. 2010). The EU is the largest single market in
the world, with about 26% of world imports. In recent years, however,
several emerging markets have grown in importance including the PRC,
Brazil, Mexico, and the Russian Federation, and the regions of Asia and
the Near East in general. While developed countries were responsible
for 86% of total imports in 1990, it was only 76% in 2010 (FAO 2012).
South–South trade is likely to grow with rising disposable incomes in
emerging economies, gradual trade liberalization, and a reduction in the
high import tariffs due to the expanding membership of the WTO, and
the entry into force of several bilateral trade agreements with strong
relevance to fisheries (Sumaila et al. 2014; Bellmann et al. 2016).
Figure 11.2 Fishery Trade Flows by Regions ($ ‘000)
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
10,000,000
2008
2009
2010
2011
2008
2009
2010
2011
2008
2009
2010
2011
2008
2009
2010
2011
2008
2009
2010
2011
2008
2009
2010
2011
Europe Asia US and Latin America Africa Oceania
Canada and the
Caribbean
Imports Exports
US = United States.
Source: Sumaila et al. (2014) and Bellmann et al. (2016), original data from FishStat.
11.3 The Promise of Fish Trade

Given the size and scope of global trade in fish and fish products
described in section 11.2, trade plays a significant role in the quantity
of fish caught and how the benefits of fisheries are distributed
between and within countries. If effectively harnessed, the power of
trade can be used to support the implementation of the SDGs. The
key theoretical economic bases for trade are comparative advantage
and specialization. These concepts mean that entities can get better
outcomes by specializing in their comparative advantage. In this
way, both entities capitalize on their comparative advantage and can
produce more of the two goods than if they each produced both goods
to meet their own respective demands. Hence, each entity gains from
trade. Applying this concept to fish and fish products implies that
trade can generate high economic growth, which if properly harnessed
can help reduce poverty and provide the economic basis for marine
conservation. On the other hand, trade protectionism can result in
inefficiency (Johnson 1991), while trade liberalization can improve
allocation and use of fishery resources.
The removal of trade restrictions such as tariffs, tariff escalation,

export restrictions, subsidies, and nontariff barriers can benefit
employment and possibly help conserve the marine ecosystem. It can
also reduce prices of finished goods and provide consumers with a wider
range of quality products.
By facilitating the transfer of technology between nations,
international trade can promote more environmentally friendly
technology at lower cost, which can help ease the pressure on marine
ecosystems and fish stocks while helping to reduce poverty and hunger.
As we will see in section 11.4, some of the benefits of trade are
double-edged swords that need to be managed carefully to ensure the
potential benefits outweigh the potential costs.
11.4 The Perils of Fish Trade

When a country or group of countries enjoys comparative advantage
because of weak fisheries management, or the provision of subsidies, or
because they sell fish that are illegally caught, this may create incentives
for other countries to relax their fisheries policies and management.
Furthermore, lax polices may steer investment capital to fisheries in
countries with little or no regulatory oversight, resulting in a so-called
race to the bottom—a situation in which many countries deliberately
weaken their fisheries policies and management to be competitive in a
market that is supplied from regions of the world with lax regulatory
regimes (Arden–Clarke 1991).
A key concern about trade in fish is that the benefits may not reach
fishers and fishing communities, thereby undermining the anti-poverty
and anti-hunger SDGs because, in many instances, developing countries
may end up with no fish and no money (Kaczynski and Fluharty 2002;
Le Manach et al. 2012). A related concern is that international trade can
transfer technology through joint ventures that allow large industrial
fleets to fish in another country’s waters, which can harm fish stocks,
the ecosystem, and people who depend on fish and fishing for their food
and livelihoods.
Another major concern is that many fisheries around the world
are not managed effectively (Pitcher et al. 2009), leading to increased
pressure on fish stocks and overfishing through increased demand. This
would exacerbate overfishing through a reduction in food security and
losses in revenues, jobs, and incomes (Arnason et al. 2008; Sumaila et
al. 2012).
International trade is also a primary means by which invasive
species get transported around the world. Ships and fishing vessels
moving to different countries often transport species to different marine

ecosystems.
A final concern is that when governments commit to free trade, they
typically agree to several trade principles. Many people are concerned
that such principles and laws can undermine the ability of governments
to effectively manage their local and national fisheries. This is one of the
issues that many opponents of the Trans-Pacific Partnership (TPP), for
example, are worried about.
11.5 How Can Trade in Fish Support the

Implementation of the SDGs?
To support SDG 14 (Life Below Water) in particular, but also SDGs 1
(No Poverty); 2 (Zero Hunger); 5 (Gender Equality); 10 (Reduced
Inequalities); and 12 (Responsible Consumption and Production), trade
in fish and fish products has to contribute to (i) the conservation of
fishery resources; (ii) reducing poverty and inequality in the distribution
of fisheries’ benefits; and (iii) the creation of inclusive growth in the
fisheries sector.
To assess whether trade in fish would positively impact achieving
the SDGs, the following key questions need to be addressed. First, how
do we ensure that trade is a boon to conservation and sustainability?
Second, how do we make sure that trade does not increase inequality
in societies, but rather helps to reduce poverty and hunger among the
world’s most vulnerable populations?
Fischer (2010: 107) summarized the literature on trade and natural
resource management: “trade liberalisation can be a boon to resource-
rich countries, but not always; that trade can lead to the depletion of
natural resources, but not always; and that trade bans can be appropriate,
and certified trade can be helpful—but not always.” This quote clarifies
how trade and its impacts on nature and people is complex and difficult
to assess.
The literature explores ways in which policies can be designed to
ensure that trade is a boon to fish stock-rich countries, especially those
in developing countries; that trade does not deplete fishery resources,
but rather supports their conservation and sustainable use; and that
trade in fish and fish products combats poverty and hunger.
The price of fish is one channel through which the effect of its trade
is felt. For a small, fish-rich developing country, trade would increase
prices (Fischer 2010), and basic fisheries economics tells us that, in a
situation where fisheries are not effectively managed, this will result
in overcapacity and overfishing (Clark 1990). Even if fish stocks are

managed optimally, in the long run, steady-state welfare and stock sizes
may be lower (Bulte and Barbier 2005; Sumaila and Walters 2005), which
ultimately would lead to unsustainability and an increase in poverty and
hunger. Hence, to mitigate the effects of trade on the price of fish, it is
crucial and necessary, if not sufficient, that fisheries management in fish
stock-rich exporting countries is effective.
Sumaila (2012), echoing the literature, identified a number of
challenges that need to be addressed to achieve good governance or
effective management of fisheries: (i) tackle the common property
or open access nature of fishery resources; (ii) mitigate and adapt
to climate change, ocean warming, and acidification; (iii) discipline
the provision of trade-distorting, capacity-enhancing, and inequity-
generating government subsidies to the fishing sector; (iv) stop
illegal, unreported, and unregulated (IUU) fishing; (v) address the
self-defeating tendency to undervalue future fisheries benefits; and
(vi) find a meaningful way for aquaculture to contribute to meeting
our animal protein needs.
Other important challenges are the need to (vii) enhance the
position of women in fisheries; (viii) reduce corruption in fisheries and
fish trade; and (ix) “buy” insurance by creating marine protected areas.
The SDGs are crosscutting and so is trade in fish because we are
dealing with matters at the intersection of healthy oceans, sustainable
fisheries, reduction of poverty and hunger, increasing gender and group
equity, and the trade system. This clearly requires a comprehensive
approach that takes into account ecological, economic, legal, and local
realities, as well as existing multilevel governance regimes.
11.5.1 Enabling Policy Conditions for Trade in Fish

to Support the SDGs
Below I briefly outline some necessary conditions for trade in fish
to be sustainable; to support a reduction in poverty and hunger;
and to increase equity in the distribution of fisheries benefits
between genders and across different groups of peoples. Most
of the conditions and policy recommendations below relate to making
fisheries management more effective, which is clearly an important
prerequisite for achieving sustainable fish trade.
Open Access and Common Property Nature of Fish Stocks

Many fisheries within country exclusive economic zones (EEZs) and
in the high seas are still effectively open access or common property
fisheries that are not managed cooperatively (Cullis–Suzuki and
Pauly 2010; Norse et al. 2012; White and Costello 2014; Sumaila et al.
2015). It has been shown that under these regimes, the tendency is to
overcapitalize and overexploit the resource (Munro 1979; Sumaila 2013).
The root cause of this overfishing has to be treated if fish trade is to be
sustainable and in a manner that supports the SDGs. To mitigate these
problems, more effective access structures, from the local to the national
and global jurisdictional levels, are needed where they do not exist and
strengthened where they do.
Illegal, Unreported, and Unregulated Fishing

IUU fishing occurs in many parts of the global ocean (Sumaila et al.
2006; Agnew et al. 2009). IUU fishing hampers fisheries management
by making it difficult to determine total biomass removal; further, it
distorts trade and results in economic losses to legal fishers and the
formal economy as IUU catches ultimately enter illicit trade. IUU
fishing should be minimized or even eliminated completely for trade
in fish to support the SDGs. The good news is that trade policies and
measures can actually contribute to the fight against IUU fishing (see
below).
Trade-Distorting, Capacity-Enhancing, and Inequality-

Generating Subsidies
The most recent estimate of fisheries subsidies puts it at $35 billion
a year globally and that most of this (approximately $20 billion) is
capacity-enhancing overfishing subsidies (Sumaila et al. 2016b). Also,
subsidies are usually trade distorting as it provides recipient companies
with an advantage over companies that do not receive them. A third
and important issue is that ongoing bottom-up estimation of how
much of the total subsidies go to small-scale rather than large-scale
fisheries reveals that only a small fraction of the total is received by self-
sustaining fisheries (Schuhbauer et al. 2017). The combined negative
effects of overfishing, trade distortion, and self-sustaining fisheries
being disadvantaged is why eliminating capacity-enhancing fisheries
subsidies is specifically mentioned in SDG 14. Clearly, the elimination
of subsidies is crucial in ensuring that trade in fisheries supports
sustainability and the reduction of poverty and hunger as stipulated by
the SDGs (see below).
Figure 11.3 below presents the amounts of the different types of
subsidies that make up the $35 billion total. The figure shows that fuel,
arguably the most capacity-enhancing subsidy, constitute the largest
provided by governments to the fishing sector. We also see from the
figure that developing country fisheries receive far less in subsidies than
those operated by or in developing countries.
Figure 11.3 Fisheries Subsidies by Type
Rural communities
Development projects
Fishing access
Tax exemption
MPAs
Fisher assistance
Vessel buyback
Marketing and storage
R&D
Fleet modernization
Ports and harbors
Management
Fuel subsidies
0 1 2 3 4 5 6 7 8
Subsidies (billion $)
Developing Countries Developed Countries
MPA = marine protected area, R&D = research and development.

Source: Sumaila et al. 2016.
Balance Current and Future Needs from Fish and Fisheries

Balancing current against future needs is difficult even at the individual
level when the consequences in terms of costs or benefits of failing to
do so fall squarely on the individual. At the societal level, achieving
balance between now and the future is even more difficult as people
suffer the “problem of short-sightedness in valuation” and they tend
toward instant gratification (Sumaila 2004; Sumaila and Walters 2005).
This problem stems from the general human perception that what is
closest to us appears to be large and weighty, while size and weight
decreases with our distance from things, both temporally and spatially
(Sumaila 2012). This human tendency is captured by the economic
concept of discounting—that is, the approach by which values to be
received in the future are reduced to their present value equivalent
using a discount rate. This tendency drives us to want to frontload
fisheries benefits resulting in overfishing and unsustainability. For
trade in fish to be sustainable, fisheries policies to mitigate this
tendency are needed (Nijkamp and Rouwendal 1988; Ainslie and
Haslam 1992; Neumayer 2000; Weitzman 2001; Sumaila 2004; Sumaila
and Walters 2005).
Enhance the Position of Women in Fisheries

Women are important players in the fisheries sector, but their
contribution, and the economic, social, and cultural well-being of
families and communities around the world, continue to be overlooked
and marginalized. Traditionally, fishing has often been very narrowly
defined as men catching fish, but more evidence is beginning to show
that women do engage in fishing and in a large proportion when
“fishing” is expanded to include the full fish value chain (e.g., Harper et
al. 2013). Contributing to this perception that fishing is a man’s activity is
fisheries research, management, and policy being traditionally focused
on direct, formal, and paid fishing activities, which are often dominated
by men, and ignoring those that are indirect, informal, and/or unpaid,
where women are most often engaged (Teh and Sumaila et al. 2011). The
unfortunate effect of this is that there is a lack of policy attention given
to the role of women in fisheries, with serious consequences for food and
nutritional security, poverty alleviation, and well-being (Bennett 2005;
Harper et al. 2013). For trade in fish to support the SDGs of no hunger
and poverty by 2020, the role of women in fisheries must be highlighted
and their position enhanced.
Reduce Corruption in Fish and Fish Trade

Weak governments that do not control their agencies often experience
high levels of corruption (Kolstad and Søreide 2009). Yet, corruption
can also extend beyond government to include the abuse of private
office for individual gain (Bardhan 2006). In particular, “corruption
in natural resource management is defined as the use or overuse of
community natural resources with the consent of a state agent by
those not legally entitled to it” (Robbins 2000). Thus, the potential for
corruption exists at every link in the natural resource (e.g., seafood)
supply chain. To effectively manage fisheries generally, and in support
of fish trade for sustainable development, every effort has to be geared
toward eliminating corruption (Sumaila et al. 2017).
Buy Insurance by Creating Marine Protected Areas

There are many reasons why fisheries scientists like marine protected
areas. For economists, in particular, a good reason to like marine
protected areas is that they can serve as a buffer against management
errors, which cannot be completely avoided because of what is described
in the literature as irreducible uncertainties in fisheries (Lauck et al.
1998). With climate change and its effects on the marine ecosystem
biophysics, it is getting more difficult to manage fisheries effectively
and optimally. When things are complex, a wise way to achieve a goal
is apply simple approaches and solutions. Portfolio managers are a good

example—many of them diversify their portfolios as a way to manage
risk and uncertainty. Implementing a marine protected area as part of
the management tool kit to ensure that trade in fish is sustainable and
supports the SDGs is a wise thing to do.
Support Climate Change Mitigation and Adaptation Measures

Humanity continues to pump high quantities of carbon dioxide (CO2)
and other greenhouse gases into the atmosphere, which is changing
the climate, warming the oceans, and affecting ocean chemistry and
physics. These changes in turn directly and indirectly affect the
physiology, growth, reproduction, and distribution of fish species and
other marine organisms. Fish in warmer waters will probably have a
smaller body size, be smaller at first maturity, with higher mortality
rates, and be caught in different areas of the ocean than is typical
(e.g., Cheung et al. 2013). These in turn would affect the economics
and social contributions of fisheries in different parts of the world
(Allison et al. 2009; Sumaila et al. 2011; Lam et al. 2016). Hence, at the
general level, every effort should be made to mitigate CO2 emissions.
At the fisheries sector level, strategies and plans should be developed
and implemented to help coastal communities adapt to the coming
changes.
Develop Sustainable Aquaculture Practices

We have witnessed rapid growth in aquaculture production in recent
years (averaging growth of about 8% per year). Aquaculture has
consequently come to be seen by many as the solution to our food fish
supply problem. However, in terms of the SDGs, there is reason to
temper this high level of optimism because the PRC alone accounts
for about 60% of world production of farmed fish; with depleted wild
fish stocks, countries, including cash-strapped developing ones, will
have to import fish from the PRC, which may not be cheaply available
because of the PRC’s high domestic demand. This situation is almost
sure to increase poverty and hunger among vulnerable populations in
least-developed coastal communities around the world, thus acting
against SDGs 1 and 2. To mitigate this, current management of wild fish
stocks needs to be strengthened to ensure that they are sustainable. Also,
we need to support the development of sustainable aquaculture that
actually adds to the quantity of fish available by taking in less fishmeal
and oil in weight than the final quantity of fish actually produced. One
way to achieve this is to restrict farming to mainly herbivorous fish such
as tilapia, carp, and the like.
11.6 Trade Measures and Policy Options that

Support the SDGs
Here, we describe how trade measures could be implemented to
promote fishery resource sustainability. To increase the likelihood that
these measures will succeed, certain prerequisites need to be in place,
as stated in Sumaila (2016). First, fish trade policies need to be inclusive,
transparent, and coherent since the oceans are interconnected both via
nature and markets. Fish do not respect national boundaries as they
swim, and fish trade, by nature, involves more than one country. This
implies that trade-related measures in support of healthy oceans and
sustainable fisheries require international collaboration that is fair and
inclusive.
Next, more transparent information is needed to support
international collaboration and joint action, including around fisheries
data and trade policies. This can be done by bringing private and public
sector information together in integrated data platforms. The E15
Oceans, Fisheries and Trade expert group argues that this is an important
basic requirement for the successful implementation of trade-related
measures (Sumaila 2016).
One more prerequisite is capacity building: People make things
happen and well-trained and equipped people make things happen
better. Effective trade policies require a concerted global effort to train
people who can ensure implementation not only of trade measures, but
also other sustainable development policies (Sumaila 2016).
In the next two subsections, I present trade policy options and
measures to help tackle these issues based mainly on the work of the E15
Oceans, Fisheries and Trade expert group as reviewed in Sumaila (2016)
that could help combat IUU fishing and discipline capacity-enhancing
fisheries subsidies.
11.6.1 Combating Illegal, Unreported, and Unregulated

Fishing Using Trade Measures
The goal is to suggest trade policy measures as key elements of a solution.
This could be achieved by progressively closing down international
trade in IUU fish products, chiefly by making it difficult for them to
enter the market.
As suggested in Sumaila (2016), we need to build consultative,
effective, and coordinated unilateral import measures. The EU’s
IUU regulation, which incorporates an escalating warning system,
is having an impact (Hosch 2016). A key gap in the current situation
is that the EU’s import policy is limited to one market, although the
US is developing options. For this recommendation to succeed, other
large seafood markets need to adopt trade measures that incorporate
good aspects of the EU system, such as those that address IUU fish
transshipment and imports (Sumaila 2016). This approach should not
be implemented as a punishment, but as a way of helping fishing nations
to reduce or even eliminate IUU fishing within their EEZs. Therefore,
unilateral measures should include consultation with affected trading
partners and organized in stages with import bans invoked only as a last
step. Critically, unilateral measures need to consider their impact on
producers in low-income countries.
A network of regional measures to address IUU fish trade needs
to be created in different parts of the world. This is because unilateral
measures are effective only to the extent that producers cannot easily
supply their products elsewhere. The global nature of fisheries trade
means that many producers may be able to sell IUU fish in less regulated
markets. To extend the reach of import measures, they need to be
adopted bilaterally or regionally through trade agreements. It would be
valuable to use regional trade agreements as a way to link unilateral IUU
trade measures in a cohesive network with broad country coverage—
either directly or by establishing platforms that will help countries
converge toward best practices (Sumaila 2016). Examples could include
provisions in the Transatlantic Trade and Investment Partnership
(TTIP) to ensure coherence between the EU and US systems, and the
establishment of IUU platforms in the Trans-Pacific Partnership (TPP)
and the African Tripartite Free Trade Area (TFTA). To increase the
effectiveness of these measures, linkages would need to be developed
with large import markets, especially the PRC, that are not parties to the
agreements (Sumaila 2016).
Building on unilateral actions is the need to develop a system of
multilateral instruments on trade in IUU fish products. Individual
country and regional approaches to closing the market for IUU fishing
products could gradually change the economics such that their cost is too
high to make it worthwhile on a large scale. However, a comprehensive
and inclusive solution to the problem would most efficiently be
negotiated multilaterally. Regional agreements can be used to support
the entry into force of other multilateral instruments, and to establish,
through the WTO, a code of conduct on illegal fish trade. Endangered
marine species could be listed in Appendix I or II of the Convention
on International Trade and Endangered Species; and elements of best
practices from unilateral and regional systems could be captured in a
voluntary code on IUU fish imports and transshipment within the WTO
(Sumaila 2016).
Another recommendation relates to using private sector schemes.

It is generally understood that state-based solutions alone will not
be enough to address the challenges of IUU fishing, hence, the need
for complementing these solutions with private sector initiatives
and solutions. Private sector sustainability and legality certification
schemes are being developed, with some having well-developed
traceability systems. One shortcoming of these schemes is that they
are usually applied in developed markets, which leaves much of the
market for fish in developing countries not covered. Private schemes
could contribute more by enhancing the participation of developing
country fisheries in sustainability and legality certification. Assistance
directed at the development of data collection and infrastructure to
enable traceability and certification could be provided as Aid for Trade
(Sumaila 2016).
11.6.2 Disciplining Fisheries Subsidies

Fisheries subsidies have been on the global agenda for several years,
notably via the WTO. This is because there is a general consensus
that certain fisheries subsidies, known as “bad” or capacity-enhancing
subsidies, lead to overfishing (e.g., Milazzo 1998; Abdallah and Sumaila
2007). So far, efforts to reduce subsidies have not been very successful.
There is therefore a need to build momentum toward a multilateral
agreement on subsidy reform; the following options, proposed in
Sumaila (2016), could help the world make progress in significantly
reducing the so-called “bad” subsidies.
A foundational requirement is the need to create a better
worldwide data source on fisheries subsidies. At present, there are a
few independent assessments of actual subsidy levels (e.g., Sumaila and
Pauly 2006; Sumaila et al. 2016) against which to evaluate inconsistent
WTO notifications. Increasing transparency is a necessary condition
for further work on subsidies disciplines. Action can be stimulated
by revealing the scale of the problem and by providing data sets that
are accepted by governments responsible for implementing reform.
A solid database would provide a basis for both governments and
civil society to measure subsidy reductions or increases. This would
improve consistency across national policies, strengthen momentum
for collective reform, and enable the reporting and implementation of
reduction commitments to be verified (Sumaila 2016).
One way to make progress toward a multilateral agreement on
disciplining subsidies is for a group of countries that understand the
negative effects of some subsidies to implement subsidies disciplines.
Such a coalition could pursue such an agreement in the context of a
regional trade agreement, which they can combine with rules that
specify preferential conditions under which their group would trade
fish and fish products with countries that are not participating in the
agreement. The latter is an attempt to mitigate the negative effects of
free riding on members of the group.
The subsidies discipline movement could borrow from the
approach adopted by the Intergovernmental Panel on Climate Change
by establishing multilateral disciplines built stepwise and bottom-
up. Here, the WTO could stimulate collective action with bottom-up
voluntary subsidy reform commitments. Countries would, under this
approach, declare the amount of capacity-enhancing subsidies that they
would voluntarily eliminate within a given time period. Based on the
sum total of voluntary commitments, the WTO would then negotiate
the remaining “ambition gap” between the offers made and the level of
overall multilateral reductions required (Sumaila 2016).
The work of the WTO should not go to waste, with one way for the
global community to restart negotiations being based on the areas of
relative agreement identified during the last Doha Round. Even though
the first best option is to implement an ambitious multilateral agreement,
the WTO could pursue the ultimate goal by establishing disciplines built
on areas of subsidy reform that attracted the most support in earlier
negotiations. These include subsidies to IUU fishing, vessel transfers,
and access agreements (WTO 2007). There was arguably some level
of consensus about reforming vessel construction subsidies and those
affecting overfished stocks. It may therefore be possible for WTO
members to agree to eliminate a small list of subsidies in the interest of
healthy oceans and sustainable fisheries by focusing on the low-hanging
fruits in the first instance (Sumaila 2016).
It has been argued that a key reason for the lack of progress in
protracted subsidies negotiations at the WTO is that they suffer from
the requirement that negotiators should aim for an all-inclusive deal
(Sumaila 2016). This has limited the ability of the subsidies negotiations
to make progress by confounding the issue with other problems.
To overcome this difficulty, we need to align subsidies policies with
national interests by splitting the world’s fisheries into domestic and
international. The former would comprise fisheries operating within
a country’s EEZ, targeting fish stocks that spend all their lives within
the zone. The latter would include fish stocks that are trans-boundary,
highly migratory, or discrete high seas stocks. International negotiations
could then prioritize agreements to reform subsidies that affect
international fish stocks, while governments, pressured by civil society,
would work unilaterally to reform subsidies that affect their domestic
fisheries (Sumaila 2016).
11.6.3 Tariffs and Nontariff Measures

Here, I address issues in international fisheries trade, particularly
in relation to developing countries, that relate to tariff and nontariff
barriers. Given the wide range of fisheries activities and the communities
in which they are situated, governments will need to work case-by-case
to ensure that they integrate tariff liberalization into fish trade and trade
flows in a sustainable manner.
Sumaila (2016) argued that differentiating between wild-caught
and aquaculture fish products in tariff lines would enable better
measurement of global fisheries’ changing production structure, and
improve the traceability of products through the value chain. This would
in turn help policy makers address the differences in the environmental
impacts of the two production methods and ensure that marine fisheries
trade in a manner that supports the SDGs.
In general, as tariff preference margins are gradually eroded,
preference-dependent countries will need to adjust. More flexible
rules of origin in preferential arrangements could help such countries
diversify their sourcing of inputs and allow them time to find ways to
access global fish networks. Flexibility could be conditioned on fish
meeting sustainability and legality requirements. Beyond rules of origin,
there may be a case for international financing mechanisms, including
under the Aid for Trade initiative, to provide technical assistance for
producers to adjust to a loss in competitiveness (Sumaila 2016).
To continue this theme, fishers that are small, located in developing
countries, with limited access to capital, or operating in fragmented
industries are at a disadvantage when it comes to meeting high
standards in export markets. Given the contribution of fisheries trade
to employment and income in many developing countries, an inclusive
approach in which fishers can move toward certification is essential.
The private sector has an important role in this recommendation.
Private actors are well positioned to both improve access to existing
certification schemes and assist fishers and retailers (Sumaila 2016).
As the WTO Agreements on Technical Barriers to Trade (TBT) and
Sanitary and Phytosanitary (SPS) Measures do not formally cover private
standards and labels, nongovernment standard-setting bodies should be
encouraged to adhere to the TBT Agreement’s Code of Good Practice
for the Preparation, Adoption and Application of Standards (Sumaila
2016). To harness their economic power to shape fishing patterns
and ensure they are inclusive, these schemes should be encouraged
to follow basic principles set out in the 2000 Decision of the TBT
Committee on international standards, such as transparency, openness,
and coherence, while preserving their effectiveness as incentives for
sustainable fisheries and aquaculture production (Sumaila 2016).

There are differences in the national SPS and TBT systems, which
sometimes are applied inconsistently. Mutual recognition between large
markets can exclude other producers and reduce their competitiveness—
even when these standards can be met. To ensure that these integration
tools covering behind-the-border measures are inclusive, the parties to
large regional trade agreements (e.g., the TPP, the TTIP, and the African
TFTA) could consider including a linking mechanism by which trading
partners who are outside of the agreement, but whose testing and
conformity assessment systems enjoy mutual recognition with one or
more of the parties involved, could benefit from the agreement’s wider
mutual recognition provisions (Sumaila 2016). This option, combined
with technical assistance and capacity building to meet recognition
requirements, particularly for LDCs, could help change the cost–benefit
equation for producers outside of the regional agreements.
11.7 Conclusion
The literature on trade and sustainable development is clear that trade
in fish can be done in such a way that it supports the SDGs. This can
be achieved by implementing both certain trade-related measures and
policies and broader measures that pertain to the effective management
of fisheries more generally, and the equitable distribution of the benefits
of trade in fish among and between different groups in society, especially
between different genders. We have provided recommendations and
measures/policies that would help countries and the global community
to achieve the core SDGs of sustainable fisheries that support inclusive
economic growth and development.
References
Abdallah, P. R., and U. R. Sumaila, 2007. A Historical Account of Brazilian
Policy on Fisheries Subsidies. Marine Policy 31: 444–450.
Ainslie, G., and N. Haslam. 1992. Hyperbolic Discounting. In Choice Over
Time, edited by G. Loewenstein and J. Elster. New York, NY: Russell
Sage.
Agnew, D. J. et al. 2009. Estimating the Worldwide Extent of Illegal
Fishing. PLoS One 4(2): 1–8.
Allison, E. L. et al. 2009. Vulnerability of National Economies to
the Impacts of Climate Change on Fisheries. Fish and Fisheries
10(2009): 173.
Asche, F., C. A. Roheim, and M. D. Smith. 2016. Trade Intervention: Not
a Silver Bullet to Address Environmental Externalities in Global
Aquaculture. Marine Policy 69: 194–201.
Arden–Clarke, C. 1991. The General Agreement on Tariffs and Trade,
Environmental Protection and Sustainable Development (No.
AS 50768). WWF, Gland (Suiza).
Arnason, R., K. Kelleher, and R. Willmann. 2008. The Sunken Billions:
The Economic Justification for Fisheries Reform. Joint Publication
of the World Bank and the FAO. ISBN 978-0-8213-7790-1.
Bardhan, P. 2006. The Economist’s Approach to the Problem of
Corruption. World Development 34(2): 341–348.
Bennett, E. 2005. Gender, Fisheries and Development. Marine Policy
29(5): 451–459.
Bellmann, C., A. Tipping, and U. R Sumaila. 2016. Global Trade in Fish
and Fishery Products: An Overview. Marine Policy 69: 181–188.
Béné, C., B. Hersoug, and E. H. Allison. 2010. Not By Rent Alone:
Analysing the Pro-poor Functions of Small-scale Fisheries in
Developing Countries. Development Policy Review 28(3): 325–358.
Bulte, E. H., and E. B. Barbier. 2005. Trade and Renewable Resources
in a Second Best World: An Overview. Environmental and Resource
Economics 30(4): 423–463.
Cheung, W. W. et al. 2013. Shrinking of Fishes Exacerbates Impacts
of Global Ocean Changes on Marine Ecosystems. Nature Climate
Change 3(3): 254–258.
Clark, C. 1990. Mathematical Bioeconomics. New York, NY: John Wiley.
Cullis–Suzuki, S., and D. Pauly. 2010. Failing the High Seas: A Global
Evaluation of Regional Fisheries Management Organizations.
Marine Policy 34(5): 1036–1042.
Dyck, A. J., and U. R. Sumaila. 2010. Economic Impact of Ocean
Fish Populations in the Global Fishery. Journal of Bioeconomics
12: 227–243. DOI: 10.1007/s10818-010-9088-3.
Food and Agriculture Organization of the United Nations (FAO). 2012.

The State of World Fisheries and Aquaculture 2012. Report. Rome:
FAO. http://www.fao.org/fishery/sofia/en (accessed 13 May 2017).
Fischer, C. 2010. Does Trade Help or Hinder the Conservation of Natural
Resources? Review of Environmental Economics and Policy 4(1):
103–121.
Gore, M. L, J. Ratsimbazafy, and M. L. Lute. 2013. Rethinking Corruption
in Conservation Crime: Insights from Madagascar. Conservation
Letters 6(6): 430–438.
Harper, S., D. Zeller, M. Hauzer, D. Pauly, and U. R. Sumaila. 2013. Women
and Fisheries: Contribution to Food Security and Local Economies.
Marine Policy 39: 56–63.
Hosch, G. 2016. Trade Measures to Combat IUU Fishing: Comparative
Analysis of Unilateral and Multilateral Approaches. Geneva,
Switzerland: International Centre for Trade and Sustainable
Development (ICTSD).
Johnson, I. 1991. Trade and Environment: A View from the World
Bank. Statement presented on the occasion of the WTO High Level
Symposium on Trade and Environment. Geneva, Switzerland:
World Trade Organization.
Kaczynski, V. M., and D. L. Fluharty. 2002. European Policies in West
Africa: Who Benefits from Fisheries Agreements? Marine Policy
26(2): 75–93.
Kolstad, I., and T. Søreide. 2009. Corruption in Natural Resource
Management: Implications for Policy Makers. Resources Policy
34(4): 214–226.
Lam, V. W., W. W. Cheung, G. Reygondeau, and U. R. Sumaila. 2016.
Projected Change in Global Fisheries Revenues under Climate
Change. Scientific Reports 6.
Lauck, T., C. W. Clark, M. Mangel, and G. R. Munro. 1998. Implementing
the Precautionary Principle in Fisheries Management through
Marine Reserves. Ecological Applications 8(sp1).
Le Manach, F. et al. 2012. Who Gets What? Developing a More
Equitable Framework for EU Fishing Agreements. Marine Policy.
DOI: 10.1016/j.marpol.2012.06.001/.
Milazzo, M. 1998. Subsidies in World Fisheries: A Reexamination
(Vol. 23). Washington, DC: World Bank.
Neumayer, E. 2000. Trade and the Environment: A Critical Assessment
and Some Suggestions for Reconciliation. Journal of Environment
& Development 9(2): 138–159.
Nijkamp, P., and J. Rouwendal. 1988. Intergenerational Discount Rates
and Long Term Plan Evaluation. Public Finance 43(2): 195–211.
Munro, G. R. 1979. The Optimal Management of Transboundary

Renewable Resources. Canadian Journal of Economics: 355–376.
Norse, E. et al. 2012. Sustainability of Deep Sea Fisheries. Marine Policy
36: 307–320.
Pauly, D., and D. Zeller. 2016. Catch Reconstructions Reveal that Global
Marine Fisheries Catches are Higher than Reported and Declining.
Nature Communications 7.
Pitcher, T., D. Kalikoski, G. Pramod, and K. Short. 2009. Not Honouring
the Code. Commentary. Nature 457: 658–659.
Robbins, P. 2000. The Rotten Institution: Corruption in Natural Resource
Management. Political Geography 19(4): 423–443.
Schuhbauer, A., et al. 2017. How Subsidies Affect the Economic Viability
of Small-Scale Fisheries. Marine Policy 82: 114–121.
Shleifer, A., and R. W. Vishny. 1993. Corruption. Quarterly Journal of
Economics 108(3): 599–617.
Sumaila, U. R. 2004. Intergenerational Cost Benefit Analysis and Marine
Ecosystem Restoration. Fish and Fisheries 5(4): 329–343.
____. 2012. Seas, Oceans and Fisheries: A Challenge for Good Governance.
The Round Table 101(2): 157–166.
____. 2013. Game Theory and Fisheries: Essays on the Tragedy of Free for
All Fishing. London: Routledge.
Sumaila, U. R. et al. 2015. Winners and Losers in a World Where the
High Seas is Closed to Fishing. Scientific Reports 5(8481): 6.
Sumaila, U. R., A. D. Marsden, R. Watson, and D. Pauly. 2007. A Global
Ex-vessel Fish Price Database: Construction and Applications.
Journal of Bioeconomics 9(1): 39–51.
Sumaila, U. R., and C. Walters. 2005. Intergenerational Discounting:
A New Intuitive Approach. Ecological Economics 52(2):135–142.
Sumaila, U. R., and D. Pauly. 2006. Catching More Bait: A Bottom-up
Re-estimation of Global Fisheries Subsidies. Fisheries Centre
Research Reports 14(6): 114.
Sumaila, U. R., C. Bellmann, and A. Tipping. 2014. Fishing for the
Future: Trends and Issues in Global Fisheries Trade. E15Initiative.
Geneva, Switzerland: ICTSD and World Economic Forum.
www.e15initiative.org/
Sumaila, U. R., C. Bellmann, and A. Tipping. 2016a. Fishing for the Future: An
Overview of Challenges and Opportunities. Marine Policy 69: 173–180.
Sumaila, U. R., J. Jacquet, and A. Witter. 2017. When Bad Gets Worse:
Corruption and Fisheries. In Corruption, Natural Resources and
Development: From Resource Curse to Political Ecology, edited by A.
Williams and P. Le Billon. Cheltenham, United Kingdom: Edward
Elgar Publishing.
Sumaila, U. R, J. Alder, and H. Keith. 2006. Global Scope and Economics

of Illegal Fishing. Marine Policy 30(6): 696–703.
Sumaila, U. R., V. Lam, F. Le Manach, W. Swartz, and D. Pauly. 2016b.
Global Fisheries Subsidies: An Updated Estimate. Marine Policy 69:
189–193.
Sumaila, U. R. et al. 2012. Benefits of Rebuilding Global Marine Fisheries
Outweigh Costs. PloS One 7(7): e40542.
Sumaila, U. R., W. W. Cheung, and V. W. Lam, D. Pauly. and S. Herrick.
2011. Climate Change Impacts on the Biophysics and Economics of
World Fisheries. Nature Climate Change 1(9): 449–456.
Swartz, W., E. Sala, S. Tracey, R. Watson, and D. Pauly. 2010. The Spatial
Expansion and Ecological Footprint of Fisheries (1950 to present).
PloS One 5(12): e15143.
Swartz, W., R. Sumaila, and R. Watson. 2013. Global Ex-vessel Fish
Price Database Revisited: A New Approach for Estimating ‘missing’
Prices. Environmental and Resource Economics 56(4): 467–480.
Teh, L., and U. R. Sumaila. 2011. Contribution of Marine Fisheries to
Worldwide Employment. Fish and Fisheries. DOI: 10.1111/j.1467-
2979.2011.00450.x.
Tipping, A. 2016. Building on Progress in Fisheries Subsidies Disciplines.
Marine Policy 69: 202–208.
Treisman, D. 2000. The Causes of Corruption: A Cross-national Study.
Journal of Public Economics 76(3): 399–457.
Weitzman, M. 2001. Gamma Discounting. American Economic Review
91: 260–271.
White, C., and C. Costello. 2014. Close the High Seas to Fishing? PLoS
Biol 12(3): e1001826.
World Trade Organization. 2007. Draft Consolidated Chair Texts of the
AD and SCM Agreements. TN/RL/W/213.
Young, M. 2015. Trade-Related Measures to Address Illegal, Unreported
and Unregulated Fishing. E15Initiative. Geneva, Switzerland:
ICTSD and World Economic Forum.
12
The Trade and Water Nexus
Alexandre le Vernoy
12.1 Introduction
At first sight, trade and water may appear to be disjoint subject matters.
But closer examination reveals a stimulating and often overlooked set of
intersecting opportunities that can be leveraged to address some of the
most pressing development challenges the world is facing. The recently
adopted framework of the Sustainable Development Goals (SDGs)
recognizes the importance of such interlinkages and the integrated
nature of the global goals. Understanding these nexuses is critical for
delivering a sustainable development agenda. This chapter reviews the
conditions under which international trade, trade policies, and trade-
related institutions can effectively (but not solely) contribute to the
resolution of the current and future water crisis.
By 2050, global demand for water will have risen by 55% and
wastewater discharges of growing urban populations will have increased
nitrogen effluents by 180% compared with today’s rates, creating severe
water stress that will affect about 4 billion people’s livelihoods (OECD
2012). It is under this scenario that the international community agreed
on a specific water goal as part of the SDGs.
Water insecurity is rooted in four major concerns: physical scarcity
(aggravated by climate patterns); declining quality; weak management
(and regulatory frameworks); and infrastructure gaps. The water crisis
is affecting all dimensions of the use of this resource, whether for Water
Access, Hygiene and Sanitation (WASH) purposes, or for agricultural
and industrial purposes.
At a global level, it is expected that under a business-as-usual
scenario, by 2030, the demand for water will outpace current supplies by
40% on average and by more than 50% in countries that are developing
most rapidly (WRG 2009). Contributing to 70% of the world’s water
withdrawals, agriculture and farmers will suffer the most from the water
crisis. At current growth rates, the coming decade is likely to witness a
cereal production shortfall of 30% (WRG 2009). A recent World Bank
report suggests that the crisis will have impacts beyond agriculture to
294
The Trade and Water Nexus295
affect industrial capacities. In India, for instance, over the course of

2015, power plants suffered from long shutdowns due to decreasing
levels of water in dams and reservoirs and due to erratic monsoon
seasons. Overall, lack of water in all its forms could reduce the world’s
gross domestic product by 2.6% (World Bank 2016).
Global averages should not shift the attention away from varying
local situations. Across all continents, we now see the effect of shifting
climate patterns impacting water availability in quality and quantity
and, in turn, affecting economic activities in unprecedented ways
(Jouanjean, le Vernoy, and Simonet forthcoming). Droughts and water
shortages in South Africa, California, Australia, and southern parts of
the People’s Republic of China (PRC) are examples showing that this
is not just an issue for least-developed countries; the water crisis is
affecting all continents irrespective of their level of wealth.
A related issue is the lack of access to water and the essential
services it provides in terms of health and hygiene. The Millennium
Development Goals (MDGs) already contained a WASH goal to draw
attention to the considerable infrastructure that was required to provide
universal access to water. While substantial results were achieved in that
respect over the past 2 decades, many countries are still significantly
lagging, particularly in sub-Saharan Africa. A growing demography and
the rural–urban shift are powerful trends that justify new responses to
the crisis.
Access to water is not just an obvious necessity. Accessing water
in sufficient quantity and quality is also the basis for any country to
lock in all the potential of its economic development. Technology,
innovation, and hard infrastructure are the three pivotal components of
a meaningful resolution to the water crisis. Investments in infrastructure
and services will ensure that the WASH goal is reached and all sectors
of the economy can access reliable water. Strong management that
articulates planning, distribution, and efficiency with consistent and
adequate regulatory frameworks will ensure availability. In situations of
acute water stress, when demand cannot be met, strong management
practices and governance instruments represent the only guarantee that
trade-offs will be weighted optimally.
Various concerns over water usages may be concomitant to
international trade. These are not necessarily a root cause, but rather a
by-product of how countries decide to produce and trade. One of the most
striking examples is the case of irrigated cotton production for exports
by Uzbekistan that drove a severe and almost irreversible depletion
of the Aral Sea. Kenya’s exports of cut flowers are taking place at the
expense of a drained Lake Naivasha (Hoekstra 2010). Through heavy
subsidies, Saudi Arabia has long been a top-10 wheat exporter, leading to
the overuse of the country’s fossil underground water. Recognizing the
severe strain put on its groundwater resources, Saudi Arabia recently

decided to phase out its heavily subsidized cereal production and rely on
international food markets. As such, international trade can also be part
of the solution to the lack of water, acting as a mechanism to compensate
for unsustainable water abstraction in water-scarce countries. For
instance, in many Middle Eastern and North African countries, lack
of water is a key driver for food imports, without which food security
would be impossible.
This chapter argues that many solutions to the water challenge
can be found in a more concerted openness to international flows of
goods and services. A development-oriented trade regime coupled
with suitable domestic policies may help counteract the water crisis
and perhaps support its resolution in the medium term. Therefore,
international trade can help achieve the water ambition of the SDGs.
This chapter investigates the channels by which and the conditions
under which international trade may contribute to tackling the water
challenge. The first section shows the conceptual advances moving
from the MDGs to the SDGs in addressing the water crisis and how
this shapes international trade and trade policy. To further reveal the
interconnectedness between trade and water, the chapter distinguishes
between direct and indirect effects. The second section investigates the
direct effect of trade, looking at how upgrading water management and
infrastructures requires inputs in terms of goods, services, investment,
and innovation, many of which can be sourced from abroad or facilitated
multilaterally. The third section looks at an indirect, but no less powerful
effect of trade through the use of water as a production factor and the
analysis of the concept of virtual water. The final section discusses
potential policy implications necessary to unlock the win–win scenario
of the trade and water nexus in a way that promotes the achievement of
the SDGs’ water goal.
12.2 The SDGs Provide a Better Water Agenda

At the time of the United Nations’ approval of the MDGs in 2000, many
international agencies and organizations had already voiced their
concerns about a water crisis rooted in a worsening supply and demand
gap, as well as misaligned management practices. The MDGs did not
provide much room for a wider approach that should have encompassed
aspects beyond WASH and included water quality issues, management
of wastewater, efficiency, and conservation of aquatic environments. In
essence, the SDGs now support the view that water is embracing many
aspects of a strong development agenda. This section investigates the
progress made conceptually moving from the MDGs to the SDGs and
how the latter provide an improved framework to better leverage the

interconnectedness between trade and water.
Trade has received more attention in the discussion that led to the
agreement on the SDGs than was the case for the MDGs. As the messaging
in official documents is so carefully weighted and scrutinized before
their adoption, it is interesting to look at how words have been used to
build each agreement. Table 12.1 compares the number of occurrences
and the frequency (i.e., number of occurrences per 1,000 words) across
a set of keywords that are presumably important for appreciating the
focus of sustainable development discussions. The comparison is
Table 12.1 Mentions in Official Declarations—

Counting Occurrences and Frequencies
SDGs MDGs
Official Declaration Official Declaration
of Adoption (1) of Adoption (2)
Words Frequency Occurrences Frequency Occurrences
development 11.2 170 8.1 28
women/gender 3.0 46 2.0 7
environment(al) 2.2 34 2.3 8
health 2.0 31 none none
(fresh)water 1.8 28 0.9 3
agriculture/land 1.7 26 none none
poverty 1.6 24 2.9 10
hunger/food 1.4 21 0.9 3
(in)equality 1.2 18 0.9 3
peace(ful) 1.2 18 4.9 17
resilience/resilient 1.2 18 none none
trade 1.1 17 0.6 2
energy 1.1 16 none none
private sector/sphere 1.1 16 0.6 2
inclusive/economic growth 0.9 14 none none
ecosystem 0.8 12 none none
WTO/World Trade Org. 0.5 7 none none
MDG = Millennium Development Goal, SDG = Sustainable Development Goal, WTO = World Trade
Organization.
Note: Frequency denotes number of occurrences per 1,000 words.
Sources: Count by the Author; (1) From Outcome document of the United Nations summit for the
adoption of the post-2015 development agenda; (2) From Resolution adopted by the General Assembly
toward the MDGs declaration.
done by scanning through two significant milestones—the Resolution

adopted by the General Assembly of the United Nations consecrating
the MDGs, and the Outcome document of the United Nations summit
for the adoption of the post-2015 development agenda (adopted by the
General Assembly of the United Nations).
The designers of the SDGs have put more emphasis on water and
trade compared with the MDGs. The words “(fresh)water” and “trade”
are significantly more frequently used in the SDGs. Interestingly, the
term “private sector” is also more widely used, perhaps because of the
current appreciation of its role in supporting the development agenda.
It is also important to note that World Trade Organization (WTO)
and “ecosystem” are now mentioned in the SDGs. Looking at the two
documents in more detail, it is important to note that the SDGs allow
for a more complex approach on the grounds that most of the issues are
interconnected and cannot be approached in isolation. SDG 6 defines
the water target for the 2030 agenda as follows: “Ensure availability and
sustainable management of water and sanitation for all”:
Ŷźű Achieve universal and equitable access to safe and

affordable drinking water for all.
ŶźŲ Achieve access to adequate and equitable sanitation
and hygiene for all, and end open defecation, paying special
attention to the needs of women and girls and those in
vulnerable situations.
Ŷźų Improve water quality by reducing pollution, eliminating

dumping and minimizing release of hazardous chemicals
and materials, halving the proportion of untreated waste
water, and increasing recycling and safe reuse globally.
ŶźŴ Substantially increase water-use efficiency across all

sectors and ensure sustainable withdrawals and supply
of freshwater to address water scarcity, and substantially
reduce the number of people suffering from water scarcity.
Ŷźŵ by 2030 implement integrated water resources

management at all levels, including through trans boundary
cooperation as appropriate.
ŶźŶ by 2020 protect and restore water-related ecosystems,

including mountains, forests, wetlands, rivers, aquifers and
lakes.
There are other areas and goals that explicitly mention water
and water security as a means to achieving the agenda, providing the
following touch points:
Goal 3. “Ensure healthy lives and promote well-being for all”

3.3: By 2030, end the epidemics of AIDS, tuberculosis, malaria
and neglected tropical diseases and combat hepatitis, water-
borne diseases and other communicable diseases.
Goal 11 “Make cities inclusive, safe, resilient and sustainable”

11.5: By 2030, significantly reduce the number of deaths and
the number of people affected and substantially decrease
the direct economic losses relative to global gross domestic
product caused by disasters, including water-related
disasters, with a focus on protecting the poor and people in
vulnerable situations.
Goal 12 “Ensure sustainable consumption and production

patterns”
12.4: By 2020, achieve the environmentally sound
management of chemicals and all wastes throughout their life
cycle, in accordance with agreed international frameworks,
and significantly reduce their release to air, water and soil
in order to minimize their adverse impacts on human health
and the environment.
Goal 15 “Sustainably manage forests, combat desertification,

halt and reverse land degradation, halt biodiversity loss”
15.1: By 2020, ensure the conservation, restoration and
sustainable use of terrestrial and inland freshwater ecosystems
and their services, in particular forests, wetlands, mountains
and drylands, in line with obligations under international
agreements.
The capacity to ensure access to water has major impacts on several

aspects of economic development such as health, energy, ecosystems
protection, stable agricultural production, and food security. The
resilience of these systems also correlates with access to the resource
in case of sudden, short, or longer shocks. As shifting precipitations
and temperatures affect cropping patterns and, hence, agricultural
production, or as sudden adverse weather affects infrastructure,
climate shocks will threaten the speed at which populations and
economic activities can recover. This stresses the need for stimulating
synergies across several goals. Most of the concepts referenced in the
goals about freshwater management have been around for more than
2 decades (Integrated Water Resources Management, water pricing,
and ecosystems and their services). But their practical application and
implementation have been hampered locally by lack of adequate and
mature regulatory frameworks.1 Hence, without more clarity about how
to translate these goals into specifically designed domestic policies and
targets, it is difficult to project their impact on the water crisis. At this
stage, it remains interesting to see how existing tools and institutional
structures can help address the water crisis in general and achieve the
water goal in particular.
Modern responses to water scarcity involve a balance between
adopting hard and soft strategies. Hard approaches refer to
infrastructures, maintenance and operations, traditional water
storage systems, storage management, water reuse, desalinization, and
integrated flood management. These contrast with soft interventions
aimed at curbing inefficient uses or establishing proper institutional
frameworks. They focus on demand-oriented approaches and use
instruments such as pricing mechanisms, efficient technologies,
establishing a culture of conservation, land-use planning, and
education and communications.
Another soft strategy often mentioned is the relationship between
water and international trade. It is recognized that international trade
holds a promise for water savings and its reallocation to higher-value
alternative usages and production processes. Materialized by the
concept of virtual water described below, the concept allows for an
interesting compromise to align both demand-based and supply-based
approaches into a single vision. Combined with appropriate domestic
policies, trade in agricultural products may contribute to reducing
imbalances between countries using water more or less efficiently.
SDG 6 certainly recognizes one of the most pressing issues
surrounding the current water challenge, which is the lack of access
to WASH currently affecting about 2.5 billion people. The SDGs have
lacked ambition in that they fail to clearly identify water as one of the key
issues for prosperity. Of course, access is the most pressing challenge,
but it would have been beneficial to put it in a more complex perspective
of the manifold interconnections water has with other challenges such
as long-term sustainable agriculture, and energy security, that cannot
1
The concept of integrated water resource management was put forward as early as
1992 and included in the Dublin principles following the Rio commitments.
be effectively tackled in isolation. While it remains a second-best

instrument, trade can be a powerful instrument to tackle the water crisis.
Further below we look at the direct and indirect contributions of
international trade to these two dimensions of water management
responses. The literature relating to the water crisis is unambiguous
about water being a local issue that has regional and global ramifications
particularly through the impact of globalization (Hoekstra 2010). In a
context of climatic disruptions, trade may act in the medium term as
the insurer of last resort. It also emphasizes the idea that the trade and
water communities of experts and decisions makers share common
ground. Seeking an aligned agenda between the two communities could
provide powerful support for an ambitious and practical implementation
of the SDGs. Critically, the misunderstanding that has led the debates
over the past decades (particularly on the topic of privatization of
water, described below) could have detrimental effects on securing the
achievement of the SDGs. Through applying the right concepts and
instruments, and through appropriate policy implementation, there is a
clear win–win case for delivery on the SDGs.
12.3 Direct Effect: Bridging the Water Services,

Infrastructure, and Technology Gaps
Ensuring a response to the water challenge depends on the capacity to
attract new investments and secure services (distribution and treatment
of water). Parallel to this, the difficulty of maintaining or replacing aging
water-related infrastructure has been widely documented (OECD 2011).
The security of access to water can only be achieved through funding for
infrastructure projects on drainage, treatment (of both raw water and
wastewater), distribution, abstraction, and storage. All those areas are
critical to achieving SDG 6. This section suggests some ways to think
about international trade as a conduit to redress part of the gap in water
technologies, services, and investments.
12.3.1 Trade in Water Services: A Substantial Benefit

Eclipsed by an Erroneous Perception
The market for environmental goods and services has grown rapidly
over the past decade and is expected to reach $1.9 trillion by 2020
(Bucher et al. 2014). As defined by the Organisation for Economic Co-
operation and Development (OECD), environmental goods and services
refer to activities “that produce goods and services to measure, prevent,
limit, minimise or correct environmental damage to water, air, soil, as

well as problems related to waste, noise and eco-systems.” Following
this definition, the uneven technological capacities across countries
creates a positive role for international trade to distribute these goods
and services through several channels—transfer of technologies, direct
investment of companies holding patents, or direct export.
Although gaps are still wide across countries, with developing
countries still catching up, environmental regulations have evolved
significantly in recent years. As far as water use and treatment is concerned,
national standards have on the whole become more stringent and have
been supported by a wave of revisions of domestic water laws. The
water sector is still largely concentrated, with just a few multinationals
operating, for two main reasons: First, these multinationals have the
capacity and the reach to beat the market and historical operators are
difficult to challenge from a cost perspective. Second, municipalities and
other users of water-related services continue to trust historical operators
to implement technologies and processes that comply with increasingly
complex regulations. But the landscape is likely to change. Developed
countries are more mature in implementing environmental regulations
and growth is expected to shift to developing countries, with some of
them already developing their own sector, South Africa and Taipei,China
being examples. Moreover, with regulation on water distribution,
treatment, and collection evolving rapidly, the industry is becoming more
responsive to breakthrough technologies, which makes the sector more
competitive. As water management is extremely dependent on local
contexts, we expect it will facilitate small domestic businesses more
capable of reacting and responding to them (WTO 1998).
A reduction in trade barriers and the promotion of services in the
water sector could support the transition to a more stringent regulatory
framework that preserves water resources and ecosystems by providing
efficient solutions at lower costs.
There has been strong opposition to the incursion of the private
sector into water services, with the upsurge in several developing
countries fueling a heated controversy over the past 2 decades.
Central to the debate is the symbolism attached to water—inherited
from representations, traditions, and cultures—and the possible social
implications of adaptation to a new management model. Such resistance
should not be taken lightly and recent experiences of privatization show
it reflects legitimate concerns. Customs, cultural practices, and even
myths can explain a variety of management practices of water resources,
which often clash with the utilitarian views advocated by modern
approaches (McCool et al. 2008). While water pricing is expected to
correct the lack of signal of scarcity, this solution is often viewed as a
narrow and doctrinaire approach that shakes the foundation of the

value of water.
Defining the institutional framework for water services has been
difficult, with the debate dichotomy-driven so far between private and
public provision. In light of this, it is important to remember some of
the basic principles behind the General Trade Agreement on Services
(GATS). The literature generally expects liberalization of services to
generate the following benefits (Bates 2009): consumer savings via
reduced trade barriers; greater transparency and predictability through
an agreed set of rules, and long-term investment—all of which are better
discussed and settled multilaterally.
The agreement on services does not provide any guidance as to
whether water services (or any other services) should be owned and
managed by public or private entities, and there is nothing in the general
rules and principles (contained in the agreement) that forces a country
to privatize water-related services (ODI 2005). As such, GATS, under
the auspices of the WTO, says nothing about how water provision should
be handled by member countries.
The agreement adopts a positive approach whereby GATS
signatories schedule their commitments in a list of choices. Countries’
commitments do not apply unless the sectors and their corresponding
subsectors are expressly inscribed in the schedule. To date, GATS-
based commitments to liberalize water services and related sectors
have been rare. One explanation is linked to the sensitivity of this issue,
but it may also be due to the complexity of the classification for water.
The only water sector clearly referenced is sewage services, found in
the category of environmental services. Commitments on other water-
related services should thus be scheduled under a different and generic
category such as construction and related services or distribution
services.2 A better classification (which is part of an ongoing discussion)
could clarify liberalization negotiations.
Trade in water-related services, unfortunately, is driven by many
erroneous perceptions that may have eclipsed the potential benefits
of the trade agreement vis-à-vis investment and high-value services
from abroad. The opportunity cost may come at a high price point for
countries that lack capacities to implement efficient services themselves.
GATS negotiations are still hindered following the deadlock of the Doha
Round of negotiations. A coalition of the willing, comprising 23 WTO
members (including the European Union) recently decided to move
forward in the area of trade in services. It is still unclear how the Trade
2
I-TIP Services is a joint initiative of the World Trade Organization and the
World Bank.
in Services Agreement (TiSA) might deal specifically with water. The

communication lesson has been learned and the coalition took time
to defuse expectations about public services in general and water in
particular.3 It will be interesting to see whether the coalition manages
to clarify the debate on the liberalization of key “public” services,
particularly around water.
At present, it looks unlikely that we will see major unilateral,
regional, or multilateral GATS commitments on water services. Yet,
alongside South Africa, several national governments that were reluctant
to schedule GATS-based water commitments have nevertheless started
to liberalize their services (outside the multilateral framework of
negotiation), as they recognize the private sector’s pivotal management
role. This position strongly echoes the simplistic treatment of water-
related services in the current multilateral trade system that fails to
address ensuring access for the poorest (Muller 2003). This consensual
opposition to strong GATS commitments on water-related services is
unfortunate insofar as it hampers and delays the mutual benefits that
international trade coupled with efficient domestic regulations could
bring about to resolve the water crisis.
12.3.2 Technology and Innovation Transfers
An efficient framework to support a wider diffusion of water technologies

remains crucial to addressing the water crisis. Even with improved
infrastructure, the diffusion of innovations and technologies constitutes
a powerful supply-side approach to thelack of access to water and the
preservation of the resource. Added to intellectual property rights not
being well enforced and secured, private companies holding patents
will continue to prefer investing themselves rather than licensing their
technology, narrowing down the channels through which technology
can be diffused and adopted.
International technology transfers can in principle also positively
impact the demand side by ensuring that agricultural, industrial,
or domestic water users are granted access to non-research and
development (R&D) innovative processes and instruments focusing on
more efficient water usages. A novel study by Conway et al. (2015), using
patent disclosure data, suggested that most supply-oriented inventions
tend to originate in countries where water availability is relatively high
(the results are reproduced in Figure 12.1).
3
The European Commission website has a dedicated page to address frequently asked
questions about TiSA. http://ec.europa.eu/trade/policy/in-focus/tisa/questions
-and-answers/ (accessed 15 February 2017).
Figure 12.1 Water Scarcity and Share of World’s

Water-Related Inventions, 2000–2010 (%)
Absolute
Water scarcity thresholds
Chronic
Regular
No stress
0 10 20 30 40 50 60 70 80 90
Source: Reproduced from Conway et al. 2015. Threshold of water stress is defined following
Falkenmark’s 1995 methodology.
Having these inventions and innovations developed in countries

where they are less needed justifies such a global diffusion. With
environmental regulations adequately enforced and monitored,
the reduction of trade barriers and constraints on foreign direct
investment, leading to more open international trade, should promote
the diffusion of these technologies and inventions. Some countries have
demonstrated that this is possible. The role of knowledge centers is
critical as well and is contributing to a rapid growth in the water-related
R&D sector. Alongside mature actors in water-efficiency technologies
in several developed countries, Singapore is a singular and compelling
case described by Speight (2015). Water treatment in Singapore was an
apparent competitive disadvantage, but also an obvious need. Through
its efforts in specialization, Singapore has significantly reduced its
dependence on water imported from Malaysia through investing in
desalination technologies and now serves as a global water R&D hub.
Large multinational companies are now investing in Singapore to
support water technology research.
The literature usually distinguishes four main channels for effective
international technology transfers: foreign direct investment, movement
of people, trade in goods, and knowledge spillovers (Hoekman et al.
2004). The existence of regional knowledge and research hubs on
water also calls for a stronger role for international trade that could
promote North–South as well as South–South technology transfers.
Also important is the role of prior local capacity to effectively absorb the
innovation for international diffusion to be a success. Lack of training
and technical assistance is frequently a cause of local water authority

implementation failures. Cases of transfers of waste and water treatment
technologies have been well documented (Tébar Less and McMillan
2005) and demonstrate yet again the importance of local and domestic
capacity building for local officials to ensure diffusion.
12.3.3 Trade and Infrastructure
Reliable infrastructure is essential for international trade and global

integration. What is true for transport and energy infrastructure is also
true for water as a basic input for most economic activities. Ensuring the
right level of investment in water-related infrastructure thus becomes a
precondition for reaching SDG 6. And the trade and investment nexus has
a role to play in accelerating the development of infrastructure in water
as well as in other areas and to strengthen a country’s competitiveness
while achieving poverty reduction.
Demand for water sector investment is expected to increase rapidly,
creating a predictable gap between the current funding capacities and new
infrastructure requirements. Globally, $11.7 trillion of investments have
been made in water facilities and other forms of related infrastructure to
support the projected growth toward 2030 (McKinsey 2013).
As mentioned above, there are several channels through which the
water crisis can be alleviated, but technology and hard infrastructure
will remain pivotal for ensuring equitable and sustainable access.
Investments in water are largely the prerogative of the public sector
given their capital-intensive, public-good nature and because they
require important early investments that have generally low rates of
return with extended payback times. The private sector is being granted
an increasingly important role in water services and infrastructure. Yet,
compared with the energy, communication, or transport sectors, the
water sector is undermined by the private sector’s lack of enthusiasm.
Data from the Private Participation in Infrastructure Database
developed by the World Bank shows that the water sector has suffered
from chronic private sector underinvestment. Major trends are reported
in Figure 12.2.
The lack of investment is also more apparent in regions where it
is needed most, such as in sub-Saharan Africa where, incidentally,
progress toward realizing the MDGs has been limited. While the notion
of water risk is increasingly being integrated into private sector business
strategies, it does not seem to stimulate enough investment despite a
worsening of the water crisis. In light of this, official development
assistance should consistently focus on supporting infrastructure in
developing countries generally and water infrastructure in particular.
Figure 12.2 Private Investment Commitments

in Infrastructure (1990–2013)
80
70 Energy
60
50
$ billion
40 Telecom
30 Transport
20
10
Water and Sewage
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Based on data downloaded from the World Bank and the Public–Private Infrastructure
Advisory Facility, Private Participation in Infrastructure Project Database. http://ppi.worldbank.org
(accessed 15 February 2017).
Above all, development partners should ensure a sound investment

climate for the private sector.
Several policy choices could foster investments, but most important
would be a consistent multilateral regime to aggregate disparate domestic
policies. The OECD recognizes that even though water infrastructure
is not a trade-related category per se, water for irrigation and meeting
sanitary and phytosanitary standards (SPS) do in fact “contribute to
productivity and the ability to compete.” Water availability is an essential
parameter for food safety and to safeguard exporting capacities and
compliance with international SPS (e.g., GlobalGAP). In line with this,
the Aid for Trade agenda could make a significant contribution to the
quality side of the water challenge by ensuring that investments (and
official aid) support requirements around SPS and technical barriers to
trade requirements.
12.4 Indirect Effect: Virtual Water

As pointed out in the previous section, significant differences across
countries in both availability and access to technologies can explain
the struggle to preserve existing water or mobilize untapped resources.
In much the same way, we witness varying levels of agricultural

technologies across countries, along with sharp differences in labor
productivity as well as land availability. These are considered some
of the main driving forces behind international agriculture. As water
is a crucial input for agriculture, an additional question, therefore, is
whether relative international differences in water availability also
contribute to shaping international trade flows.
Cross-border transfers of bulk water are politically sensitive and
the integration of water as a commodity in trade agreements leads to
delicate negotiations among states over ownership and sharing. During
the negotiations to conclude the North American Free Trade Agreement
(NAFTA), Canada forced the inclusion of a clause in the regional
trade agreement to “protect” its freshwater from exports. Recently, an
American water export company launched a lawsuit against Canada for
$10.5 billion and the case has been filed under Chapter 11 of NAFTA. But
water is hardly ever traded as such. Notable examples of cross-country
water transfers are projects between the south of France and the
autonomous region of Catalonia in Spain, and between South Africa and
Lesotho. Most large-scale transfers still occur domestically. The PRC
is just finalizing the largest network of pipelines in history to transfer
water from the north to the south of the country, at a total length of 4,350
kilometers. Large-scale water transfers commonly attract attention
from the media and scrutiny from civil society, particularly concerning
their environmental and social implications.
Through the Harmonized Systems, customs classify bulk water
explicitly as “ice, snow and potable water not sweetened or flavoured.”4
Imports of bulk water reported to the United Nations statistical agency
amounted to an annual average of 0.34 cubic kilometers (km3) between
2011 and 2015, an insignificant volume compared with the annual global
average withdrawal of 3,908 km3 over the same period.5
However, water is being transported by other means. It can flow
between trade partners through imports and exports when it is accounted
for as a production factor. Virtual water is the volume of water used (and
embedded) in the production of a good or a service (Allan 1997). Each
production process requires dissimilar amounts of water, which may
4
The exact HS code is 22-01. Chapter 22 includes all beverages, spirits, and vinegar,
whether they are bottled or not, but does not cover (i) products of this chapter (other
than those of heading 2209) prepared for culinary purposes and thereby rendered
unsuitable for consumption as beverages (generally heading 2103); (ii) sea water
(heading 2501); and (iii) distilled or conductivity water or water of similar purity
(heading 2853).
5
World Bank. World Development Indicator database.
vary from country to country. While products are traded regionally or

globally, movements of goods involve virtual transfers from one trading
partner to another of the water used in their respective production
process. This water is said to be virtual because it is not present as such
in the product, but was required for its production.
From a pure trade economics perspective, the theory of comparative
advantage revolves around trade in factor services, also referred to in
the literature as the factor content of trade. The theory shows how trade
takes place among countries based on how much of a relative factor is
used in the production of goods and depending on the relative cross-
country differences in endowments of the production inputs. This
section summarizes the debate so far about virtual water and suggests
some aspects of its applicability and implementation from a trade policy
perspective.
12.4.1 Virtual Water: Can Trade in Goods be a Solution

to Water Scarcity?
A methodology to calculate virtual water flows associated with trade
in crops and livestock was developed through the evaluation of a
product- and country-specific water requirement coefficient (usually
measured in cubic meter of water per ton of product). Pre-multiplying
this coefficient by the trade flow of the corresponding product allows for
the quantification and the mapping of volumes of virtual water between
trading partners. It gives interesting insights into the water content of
trade flows across the world. The key importers and exporters of net
virtual water flows are ranked in Table 12.2.
Some of these results may be at odds with the conventional
perception of the state of the resource. How can two parched countries
like Australia and India be major exporters of virtual water?
Australia’s freshwater withdrawals represent just 3% of its total
renewable water resources. This country-level average hides local
differences across states and territories. The Murray-Darling basin’s
economic activities are underpinned by significant farming activities
that use irrigation as the main mode of production adding up to the
use of 80% of the basin’s available water, while contributing to 5% of
the gross domestic product of the area. Although it represents a small
fraction of the basin’s economy, water shortages could come at a high
price for the continued growth of the country. The southwest of the
country is also constrained by reduced rainfall supplies, a dynamic that
is already affecting wheat production. It is worth noting that, according
to the Australian government, 80% of the wheat produced in that
region is exported. One of Australia’s main trading partners of wheat
Table 12.2 Top 10 Net Virtual Water Exporters and Importers (km3)
Pressure Pressure
Net Virtual Water on Water Net Virtual Water on Water
Exports Resources Imports Resources
Rank km3 in 2005 (%) km3 in 2005 (%)
1 Australia 64 3 Japan 92 19
2 Canada 60 1 Italy 51 28
3 US 53 14 UK 47 6
4 Argentina 45 4 Germany 35 21
5 Brazil 45 1 Rep. of Korea 32 42
6 Côte d’Ivoire 33 2* Mexico 29 17
7 Thailand 28 13* Iran 15 68
8 India 25 34 Spain 14 33
9 Ghana 18 2* Saudi Arabia 13 943*
10 Ukraine 17 8 Algeria 12 67
3
km = cubic kilometer, UK = United Kingdom, US = United States.
Notes: In this table * denotes data for 2006. Data on pressure on water resources express freshwater
withdrawal as a percentage of total renewable water resources and derived from the Aquastat database of
the Food and Agriculture Organization of the United Nations.
Source: Data on virtual water flows are from the Water Footprint Network and Hoekstra et al. 2003.
is Japan, a country that, given its size, geography, and hydrogeology,

is crucially lacking both land and water and relies on virtual water
to ensure its food sufficiency. The water crisis in several regions of
Australia has urged its government to implement a profound revision
of its water management to redirect its use to higher-value usages. This
does not necessarily exclude that agricultural production should be
exported, as international trade in agriculture represents a significant
share of Australia’s economic stability. In other words, even if there is
a perceived disconnection between the size of a country’s trade and its
water availability, a solution to the challenge this represents can often be
found in domestic regulations on access and use of water.
Water scarcity is rarely signaled through price. Because water
is commonly mispriced, surface and groundwater are perceived as
inexpensive sources. The reality is that water resources generally have a
sharp marginal cost curve. As conventional water sources become scarcer,
investment in unconventional supplies (desalinated water, reclaimed
water, rain water harvesting) can find new market development, but
this is not sufficient to tackle the issue in the medium term. For the
more conventional provision of water, pricing policies are lacking and
existing ones usually do not reflect the level of scarcity. Without efficient
domestic regulations to ensure the right level of production and the
allocation of water to high-value use (whether the output is for the
domestic market or the international market), the water crisis can only
worsen. In short, the solution is not to limit trade in agriculture, but to
ensure that management strategies correctly reflect the property rights
and the common-good problem of the use of water.
12.4.2 Measuring and Securing the Gains from Trade

Can trade reduce imbalances between relatively water-stressed and
relatively water-abundant countries? The concept of virtual water can
shed light on this. The concept seemed novel when first coined, but it
should be familiar to trade economists as it can be seen as an application
of theories of comparative advantage and factor content of trade (Le
Vernoy and Messerlin 2011).
Using the data on the water content of world trade, gross virtual
water flows amount on average to 1,624 km3, with 61% of the total virtual
water trade associated with international trade in crops, 17% with
livestock, and 22% with industrial products (Hoekstra 2010). Water may
be saved through trade provided it moves from high water productivity
countries to low water productivity countries. Savings do not amount
to the volume of virtual water of the imported product, but to the
volume of water the importers would have required to produce the
same quantity of product. Globally, savings represent on average 10% of
global freshwater withdrawals (around 352 km3 according to Chapagain
et al. 2005). Given that gross flows of virtual water are for the most part
explained by agricultural exports (as opposed to industrial trade) and
that the current trade regime is heavily subsidized, this figure is in fact
quite high. As imperfect as they are, the current trade rules are allowing
for quite a substantial saving of water globally. At least, this figure gives a
sense of what would be the cost of autarky or, alternatively, the scope of
untapped opportunities that lies in further trade integration (Le Vernoy
and Messerlin 2011).
Trade becomes an alternative to the costly transportation of a
rather internationally immobile and hardly substitutable production
factor. The calculation of the volume of freshwater being saved as
a by-product of international trade does not say much about the
drivers or causality of such a relationship. An important question is
whether the relationship can partly be traced to relative water scarcity
across nations (as noted above in the case of India and Australia). On
this issue, the literature provides mixed results (Wichelns 2015).
A study by Debaere (2014) based on recent data estimated water
endowments across countries as a source of comparative advantage

(in a Heckscher–Ohlin setting). Debaere’s results suggest that relatively
water-abundant countries export more water-intensive products, but
that the water content of trade is less significant in explaining trade
patterns than capital or relative labor endowments.
The literature singles out three major “noises” that impede
perfectly capturing the potential gains from trade for a more efficient
global allocation of water. They relate to lack of information about the
resource, incorrect water pricing mechanism signals, and agricultural
subsidies. Such elements can be addressed through concerted and
consistent regional or global trade policies and domestic policies.
The overall amount of water available globally as well as the
theoretical dynamics underpinning the water cycle has been established.
Far less is known about local hydrological dynamics, particularly the
state of groundwater resources. Catchment-based surveys often rely
on outdated data. Furthermore, little is known about the dynamics of
demand and the water resource extraction rate. The trend is advancing
toward more monitoring rather than less, but local and national
regulations are more often than not based on incomplete information.
More efforts in that area would be welcome to ensure that SDG 6 is
achieved.
As noted, water is too often mispriced and accounts for an
insignificant share of production cost, rarely reflecting the value of
scarcity and the cost recovery of the investments made to secure its
availability. Moreover, if scarcity or decreasing quality issues are not
correctly reflected in prices, it may leave the terms of trade generally
unaffected by a relative difference in water endowments, hence
distorting the positive impact trade can have on allocation of water
uses. Natural resource pricing is typically a domestic policy prerogative,
which reinforces the notion that the benefits of more open trade can
only be achieved with a relevant set of domestic policies.
Agriculture has historically been subsidized, with the international
trade system under the WTO recognizing the need to support farmers
through direct support from the government, along with payments
for environmental assistance programs and measures that should only
have minimal impact on trade in areas such as research, disease control,
infrastructure, and food security. There are examples of subsidies that
distort the signal of water scarcity to the point that unsustainable use
of water is being ultimately maintained rather than curbed (Boulanger
2007). On the other hand, we can assume that preserving some financial
protection level of farmers can be important to ensure that water use
is sustainable, which may require public investments and targeted
regulations. But those instruments ought to be carefully assessed.
Following recent climate shocks and their impact on food production,

countries are turning to food security policies to protect farmers and the
agriculture sector from world price volatility. While it is understandable
that countries want to reduce their exposure to world price volatility,
this may come at an even higher price if it goes against sustainable water
management. In this context, international trade should be considered
as a powerful instrument in the medium term, to be used as insurance
against climate shocks. The benefit of a more open international trade
environment can only be safeguarded through stable and reactive
domestic policy responses to protect domestic economies from adverse
social implications and negative environmental externalities.
12.5 Conclusion and Policy Recommendations

With the current fragility of the WTO negotiations attracting most of
the attention, commentators tend to overlook the importance of the
rules themselves. The negotiations on the reduction of trade barriers
have recently lost momentum, but the trade regime and its underlying
principles are remarkably lean and efficient. While perfectible, they
provide the framework for a vast set of policy options to harness the
benefits of international trade.
Water challenges respond to local issues and confined circumstances
requiring institutional responses at the catchment level. Taking a closer
look at the trade and water nexus reveals the emergence of a water
agenda with global concerns as well as global solutions and instruments.
As the world only recently forged an ambitious climate agenda following
the agreement at the 2015 Paris Climate Conference (COP21) and a
development ambition through the SDGs, a stronger water regime has
yet to materialize and is unlikely to develop quickly. This chapter argues
that until a water regime develops, the current trade regime can be put to
good use to address (partly) some of the most pressing water challenges.
The potential adverse effects on water resources of untenable
productive activities, some of which have been recalled in the
introduction of this chapter, cannot be dismissed. In these cases,
international trade cannot be seen as the root cause of the unsustainable
use of water. Mismanagement of the resource and shortsighted choices
are at the core of the water crisis. This chapter looked at both direct and
indirect linkages between international trade and water.
In a growing number of regions of the world, the water crisis has
become so acute that ensuring acceptable access for all users, including
ecosystems, must be managed by adopting a calculated risk approach
and at an acceptable level of uncertainty. There is growing agreement
that public water policies will face (and perhaps already are facing)
challenging trade-offs to achieve water security. While the reallocation
of a scarce resource across productive sectors and users is politically
sensitive, there are fewer painful trade-offs that can be looked at.
Arbitration can be driven by thoughtful policies across supply-oriented
approaches (e.g., infrastructure, transfers, storage systems) and demand-
oriented approaches (e.g., pricing, planning, and greater use of efficient
technologies).
International trade should be considered as a powerful solution to
support both demand and supply-oriented responses to the water crisis.
When discussing the direct effect of international trade on water, we
mentioned some critical areas where progress can be made and where
international trade can support. A more concerted and open international
trade environment could help secure solutions, notably through a
sound investment environment for water-related infrastructure and the
capacity to source input, technologies, and innovations from abroad.
This chapter also suggests the existence of an indirect channel through
which international trade can support the alleviation of the water crisis
through the concept of virtual water. It shows how tightly trade in
agriculture (and industrial products) is linked to the use of water and
the (relative) availability of the water resource. That a growing number
of water-scarce countries are relying on food imports is not just the
result of an accidental correlation. Through the reallocation of water to
higher-value uses at the country and regional level, coordinated trade
and trade policies can positively impact balancing out the lack of water
across countries.
References
2030 Water Resources Group (WRG). 2009. Charting Our Water Future:
Economic Frameworks to Inform Decision Making. Washington, DC:
The World Bank.
Allan, J. 1997. Virtual Water: A Long-Term Solution for Water Short
Middle Eastern Economies? Paper presented at the 1997 British
Association Festival of Science, University of Leeds.
Bates, R. 2009. The Trade in Water Services: How Does GATS Apply to
the Water and Sanitation Services Sector? Sydney Law Review 31(1):
121–142.
Bucher, H., J. Drake-Brockman, A. Kasterine, and M. Sugathan. 2014.
Trade in Environmental Goods and Services: Opportunities and
Challenges. International Trade Centre Technical Paper. Geneva.
Boulanger, P. 2007. A Flood of Euros for Irrigated Fields. Policy Brief.
Groupe d’Economie Mondiale. Sciences Po.
Chapagain, A. K., A. Y. Hoekstra, and H. H. G. Savenije. 2005. Water
Saving through International Trade of Agricultural Products.
Hydrol. Earth Syst. Sci. Discuss. 2: 2219–2251.
Conway, D. 2015. Invention and Diffusion of Water Supply and Water
Efficiency Technologies: Insights from a Global Patent Dataset.
Working paper. Grantham Research Institute on Climate Change
and the Environment.
Debaere, P. 2014. The Global Economics of Water: Is Water a Source
of Comparative Advantage? American Economic Journal: Applied
Economics 6(2): 32–48.
Falkenmark, M. 1995. Coping with Water Scarcity under Rapid
Population Growth. Paper presented at the Conference of SADC
Ministers. Pretoria, South Africa, 23–24 November.
Hoekman, B. M., K. E. Maskus, and K. Saggi. 2004. Transfer of Technology
to Developing Countries: Unilateral and Multilateral Policy Options.
Policy Research Working Paper Series 3332. Washington, DC: The
World Bank.
Hoekstra, A. 2010. The Relation between International Trade and
Freshwater Scarcity. Working Paper ERSD-2010-05. Geneva,
Switzerland: World Trade Organization, Economic Research and
Statistics Division.
Jouanjean, M. A., A. le Vernoy, and C. Simonet. Forthcoming. Price,
Water and Trade in Agriculture: An Alternative to the Rain Dance.
Paper under review and written to support the project “Pathways to
Resilience in Semi-arid Economies (PRISE).”
Le Vernoy, A., and P. Messerlin. 2011. Water and the WTO: Don’t Kill the
Messenger. In Value of Water Research Report Series No. 54, edited
by A. Y. Hoekstra et al. Delft, the Netherlands: UNESCO–IHE.
McCool, S., F. Clark, N. Roger, and G. H. Stankey, eds. 2008. Water and
People: Challenges at the Interface of Symbolic and Utilitarian
Values. Gen Tech. Rep. PNW-GTR-729. United States Department
of Agriculture, Forest Service.
McKinsey and Company. 2011. Resource Revolution: Meeting the World’s
Energy, Materials, Food, and Water Needs. McKinsey Global Institute.
____. 2013. Rethinking Infrastructure: An Investor’s view. McKinsey
Global Institute.
Muller, M. 2003. Water 2003: What Should Be Done: Lessons from
Johannesburg and Pointers to the Future. South Africa: Department
of Water Affairs and Forestry.
2012. Environmental Outlook to 2050: The Consequences of Inaction.
Paris: OECD Publishing.
____. 2011. Strategic Financial Planning for WSS at National or Regional
Level – The FEASIBLE Tool. In Meeting the Challenge of Financing
Water and Sanitation: Tools and Approaches. Paris: Organisation for
Economic Co-operation.
ODI. 2005. Water and GATS: Lots of Smoke But Where Exactly is the
Fire? Briefing papers. December. London: Overseas Development
Institute.
Rodriguez, D. J., C. van den Berg, and A. McMahon. 2012. Investing in
Water Infrastructure: Capital, Operations, and Maintenance. Water
papers. Washington, DC: The World Bank.
Speight V. L. 2015. Innovation in the Water Industry: Barriers and
Opportunities for US and UK Utilities. WIREs Water 2015.
Tébar Less, C., and S. McMillan. 2005. Achieving the Successful Transfer
of Environmentally Sound Technologies: Trade-Related Aspects.
OECD Working Papers No. 2005/02. Paris: OECD Publishing.
Wichelns, D. 2015. Virtual Water and Water Footprints: Overreaching
into the Discourse on Sustainability, Efficiency, and Equity. Water
Alternatives 8(3): 396–414.
World Bank. 2016. High and Dry: Climate Change, Water, and the
Economy. Washington, DC: The World Bank.
World Trade Organization (WTO). 1998. Environmental Services.
Background Note by the Secretariat Council for Trade in Services
S/C/W/46. Geneva, Switzerland.
13
Trade, Labeling,
and Food Safety
Norbert Wilson
13.1 Introduction
The economics literature has developed theoretically founded and
empirically supported analysis that suggests that international trade
is an engine of economic growth globally (Anderson and Martin 2005;
Bhagwati and Srinivasan 2002; Dollar and Kraay 2004; Maertens and
Swinnen 2009). Further, the analysis makes the point that impediments
to free trade are impediments to the predicted growth and welfare
benefits. Several of the Sustainable Development Goals (SDGs) suggest
that improving well-being is achievable through trade. In particular, SDG
8 (Promote inclusive and sustainable economic growth, employment,
and decent work for all) and SDG 12 (Ensure sustainable consumption
and production patterns) can be supported by the free flow of goods
and services internationally, which encourages efficient production and
expansion of consumption.
13.2 Trade Effects of Nontariff Barriers

After the signing of the Uruguay Round of the World Trade Organization
(WTO), particularly the Agreement on Agriculture, concerns arose
that codified globalization would lead to a race to the bottom in terms
of safety and environmental concerns (Young 2003). However, Vogel
(1995) argues that under certain conditions trade could lead to an
improvement (“trading up”) in these areas because of the exchange (cf.
Hart 2007; Maertens and Swinnen 2009; Murphy, Levidow, and Carr
2006; Shepherd and Wilson 2013; Swinnen and Vandemoortele 2011;
Swinnen et al. 2015; and Young 2003). Further, the economics literature
317
suggests that these standards1 can enhance trade. Given improvements

to consumer welfare, the net effect of standards can be beneficial
(Beghin, Disdier, and Marette 2013; Beghin et al. 2013; Disdier and
Marette 2010; Swinnen and Vandemoortele 2011; Swinnen et al. 2015;
and van Tongeren et al. 2010).
Researchers also express concerns that nontariff barriers (NTBs),
such as labels and food safety regulations, which may be used to trade
up, would rise and limit trade and limit the welfare-enhancing benefits
of freer trade (Henson 2007; Henson, Masakure, and Cranfield 2011;
Wilson and Anton 2006). In particular, the thought has been that these
NTBs would limit developed countries and, in some instances, lead
to even greater harm for exports of developing countries compared
with developed countries (Otsuki, Wilson, and Sewadeh 2001a;
Otsuki, Wilson, and Sewadeh 2001b; cf. Shepherd and Wilson 2013;
Tran, Wilson, and Anders 2012; Tran, Nguyen, and Wilson 2014). A
challenge of these regulations centers on the question of when these
policies are implemented to protect domestic producers or to enhance
trade. Further, if the intent of the policies is appropriate, differences in
perspective of expectations of quality, safety, and risk tolerance shape
what level of information, ethical concern, or food safety requirements
is appropriate between countries. However, Swinnen et al. (2015)
suggest that the intent of the policy may not matter; rather, the context
of the standards (political factors, producer costs, consumer demand
conditions, etc.) may shape the effect of the standard more. Given that
the SDGs are achievable, the potential negative effects of labeling and
food safety regulations, as with other NTBs, would need managing so as
not to limit trade in a distortionary fashion. In this chapter, I will lay out
the effects of labels and food safety regulations on international trade,
especially for developing countries.
A prima facie argument is that the intent of the regulation (food
safety, consumer information, protectionism, etc.) does not matter
for regulations that limit the ability of developing countries to
trade. Regardless of the validity of the reason for standards and the
beneficiaries, trade policies that limit the ability of producers to benefit
from trade lower growth and development of the exporting countries,
particularly exporters in a developing country. Over time, however, the
intent of the regulation can matter. Food safety regulations, created to
prevent the trade of products with pathogens or excessive chemical
residues, will shore up markets and potentially enhance welfare or the
1
I use the terms “standards” and “regulations” interchangeably in this chapter.
However, in some texts authors may use the term “standard” to suggest a voluntary
rule and a “regulation” as obligatory.
Trade, Labeling, and Food Safety 319
demand for the product. Multiple researchers make the case that a food
safety standard can lead to more stringent standards, but other factors
can affect the outcome such as the preferences of consumers of risk
(Beghin et al. 2013; Disdier and Marette 2010; Fulponi 2006; Henson
2007; Swinnen et al. 2015; and van Tongeren et al. 2010). Similarly, a label
that reflects production practices that are consistent with consumer
values or ideas concerning organics or animal welfare may also support
consumption of the product and yield premiums for the producers.
Further, these policies can enhance the productive capacities of the
developing country producers by rationalizing production, enhancing
efficiencies, or contributing to producer welfare. In these cases, we
see “win–win” regulations—consumers, not just those in developed
countries, obtain their consumption goals, and producers in exporting
countries attain the economic benefit of selling products in valuable
global markets.
Beyond the idea of trading up and win–win regulations, much of
the analysis in the trade and development literature have tended to
look at regulations imposed by governments as either beneficial to the
consumers in the importing country or harmful to the producers in
the exporting country. However, a tertiary literature suggests that the
effects depend on a number of mitigating factors. Further, a burgeoning
literature on private standards follows a similar pattern. Thus, a critical
assessment of the regulatory environment may prompt a careful
weighting of the goals of regulations in light of the efforts to use trade as
a means to achieve the SDGs.
13.3 Labels and Food Safety Defined

To begin this discussion, the parameters for this chapter of labels and
food safety need explanation. Jansen and de Faria (2002) argue that
labels fall into one of two functional areas: (i) to give information on
aspects of the product, or (ii) to provide a minimum standard of quality
of the product. An example of information labels is consumer-facing
labels that indicate the nutrients and ingredients in a product. These
labels are usually incontrovertible and required. Following the second
label type, a product is (or is not) organic, dolphin-safe, ecologically
friendly, etc. by the presence (or lack) of the label. The presence of
these labels may reflect gradients of compliance or adherence. For
example, organic labeling in the United States indicates “100% organic,”
“organic,” or “Made with organic [a named specific ingredient]” (USDA
Agricultural Marketing Service 2016). Typically, though, these quality
labels are binary: the product is certified “Rainforest Alliance” or not.
These quality labels may not be required, but the presence of these
labels suggests a range of qualities in the marketplace.
Safety, in the realm of food, is not readily detectable to the consumer.
As a credence trait, consumers assume the safety of the product, and that
assumption rests upon the regulatory institutions within and between
countries. The safety of the product is often determined through science.
However, societies often observe the science of food safety through the
cultural lens of the permissible levels of risk and uncertainty, as seen
in the case of genetically modified organisms globally. Food safety
and labeling often do not intersect because products have labels,
which state that one product is safe and another is unsafe. The case of
genetically modified products is one where the lines of safety, quality,
and consumers’ right to know begin to blur.
In cases like these, controversies abound, but as suggested earlier,
nations have a cultural understanding of safety and the extent of
acceptable safety. Similarly, different consumers demand differing
levels of production methods, desired qualities based on values, even the
requisite amount of information, as seen with labels. These differences
and the attendant ambiguity of the means and motivations for safety
and information lead to conflicts in international trade. The lack of
careful consideration and transnational dialogue can limit the ability of
countries to gain the most from international trade.
13.4 World Trade Organization, Labels,

and Food Safety
Under the WTO, the Agreement on Technical Barriers to Trade (TBT
Agreement) and the Agreement on the Application of Sanitary and
Phytosanitary Measures (SPS Agreement) are the two mechanisms
that provide the rules for nations to implement labels and food safety
regulations in trade. Before these agreements, the General Agreement
on Tariffs and Trade (GATT) had limited scope to address issues related
to labels. Article XI indicates that limits to most favored nations are
possible for traded goods to follow standards and regulations. Article
XX(b) states that measures are permissible to protect the health and
life of humans, animals, and plants as long as the measures are not
veiled attempts of protectionism. At the end of the Tokyo Round in
1979, GATT member countries agreed to the TBT Agreement, which
established principles to guide the implementation of labels and other
trade restrictions for the protection of health and life and the broader
environment (Wilson 2003). Member countries revised the TBT
Agreement at the end of the Uruguay Round in 1994.
The advent of the SPS Agreement coincides with the Agreement

on Agriculture at the conclusion of the 1994 Uruguay Round. The
SPS Agreement builds on Article XX(b) of the GATT and the TBT
Agreement by addressing specifically protection of humans and animals
from food-borne illness and other harmful substances found in food or
feed. Further, the SPS Agreement extends protection from the spread
of disease, pests, or organisms that could spread such diseases or pests.
Based on the science of risk assessment, nations have the freedom
“to provide the level of health protection it deems appropriate, but to
ensure that these sovereign rights are not misused for protectionist
purposes and do not result in unnecessary barriers to trade” (World
Trade Organization 1998).
To help promote trade, the TBT Agreement and the SPS Agreement
share some common principles of harmonization, equivalence,
and transparency. Harmonization is to encourage nations to adopt
internationally common standards. To this effect, the agreements
recognize explicitly international standard-setting organizations such
as Codex Alimentarius for food safety; International Office of Epizootics
for animal health; International Plant Protection Convention for plant
health; and International Organization of Standards for standards
across all products. Equivalence is the recognition that different
policies may achieve the same outcome; thus, trading partners
should recognize and accept each other’s regulations. Transparency
encourages nations to notify new policies and to allow for public
review of the policies.
13.5 The Evolution of the Technical Barriers

to Trade Agreement and the Application of
Sanitary and Phytosanitary Measures
These principles should help nations overcome the trade restrictiveness
of NTBs. Of the principles that can be observed, the number of
notifications reported over time and by country type can serve as a
proxy measure of transparency. As seen in Figure 13.1, the number of
TBT notifications increased from nearly 500 in 1995 to over 2,000 in
2014. This fourfold increase may be a sign of greater protectionism.
Walkenhorst (2003), however, argues that increases in the number of
notifications may reflect an increase in trade or increased awareness by
countries of the importance of transparency. The process of notifying
new and revised TBTs encourages discussion of the proposed TBTs
and gives trade partners the opportunity to discuss and potentially
encourage the adjustment of the TBTs.
Figure 13.1 Total Technical Barriers to Trade

Notifications, 1995–2015
2,500
2,000
1,500
1,000
500
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
New Notifications Revisions Addenda and Corrigenda
Source: World Trade Organization (2016).
Figure 13.2 New Notifications by Development

Status, 1995–2015
1,400
1,200
1,000
800
600
400
200
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Developed members Developing members Least-developed members

As seen in Figure 13.2, developed countries made the most notifications

from 1995 to 2000. After that period, developing countries notified over
three times as many TBT notifications as developed countries. Developed
countries kept a steady flow of notifications, at around 200 notifications a
year. Least developed members of the WTO have been slow to contribute
to the notifications. The great expansion of notifications by developing
countries suggests a counter-narrative to the one of developed countries
imposing NTBs on developing countries. However, from 1995 to 2015,
the top-five notifying countries in order are the United States, Brazil, the
European Union, the People’s Republic of China, and Israel (World Trade
Organization 2016). Of course, these data only reflect those countries
that notify. Underreporting is possible. Nevertheless, the implication of
these data is that, on a per country basis, developed countries generate
the largest number of new TBTs, and the large number of developing
countries, which provide fewer TBT notifications per country, is the
reason for the substantial increase in TBTs.
Another important measure of the effects of TBTs on trade is the
number of disputes initiated at the WTO. As seen in Table 13.1, in the
first half of the data set, countries brought 33 cases before the Dispute
Settlement Panel. That number fell by 42.4% in the second half of the
Table 13.1 Technical Barriers to Trade and Sanitary and

Phytosanitary Disputes Raised at the World Trade Organization
Developing Developing Developed Developed
Country Country Country Country
Complainant Complainant Complainant Complainant
and and and and
Number of Developing Developed Developing Developed
Disputes Country Country Country Country
Raised Respondent Respondent Respondent Respondent
Dispute Year Number %
TBT 1995– 33 6.06 27.27 24.24 42.42

2005
2006– 19 21.05 47.37 5.26 26.32
2016
SPS 1995– 30 10.00 16.67 23.33 50.00
2005
2006– 14 14.29 35.71 28.57 21.43
2016
SPS = sanitary and phytosanitary, TBT = technical barriers to trade.
Source: Author.
data set. The high number of disputes brought in the first half could be
the result of the revision of the TBT Agreement in 1994, and nations
perceived that they had stronger grounds to bring a case against another
WTO member. Another explanation is that member countries have
resolved many core differences, and the principle of transparency has
improved communication so that fewer disputes occurred. In support
of this point is the decline in the number of disputes. That decline
coupled with the increase in the number of notifications suggests that
the transparency and dialogue may have lowered possible conflicts
from TBTs.
An important change occurred in the relative share of disputes
brought before the Dispute Settlement Panel from developing countries
as compared with developed countries. From 1995 to 2005, developing
countries brought nearly 33% of the TBT disputes, and developed
countries brought nearly 66% of the disputes. This relationship inverted
in the second half of the data. From 2006 to 2016, developing countries
brought over 68% of TBT disputes, and developed countries brought
only 32% of the disputes. The reversal in relative shares suggests that
initially developed countries used the mechanism to address long-
standing conflicts. The increase in the share of developing countries
bringing disputes suggests a shift in focus of developing countries and
commitment to address challenges that they faced particularly from
developed countries. These findings suggest that the WTO created a
path for countries to identify and resolve TBT issues. While TBT issues
such as labels have not disappeared, the facility in the WTO to discuss
and resolve trade conflicts may have been beneficial for member states.
The evolution of SPS is similar to TBT. Since its inception, the
number of SPS notifications increased from 200 in 1995 to over 1,600
in 2014 (see Figure 13.3). Beginning in 2008, developing countries
contributed over 50% of SPS notifications (see Figure 13.4). Similar to
the TBT notifications, the increase in SPS notifications is associated
with a decline in the number of SPS disputes from 1995–2005 to 2006–
2016. Thus, WTO members may not find the new SPS regulations overly
burdensome. The relative share of SPS disputes increased for developing
countries from 26% to nearly 50%. These findings suggest that SPS and
TBT regulations are not growing in restrictiveness and potentially are
weakening. The concern that developed countries are using mechanisms
such as the TBT and SPS agreements as tools of protectionism against
developing countries does not seem to hold. Collectively, the previously
discussed standards that fall under the aegis of the SPS and the TBT
agreements are public standards as national governments create and
enforce these standards.
Figure 13.3 Notifications Submitted per Year
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
9/15/2015
Regular notifications Addenda/Corrigenda Emergency notification
Figure 13.4 Share of Total Notifications Submitted

by Developing Country Members (including Least
Developed Countries)(%)
100
90
80
70
60
50
40
30
20
10
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
9/15/2015

13.6 Public Standards

A number of studies have suggested that these public standards may
have a negative effect on trade. Two of the earliest studies of the effects
of regulations, specifically food safety, on developing countries center
on peanuts and aflatoxin (Otsuki, Wilson, and Sewadeh 2001a; Otsuki,
Wilson, and Sewadeh 2001b). This literature prompted a number of
studies that use a similar method—the gravity model2 (Czubala, Shepherd,
and Wilson 2009; Disdier, Fontagne, and Mimouni 2008; Disdier and
Fontagne 2009; Disdier and Marette 2010; Drogue and DeMaria 2012;
Shepherd 2007; Shepherd and Wilson 2013; Tran, Wilson, and Anders
2012; Tran, Nguyen, and Wilson 2014; Wieck, Schluter, and Britz 2012;
Wilson and Otsuki 2003; and Xiong and Beghin 2014, among others).
Much of this literature suggests that rising standards lower the value
of trade, and that developing countries, in particular, are hurt by these
standards. However, the later literature began to question the negative
effect of standards. In particular, researchers using new techniques to
address zero trade, distinguish between intensive and extensive margins,
and address other technical issues (Helpman, Melitz, and Rubinstein
2008; Santos Silva and Tenreyro 2006). The findings based on the new
techniques began to show that new standards may have positive or no
effect (Shepherd and Wilson 2013; Xiong and Beghin 2014) or that even
if standards have negative effects the overall effect in terms of welfare
could be positive (Disdier and Marette 2010). Further, researchers
found evidence that some countries were able to use the SPS regulations
as a competitive tool and a way to reap the higher returns associated
with safer products (Henson and Jaffee 2008; Neeliah, Neeliah, and
Goburdhun 2013).
13.7 Private Standards

Concern has grown in the literature and policy circles about the presence
of private standards, such as those created by retailers like the British
Retail Consortium and EurepGAP, which became GlobalGAP (Good
Agricultural Practices), and civil society organizations such as Marine
Stewardship Council, among others. Fulponi (2006) argues that private
groups are leading forces shaping international standards on food ethics,
quality, and safety. Many researchers suggest that the standards from
2
Some of these papers assess the effects of public and private standards, which
I discuss in the next section.
private groups can be more stringent than the standards that national
governments set (Fulponi 2006; Henson 2007; Henson and Jaffee
2008; Swinnen et al. 2015). The reason for the increased stringency is
to establish or extend the reputation of the firms to gain a competitive
edge over other firms (Fulponi 2006; Swinnen et al. 2015).
With the higher standards, producers face higher compliance costs.
As a result, researchers have suggested that private standards may
create market distortions and leave small-scale producers in developing
countries out of profitable markets. If the standards ultimately encourage
cost reductions managed through economies of scale, they can favor
larger exporters and producers (Henson 2007; Tran et al. 2013). Thus,
these smaller firms may exit the supply chain; however, the private
standards may incentivize improvements in production practices
(Fulponi 2006; Swinnen et al. 2015). During the development of this
literature, Henson (2007) suggested the need for empirical research of
the effects of private standards.
As noted by Minten et al. (2009) and Maertens and Swinnen
(2009), a number of studies suggested that development of local
and international retail markets may harm small-scale producers
(Delgado 1999; Key and Runsten 1999; Kirsten and Sartorius 2002;
Minot and Ngigi 2010; Reardon and Swinnen 2004; Reardon et al.
2003; Weatherspoon and Reardon 2003). However, a body of literature
based on a series of empirical case studies, has begun to show that the
private standards are not harmful but may in fact contribute to the
development process.
From household level surveys of nearly 10,000 vegetable farmers in
Madagascar, Minten et al. (2009) provide evidence that private standards
improved the well-being of participating farmers. Under the contracts
with Europe-based supermarkets, farmers had to meet a complex set of
quality and phytosanitary standards. In the analysis, researchers found
that farmers had higher welfare, more stable incomes, and shorter lean
times. Further, these farmers gained from the contracts via technology
spillovers and better resource management. Maertens and Swinnen
(2009) and, in a follow-up paper, Colen et al. (2012) critique the literature
of the time for failing to evaluate the effects of high-standard trade on
poverty and welfare. Evaluating a group of vegetable farmers in Senegal,
Maertens, and Swinnen (2009) find that participating in contracts that
required adherence to marketing standards, SPS measures, hygiene
standards, and traceability standards, these farmers increased exports
and experienced higher wages. Through simulations, they show that
poverty would decline. Colen et al. (2012) evaluated the effect of the
participation of Senegal’s farmers in GlobalGAP. They also find increased
wages and longer contracts for poor household members. In both
studies, they find that the structure of production changed: a movement

from smallholder farmers to large, more industrial plantations, which is
a concern raised in the earlier literature.
Henson (2007) acknowledges the restructuring of production
that standards could prompt. However, Colen, Maertens, and Swinnen
(2012) and Maertens and Swinnen (2009) suggest that the movement
away from smallholder production to hired labor on larger industrial
farms is part of the gains for producers. As standards evolve and markets
change, will these new relationships hold into the future? Another area
of concern centers on who has voice and power in the global value
chains under standards. Bergleiter and Meisch (2015) suggest that
shared values between consumers and producers can lower the costs
of standard setting and implementation. Bush and Oosterveer (2015)
assert that private standards, for example, from the Marine Stewardship
Council, not only affect markets and trade, but they may alter the
relationship of the actors in the value chain. These dynamics may
alter the standard, which ultimately affects producers and consumers.
Similarly, Ponte (2008) suggests that politics and local conditions may
mediate standard setting and implementation beyond the dictates
of science. The importance of who has voice and power in the value
chain for setting and controlling standards rests on the fact that these
private standards are outside of the political process. Producers have no
recourse for addressing concerns about private standards, as is the case
for public standards. To this point, Henson (2007) asks, “Should public
authorities concede the governance of global supply chains to private
standards or attempt to rein these in?”
13.8 Conclusion
Standards have an effect on trade. The evolution of literature suggests
an ever changing perception of what these standards are and the
consequences of labels and food safety guidelines. Early in the
implementation of standards, national governments were the main
actors and contributors to these standards. Member countries of the
WTO had the ability to raise the issue of the appropriateness of these
standards. However, a new wave of standards has moved the rule setting
out of the hands of governments, effectively out of the WTO and national
(and supra-national) governments, and into the hands of private firms
and nongovernment organizations. This second wave of standards calls
into question who has the ability to effect change in the value chain and
the standards that intervene in the value chains.
One interpretation of the literature and policy discussion around

standards is that standards will interrupt trade and harm producers
and exporters in developing countries. Much of the early evidence
from the empirical trade literature provides support that the standards
lower trade values. Nevertheless, a new literature finds mixed results,
suggesting that standards may have no effect on or even increase trade.
Further, the development literature provides evidence from case studies
that standards are contributing to economic growth. In contrast, the
literature on global value chains calls into question not the trade effects
of the standards in the short run; rather, the literature critiques the power
relationships between actors along the value chain with implications
that these relationships may shape future development and consumer
well-being.
The upshot of this chapter is that trade can enhance economic growth
and development. Standards, such as labels and food safety regulations,
may contribute to or hamper this growth, which affects the capacity to
attain the relevant SDGs as no consensus holds for the effects of standards.
Part of the reason for the differences in the evaluation is differences
in methods, products under consideration, countries evaluated, and
outcome measures. Despite these differences and the limited scope
for generalizations or direct comparisons, this literature does provide
a frame to evaluate the effects of standards on the development
process. Thus, future analysts and governments can do precise
evaluation of industries, standards under review, outcome measures,
and power relationships to determine the effects of standards on trade
and development.
References*
Anderson, K., and W. Martin. 2005. Agricultural Trade Reform and the
Doha Development Agenda. World Economy 28(9): 1301–1327.
Beghin, J. C., A-C. Disdier, and S. Marette. 2013. The Economics and
Potential Protectionism of Food Safety Standards and Inspections:
An Application to the U.S. Shrimp Market. In Nontariff Measures
with Market Imperfections: Trade and Welfare Implications, edited
by J. C. Beghin. Bingley, United Kingdom: Emerald.
Beghin, J. C., A-C. Disdier, S. Marette, and F. van Tongeren. 2013. A
Cost–Benefit Approach for the Assessment of Nontariff Measures
in International Trade. In Non-Tariff Measures with Market
Imperfections: Trade and Welfare Implications, edited by J. C. Beghin.
Bingley, United Kingdom: Emerald.
Bergleiter, S., and S. Meisch. 2015. Certification Standards for
Aquaculture Products: Bringing Together the Values of Producers
and Consumers in Globalised Organic Food Markets. Journal of
Agricultural & Environmental Ethics 28(3): 553–569. doi: 10.1007/
s10806-015-9531-5.
Bhagwati, J. N., and T. N. Srinivasan. 2002. Trade and Poverty in the
Poor Countries. American Economic Review 92(2): 180–183.
Bush, S. R., and P. Oosterveer. 2015. Vertically Differentiating
Environmental Standards: The Case of the Marine Stewardship
Council. Sustainability 7(2): 1861–1883. doi: 10.3390/su7021861.
Colen, L., M. Maertens, and J. Swinnen. 2012. Private Standards, Trade
and Poverty: Globalgap and Horticultural Employment in Senegal.
World Economy 35(8): 1073–1088.
Czubala, W., B. Shepherd, and J. S. Wilson. 2009. Help or Hindrance?
The Impact of Harmonised Standards on African Exports. Journal
of African Economies 18(5): 711–744.
Delgado, C. L. 1999. Sources of Growth in Smallholder Agriculture in
Sub-Saharan Africa: The Role of Vertical Integration of Smallholders
with Processors and Marketers of High Value-Added Items. Agrekon
38(Special May): 165–189.
Disdier, A-C., and L. Fontagne. 2009. Trade Impact of European
Measures on Gmos Condemned by the WTO Panel. CEPII Research
Center Working Papers. Paris: Centre d’Études Prospectives et
d’Informations Internationales.
Disdier, A-C., and S. Marette. 2010. The Combination of Gravity and
Welfare Approaches for Evaluating Nontariff Measures. American
Journal of Agricultural Economics 92(3): 713–726.
*
The Asian Development Bank refers to “Vietnam” as Viet Nam.
Disdier, A-C., L. Fontagne, and M. Mimouni. 2008. The Impact of

Regulations on Agricultural Trade: Evidence from the SPS and TBT
Agreements. American Journal of Agricultural Economics 90(2):
336–350.
Dollar, D., and A. Kraay. 2004. Trade, Growth, and Poverty. Economic
Journal 114(493): F22–F49.
Drogue, S., and F. DeMaria. 2012. Pesticide Residues and Trade, the
Apple of Discord? Food Policy 37(6): 641–649.
Fulponi, L. 2006. Private Voluntary Standards in the Food System: The
Perspective of Major Food Retailers in OECD Countries. Food Policy
31(1): 1–13.
Hart, M. 2007. Trading Up: The Prospect of Greater Regulatory
Convergence in North America. Vol. Estudios y Perspectivas. Mexico
City: International Trade and Industry Unit México, D. F., Sede
Subregional de la CEPAL en México.
Helpman, E., M. Melitz, and Y. Rubinstein. 2008. Estimating Trade
Flows: Trading Partners and Trading Volumes. The Quarterly
Journal of Economics 73(2): 441–487.
Henson, S. 2007. The Role of Public and Private Standards in Regulating
International Food Markets. Journal of International Agricultural
Trade and Development 4(1): 63–81.
Henson, S., and S. Jaffee. 2008. Understanding Developing Country
Strategic Responses to the Enhancement of Food Safety Standards.
World Economy 31(4): 548–568.
Henson, S., O. Masakure, and J. Cranfield. 2011. Do Fresh Produce
Exporters in Sub-Saharan Africa Benefit from Globalgap
Certification? World Development 39(3): 375–386.
Jansen, M., and A. L. de Faria. 2002. Product Labeling, Quality and
International Trade Vol. 2002–01. Geneva, Switzerland: World
Trade Organization.
Key, N., and D. Runsten. 1999. Contract Farming, Smallholders, and Rural
Development in Latin America: The Organization of Agroprocessing
Firms and the Scale of Outgrower Production. World Development
(Oxford) 27(2): 381–401.
Kirsten, J., and K. Sartorius. 2002. Linking Agribusiness and Small-
Scale Farmers in Developing Countries: Is There a New Role for
Contract Farming? Development Southern Africa 19(4): 503–529.
doi: 10.1080/0376835022000019428.
Maertens, M., and J. F. M. Swinnen. 2009. Trade, Standards, and Poverty:
Evidence from Senegal. World Development 37(1): 161–178.
Minot, N., and M. Ngigi. 2010. Are Horticultural Exports a Replicable
Success Story? Evidence from Kenya and Cote d’Ivoire. In Successes
in African Agriculture: Lessons for the Future, edited by S. Haggblade
and P. B. R. Hazell. Published for the International Food Policy

Research Institute. Baltimore, MD: Johns Hopkins University Press.
Minten, B., L. Randrianarison, and J. F. M. Swinnen. 2009. Global
Retail Chains and Poor Farmers: Evidence from Madagascar.
World Development 37(11): 1728–41. http://dx.doi.org/10.1016
/j.worlddev.2008.08.024 (accessed 30 January 2017).
Murphy, J., L. Levidow, and S. Carr. 2006. Regulatory Standards for
Environmental Risks: Understanding the US–European Union
Conflict over Genetically Modified Crops. Social Studies of Science
36(1): 133–160. doi: 10.1177/0306312705054591.
Neeliah, S. A., H. Neeliah, and D. Goburdhun. 2013. Assessing the
Relevance of EU SPS Measures to the Food Export Sector: Evidence
from a Developing Agro-Food Exporting Country. Food Policy 41:
53–62.
Otsuki, T., J. S. Wilson, and M. Sewadeh. 2001a. What Price Precaution?
European Harmonisation of Aflatoxin Regulations and African
Groundnut Exports. European Review of Agricultural Economics
28(3): 263–283.
____. 2001b. Saving Two in a Billion: Quantifying the Trade Effect of
European Food Safety Standards on African Exports. Food Policy
26(5): 495–514.
Ponte, S. 2008. Greener Than Thou: The Political Economy of Fish
Ecolabeling and Its Local Manifestations in South Africa. World
Development 36(1): 159–175. doi: 10.1016/j.worlddev.2007.02.014.
Reardon, T., and J. F. M. Swinnen. 2004. Agrifood Sector Liberalisation
and the Rise of Supermarkets in Former State-Controlled
Economies: A Comparative Overview. Development Policy Review
22(5): 515–523. doi: 10.1111/j.1467-7679.2004.00263.x.
Reardon, T., C. P. Timmer, C. B. Barrett, and J. Berdegué. 2003. The
Rise of Supermarkets in Africa, Asia, and Latin America. American
Santos Silva, J. M. C., and S. Tenreyro. 2006. The Log of Gravity. Review
of Economics and Statistics 88(4): 641–658.
Shepherd, B. 2007. Product Standards, Harmonization, and Trade:
Evidence from the Extensive Margin. Policy Research Working
Paper. Washington, DC: World Bank.
Shepherd, B., and N. L. W. Wilson. 2013. Product Standards and
Developing Country Agricultural Exports: The Case of the European
Union. Food Policy 42(0): 1–10.
Swinnen, J. F. M., and T. Vandemoortele. 2011. Trade and the Political
Economy of Food Standards. Journal of Agricultural Economics
62(2): 259–280. doi: 10.1111/j.1477-9552.2011.00294.x.
Swinnen, J., K. Deconinck, T. Vandemoortele, and A. Vandeplas. 2015.
Quality Standards, Value Chains, and International Development:
Economic and Political Theory. Cambridge, United Kingdom:

Cambridge University Press.
Tran, N., A. Nguyen, and N. L. W. Wilson. 2014. The Differential Effects
of Food Safety Regulations on Animal Products Trade: The Case of
Crustacean Product Trade. Agribusiness 30(1): 31–45.
Tran, N., C. Bailey, N. Wilson, and M. Phillips. 2013. Governance of
Global Value Chains in Response to Food Safety and Certification
Standards: The Case of Shrimp from Vietnam. World Development
45: 325–336.
Tran, N., N. L. W. Wilson, and S. Anders. 2012. Standard Harmonization
as Chasing Zero (Tolerance Limits): The Impact of Veterinary Drug
Residue Standards on Crustacean Imports in the EU, Japan, and
North America. American Journal of Agricultural Economics 94(2):
496–502.
USDA Agricultural Marketing Service. 2016. Organic Labeling Standards.
Washington, DC. https://www.ams.usda.gov/grades-standards
/organic-labeling-standards (accessed 28 July 2016).
Van Tongeren, F., A-C. Disdier, J. Komorowska, S. Marette, and M.
von Lampe. 2010. Case Studies of Costs and Benefits of Non-Tariff
Measures: Cheese, Shrimp and Flowers. OECD Food, Agriculture
and Fisheries Working Papers 28. Paris: Organisation for Economic
Co-operation and Development (OECD), Directorate for Food,
Agriculture and Fisheries.
Vogel, D. 1995. Trading Up: Consumer and Environmental Regulation in a
Global Economy. Cambridge, MA: Harvard University Press.
Walkenhorst, P. 2003. Implementation of the TBT and SPS Agreements.
In The Impact of Regulations on Agro-Food Trade: The Technical
Barriers to Trade (TBT) and Sanitary and Phyosanitary Measures
(SPS) Agreement, edited by W. Jones and P. Walkenhorst. Paris:
OECD.
Weatherspoon, D. D., and T. Reardon. 2003. The Rise of Supermarkets
in Africa: Implications for Agrifood Systems and the Rural Poor.
Development Policy Review 21(3): 333–356.
Wieck, C., S. W. Schluter, and W. Britz. 2012. Assessment of the Impact
of Avian Influenza-Related Regulatory Policies on Poultry Meat
Trade and Welfare. World Economy 35(8): 1037–1052.
Wilson, J. S., and T. Otsuki. 2003. Food Safety and Trade: Winners and
Losers in a Non-Harmonized World. Journal of Economic Integration
18(2): 266–287.
Wilson, N. L. W. 2003. Clarifying the Alphabet Soup of the TBT and the
SPS in the WTO. Drake Journal of Agricultural Law 8: 703–724.
Wilson, N. L. W., and J. Anton. 2006. Combining Risk Assessment and
Economics in Managing a Sanitary-Phytosanitary Risk. American
World Trade Organization. 1998. Understanding the WTO Agreement

on Sanitary and Phytosanitary Measures. Sanitary and Phytosanitary
Measures: Introduction. Geneva. https://www.wto.org/english
/tratop_e/sps_e/spsund_e.htm (accessed 10 September 2003).
____. 2015. Overview Regarding the Level of Implementation of the
Transparency Provisions of the SPS Agreement Revision Congress.
G/SPS/GEN/804/Rev. 8.
____. 2016. Twenty-First Annual Review of the Implementation and
Operation of the TBT Agreement: Note by the Secretariat Revision
Congress. G/TBT/38/Rev.1.
Xiong, B., and J. Beghin. 2014. Disentangling Demand-Enhancing and
Trade-Cost Effects of Maximum Residue Regulations. Economic
Inquiry 52(3): 1190–1203.
Young, A. R. 2003. Political Transfer and “Trading Up”? Transatlantic
Trade in Genetically Modified Food and U.S. Politics. World Politics
55(4): 457–484.
PART III
Education and Health
14
Trade in Education Services
and the SDGs
Aik Hoe Lim, Pamela Apaza, and Alin Horj
14.1 Introduction
Trade in education services can play a key role toward achieving the
Sustainable Development Goals (SDGs) of ensuring inclusive and quality
education and promoting lifelong learning, which in turn is linked to
other goals on reducing poverty and promoting economic growth and
decent work. The SDGs put in focus the importance of balancing, on
the one hand, universal access to and quality in education and, on
the other, the need for open markets to ensure more investment and
education opportunities. Education is also an overarching goal, which
is included in the SDGs on health, growth, and employment; sustainable
consumption and production; and climate change. While the Millennium
Development Goals mentioned primary education only, the SDGs refer
also to technical, vocational, and tertiary education, including university
(referred to as “higher education” in this paper). Although trade has
the potential to provide more education opportunities at all levels, this
paper focuses on higher education. This is an area where international
trade can contribute the most, given the important structural changes
that have taken place globally.
The first part of the chapter focuses on the main trends in the sector
and how these have spurred reforms in education systems, especially the
provision of higher education services. These factors include demand-
side factorsǇ (e.g., demographic changes), supply-side factors (e.g.,
reforms in government funding and changes in investment flows), as
well as other factors such as technological developments and new global
patterns of production. Many developing countries are experiencing
a youth explosion and facing the challenge of integrating their young
into the labor market. There is also an increasing need for governments
to ensure that local skilled labor becomes more competitive in today’s
337
knowledge economy and better integrated into global value chains

(GVCs). In addressing these challenges, education is often cited as a key
factor but many governments also face significant budgetary constraints.
As a result, governments are using a mix of policies allowing private
education services to operate alongside publicly provided services.
Together with these policies, foreign providers are increasingly viewed
as prospective partners.
The second part of the chapter examines the opportunities and
challenges provided by trade agreements in spurring reforms aimed at
liberalizing trade in higher education, while safeguarding domestic policy
objectives. It focuses on the General Agreement on Trade in Services
(GATS) of the World Trade Organization (WTO), but also includes
recent trends in preferential trade agreements (PTAs) to provide an
overview of the international framework governing trade in educational
services. New disciplines on e-commerce relevant to online education
found in the latest PTAs, which may encourage similar initiatives in
the WTO, are also examined. International trade agreements can help
countries attract foreign providers of education services by reducing
barriers to entry, ensuring a level playing field among providers, and
guaranteeing a transparent and predictable regulatory environment.
GATS can also support and complement initiatives aimed at addressing
national and global regulatory challenges such as safeguarding quality
and equity in education, thereby fostering coherence among different
policy objectives and contributing toward the SDGs.
The chapter concludes with some observations on addressing
the challenges and opportunities posed by opening trade in education
services in contributing to the SDGs and the potential role of GATS.
14.2 Main Drivers and Trends in Education

Services
While providing education remains to a large extent the responsibility
of governments, recent developments have paved the way for important
reforms in the higher education sector. At the basic level (primary and
secondary education), the role of governments as both providers and
regulators continues to be more prominent, with a limited role for
international trade. The growing importance of international trade in
higher education services is characterized by demand-side factors (e.g.,
demographic changes), supply-side factors (e.g., reforms in government
funding and changes in foreign direct investment [FDI] flows). Other
factors include technological developments and the rise of GVCs. As a
Trade in Education Services and the SDGs339
country’s comparative advantage is also determined by the availability

of skilled human capital (Bougheas, Kneller, and Riezman 2001),
international trade in education can provide a useful tool for developing
countries to expand their educated workforce and better integrate this
workforce into GVCs. All these factors have required governments
to use a mix of policies to attain education goals. These policies have
introduced more space for private education services, including foreign
ones, to operate alongside publicly provided education services.
14.2.1 Demographic Changes and Other Factors

Shaping the Demand for Higher Education Services
The demand for higher education has expanded rapidly for several
reasons. On the one hand, many developing countries have experienced
a youth explosion over recent years and face the challenge of integrating
large youth populations into labor markets (KPMG International
2013). Having a pool of qualified individuals that can contribute to the
overall competitiveness of the economy is crucial for many economies,
particularly in the developing world. For instance, 11 million young
Africans under the age of 25 are expected to join the labor market every
year for the next 10 years (KPMG International 2013). On the other hand,
some developed economies are faced with a rapidly aging population
due to longevity and lower fertility rates (OECD 2008). Other factors
explaining the increase of global demand for higher education services
include a rapidly growing middle class especially in some developing
and emerging economies, and progress at the secondary level, which
have resulted in an increased number of candidates for higher education.
The large and ever increasing youth population in many developing
countries has put pressure on governments to meet the demand for
education. For example, the number of university-age students across
Africa is predicted to double from 200 million to 400 million by 2045
(University of Oxford 2015). A predominantly young population could be
a boon for economic growth, but only if it has the knowledge and skills
that would allow it to be integrated into the labor market. Countries
experiencing a rapidly aging population face the contrary situation of
labor shortages in certain areas coupled with overcapacity in higher
education services. To deal with excess supply issues, some higher
education institutions have sought to attract foreign students. For instance,
demographic changes have prompted numerous member countries of
the Organisation for Economic Co-operation and Development (OECD)
to reform their higher education systems to allow institutions to attract
more foreign students (University of Oxford 2015). An example is Japan,
which is aging faster than any other economy. Its Global 30 Project aims
to increase the number of foreign students in Japan to 300,000 by 2020

(Burgess et al. 2010). The possibility of students going abroad to obtain
high-quality education is directly linked to the issue of “brain drain,” as
there is often a risk that students may remain abroad to work and stay past
the duration of their courses. This issue, which has been given attention
in policy circles, will be addressed when examining the implications of
the different forms of delivery of trade in education services from the
perspective of SDGs.
There is also a market incentive for secondary graduates to pursue
higher education studies. According to an OECD study, adults who attain
tertiary education are more likely to be employed and earn more than
adults without tertiary education (OECD 2015). Progress at the secondary
level has also resulted in an increased number of candidates for higher
education. According to the United Nations Educational, Scientific and
Cultural Organization (UNESCO), secondary school enrollment grew
at a faster rate than the school-age population between 1970 and 2009
(UNESCO 2011). While enrollment worldwide increased by an average
annual rate of 2.6%, the targeted school-age population grew by 1.4% only
(UNESCO 2011). Globally, the secondary gross enrollment ratio1 rose from
43% to 68% between 1970 and 2009, although the situation varies across
regions.2
Another demand-side factor is the growth of the middle class,
especially in Asia, the largest regional source of international students.
This growth has given rise not only to a higher demand for more quantity,
but also for good quality higher education. The periods of economic
growth in East and Southeast Asia generated a rapidly expanding middle
class at a time when globalization, communications, and business were
augmenting the value of foreign degrees (OECD 2004). Significant
unmet demand among middle class families has been a major driver of
foreign education in countries such as the People’s Republic of China
(PRC), Thailand, and Malaysia (OECD 2004). This has resulted not only
in the movement of Asian students to OECD countries, but also in the
expansion of educational programs and campuses into Asia.
1
The gross enrollment ratio is the ratio of total enrollment, irrespective of age, to the
targeted population. It provides a measure of the capacity of education systems.
2
While in South and West Asia total enrollment at the secondary level increased from
26 million to 136 million, in Africa it increased from 53 million to 62 million only
(UNESCO 2011).
14.2.2 Reforms in Government Funding and Growth

of Private Education Provision
Traditionally, in many countries, the market had no major influence on

higher education as universities were mainly created and subsidized
by the state (Kwiek 2002). However, in recent decades, the role of
private sources of funding has become increasingly prominent. Today,
30% of funding for tertiary institutions arises from private sources,
while the average share of public funding for tertiary institutions in
OECD countries decreased from 69% in 2000 to 64% in 2012 (Kwiek
2002). Tertiary education spending accounts for around 1.5% of gross
domestic product (GDP) on average across OECD countries, although
some countries including Canada, Chile, the Republic of Korea, and
the United States (US) spend between 2.3% and 2.8% of their GDP
on tertiary education. But elsewhere, the picture is mixed. In Liberia,
tertiary education expenditure was only 0.10% of GDP in 2012, while
in Ghana it exceeded 1.10% of GDP. Other countries with large young
populations such as Indonesia and Pakistan also have relatively low
public funding for higher education of around 0.5% of GDP.3 The gap
between limited public supply and unmet demand has created market
opportunities for private education institutions.
Globally, one in three higher education students is in the private
sector, while in Europe the figure is one in seven (The Economist
2015). In some countries like Finland, Austria, and Iceland, the private
sector represents no more than 10% of total tertiary enrollments, but
for others such as Indonesia, the Netherlands, Mexico, and Italy, it is
about 30%. In Asia and the Pacific economies such as the Republic of
Korea and Japan, as well as in Chile, the US, Colombia, and Australia,
the share of private education expense exceeds 55% of the total expense
for education (Figure 14.1). Private spending on higher education has
also increased significantly in countries that have traditionally relied
on public education, such as Hungary (+114%) and Turkey (+97%), as
well as in countries where private education has traditionally played
an important role in the education system, such as the United Kingdom
(UK) (+53.7%) and the US (+13.3%). Conversely, the share of private
spending in education decreased in Austria (–44%), Slovenia (–40%),
Poland (–25.9%), and Chile (–22%).
Private education has also been expanding strongly in Africa, where
the demand for higher education has been increasing in the last years.
3
UNESCO Institute for Statistics. Expenditure on education as % of GDP (from
government sources). http://data.uis.unesco.org/?queryid=181
Figure 14.1 Share of Private Expenditure on Tertiary Educational

Institutions in Selected Economies (2002 and 2012)
90
80
70
60
50
%
40
30
20
10
0
Republic of Korea
Japan1
Chile1, (*)
United States1
Colombia(***)
Australia
New Zealand
Israel (*)
Portugal (*)
Hungary
Canada1,(**)
United Kingdom
Russian Federation(***)
Latvia(***)
Italy
Mexico
Netherlands
Indonesia(***)
Spain
Slovak Republic1
Poland{
Estonia(*)
Czech Republic
France
Turkey
Ireland
Germany
Slovenia(*)
Sweden
Belgium
Iceland
Austria
Finland
2002 2012
1 = Post-secondary non-tertiary included in both upper secondary and tertiary education.

(*) = Year of reference 2006 and 2012.
(**) = Year of reference 2005 and 2012.
(***) = Year of reference 2011 and 2012.
Source: Organisation for Economic Co-operation and Development. Education at a Glance Indicators, 2002,
2005, 2006, 2011, 2012.
For example, in sub-Saharan Africa, the growth of public universities

has been outpaced by the rate of growth in the private sector in recent
decades. Between 1990 and 2007, the number of private universities and
colleges, including for-profit and not-for-profit institutions, increased
from 24 to more than 468. More than 53% are found in Francophone
countries such as Senegal (41 institutions) and the Democratic Republic
of Congo (39), while 34% are in Anglophone countries, particularly in
South Africa where there are 79 private universities (Havergal 2015).
Data on private education is however not systematically collected for
many African countries.
The growth of private education in Africa has to be kept in context.
The majority of private institutions tend to be small and have fewer than
1,000 students. They cannot be easily compared with public universities,
which still remain the main provider of higher education. Tuition fee
levels in public universities are very low, while those in private sector
institutions can amount to several multiples of average incomes. In
Tanzania, for example, they can reach $8,000 per year as compared with
its GDP per capita of only $998.
One of the main reasons for the growth of private education in Africa
is that courses offered by the private sector are tailored to the demands
of industries in areas such as business management, accounting,

computer sciences, and economics (Havergal 2015). Many private
universities have introduced curriculum innovations aimed at the local
market, such as entrepreneurship training. At the same time, the quality
of many private universities has been a source of concern as they tend
to offer courses that require limited infrastructure investment and are
cheaper to deliver. According to the World Bank, this trend of rising
private universities has to be accompanied by higher-quality education
to provide the knowledge and skills needed to boost competitiveness
and growth of African nations (Experton and Fevre 2010).
A related trend has been the increasing involvement of public
universities in other revenue-generating activities. Besides tuition
fees, universities also generate income from research funds, as well as
consulting and research fees (Lim and Saner 2011). This has given rise to
a new generation of government-dependent institutions with commercial
linkages,4 but also greater competition for higher fee-paying international
students, as they do not receive tuition subsidies. Such policies have been
adopted by Australia, New Zealand, the US, and the UK. In this respect,
some exporting countries of higher education services have adopted
nonsubsidized tuition fees for international students. High tuition fees do
not necessarily discourage prospective international students, as there is a
strong perception that it correlates with higher quality and that potential
returns will make the investment worthwhile. This has led several
countries to initiate policies to attract more international students on a
revenue-generating basis and to make international education an explicit
part of their socioeconomic strategy (OECD 2015).
14.2.3 Changes in Foreign Direct Investment Flows
The rising demand for higher education in countries with limited

educational opportunities, especially in emerging markets, has led to
more FDI from US, Australian, and British universities. There are a wide
variety of models with some countries investing in higher education in
the form of wholly owned international branch campuses (IBCs) or
in joint ventures with local education institutions, either for profit or
for nonprofit. There is however very little data on FDI in education,
as this is not a category for which statistics are systematically kept.
Nevertheless, FDI can have an important impact on both the supply of
and demand for education. In terms of supply, while it is not possible to
4
OECD (2009a) defines a government-dependent private institution as one where
more than 50% of funding comes from government sources. A fully independent
private institution receives less than 50%.
disaggregate education services from FDI flows, there are two factors
which are important to consider. First, about two-thirds of investment
is in the services sector. Second, the global FDI stock is very large and
jumped from $636 billion in 1980 to $27 trillion in 2014 (UNCTAD
2015). Taking into account both of these factors, even if FDI in education
services might be a small percentage of total flows, its impact could still
be very significant.
FDI may not only bring in capital, technology, and technical and
managerial skills, but may also contribute to capital accumulation by
increasing the demand for skilled labor. There is also evidence pointing
toward the availability of skilled labor in the host country as a factor in
FDI flows. The availability of local skills has become an important pull
factor of FDI in the process of globalization since the 1990s (Mughal and
Vechiu 2009). For instance, there is a strong correlation between where
US universities are located and where US FDI is headed. But depending
on the type of FDI, the impact on economic growth and human capital
accumulation is different (Beugelsdijk, Smeets, and Zwinkels 2008).
Horizontal rather than vertical FDI seeks to enter and gain market
shares in a new market in the host country and they compete directly
with one another and local firms. It also contributes to the host country’s
technological upgrading and human capital accumulation. Horizontal
FDI currently accounts for a larger share of research and development
(R&D) activities, which are human capital intensive and have positive
spillovers to the local economy (UNCTAD Secretariat 2004). A strong
and positive relationship was found between FDI and human capital
proxied by the level of schooling in 38 developing countries during
1975–2000 (Nunnenkamp 2002). In general, R&D projects in developing
countries have boosted skilled labor demand and increased participation
in higher education (Mughal and Vechiu 2009).
14.2.4 New Information and Communication

Technologies
The advent of new information and communication technologies

(ICT) has significantly influenced the way providers deliver education
services and students learn around the world. Innovations in ICT have
made possible the emergence of new business models in education,
such as distance learning or blended courses that combine traditional
and online instruction. They have the potential to considerably
reduce the delivery cost of education services regardless of location of
students. By aggregating the demand globally, online courses attract
student numbers, which even the largest universities cannot service in
traditional settings (Becker–Lindenthal 2015). They can also be used to
upskill workers in specific areas including new technologies (The Earth

Institute, Columbia University; Ericsson 2016). In addition, ICT can
provide researchers with new tools to facilitate data collection, analysis,
and dissemination (University of Oxford 2015).
A main challenge, however, is ensuring that less-developed
countries have the broadband infrastructure required to benefit from
the use of new ICT in education. Internet access has grown substantially
and, in 2015, 3.2 billion people were online (University of Oxford 2015).
However, only 1 in 10 least developed countries had internet access.
Another challenge is making sure that education institutions and
students can make use of ICT in education. A number of priority areas
for governments include connecting universities to the internet and
mobile broadband, as well as training professors on how to integrate
ICT tools into teaching (University of Oxford 2015).
14.2.5 Rise of Global Value Chains and the Global

Knowledge Economy
Many developing countries are rapidly moving toward high value-added
manufacturing and knowledge intensive industries that are structured
around global value chains (GVCs), which require more technical and
vocational education. With GVCs, production is split into different
phases with various intermediate goods sourced both domestically and
from third countries. Currently, about 60% of global trade accounting
for more than $20 trillion consists of trade in intermediate goods and
services that are incorporated at various stages into the production
process before final consumption (UNCTAD 2013). The rise of GVCs
has produced a new “trade-investment-services-know-how nexus,”
a movement of capital and ideas, and greater demand for services to
coordinate the dispersed production and distribution of goods and
services (OECD 2014). For instance, much of the value of the product
does not only come from manufacturing, but also from associated
services such as software, design, and marketing.
Trade in education services can allow countries to further
participate in GVCs and develop the skills needed to provide various
services, including business services, accountancy, design, and R&D.
There is a directly proportional relationship between the growth rate
of knowledge and the growth rate of the economy. Hence, proper
education policies can be an important factor in developing such
supply-side capacity. It is important and timely to do a thorough
analysis of factors and policy areas where additional policy attention
could be directed to secure entry and to expand and upgrade
participation within GVCs. Figure 14.2 shows the recommendations
Figure 14.2 Key Education Policy Priority Areas for Supporting

Participation in Global Value Chains
Security entry Expanding participation Upgrading within GVCs

to GVCs in GVCs and creating new GVCs
ƷɆ$. Ɇ%*"./0.101.! ƷɆ/+"0Ɇ%*"./0.101.!ƃ ƷɆ1%( %*#Ɇ%**+20%2!ƂɆ

ƷɆ +)!/0%Ɇ.!#1(0+.5Ɇ ! 10%+*Ɇ* Ɇ0.%*%*#Ɇ $1)*ƂɆ* Ɇ˔.)Ɇ
/5/0!)/ 0+Ɇ%*.!/!Ɇ/+.,0%2!Ɇ ,%0(
ƷɆ0. !Ɇ* Ɇ%*2!/0)!*0 ,%05Ɇ+"Ɇ˔.)/Ɇ* Ɇ
(%!.(%60%+* 3+.'!./
ƷɆ0. !Ɇ"%(%00%+* ƷɆ
Ɇ !2!(+,)!*0
GVC = global value chain, ICT = information and communication technology.

Source: United Nations Economic and Social Commission for Asia and the Pacific. 2015. Asia–Pacific
Trade and Investment Report 2015: Supporting Participation in Value Chains. Bangkok.
related to higher education grouped under three objectives. The

recommendations are not exhaustive and would have to fit country-
specific circumstances.
For small and low-income countries to secure entry to GVCs, they
need to upgrade their physical infrastructure, undertake domestic
regulatory reforms, and establish a supportive and coherent trade
and investment framework. But countries also need education and
training to increase the absorptive capacity of firms and workers, as
well as improved education and ICT. For both domestic and foreign
value chains, local producers are often small and medium-sized
enterprises that account for the majority of industrial employment.
They are reportedly constrained in their ability to enter GVCs both
in developed and developing countries due to a lack of adequate
skills in the workforce (UNCTAD 2010). This is often delayed and
inadequately supplied by public training institutions (UNCTAD 2010).
For low-income and developing countries to join GVCs and expand
participation, developing (or importing) the right education and
training for their workforce would increase the capacity of firms to
deliver services and intermediate goods.
In particular, to facilitate participation in GVCs, governments
may need to focus more on technical and vocational education, which
can improve the performance of specific tasks. In a survey carried
out by the United Nations Conference on Trade and Development
(UNCTAD) regarding SMEs’ participation in GVCs, the majority of
case studies revealed a delayed and inadequate response of public

training institutions to new skills development and in some cases
even to basic skills needs (UNCTAD 2010). A technically skilled labor
force is often central to ensuring standards compliance, including
the tracing of foodstuffs, or ensuring that each product run in the
factory meets quality requirements. Without adequate human capital,
developing countries often face bottlenecks in filling key technical
positions to meet the process of upgrading requirements of GVCs
(OECD 2014).
As more countries secure entry to GVCs, expanding and upgrading
participation has become one of the key, if not the most important,
factors determining future economic growth and prospects for
sustainable development. The role of tertiary education in this area is
significant. For instance, in addition to technical competencies, policies
could include the provision of education and training in higher-level
skills, such as languages, and professional qualification (ESCAP 2014).
Participation in GVCs is a dynamic process, and to stay competitive
continual investment in developing human and firm capital is needed.
It is not sufficient to acquire new machines, for example, for technology
transfer to be effective and sustainable; both workers and local engineers
need to have the capacity to absorb new techniques and adapt them to
domestic conditions (ESCAP 2014). Finally, as a new sector emerges, it
is important to create advanced and specialized skills that would not
distort the market and damage the internal dynamism of the private
sector (UNCTAD 2010).
Once participation in GVCs is expanded, governments also need
to manage the interdependencies that come with greater economic
integration. In particular, the social aspects will require special attention.
Enabling GVC development will increasingly require more international
cooperation and coordination in education among governments. As
cross-border education (CBE) can benefit both sending and receiving
countries, aligning educational systems with international standards
is seen widely as a key means of improving the economy’s overall
competitiveness.
14.3 Trade in Education Services and

International Trade Agreements
A wide variety of national policy frameworks exist for the provision
of trade in education services. A host country’s policies toward the
internationalization of higher education play a key role in determining

the scope, form, and depth of transnational education (Zimny 2011).
The level and form that market opening may take will rely on a variety
of policy considerations. While all countries will benefit from more
open trade in education services, countries may have different needs
or priorities. In general, the provision of education is considered the
responsibility of governments. This is particularly the case for primary
and secondary schooling (also called “compulsory education”). While
in most countries public and private providers of basic education
services coexist, the role of international trade has been limited. This is
also reflected in trade agreements, where governments have been less
prone to bind commitments directed to open primary and/or secondary
education to outside competition, as compared with higher education.5
Nonetheless, trade liberalization of higher education services could
have positive spillovers on basic education. One of the SDGs on
education is the substantial increase of qualified teachers by 2030.
Increasing education opportunities in the field of teaching through
the different modes of delivery of higher education services could help
to cope with the shortage of qualified teachers that exists at the basic
level, particularly in less-developed countries. Given the importance of
basic education for sustainable development, the spin-offs of opening
trade in higher education for improving domestic capacity at the basic
level should be considered. As explained below, GATS provides enough
flexibility for governments to open markets according to their own
situation.
While the trends discussed in the first section point toward the
internationalization of education, the role of international trade
agreements and their potential contribution toward the SDGs has barely
been examined. Trade agreements can contribute in several ways. First,
they can facilitate reforms aimed at opening the sector to help meet the
increasing demand for higher education by reducing barriers to entry
and competition. Second, they can help attract FDI and new providers of
education services by ensuring a level playing field among providers as
well as transparency and predictability of education regulations. Third,
trade agreements can spur the accompanying regulations to help reap
the benefits of opening trade in education while safeguarding national
and global policy objectives such as quality and equity in education.
5
Similarly, within the context of GATS, the collective proposal presented in the WTO
Doha negotiations on trade in education services focused on higher education.
14.3.1 Education Services and the General Agreement on

Trade in Services
GATS is the only international agreement dealing with global rules

for services trade including trade in education services. It aims at
progressively liberalizing trade in services as a means of promoting
economic growth and development.6 The agreement seeks to ensure
that services trade is conducted in a predictable and transparent
environment, and without discrimination among services and service
suppliers from different members. This is also known as the most
favored nation (MFN) principle.7 There is no obligation to open
markets under GATS. The agreement recognizes WTO members’
right to regulate the supply of services within their territories to meet
national policy objectives. The combination of the GATS commitments
and properly designed regulations can be used to pursue SDG-related
objectives of increasing access to, quality of, and equity in education
services.
The GATS Modes of Supply and the Different Forms of

Provision of Education Services
GATS defines “trade in services” as the supply of a service through
four modes of supply, which cover virtually all internationally services
transactions. The internationalization of trade in educational services
has resulted in a rich array of providers and ways of delivering
educational services across the globe. Furthermore, advances in ICT
are increasingly allowing the delivery of education services through the
combination of two or more modes of supply at the same time.
Mode 1 (cross-border supply) refers to education services supplied
across the border. It covers international online education, as well as other
forms of delivery that usually involve foreign and domestic providers
such as franchising and twinning arrangements. These forms of delivery
do not require the “presence” of the foreign supplier and are becoming
increasingly popular in the education sector. Mode 2 (consumption
abroad) refers to the situation where the consumer (e.g., student) moves
6
See GATS Preamble, second paragraph.
7
The MFN obligation applies to any measure affecting trade in services in any sector
falling under GATS, irrespective of whether specific commitments have been
undertaken or not. For instance, a member may have chosen not to open the sector
to foreign services and services suppliers. In such a case, according to the MFN
obligation, it cannot subsequently decide to open the market to providers of some
members but not to others. Members could seek exceptions to the MFN obligations
at the time of entry into force of the WTO Agreement (or date of accession). MFN
exceptions specific to education have been listed only on three occasions.
to a foreign country to study. The majority of trade in education services

falls under mode 2. Mode 3 (establishment or investment) takes place
when a foreign education provider establishes a commercial presence
(e.g., a campus) in another territory to supply higher education services.
Mode 4 (temporary presence of natural persons) describes the situation
where a natural person (e.g., teacher or academic) supplies a service
in a foreign territory, for instance, as a self-employed supplier or as an
employee of a foreign university established in a country. Depending on
their policy objectives, governments may decide to prioritize certain
modes of delivery of higher education services taking into consideration
the complementarity that exists among the different modes. The next
section will look at each of these modes of delivery of education services
from the perspective of the SDGs.
Higher Education Services under GATS

As mentioned above, the SDG goals in education refer to technical,
vocational, and tertiary education including university, which are
comprised under the term “higher education” in this paper. In the WTO
Services Sectoral Classification List,8 the subsector of higher education
includes educational services leading to a university degree or equivalent
as well as post-secondary technical and vocational education (not leading
to a university degree).9 Members may depart from such classification
when undertaking commitments in trade in education services according
to their own circumstances. This flexibility is relevant since new providers
and new learning activities do not always easily fit in existing categories.10
In those cases, they are recommended to be sufficiently clear in their
descriptions.
8
The list is used by most WTO members for preparing their schedules of commitments
in trade in services, including education services. It is based on the UN Provisional
Central Product Classification List (CPC), which divides education services into five
subsectors: (i) primary education; (ii) secondary education; (iii) higher education,
comprising post-secondary technical and vocational education (not leading to a
university degree), as well as higher education services leading to a university degree
or equivalent; (iv) adult education (outside the regular education system); and
(v) other education services (not elsewhere classified).
9
Later reviews to the CPC include two separate categories: (i) “post-secondary not
tertiary education” leading to a labor-market relevant qualification, and (ii) “tertiary
education” leading to a university degree or equivalent.
10
The CPC has been later revised more than once to reflect changes in the sector
and the realities of the market such as the entrance of new providers. The main
differences are the distinction made between tertiary and non-tertiary education
(degree and non-degree “higher education”), overlap between adult education and
“other education,” as well as the classification of training and non-instructional
activities. See also WTO. 2010. Education Services, Background Note by the
Secretariat, Council for Trade in Services, document S/C/W/313, 1 April.
The GATS scope of application is broad as it applies to all government

measures “affecting trade in services” in practically all sectors, with two
exclusions. The most relevant to education services relates to services
supplied in the exercise of “governmental authority,” meaning any service
provided “neither on a commercial basis nor in competition” with one or
more services suppliers.11 GATS does not however define “competition”
or “commercial basis.” There is also no unified model of governmental
provision of education services since national traditions and education
systems differ. For some countries, the public sector is the main provider
of education. In others, private education plays a very important role and
both the public and private sector coexist in the delivery of education
services. A similar situation exists for other services sectors that feature
an important public service aspect, such as health services.12
Although the public sector is an important education service
provider, this does not necessarily mean that education is a public good.
Public goods in economic analysis are defined by two characteristics:
(i) non-excludability, and (ii) non-rivalry in consumption. In other
words, individuals cannot be effectively excluded from consuming the
good, and consumption by one individual does not reduce availability
to others. Education does not meet these conditions as it can be made
excludable and there is rivalry in consumption. On the other hand,
education has strong positive externalities and benefits accrue not
only to the individual but to society at large. There are both private
and public benefits from having people consume more education. This
is why the sector does receive significant public investment, but at the
same time the individual is often also expected to share in the costs. The
exact proportion between public and private expenditure can only be
determined on a case-by-case basis, and it may vary among countries
and over time (UNESCO 2012). Under GATS, there is full flexibility to
cater to all situations, from having no sector commitments (in which case
there would not be any market access or national treatment obligations)
to scheduling specific commitments with limitations inscribed. As
discussed below, there are many ways by which specific commitments
can be conditioned to suit national policy objectives.
11
See Article 1.3, subparagraphs (b) and (c). GATS also excludes air transport services
from its scope of application. The agreement does not define the terms “commercial
basis” or “competition.” Some factors that could be taken into consideration when
analyzing whether educational services are provided on a commercial basis or
competition may include (i) the profit or nonprofit nature of the service provided,
(ii) who owns the facilities or infrastructure, and (iii) to what extent education
providers receive government assistance or not.
12
For a discussion of public services, see Adlung, R. 2005. Public Services and the
GATS. WTO Working Paper ERSD 2005-03. Geneva: Economic Research and
Statistics Division.
GATS Flexibilities and the SDGs

One of the issues that might arise in a discussion of the SDGs is whether
there is sufficient flexibility to safeguard non-trade policy objectives
in education. Under GATS, much flexibility has been built into the
agreement. Members determine the sectors and subsectors in which they
want to grant foreign providers market access and national treatment
(nondiscrimination between national and foreign services and services
suppliers). These obligations are undertaken per mode of supply. This
allows governments to tailor bindings according to their own situation
and policy objectives.13
First, members may circumscribe the scope of their commitments
based on a description of the part of the sector they want to commit.
For instance, some members have limited their commitments based on
the source of funding by stating that these apply to “privately funded
education services,”14 while others have limited commitments to
“private education” only.15 Such distinctions have been used because
many national systems involve a mix of public and private providers,
and the member wishes to clearly demarcate the activities for which
market access obligations have been undertaken.16 Second, even when
the sector has been committed, the obligations on market access17
and national treatment18 can still be made subject to limitations. For
instance, some countries have opened their market to foreign providers
of higher education services under mode 3 (commercial presence) but
require IBCs to partner with local institutions through joint ventures.
13
The level of market opening granted is bound in each member’s schedule of specific
commitments for trade in services under GATS (Article XX of GATS). Members may
modify their commitments but only after negotiating with affected members and
subject to compensation (Article XXI of GATS).
14
GATS Schedule of the European Union (Germany).
15
GATS Schedule of Mexico.
16
While public institutions increasingly need to seek private funding and charge
tuition fees, private institutions are sometimes eligible for public funds. Knight,
J. 2006. Higher Education Crossing Borders: A Guide to the Implications of the
General Agreement on Trade in Services (GATS) for Cross-Border Education. Report
prepared for the Commonwealth of Learning and UNESCO. p.22.
17
All measures falling under any of the categories listed under Article XVI: 2 of GATS
must be listed in the market access column, no matter whether such measures are
discriminatory according to the national treatment obligation.
18
The national treatment obligation under Article XVII of GATS requires members to
grant to services and service suppliers of other members treatment no less favorable
than that accorded to its own like services and service suppliers. Unlike Article XVI
(market access), Article XVII of GATS does not include a list of the types of measures
that would constitute limitations on national treatment.
Another example would be scholarships or study loans made available

only to citizens or residents, which shall be listed as national treatment
limitations. Besides, domestic regulations such as approval procedures
or requirements (e.g., minimum capital requirements or accreditation
status) applied as conditions to obtain a license do not need to be listed
if they do not fall under the market access and national treatment
obligations.19 Those requirements are not currently subject to disciplines
on necessity or trade restrictiveness.
Notwithstanding the flexibilities referred to above, education is
one of the sectors that has attracted the lowest level of commitments.
In total, 58 members out of 162 (counting the European Union as one)
have undertaken commitments in education.20 Of these 58 members, 50
have committed in “higher education,” the subsector with the highest
number of commitments. Primary education shows the lowest level
of commitments (after “other education services,” which constitutes
a residual category). Except for acceding members,21 in general,
developing countries have a lower level of commitments in education
services compared with their developed counterparts. Within the
context of the Doha negotiations, there was a collective request for
commitments in the education sector with a focus on private higher
education. However, since the negotiations did not conclude, no new
commitments resulted.
That said, many developing countries have introduced important
reforms in their education systems in recent years, allowing the
entrance of foreign providers of educational services. In reality, market
access conditions for higher education may be much more liberal than
as reflected in trade agreements. Thus, there may be considerable scope
to bind some, if not all, of the reforms through trade commitments,
and to use that as a means to attract investment to achieve the SDGs in
education.
19
Article VI of GATS on domestic regulation.
20
WTO Integrated Trade Intelligence Portal (I-TIP). http://i-tip.wto.org/services
/default.aspx (accessed 2 October 2016).
21
Commitments made by recently acceded members (those that acceded to the WTO
after its establishment in 1995) are particularly high. As a result of accessions, the
sectoral coverage of developing countries and economies in transition is wider than
that of developed members.
14.3.2 The Modes of Supply of Education Services from

the Perspective of the SDGs
The demand for international education is expected to increase from

1.8 million international students to 7.2 million in 2025 (Böhm et al.
2002). While student mobility (mode 2) represented until recently the
main form of supply of international trade in education, recent trends
referred to in section 14.2 have paved the way to new providers and
forms of delivering education services (Table 14.1). While all modes
of delivery can contribute toward realizing the SDGs, each mode has
different implications. For instance, mode 3 (commercial establishment)
offers greater opportunities to enhance quality and capacity in the
sector, as well as to reduce shortages of skilled human resources; while
mode 1 (CBE including distance education) could potentially promote
accessibility at a larger scale in the future, provided minimum levels of
quality are met. Similarly, there are potential drawbacks or challenges
uniquely associated with each mode of supply. From a policy perspective,
the complementary relationship between the different modes of supply
should be kept in mind when designing national education policies and
undertaking commitments for trade in education.
Increasing Education Opportunities Abroad through Student

Mobility (mode 2)
Studying abroad offers advantages such as an international quality
education with worldwide recognition and better career prospects. The
number of students pursuing studies abroad grew from 2 million students in
2000 to 4.1 million in 2013.22 This increase of mobile students suggests that
the growing demand for higher education often exceeds local capacity. The
largest numbers of international students in absolute terms are from the
PRC, India, and the Republic of Korea, with Asian students accounting for
52% of all students abroad.23 The second region with most mobile students
is sub-Saharan Africa, where the number of students abroad increased
from 204,900 in 2003 to 264,774 in 2013 (UNESCO 2012). This region also
faces the greatest challenge in the provision of higher education. While in
the case of Asia, most students went to OECD countries, particularly the
US (19%), the UK (10%), Australia (6%), and France (6%), most students
from Africa decided to study within their region, with South Africa as the
main country of destination (UNESCO 2012).
22
See more at UNESCO. Higher Education. http://www.uis.unesco.org/Education
/Pages/international-student-flow-viz.aspx#sthash.bgEZoTdY.dpuf
23
This group grew from 67,300 in 2003 to 165,542 in 2013, with the outbound mobility
ratio more than doubling from 3.5% to 7.6% (OECD 2011).
Table 14.1 Main Forms of Delivery of Higher Education Services
Main Advantages from Main Issues and

GATS Mode Main Feature SDGs Perspective Potential Drawbacks
Cross-border Program mobility ƷɆ Enhance access and ƷɆ Internet
supply—CBE Examples: study offer at a large/ infrastructure
(mode 1) ƷɆ Franchising global scale (broadband) not
and twinning ƷɆ Promote universal always available
arrangements access (to the extent it ƷɆ Local presence
ƷɆ Online remains affordable) requirements,
education ƷɆ Increase flexibility and restrictions on
availability of study cross-border
programs information
ƷɆ Regulatory
challenge of
ensuring minimum
standards of quality
more prominent
given its cross-
border nature
Consumption Student mobility: ƷɆ Increase education ƷɆ High costs
abroad studying opportunities abroad ƷɆ Often subject
(mode 2) abroad ƷɆ Access to high quality to availability of
education funds/scholarships
ƷɆ Gain international ƷɆ Risk of brain drain
experience ƷɆ Migratory
ƷɆ Promote cultural restrictions
understanding
Commercial Provider/ ƷɆ Attract FDI toward ƷɆ Requires regulatory
presence institution education framework to
(mode 3) mobility: ƷɆ Improve access and attract FDI
Establishment offer locally ƷɆ Capacity to attract
of foreign ƷɆ Improve quality and foreign providers
educational capacity domestically varies among
institutions ƷɆ Develop skilled human countries (e.g.,
including resources depending on
international ƷɆ Reduce brain drain market size)
branch campuses ƷɆ Restrictions on
and joint ventures foreign suppliers,
with local equity participation
institutions
Presence of Academic Increase availability ƷɆ Migratory
natural persons mobility: of qualified teachers restrictions
(mode 4) Teachers, ƷɆ Increase research
lecturers, opportunities
researchers ƷɆ More opportunities for
providing academic exchange
education
services abroad
CBE = cross-border education, FDI = foreign direct investment, GATS = General Agreement on Trade in
Services, SDG = Sustainable Development Goal.
Source: Authors’ chart based on taxonomy developed by the Organisation for Economic Co-operation and
Development and the World Trade Organization Background Note on Education Services.
While the number of mobile students has increased steadily during

the last decade, some may argue that its contribution to improving
access may be limited, particularly compared with other forms of
delivery of education services. Participation in student mobility is
largely self-financed. Studies have shown a correlation between the
level of development of a country and the number of students studying
abroad. Although student mobility also benefits from the availability of
scholarships from different sources,24 this form of funding is unlikely
to be able to keep pace with growing developing country demand for
higher education. To lower costs, one option could be for students to
study in neighboring countries (as it is the case in Africa) provided that
educational services remain affordable in those countries. However, this
makes the unlikely assumption that countries in the region, which are
at the same levels of development and already struggling to meet their
own domestic demand, will have the capacity to meet the expectations
of foreign students.
Studying abroad allows students to gain international exposure
and experience, which may further strengthen their contribution to the
workforce of their home country upon their return. However, capturing
the benefits will also depend on attracting back skilled graduates
and providing opportunities for them to use their new competencies
(Cervantes and Guellec 2002). While the risk of brain drain exists for all
countries, developing countries seem to be more exposed. According to
some estimates, up to a third of R&D professionals from the developing
world are believed to reside in OECD countries (Zimny 2011). For
instance, survey evidence shows that 1990–1991 PhD graduates from
India (79%) and the PRC (88%) were still working in the US in 1995
(Zimny 2011). In practice, only a few governments restrict students from
studying abroad. Indeed, student mobility has the highest percentage
of full commitments in market access under GATS—75% for higher
education. Given the benefits of having citizens educated abroad, the
best course of action may be for developing countries to find other ways
to address the risk of brain drain rather than to curb mobility through
trade restrictions. There are both push and pull factors, including
political instability in the home country or better education and job
prospects in the host country, which may lead to brain drain. Some
countries have adopted special policies to mitigate the risks of brain
drain, such as providing incentive mechanisms to encourage regular
returns home and more research opportunities. In some cases, they have
also developed means of capturing the benefits and know-how of having
24
Scholarships are provided by governments and nongovernment organizations, and
public and private institutions.
highly skilled people overseas, for example, by connecting them to

domestic researchers through scientific networks (Zimny 2011). Indeed,
science and R&D policies are deemed crucial in fostering the return
of skilled migrants. In general, the best prospects may be provided by
the overall country’s situation and better career opportunities. In this
regard, long-term policies aimed at building the domestic innovation
infrastructure and enhancing the business environment are key (Zimny
2011; Experton and Fevre 2010).
Attracting Foreign Direct Investment to Increase Access

Domestically and Develop Skilled Human Resources,
while Enhancing Local Capacity in Education (mode 3)
The number of IBCs25 has grown steadily over the past years, from
82 branch campuses in 2006 to 200 in 2011 (Lawton and Katsomitros
2012). The Observatory on Borderless Higher Education expects the
number to reach 280 by 2020 (Lawton et al. 2013). From the perspective
of the SDGs, the establishment of IBCs offers unique advantages and
spillovers to the host country, which range from increasing local
access and skilled human resources to enhancing quality and capacity
building domestically. In terms of access, IBCs might reduce the
risks of brain drain as the domestic supply of education is improved.
IBCs can also contribute to developing an educated workforce, which
would help countries to be more competitive in the global market.
The main advantage of IBCs compared with other forms of supply
may be the opportunity they offer for building capacity locally and
strengthening the domestic education system (in both public and
private institutions). Spillovers include encouraging the use of new
technologies and curricula, more academic mobility, and further
research opportunities.
Many developing countries have adopted policies aimed at attracting
foreign providers of education services in the past years.26 Those policies
may include incentives provided by governments in the form of capital
and infrastructure, which are made conditional to certain requirements
such as ensuring the quality and relevance of the education services
rendered (e.g., ensuring programs in areas where human resources or
training are needed). As IBCs are mainly revenue-driven and require
25
The Observatory on Borderless Higher Education defines IBCs as an initiative
operated by the institution or through a joint venture in which the institution is a
partner in the name of the foreign institution and where upon successful competition
of the course program, which is fully taken at the unit abroad, students are awarded
a degree from the foreign institution.
26
See also McBurnie and Ziguras (2007).
heavy investment, the existence of a clear regulatory framework in

the host country is crucial to mitigating risks and attracting providers
of high quality education services. The highest numbers of IBCs are in
Asia (the PRC 33, Malaysia 14, and Singapore 14)27 and the Middle East
(United Arab Emirates 48, Qatar 11). The PRC, Malaysia, and Viet Nam
stand out among those countries trying to build capacity in the domestic
private sector or improve quality in the public sector (Bashir 2007).
While developed countries (notably the US, the UK, and Australia)
continue to account for the largest share of all existing IBCs, attracting
around 77% of students worldwide, providers from developing countries
are also starting to establish branch campuses in other countries. These
developing countries are now not only “importers” of higher education
services but also “exporters.” A number of Asian institutions, notably in
India, the PRC, and Malaysia are establishing IBCs in Asia and Africa
(footnote 16). They appear willing to invest in other countries, including
low-income countries, which would normally not attract developed
country investors or providers. Some other developing countries (such
as Singapore, Malaysia, Mauritius, Qatar, and United Arab Emirates)
are also attracting foreign universities to create “regional hubs” for
international students within their region.28 Both strategies constitute
a new trend in international trade of education services (footnote
12). From the perspective of the SDGs, these regional hubs provide
students in less-developed countries with education opportunities with
worldwide recognition at a much-lowered cost.
For the 50 members, which have undertaken commitments in
higher education, the level of full commitments for mode 3 is relatively
low (47%). Members have listed limitations such as quotas to restrict
the number of suppliers, nonuse of subsidies for studying in foreign
institutions established locally, as well as foreign equity capital limits
and discriminatory fiscal measures. The GATS commitments do not
however reflect the actual situation in a number of developing countries
where the sector has been opened and many of the restrictions
mentioned above eliminated. As those traditional barriers are reduced,
regulatory issues are becoming more prominent. The last section will
focus on regulatory challenges affecting trade in education and the
possible role of trade agreements in helping to overcome them.
27
Cross-Border Education Research Team. Branch Campus Listing. Data originally
collected by K. Kinser and J. Lane. http://globalhighered.org/branchcampuses
.php (accessed 3 August 2016).
28
See, for instance, Knight (2010).
Increasing the Supply of Qualified Teachers and Promoting

Academic Mobility (mode 4)
The SDG targets include substantially increasing the supply of qualified
teachers by 2030. Trade liberalization of higher education services could
have positive spillovers. Easing restrictions for education professionals
can contribute to improving the shortage of qualified teachers, a problem
that exists in many developing countries. Mode 4 education commitments
under trade agreements would apply mainly to teachers and academics
traveling to provide education services on a nonpermanent basis, as well
as to managers or staff traveling abroad to set up institutions or franchise
and twinning arrangements (footnote 12). Further, liberalization of mode
4 might also support other forms of education services delivery, such as
by IBCs through commercial presence. Some recent preferential trade
agreements (PTAs) have included specific commitments to facilitate the
mobility of education professionals specifically for those purposes.29 The
mobility of people under mode 4, however, raises sensitive immigration-
related issues. Although intended to be nonpermanent and entitlement
is gained through mode 4, there are often concerns that the persons may
stay on and not return to their home country. Not surprisingly, despite
its potential contribution, mode 4 has attracted the lowest level of
commitments under GATS.
Taking Advantage of Information and Communication

Technology to Increase Education Opportunities through
Cross-Border Education including Distance Education (mode 1)
One of the main aspects of the internationalization of higher education
is the significant growth of CBE due to ICT innovations. Education
models such as franchising and twinning arrangements between foreign
education providers and local institutions, as well as pure distance
learning, have expanded in scope and depth. From the perspective of the
SDGs, CBE can greatly contribute to increase access to higher education
and provide more education opportunities at a lower cost, thereby also
promoting inclusiveness.
Franchising and twinning arrangements30 do not involve the
establishment of the foreign provider, and thus they require less
29
See, for instance, the Trans-Pacific Partnership (TPP)—Annexes on Temporary Entry
for Business Persons of Japan, Malaysia, and Viet Nam.
30
Under franchising arrangements, which may take different forms, the local
institution is authorized to offer whole or part of the foreign provider’s education
program. Twinning allows students to enroll in a foreign institution, but students
undertake part of their course in a local institution—a mix of program and student
mobility (modes 1 and 2).
capital investment. At the same time, they are not subject to the
same administrative requirements that normally apply to IBCs. They
allow students to enroll in a foreign institution and receive a foreign
qualification at a reduced fee, while staying partially or fully in their
home country throughout the duration of the course. Besides increasing
accessibility, CBE also increases the range of programs available in
the receiving countries. In addition, it provides capacity-building
opportunities to local institutions, which can learn from the experience
of foreign providers. But the highest potential for contribution toward
the SDGs arguably comes from massive open online courses (MOOCs),
which can provide a cost-effective means of increasing access to higher
education especially in developing countries.
A recent study from 212 countries found that online learners from
lower socioeconomic backgrounds are significantly more likely to report
benefits from online learning.31 The emergence of MOOCs,32 which offer
courses for free, has generated considerable attention in the last years
and may well deserve further analysis in light of the SDGs’ objectives on
education. As mentioned earlier, a precondition for enjoying the benefits
of distance education is having the necessary internet infrastructure
including broadband. Thus, for any strategy for using MOOCs to
fulfill education, the SDGs must assess the adequateness of the ICT
infrastructure supporting the internet.33 Unfortunately, there is no
available data on the number of students benefiting from online courses,
or on their origin or regional distribution. According to a survey carried
out in the UK, the number of students studying wholly overseas for a
higher education qualification increased from around 95,000 in 2011
to 503,795 in 2012. Of those students, 113,060 were enrolled abroad via
distance education.34 The top-five receiving countries were Malaysia;
Singapore; Hong Kong, China; Pakistan; and Nigeria (footnote 22).
While the model of MOOCs is based on free access,35 new ways
of generating revenue are being developed as distance learning gains
31
The survey was carried out by academics at the University of Pennsylvania and the
University of Washington (Wylie 2016).
32
Massive open online courses are provided through platforms like Coursera, edX,
Udacity, and NovoEd.
33
The number of internet users in the last decade surged from 1 billion in 2005 to more
than 3 billion in 2015.
34
Based on information available at Britain’s Higher Education Statistics Agency. See
Clark (2012).
35
A compilation of MOOCs from courses around the world (for free and most
offering certificate) can be found at Financial Times. http://www.ft.com/intl
/cms/s/2/039fb95a-161c-11e3-a57d-00144feabdc0.html#axzz42xzf1FMf (accessed
3 October 2016).
more recognition. Nevertheless, fees paid for online courses will

likely remain lower as compared with face-to-face education services.
Another advantage of distance education is the possibility it offers to
overcome language barriers and thus to reach a broader audience. The
language used in international higher education is largely English.
While the same applies currently to distance learning, it may be possible
to translate online courses to different languages at a faster rate than to
train education professionals to teach in different mediums.
After mode 2, CBE has the highest percentage of full commitments
in market access for higher education under GATS (69%). Main
limitations include restrictions on the electronic transmission of course
material, restrictions on the content of programs, limitations on the
number of suppliers, and measures requiring the use of local partner or
physical presence of the foreign institution. As explained below, some
of these restrictions have been addressed through PTAs. In addition,
commitments undertaken under other services sectors (notably
telecommunications) could contribute to build the infrastructure and
introduce the new technologies needed to take advantage of CBE.
Besides, initiatives aimed at increasing interconnectivity in developing
countries can also help to make available the internet infrastructure
required in low-income countries.36
In addition to infrastructure, quality assurance and consumer
protection are key challenges to the promotion of online education. The
use of MOOCs, for instance, to reduce the educational gap in developing
countries and to contribute to lifelong learning in line with the SDGs
will have to be supported by a robust regulatory framework.
14.3.3 New Developments in Preferential Trade

Agreements Relevant to Trade in Education Services
While GATS sets out the multilateral framework for trade in education
services, PTAs provide an additional avenue for WTO members to make
further commitments in higher education.37 Up to December 2015, a
total of 131 PTAs covering trade in services were notified to the WTO.
Building on GATS, a number of PTAs include improvements in education
36
It is noteworthy that SDG 9 targets include to “significantly increase access to ICTs
and strive to provide universal and affordable access to the internet in least developed
countries [LDCs] by 2020.”
37
Those agreements are allowed subject to certain conditions, including notification
to the WTO. For agreements liberalizing trade in services, referred to in GATS as
“economic integration agreements.” Article V of GATS lays down the applicable
conditions.
services across most subsectors.38 The impetus of the SDGs may provide
momentum for members to multilateralize those commitments as
a way of facilitating trade in education services and supporting the
achievement of common sustainable objectives.
In general, there has been significant activity on private higher
education in PTAs with some 168 commitments in total.39 While a
number of PTAs also include commitments in basic education, mainly
those following a “positive-list approach,”40 these have to be read
together with the “public education” reservation usually found in those
agreements.41 It is also noteworthy that these commitments have mainly
been taken at the level of the applied regime. As compared with the GATS
schedules, market access commitments in PTAs are of greater scope
and depth. Recent PTAs also include some additional commitments
and disciplines that can facilitate trade in education services. These
include disciplines linked to e-commerce that preclude countries from
imposing local presence requirements and rules on the digital economy,
which could otherwise curb CBE services (mode 1). In addition, the
latest PTAs include obligations directed at easing the mobility of people
for the supply of education services (mode 4).
Prohibiting local presence requirements42 such as requiring a
representative office and any form of enterprise or residency as a
condition to supply a service in a country43 would remove an important
constraint on foreign online education providers.44 The provision
38
See also Martin, Marchetti, and Lim (2006).
39
Information extracted from a sample of 77 PTAs notified to the WTO. For more
information on members’ commitments in PTAs notified under Article V of GATS,
see WTO I–TIP (University of Oxford 2015).
40
Under the “positive-list approach,” all sectors/subsectors are liberalized unless
otherwise specified in each country’s list of reservations.
41
This reservation generally covers social services including public education services
to the extent they are social services maintained or established for a public purpose.
42
This provision is commonly found in PTAs concluded by the US, including the Trans-
Pacific Partnership Agreement (TPP).
43
See, for instance, US–[the Republic of ] Korea (KORUS) and the TPP—a plurilateral
PTA concluded by 12 WTO members in 2015 (ratification in most TPP parties is
pending). This obligation should be looked at in conjunction with the reservations
made by the parties in the annexes.
44
Measures requiring the physical presence of the foreign institution have been
identified as one of the main barriers affecting CBE. WTO Background Note by the
Secretariat on Education Services, p. 23. The WTO Work Programme on Electronic
Commerce states, “Exclusively for the purposes of the work programme, and
without prejudice to its outcome, the term ‘electronic commerce’ is understood to
mean the production, distribution, marketing, sale or delivery of goods and services
by electronic means.”
on localization requirements is relevant to CBE as it would prohibit

requirements on the use of local computing facilitates, such as servers,
as a condition for providing online education services in a country.45
The WTO adopted in 1998 the Work Programme on Electronic
Commerce and since then members have been discussing different
aspects related to this area, though no agreement has so far been
reached.46 A number of PTAs on the other hand already include
e-commerce-related provisions.47 Some recent PTAs provide not
only rules on nondiscrimination and cooperation on the prevention
of deceptive practices to protect consumers, but also on cross-border
data flows and data localization requirements.48 While restrictions
on cross-border data flows often relate to the movement of personal
data, localization requirements apply to local storage and processing.
The motivations behind these policies generally fall under concerns
for privacy and security (OECD 2015). However, the line between
those legitimate concerns and protectionist purposes is often hard to
establish (Stone, Messent, and Flaig 2015). When overly restrictive,
they may affect a wide variety of sectors including education. As
mentioned above, limitations on the electronic transmissions of
course material and course content have been identified as one of
the main barriers affecting CBE (Beugelsdijk, Smeets, and Zwinkels
2008).
Other developments in PTAs that could be of interest is the
easing of restrictions of mode 4 service suppliers, which would cover
independent education professionals such as teachers, academics, and
other staff of education institutions.49 Commitments in mode 4, even
in PTAs, however remain modest. That said, facilitating the movement
of education professionals could be an important way by which trade
in education services could support the SDGs. This is particularly so
45
See Article 14.3 of the TPP. A covered person includes a service supplier of a party.
46
Some GATS provisions already apply to digital trade (e.g., some transparency
obligations). Subject to each member’s commitments, the GATS obligations on
national treatment and market access may also apply to certain internet-related
services.
47
The type and depth of e-commerce provisions vary greatly across PTAs. Examples
of PTAs including e-commerce-related provisions are Singapore–Australia (SAFTA),
[the Republic of ] Korea–Singapore, KORUS, and the Association of Southeast Asian
Nations (ASEAN)–Australia—New Zealand.
48
Those obligations are subject to exceptions aimed at protecting legitimate policy
objectives. See Articles 14.11.3 and 14.13.3 of the TPP.
49
Immigration requirements would still apply. See, for example, the TPP—Annexes
on Temporary Entry for Business Persons of Japan, Malaysia, and Viet Nam.
https://www.mfat.govt.nz/en/about-us/who-we-are/treaties/trans-pacific
-partnership-agreement-tpp/text-of-the-trans-pacific-partnership7
given the shortage of education professionals in developing and least

developed countries.
14.4 Main Regulatory Challenges Concerning

Trade in Education Services and the SDGs
While trade liberalization can contribute to improving access to and
quality in education, it also requires putting in place a complementary
regulatory framework to ensure that social objectives are achieved.
As governments move away from being the only providers of higher
education toward allowing private providers, their regulatory and
oversight function becomes more important (Experton and Fevre
2010). This poses particular challenges to least developed countries
which may not always have the institutional capacity required to
develop and enforce the accompanying regulations. Host countries’
policies on education are of utmost importance when it comes to
deciding where to invest or provide education services (Experton and
Fevre 2010). The market size of a country, political stability, and other
factors (e.g., geographic situation) are also important. Regulatory
frameworks should aim at striking a balance between minimizing
risks for providers and ensuring that trade opening promotes public
objectives in education.
Among the main regulatory issues are ensuring that education
services meet minimum standards of quality and that there is equity
of access to education. These issues are in turn directly linked to the
SDGs—ensuring inclusive and quality education. While quality assurance
is closely related to the accreditation of institutions and recognition of
degrees or qualifications,50 equity touches upon the issue of universal
access to education. Policy makers may not think specifically of trade when
designing and implementing regulations aimed at safeguarding quality and
inclusiveness in education. However, trade agreements can help to address
those regulatory issues in a manner that does not hinder the benefits of
opening trade in education services, thereby fostering coherence among
policy objectives. This section focuses on the potential role of trade
agreements in helping to overcome the main regulatory challenges in
education, with a view of providing some policy options at the end.
50
A distinction must be made between recognition of foreign qualifications for
employment purposes and recognition of foreign qualifications for education
purposes.
14.4.1 Ensuring the Quality of Education

When it comes to trade, quality assurance and recognition of foreign
degrees or qualifications are key factors affecting market access. In
principle, there is no reason to apply different quality regimes to foreign
providers, although some ways of delivering education services may pose
unique regulatory challenges. An international framework on quality
assurance and accreditation would certainly help, and some attempts
have been made to agree on international rules on quality assurance and
accreditation, but so far no international standards exist (OECD 2002).
Quality assurance is thus of utmost importance not only for
governments in both receiving and home countries, but to all
stakeholders involved. On the one hand, students require quality
education and protection from fraudulent or substandard providers
caused by information asymmetries. On the other hand, education
service providers require a transparent and predictable framework
on accreditation and recognition, which is based on objective criteria.
Last but not least, quality assurance also has implications for the labor
market as employers need to have confidence in the value of the degrees
and qualifications earned. Some of these challenges are addressed by
regional initiatives on the recognition of academic and professional
qualifications, including the six UNESCO regional conventions.51
However, the expansion of CBE has both amplified and raised new
issues. Many institutions that provide cross-border programs typically
operate outside the territory in which their services are being delivered,
which makes them in many ways “stateless” (Knight 2006). Apart
from the question of jurisdiction, for many developing countries that
already struggle with quality assurance of local providers, taking on the
task of handling low quality or rogue providers and accreditation mills
from abroad can be overwhelming (Hopper 2007). One way might be
to rely on the quality assurance mechanisms of the sending country or
those developed by recognized international associations.52 Moreover,
countries may need to align their quality assurance mechanisms to their
own development objectives, and this may not be taken into account
51
Regional Conventions on Recognition of Studies, Diplomas, and Degrees concerning
Higher Education, which are binding among the parties to those conventions.
http://www.unesco.org/new/en/education/themes/strengthening-education
-systems/higher education/conventions-and-recommendations/
52
See, for instance, the International Network for Quality Assurance Agencies in
Higher Education. http://www.inqaahe.org/. But even in those cases, identifying
those entities that can provide a reliable quality assurance assessment of CBE
providers may be key in view of local capacities and constraints (Hopper 2007).
by the sending country. Another problem that may arise is the risk of
creating a two-tier system. As private providers will normally target
self-financed students, not all sectors of society may benefit equally from
more open trade in education. An example might be a brain drain of
teachers and academics from public to private institutions due to higher
salaries, leading to a decrease of quality in public higher education.
How could such challenges be addressed while undertaking trade
commitments to open the education sector? In the case of GATS,
governments have the space to adopt any regulations and procedures
deemed necessary, including for quality concerns. The main disciplines
of the agreement are on transparency and avoiding discrimination, but
these do not prevent governments from setting their required education
standards and procedures. GATS only provides a basic standstill framework
to ensure that countries’ regulations do not constitute unnecessary
barriers to trade. There is a mandate for negotiating further disciplines on
domestic regulation, but very limited progress has been achieved so far.53
Even then, much of the emphasis on the domestic regulation negotiations
has been on improving transparency and reducing the administrative
burden of obtaining licenses and qualifications. Indeed, such disciplines
could help improve the efficacy of the measure. By the same token,
international trade negotiations could stimulate policy dialogue among
the different agencies and stakeholders involved in the development of
quality assurance systems to enhance the effectiveness of those policies
and coherence among different objectives.
While the development of quality assurance mechanisms is not
within the purview of GATS, regulatory coherence between rules or
guidelines on quality assurance could help trade opening strategies
in education. Building on international and regional initiatives, it may
be possible to foster regulatory cooperation for the development of a
set of basic multilateral principles or nonbinding guidelines that could
be used as a basis by national accreditation and quality agencies. A
number of initiatives have been taken by different international and
regional organizations (e.g., UNCTAD, OECD, Asia–Pacific Economic
Cooperation [APEC]) aimed at developing international guidelines
for quality provision in higher education. They adopt the form of
recommendations based on good practices (“soft law”). The best
example is the UNESCO and OECD “Guidelines for Quality Provisions
in Cross-Border Higher Education.”54
53
See GATS Article VI:4 (domestic regulation).
54
They include recommendations for a range of stakeholders and encourage
governments to establish mechanisms for accreditation and quality assurance in
their territory. See http://www.oecd.org/general/unescooecdguidelinesforquality
provisionincross-borderhighereducation.htm
Countries having assumed commitments in higher education under

GATS may decide to undertake additional commitments based on those
principles or guidelines as a means of promoting the transparency and
predictability of their quality assurance mechanisms. Disciplines on
domestic regulation could complement those initiatives by enhancing
transparency of education regulations and by easing or speeding
up quality accreditation procedures (e.g., reducing time frames,
documentation requirements, and fees).55 Besides, agreements on the
recognition of academic and professional qualifications concluded
within the purview of GATS Article VII could also help.56 This provision
also states that, wherever appropriate, recognition should be based on
multilateral criteria and developed in cooperation with governmental
and nongovernment organizations.57 All or some of the elements
mentioned above could form part of a WTO sectoral initiative aimed at
boosting trade in higher education while addressing pressing regulatory
issues with the aim of contributing toward the SDGs. The adoption of the
SDGs could also foster a dialogue on promoting sustainable investment
in education.
14.4.2 Issues of Universal Access and Service
Trade in higher education can contribute to increasing supply, which

in turn could help to enhance inclusiveness in education. However,
universal access and service policies may still be necessary to ensure that
certain segments of society are not left unattended. This is particularly
the case for developing countries where the basic education needs of the
population may not have been fully met. Thus, for international trade
55
Leaving aside regulatory substantive criteria (related to the “necessity test”) where
countries still have very divergent views.
56
Article VII provides flexibility for members to achieve recognition on the education
or experience obtained, requirements met or licenses or certifications granted in
another country. Those agreements have to be notified to the WTO, and adequate
opportunity shall be afforded to other interested members to accede to such
agreements or to negotiate comparable ones. Countries have concluded these types
of agreement for certain specific professions and in many cases as part of a broader
process of integration between two or more countries (e.g., within the European
Union and APEC). See, for instance, APEC. http://www.apecarchitects.org/index
.php?option=com_content&view=article&id=61&Itemid=75
57
Article VII paragraph 5. See also WTO Guidelines for Mutual Recognition
Agreements in the Accountancy Sector. These are nonbinding guidelines and are
intended to be used by governments to make it easier to negotiate agreements on the
mutual recognition of professional qualifications. Besides, some PTAs include rules
or guidelines aimed at facilitating the mutual recognition of qualifications for certain
professions. Such bilateral or plurilateral initiatives could lead to further cooperation
in the education sector in the future.
agreements to support the SDGs in education they have to contribute to

not only increasing supply but to also reducing disparities in access. One
way would be to promote the liberalization of new forms of delivery,
which are less costly and have potential for scaling up, such as MOOCs
and other new methods for the delivery of CBE. To do so, quality
assurance mechanisms that are suited to such programs would have to
be put in place. The advantage of distance learning with no or limited
student mobility is that it is particularly cost-effective (OECD 2004).
One approach might be to combine market opening with funding
mechanisms such as student scholarships and loan schemes.58 Under such
an approach, rather than making funding available only to those students
enrolled in domestic institutions, universal access objectives would be
better served by making them available to domestic students enrolled
in both national and foreign institutions.59 Given the considerable costs
involved, such an option is unlikely to be pursued, however. While other
funding mechanisms exist (e.g., those made available by international
institutions or nonprofit providers), these may not be able to cope with
the demand for higher education.
Another option, which would not be constrained by financing,
could be to apply “universal services obligations” (USOs) to domestic
and foreign providers of education services with the aim of favoring
disadvantaged groups.60 GATS would not hinder a government’s right
to adopt policies and regulations aimed at promoting universal access
in education provided those policies are applied in a nondiscriminatory
manner. That said, not many governments apply USOs on education
services providers. There may be several reasons for that. In most
cases, USOs are more common in infrastructure or network services,
for example, telecommunications. Such measures are typically imposed
when the sector is akin to a natural monopoly, and unless the incumbent
provides the service, no other player will be able to do so. In the case
of education, the sector does not have the characteristics of a natural
monopoly, and often multiple suppliers exist, in many cases with public
and private education providers operating side by side.
58
In the first case, the source is mainly public; while in the second case, it may come
from public, nongovernment, or private institutions.
59
Examples of countries adopting such an approach are Malaysia and Thailand.
See OECD (2004).
60
An example of USO not scheduled includes measures in the health sector requiring
all commercially established hospitals to provide 20% of their services to the poor;
another example from the finance sector would be measures requiring all banks
established in the capital to operate subsidiaries in all other major cities throughout
the country. See UNCTAD (2006).
Furthermore, the policy aim might be to make the regulatory

environment as conducive as possible for attracting foreign providers
of high-quality education services, and imposing universal service
requirements might be a disincentive. Countries with a small domestic
market might also be wary of imposing too many conditions. Ultimately,
a balance would need to be struck between opening the market to attract
foreign providers and ensuring that public policy objectives such as
ensuring universal access to education are met.
The WTO reference paper in basic telecommunications is an
example of how to strike this balance with explicit recognition of
USOs and the right of members to define their scope, provided they
comply with certain basic principles such as nondiscrimination and
transparency.61 The experience in the telecom sector could arguably
be used as a model in other sectors with significant public sector
involvement such as education. Indeed, confirming members’ right to
use universal services policies consistent with GATS was discussed as
part of the WTO negotiations on domestic regulation.62 GATS could help
by using the reference paper model to make explicit the right to impose
USOs, which would support the SDGs, while providing some principles
under which those obligations can be applied to avoid discrimination.
Where minimum requirements are needed, these should be carefully
crafted to ensure they do not hinder other policy objectives.
14.5 Conclusion
This chapter has discussed how trade has the potential to help increase
supply and investment in the education sector, thereby enhance quality
and access opportunities in support of the SDGs. The reality today is
that with or without explicit policies to leverage the role of the private
sector, private sources of funding, including FDI, in higher education
has become increasingly prominent. Sometimes this is a response to an
underfunded public sector; in other cases, it is due to personal career
61
Some have raised concerns about the implications of Article VI:4 on domestic
regulation and the “necessity test” on USOs as this provision refers to measures
necessary to ensure the “quality of the services providers.” Article IV:4 has been
under review and some members have suggested changing the language to also
include other legitimate policy objectives, which would include ensuring equity in
access.
62
See Second Revision, Draft Disciplines on Domestic Regulation Pursuant to GATS
Article VI.4. Informal Note by the Chairman. Room Document. 20 March 2009.
Paragraph 12.
development choices; or it might simply be a response to a lack of

sufficient places in public institutions of higher education. Whichever
the root cause, private education institutions are competing globally
to provide higher education services, and developing and emerging
countries are important new markets.
Thus, it becomes important for any strategy to achieve the SDGs
in education to understand the changing dynamics and demands in the
sector and to find effective ways to maximize the impact of the private
sector. The internationalization of trade in higher education has gone
hand in hand with the emergence of new business models and ways
of delivering educational services from foreign education institutions
bringing “bricks and mortar” investment to online providers offering
MOOCs. These developments offer more education opportunities and
can enhance inclusiveness. Another dimension to trade and education
services and the SDGs is how some developing and emerging economies,
apart from being importers of education services, have also established
regional hubs providing higher education services to other developing
countries.
At the same time, the gains from trade and the involvement of
the private sector in skills development will not address all education
objectives. There is thus a need for an appropriate policy and regulatory
framework to ensure quality and inclusiveness. Such a framework need
not be at odds with market openings; rather, trade in education services
needs regulations that help improve predictability, transparency, and
confidence in the quality of services provided. Take, for instance, cross-
border education including online education. This mode of supply may
significantly increase access and would benefit from an international
framework for quality assurance. This calls for strengthened cooperation
between agencies in different countries, which would in turn support
international trade.
On finding a balance between trade and regulation, and on using
regulatory frameworks to support and complement market opening,
GATS provides ample flexibility to meet virtually all policy objectives.
The agreement neither sets standards nor prescribes policies or their
level of attainment—that is the prerogative of governments and their
agencies. These policies should be implemented in a nondiscriminatory
manner and not serve as a disguised trade restriction. The framework
of international trade agreements and the flexibility provided should
be used to support the SDGs—by reducing barriers to entry and
competition in the education sector; by enhancing the transparency
and predictability of education regulations, which would help attract
FDI and new providers of education services; and by spurring the
internationalization of education.
References
Adlung, R. 2005. Public Services and the GATS. WTO Working Paper
ERSD 2005-03. Geneva, Switzerland: Economic Research and
Statistics Division, World Trade Organization (WTO).
Bashir, S. 2007. Trends in International Trade in Higher Education:
Implications and Options for Developing Countries. World Bank
Education Working Paper Series 6. Washington, DC: World Bank.
Becker–Lindenthal, H. 2015. Students’ Impression Management in
MOOCs: An Opportunity for Existential Learning? MERLOT
Journal of Online Learning and Teaching 11(2): 320–330.
Beugelsdijk, S., R. Smeets, and R. Zwinkels. 2008. The Impact of
Horizontal and Vertical FDI on Host’s Country Economic Growth.
International Business Review 17(4): 452–472.
Böhm, A., D. Davis, D. Meares, and D. Pearce. 2002. Global Student
Mobility 2025: Forecasts of the Global Demand for International
Higher Education. Canberra: IDP Education Australia.
Bougheas, S., R. Kneller, and R. Riezman. 2011. Optimal Education
Policies and Comparative Advantage. Pacific Economic Review 16(5):
538–552.
Burgess, C. et al. 2010. The ‘Global 30’ Project and Japanese Higher
Education Reform: An Example of a ‘Closing In’ or an ‘Opening Up’?
Globalisation, Societies and Education 8(4): 461–475. http://www
.uni.international.mext.go.jp/global30/
Cervantes, M., and D. Guellec. 2002. The Brain Drain: Old Myths,
New Realities. OECD Observer 230. http://oecdobserver.org
/news/printpage.php/aid/673/The_brain_drain:_Old_myths,_new
_realities.html
Clark, N. 2012. Understanding Transnational Education, Its Growth
and Implications. World Education News and Reviews. 1 August.
http://wenr.wes.org/2012/08/wenr-august-2012-understanding
-transnational-education-its-growth-and-implications/
The Economist. 2015. The World is Going to University. 28 March.
http://www.economist.com/news/leaders/21647285-more-and
-more-money-being-spent-higher-education-too-little-known
-about-whether-it
Experton, W., and C. Fevre. 2010. Financing Higher Education in
Africa. Africa Regional Educational Publications. Directions in
Development. Human Development. Washington, DC: World Bank.
http://documents.worldbank.org/curated/en/497251467990390368
/Financing-higher-education-in-Africa
Havergal, C. 2015. Africa’s “Teaching Shops”: The Rise of Private
Universities. Times Higher Education. 22 October. https://www
.timeshighereducation.com/features/africas-teaching-shops-the
-rise-of-private-universities
Hopper, R. 2007. Building Capacity in Quality Assurance: The Challenge
of Context. In Cross-Border Tertiary Education: A Way towards
Capacity Development. Paris: OECD Publishing/World Bank.
Knight, J. 2006. Higher Education Crossing Borders: A Guide to the
Implications of the General Agreement on Trade in Services
(GATS) for Cross-Border Education. Report prepared for the
Commonwealth of Learning and UNESCO.
____. 2010. Regional Education Hubs-Rhetoric or Reality. International
Higher Education 59. https://ejournals.bc.edu/ojs/index.php/ihe
/article/download/8491/7625
KPMGInternational.2013.FutureState2030:TheGlobalMegatrendsShaping
Governments. Toronto, Canada: Mowat Centre for Policy Innovation,
University of Toronto. https://www.worldgovernmentsummit.
org/api/publications/document?id=b5d469c4-e97c-6578-b2f8
-ff0000a7ddb6
Kwiek, M. 2002. The Social Functions of the University in the Context
of the Changing State/Market Relations. The Global, European
Union and Accession Countries’ Perspectives. Issue Paper for
the European Commission, Research Directorate-General. High
Level Expert Group. STRATA Project, “Developing foresight
for the development of higher education/research relations in
the perspective the European research area (ERA).” Brussels:
Commission of the European Communities. http://www.policy.hu
/kwiek/Commission_paper.pdf
Larsen, K., J. Martin, and R. Morris. 2002. Trade in Educational
Services: Trends and Emerging Issues. OECD Working Paper.
Paris: Organisation for Economic Co-operation and Development
(OECD).
Lawton, W., and A. Katsomitros. 2012. International Branch Campuses:
Data and Developments. Boston, MA: The Observatory on Borderless
Higher Education.
Lawton, W., M. Ahmed, T. Angulo, A. Axel–Berg, A. Burrows, and
A. Katsomitros. 2013. Horizon Scanning: What Will Higher Education
Look Like in 2020? Boston, MA: The Observatory on Borderless
Higher Education.
Lim, H., and R. Saner. 2011. Rethinking Trade in Education Services:
A Wake-Up Call for Trade Negotiators. Journal of World Trade
45(5): 993–1034.
Martin, R., J. Marchetti, and H. Lim. 2006. Services Liberalization in
the New Generation of Preferential Trade Agreement (PTAs):
How Much Further than the GATS? WTO Staff Working Paper
ERSD-2006-07. Geneva, Switzerland: Economic Research and

Statistics Division, WTO.
McBurnie, G., and C. Ziguras. 2007. Transnational Education:
Issues and Trends in Offshore Higher Education. January. https
://www.researchgate.net/publication/225084092_Transnational
_Education_Issues_and_Trends_in_Offshore_Higher_Education
Mughal, M., and N. Vechiu. 2009. Does FDI Promote Higher Education?
Evidence from Developing Countries. 10th Nordic Conference in
Development Economics. http://www.umb.no/statisk/ncde-2009
/mughalvechiu.pdf
Nunnenkamp, P. 2002. Determinants of FDI in Developing Countries:
Has Globalization Changed the Rules of the Game? Kiel Working
Paper 1122. Kiel, Germany: Kiel Institute for World Economics.
OECD. 2004. Implications of Recent Developments for Access and
Equity, Cost and Funding, Quality and Capacity Building. In
Internationalisation and Trade in Higher Education: Opportunities
and Challenges. Paris: OECD Publishing.
____. 2004. Key Developments and Policy Rationales in Cross-Border
Post-Secondary Education. In Internationalisation and Trade
in Higher Education Opportunities and Challenges. Paris: OECD
Publishing.
____. 2008. Higher Education to 2030, Volume 1: Demography. Paris:
OECD Publishing. http://www.oecd.org/education/skills-beyond
-school/highereducationto2030vol1demography.htm
____. 2011. Education at a Glance 2011: Highlights. Paris: OECD Publishing.
http://dx.doi.org/10.1787/eag_highlights-2011-en
____. 2014. Global Value Chains: Challenges, Opportunities, and
Implications for Policy. https://www.oecd.org/tad/gvc_report_g20
_july_2014.pdf
____. 2015. Education at a Glance 2015, OECD Indicators. Paris: OECD
Publishing. http://www.oecd-ilibrary.org/education/education-at
-a-glance_19991487
Stone, S., J. Messent, and D. Flaig. 2015. Emerging Policy Issues:
Localisation Barriers to Trade. OECD Trade Policy Papers 180.
Paris: OECD Publishing. http://dx.doi.org/10.1787/5js1m6v5qd5j-en
The Earth Institute, Columbia University, and Ericsson. 2016. ICT
& SDGs Final Report: How Information and Communications
Technology can Accelerate Action on the Sustainable Development
Goals. https://www.ericsson.com/res/docs/2016/ict-sdg.pdf
United Nations Conference on Trade and Development (UNCTAD)
Secretariat. 2004. The Impact of FDI on Development: Globalization
of R&D by Transnational Corporations and Implications for
Developing Countries. Geneva, Switzerland: UNCTAD.
UNCTAD. 2010. Integrating Developing Countries’ SMEs into Global

Value Chains. Geneva, Switzerland: UNCTAD.
____. 2013. World Investment Report 2013: Global Value Chains: Investment
and Trade for Development. Geneva, Switzerland: UNCTAD.
____. 2006. Report of the Expert Meeting on Universal Access to
Services held at Palais des Nations, Geneva. TD/B/COM.1/EM.30/3.
November. Geneva, Switzerland: UNCTAD.
____. 2015. World Investment Report 2015: Reforming International
Investment Governance. Geneva, Switzerland: UNCTAD.
UNESCO. 2011. Global Education Digest 2011. Comparing Education
Statistics Across the World, Institute for Statistics. http://www.uis.
unesco.org/Library/Documents/global_education_digest_2011
_en.pdf
____. 2012. New Patterns in Study Mobility in the Southern African
Development Community. UNESCO Institute for Statistics.
http://www.uis.unesco.org/FactSheets/Documents/ib7-student
-mobility-2012-en.pdf
United Nations Economic and Social Commission for Asia and the Pacific
(ESCAP). 2014. Asia–Pacific Trade and Investment Report 2014:
Trends and Developments. Sales No. E.15.II.F.2. www.unescap.org
/resources/asia-pacific-tradeand-investment-report-2014-recent
-trends-anddevelopments
University of Oxford. 2015. International Trends in Higher Education
2015. International Strategy Office. https://www.ox.ac.uk/sites
/files/oxford/International%20Trends%20in%20Higher%20
Education%202015.pdf
World Trade Organization (WTO). 2009. Draft Disciplines on Domestic
Regulation Pursuant to GATS Article VI.4. Informal Note by the
Chairman. Room Document. 20 March.
WTO. 2010. Education Services, Background Note by the Secretariat.
Council for Trade in Services. Document S/C/W/313. 1 April.
Wylie, I. 2016. Free Moocs Act as Try-Before-You-Buy Model for Online
Courses. Financial Times. 7 March. http://www.ft.com/intl/cms/s
/2/16214054-cb3b-11e5-a8ef-ea66e967dd44.html#axzz42xzf1FMf
(accessed 3 June 2016).
Zimny, Z. 2011. Foreign Direct Investment in Education. 18 December.
SSRN: https://ssrn.com/abstract=2433876 or http://dx.doi.org/10.2139
/ssrn.2433876
15
Trade in Medical Products
and Pharmaceuticals
15.1 Introduction
Trade economists have long argued the case that increased openness
to international markets can, under the right circumstances, boost
productivity, which is the backbone of sustained growth in per capita
incomes. The distribution of the gains from trade in a way that conforms to
each society’s view of equity is an issue best addressed by complementary
policies such as tax, welfare, and social safety net measures. But the
experience of many developing countries suggests that trade can be an
important part of promoting economic growth, which can help reduce
poverty. Trade is therefore intimately linked to Sustainable Development
Goal (SDG) 1 which relates to ending poverty, and SDG 8 which relates
to promoting sustained, inclusive, and sustainable economic growth.
The relationship between trade and growth is not as simple and direct
as was believed by some commentators in the 1990s, but there is a broad
consensus that without openness to international markets for goods,
services, labor, and capital, it is difficult, if not impossible, to bring about
rapid economic growth and development.
The motivation for this chapter is not, however, to delve further
into the links between trade and economic outcomes, such as growth
and poverty reduction. Instead, it examines the ways in which openness
to trade can help improve development outcomes other than through
channels such as income and productivity. It focuses specifically on
the case of health. The intuition is simple: trade openness reduces
prices and increases access and variety for consumers. The point holds
just as strongly for products that are important for health-related
development outcomes as it does for consumer goods. This chapter
makes a case for priority liberalization of trade policies affecting
“development products” such as those used in health services.
375
It argues that trade can, and should, play a role in attaining SDGs other
than 1 and 8, in particular SDG 3: ensuring healthy lives and promoting
well-being for all ages.
Trade and health is an issue that has been extensively examined over
the last 10–15 years. However, that discussion has focused largely on the
issue of intellectual property rights. Trade agreements now routinely
include chapters on protection of intellectual property rights. At the
World Trade Organization (WTO), the Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPS Agreement) lays down
minimum standards for protection in member states. Pharmaceuticals
are a product where intellectual property issues loom large from a
development standpoint, because there could be a conflict between
promoting innovation on the one hand, and extending access to crucial
medications on the other. Indeed, many developing countries were
so concerned about this conflict in the context of the AIDS epidemic
that they successfully campaigned for the 2001 Declaration on TRIPS
Agreement and Public Health.
Another aspect of trade and health that has received considerable
attention is trade in health services. Trade in health services can be
delivered in all four modes of supply, as defined by the WTO’s General
Agreement on Trade in Services. One of the most prevalent forms of
trade in health services is by medical travel, i.e., when a patient seeks
medical treatment abroad.
The focus of this chapter is on trade of all physical goods that enter
the health sector. These goods are either those that can be used directly
for diagnosis and treatment of patients or those that are necessary for
testing and medical research. The chapter proceeds as follows. Section
15.2 first shows how international trade in health products has evolved
in recent years. It then outlines trade policies affecting six core groups
of health-related products, and identifies their effects on the world’s
poor. Section 15.3 examines the special case of vaccines, and reports on
an econometric analysis that establishes the important role of logistics
services—which are traded internationally—in promoting access.
Section 15.4 presents evidence from the world market for insulin,
a crucial product in the management of diabetes. The final section
concludes and addresses policy implications.
15.2 Trade and Trade Policies In Health Products

In terms of economic mechanisms, the most obvious linkage between
trade and health is on the consumption side. We know that health
expenditures around the world have been increasing rapidly, especially
Trade in Medical Products and Pharmaceuticals377
in fast-growing economies. According to general principles, open trade

can facilitate the access of health-care providers or patients to health
products at competitive prices, and in new varieties.
Helble (2012) maps out the “universe” of health products covering
207 subheadings of the Harmonized System (HS). The list consists
of products in three groups: (i) medicines, (ii) chemicals used in the
production of pharmaceuticals, and (iii) hospital and laboratory inputs
and equipment (Figure 15.1). This “universe” of health products consists
of a carefully selected list. However, as stated by the author, the list
is only an approximation of the full trade. Some subheadings might
include products that are not only used in the public health domains,
such as syringes used in medical, surgical, dental, or veterinary sciences
(HS 901831). On the other hand, the author excludes categories where
the subheading captures products that are, in the majority, non-health
related. For example, malaria bed nets fall under HS 630493: “Not
knitted or crocheted, of synthetic fibers; articles for interior furnishing,
or synthetic fibers.” Despite these caveats, analyzing international
exchanges in these health products gives us important insights into the
role of trade for public health.
Figure 15.1 Product Groups Related to Public Health
Public Health
A1 B
Dosified Medicines Chemical Inputs of
General Purpose
A2 C1
Bulk Medicines Hospital and lanoratory
inputs
A3 C2
Inputs specific to the Medical technology
pharma. industry equipment
PHARMACEUTICAL OTHER INDUSTRIES
Source: Helble (2012).

15.2.1 International Trade of Health Products

First, we study the evolution of world trade in all health products since
2002. We therefore download all imports in health products reported by
201 countries. Figure 15.2 depicts the evolution of international trade of
health products since 2002 by world region (World Bank classification
of world regions). Overall, we observe that international trade in health
products increased rapidly. The biggest trader of health products is
region Europe and Central Asia. North America is the second-largest
market for health products. However, developing countries have been
expanding their role as a provider of health products.
Figure 15.2 Trade in Health Products 2002–2014 by Region

(measured by imports reported by countries)
1,000
800
Values ($ billion)
600
Sub-Saharan Africa
400 South Asia

North America
Middle East and North Africa
200
Latin America and the Caribbean
Europe and Central Asia
East Asia and Pacific
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Authors.
Figure 15.3 shows the relative shares of the seven world regions.
Europe and Central Asia as well as North America account for the
lion’s share in international trade in health products. However, their
combined share fell from 81.9% in 2002 to 74.0% in 2014. As a corollary,
the shares of regions with developing countries rose steadily. The share
of East Asia and the Pacific increased from less than 11.7% in 2002 to
16.0% in 2014. The relative increase was largest in South Asia (from
0.1% to 1.5%) and sub-Saharan Africa (from 0.6% to 1.2%). Despite the
considerable expansion of the market shares of developing countries,
Figure 15.3 Shares of Trade in Health Products 2002–2014

by Region (measured by imports reported by countries)
100
80
60
%
Sub-Saharan Africa
South Asia
40
North America
20 Latin America and the Caribbean
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Authors.
one should not forget that the developing countries also have by far the
largest needs. If we take the Organisation for Economic Co-operation
and Development (OECD) membership as a benchmark for the level
of economic development, we know that the population share of non-
OECD countries was about 83% of the world in 2014; however, the
imports of health products only amounted to 24%. The example of South
Asia illustrates this point. Even though South Asia represents 24% of the
world population, it only absorbs 1.5% of internationally traded health
products. There is, of course, a significant production of some health
products in that region, but substitution of local production for imports
could result in higher prices or reduced access to high-quality varieties
in some cases.
15.2.2 Tariffs on Health Products
Tariffs and nontariff measures (NTMs) restrict access to health products.

Tariffs are relatively easy to measure as they are reported to international
bodies, including the WTO. In contrast, comparable international
records on NTMs are sparse. Yet, NTMs play an important role for health
products. Developed countries, in particular, have stringent standards
for medicines and other health products. It is important to emphasize at
the outset that although some NTMs, such as quality controls, can have
important public benefits that justify their use, the same cannot be said of
tariffs. Tariffs simply transfer income from consumers to local producers

and the government, with an additional cost in economic efficiency.
There is no public policy objective, such as consumer protection, that
is achieved in a first-best way by tariffs. Conceivably, there could be an
argument that, to promote infant industries in developing countries,
it is important to protect producers of health products. However, that
position has proved problematic in historical context, as infants rarely
“grow up.” In addition, it is difficult, from a development perspective,
to accept that promotion of a particular domestic industry trumps the
public health objective of ensuring maximum possible access to health
products.
To assess the barrier stemming from tariffs, we first downloaded the
latest applied Most Favored Nation (MFN) tariffs for the six commodity
groups introduced above for 160 countries. The simple averages of the
applied MFN tariff across all countries for the six commodity groups are
presented in Figure 15.4. At this level of aggregation, we observe that the
average tariffs are rather low, ranging between 2.8% and 4.4%. However,
the simple average hides substantial difference across regions, across
countries, and across individual products. In a second step, we therefore
look at seven different regions.
Average applied tariff MFN rates by World Bank developing region
are presented in Figure 15.5. It is important to emphasize that these are
statutory tariff rates that apply to everyday imports of health-related
Figure 15.4 Applied Most Favored Nation Tariff

on Health Product Groups (%)
0
A1 A2 A3 B C1 C2
Product Group
Applied Most Favored Nation Tariff
Note: Tariff data based on latest available year, but not older than 2010.
Source: Authors.
Figure 15.5 Applied Most Favored Nation Tariff

on Health Product Groups by World Region (%)
Latin America and the Caribbean
North America
South Asia
Sub-Saharan Africa
0 5 10 15
Tariff (simple average)
2002 2008 2014
Source: Authors.
products. In cases of emergency relief, countries typically do not levy

customs duties on incoming supplies. So the focus here is on policies
that can affect the general level of health and health-care service
provision in a country in ordinary times, not emergencies. We note that
the tariffs have been coming down in the past years. On average, the
most protected developing region is South Asia. Although the average
tariff is relatively low, at about 8% for pharmaceuticals and 6% for
medical instruments, it seems difficult to justify at all on development
grounds, as discussed above.
On average, tariff rates on pharmaceuticals and medical equipment
are relatively low, and a wide range of countries allow duty-free access.
However, the fact that tariffs persist at all is puzzling in light of the
importance of ensuring access to affordable medicines for poor people.
From a political economy perspective, it would be important to know
what forces in some developing countries align to prevent the entry
of low-cost health products from the world market. In some cases, it
is likely infant industries lobbying for protection from international
competition. But there also appear to be countries that levy tariffs on

imported medicines even though they do not have significant domestic
capacity.
Moreover, the regional averages conceal considerable variation
across countries. The two largest countries in South Asia also have the
highest tariffs: India at 10% and Pakistan at 12%. In the case of India,
protection of the domestic pharmaceuticals industry is one possible
political economy explanation for the existence of this significant import
tax. However, that industry is already globally competitive and seems
to have little need of protection on infant industry grounds. Countries
in other regions, often without significant domestic manufacturing
capacity, also impose significant tariffs on pharmaceuticals. Examples
include Tunisia and Djibouti (11%), Ghana (9%), and the Lao People’s
Democratic Republic (8%).
In most regions, average tariff rates on medical equipment are
lower than for pharmaceuticals. However, the averages again mask
considerable cross-country variation: in fact, the countries with the
highest tariffs in this sector apply them at levels that far exceed those
for pharmaceuticals. For example, Djibouti taxes foreign medical
instruments at an average rate of 24%, Iran applies a 14% tariff, and rates
in the next 10 most protected countries (covering five of the six World
Bank regions) are approximately 10%. There are undoubtedly political
economy motivations for these tariffs in each country, in addition to
possible revenue-raising objectives.
To take a more detailed look at the tariff levels of health products,
we study the tariffs at the highest level of disaggregation, 6 digit HS.
For our analysis, we look at the latest available tariff (but not older
than 2010) of 158 countries in 190 health products. Out of the possible
30,020 observations, we are able to gather 20,486 tariff lines. In
Table 15.1, we measure the percentage of tariff lines that are equal or
above a certain level. We observe that on more than one third of all tariff
lines import duties of more than 5% are levied. On almost 10% of all
Table 15.1 Percentage of Tariff Lines Protected

with High Import Duties
Percentage of Tariff Lines with a Tariff of …

Tariff level 0% 5%d10% 10%d15% <15%
% of tariff lines 49.0% 27.6% 7.3% 2.1%
Source: Authors.
tariff lines, the import duties are still above 10% and on 2.1% of the tariff
lines, we found rates above 15%.
To know the countries that still maintain high tariffs on health
products, we calculate the applied tariff (simple average) across
all health products for all countries in our sample. Table 15.2 lists
28 countries that levy on average a tariff higher than 5% on health
products. Among these countries, we find a few advanced economies
such as Chile and the Republic of Korea. Furthermore, the list includes
two large countries: Brazil and India. However, most of the countries
are among the poorest in the world, including several least developed
countries in Africa and Asia. Most of these countries do not have any
domestic industry that produces health products. Charging tariffs
therefore only creates additional costs for patients without having
any economic rationale.
Table 15.2 Countries with High Applied Tariffs on Health Products
Applied Tariff Applied Tariff

Country Name (simple average) Country Name (simple average)
The Bahamas 25.9 Congo, Democratic 6.3
Republic of the
Djibouti 20.0 Central African 6.3
Republic
Bermuda 15.1 Brazil 6.1
Anguila 14.8 Algeria 6.0
Iran, Islamic 12.2 Chad 6.0
Republic of
Maldives 10.8 Argentina 6.0
Ghana 10.0 The Gambia 5.9
Cuba 8.1 Sierra Leone 5.7
India 8.0 Venezuela 5.7
Ethiopia 7.7 French Polynesia 5.4
Aruba 7.6 Uzbekistan 5.4
Nepal 6.8 Bangladesh 5.2
Cameroon 6.8 Samoa 5.2
Pakistan 6.7 Lao People’s 5.1
Democratic
Republic
Source: Authors.
Table 15.3 Most Protected Products with Applied Tariffs

Above 10% by Number of Countries
Product Number of Countries with

Code Product Description Applied Tariff above 10%
900630 Cameras for medical or surgical examination 54
(or other purposes)
940210 Dentists’, barbers’, or similar chairs and parts 48
thereof
940290 Other medical, surgical, dental, or veterinary 32
furniture
401511 Surgical gloves of vulcanized rubber 30
300692 Waste pharmaceuticals 30
701720 Laboratory, hygienic, or pharmaceutical 25
glassware
290410 Sulfonated derivatives of hydrocarbons 25
701790 Other laboratory, hygienic, or pharmaceutical 23
glassware
401490 Other hygienic or pharmaceutical articles of 23
vulcanized rubber
Source: Authors.
The analysis allowed us to better gauge the distribution of the applied

tariffs as well as to know the countries that maintain the highest tariff
levels. To know the products that are subject to the highest protection,
we looked at all health products with above 10% applied tariffs. In Table
15.3, we count the number of countries that have tariffs above 10% and
show the nine most protected goods. For example, our data reveals that,
in 30 countries, for importing surgical gloves of vulcanized rubber,
import duties of more than 10% need to be paid. The most protected
health products are cameras for medical or surgical examination. (This
HS subheading also covers cameras for underwater and aerial survey
as well as comparison cameras for forensic or criminological purposes.
All these additional purposes probably account, in most countries,
for a small share compared with cameras used for medical or surgical
purposes.)
In Tables 15.4 and 15.5, we highlight two product groups with
particularly high tariffs: surgical gloves and cameras for medical or
surgical examinations. Nineteen countries levy applied tariffs of 20%
or more on surgical gloves. It is difficult to see which of these countries
could have an interest in protecting a domestic industry of surgical

gloves, as several of the countries are small economies with small
industrial bases. For health care, surgical rubber gloves are heavily
used and thus constitute an important input. Lowering the tariffs for
rubber gloves could therefore make a direct contribution to lower
health-care costs.
Cameras for medical or surgical examination of internal organs
are another example of health products with high tariffs. The list of
countries with applied tariffs exceeding 20% includes 46 countries, of
which almost 20 are least developed countries. The less developed and
least developed countries, in particular, have no domestic industry that
might compete with imports. Levying high tariffs is a direct burden for
public health.
We have just examined several specific types of health-related
products, albeit important ones. The findings are symptomatic of a
more general problem: activist trade policies that insulate countries
from world markets can push up prices and limit availability of
important development products, i.e., goods that play a particular role
in promoting the SDGs other than through income channels. Trade
can be a lever to promote non-income objectives in the SDGs such as
the health goals of SDG 3.
Table 15.4 Countries with an Applied Most Favored Nation

Tariff of 20% or More on Surgical Gloves of Vulcanized Rubber
(Harmonized System Code 401511)
Algeria Maldives
The Bahamas Namibia

Botswana Pakistan
Congo, Rep. of the Samoa
Djibouti South Africa
Fiji Swaziland
The Gambia Tonga
Iran, Islamic Rep. of Tuvalu
Jordan Viet Nam
Lesotho
Note: Least developed countries in bold.
Source: Authors.
Table 15.5 Countries with an Applied Most Favored Nation Tariff

of 20% or More on Specially Designed Cameras
(Harmonized System Code 900630)
Algeria Guyana
Anguila Jamaica
Antigua and Barbuda Liberia
The Bahamas Madagascar
Barbados Mali
Belize Mauritania
Benin Montserrat
Burkina Faso Mozambique
Cambodia Niger
Cameroon Nigeria
Central African Republic Samoa
Chad Senegal
Congo, Dem. Rep. of the Sierra Leone
Congo, Rep. of the St. Kitts and Nevis
Cote d’Ivoire St. Lucia
Cuba St. Vincent and the Grenadines
Djibouti Sudan
Dominica Suriname
Fm Sudan Syrian Arab Republic
Ghana Togo
Grenada Tonga
Guinea Trinidad and Tobago
Guinea-Bissau Uzbekistan
Notes: These comprise cameras specially designed for underwater use, for aerial survey, or for medical or
surgical examination of internal organs; and comparison cameras for forensic or criminological purposes
(Harmonized System Code 900630). Least developed countries in bold.
Source: Authors.
15.2.3 Nontariff Measures for Health Products
NTMs refer to measures other than import duties which can affect market
access. Examples are technical regulations, product standards, or pre-
shipment inspections. Health products are typically subject to numerous
NTMs, most prominently product registration and approval, as they have

the potential to directly impact health. If appropriately designed and
implemented, such NTMs can further important public policy objectives
such as ensuring consumer safety and promoting public health. Our
intention is not to suggest that they be rolled back, but instead to highlight
their prevalence and to highlight the need for detailed assessments of the
costs and benefits of different regulatory options.
NTMs are notoriously difficult to measure and quantify. In 2009,
a group of technical experts from various international organizations
developed a classification of 16 chapters, ranging from technical regulations
(Chapter 1), conformity assessments (Chapter 2), pre-shipment
inspections (Chapter 3), to rules of origin (Chapter 15) and export-related
measures (Chapter 16). The data collection effort is still under way, and
results are currently available for a small number of developing countries
only. Nonetheless, we review them in this chapter. We also address some
previous work that looks directly at the health sector.
One of the rare surveys that studies NTMs was undertaken by the
International Trade Centre in 2010 (International Trade Centre 2011),
focusing on antimalarial products. The survey was based on phone
interviews with 29 importers and 6 exporters of antimalarial products in
mostly developing countries. Even though the sample size is rather small,
the results clearly show that NTMs are a major obstacle for international
trade in health products. The authors found that 60% of interviewees
faced burdensome NTMs; only nongovernment organizations and
international organizations did not report major NTMs. The most
commonly reported NTM related to product registration and inspection
requirements. Almost half of NTMs were perceived as burdensome
because of delays in administrative procedures, high fees and charges, as
well as lack of transparency and necessity for bribes. Several cases were
reported in which the product registration took several months or even
1 year. Inspection at customs seems to take a long time due to congestion
in the port and insufficient capacity of customs. Furthermore, many
respondents reported that additional charges and taxes other than
customs duties had to be paid, ranging between 5% and 10%. Finally,
high transportation costs between or within countries increase costs of
drugs. The International Trade Centre’s survey on antimalarial drugs
illustrates how NTMs add substantially to the final price of health
products.
More anecdotal evidence for NTMs comes from different country
cases. For example, Nigeria bans the import of various pharmaceutical
products. The ad valorem tariff in that case is effectively infinite on the
covered products. Of particular concern is the fact that the prohibition
list includes chloroquine, a drug used in the prevention and treatment
of malaria, as well as various antibiotics and deworming treatments. All

of these products have special significance in terms of health outcomes
in a developing country like Nigeria. The rationale for the import bans is
unclear, but there is likely to be a political economy motivation.
Mehta (2005) reports findings based on interviews with
10 pharmaceutical enterprises in India. The firms produced bulk
drugs (intermediates and active pharmaceutical ingredients, A2 in our
classification) and finished formulations in various dosage forms (A1 in
our classification). They exported to developed countries and developing
countries. The firms seemed to suffer from various kinds of NTMs in
overseas markets, including company registration, product registration,
World Health Organization–Good Manufacturing Practice certification,
packaging and labeling requirements, import bans, antidumping
measures, and pre-shipment inspection. The incidence of NTMs
varied across export markets. In developed countries, pharmaceutical
producers in India were mainly confronted with one main type of NTM
(company and product registration), while in developing and transition
economies, various NTMs had to be overcome. Furthermore, the
companies reported that compliance with NTMs involved considerable
financial costs and time. It is important to stress that although some of
these NTMs may have legitimate public policy objectives, others, like
import bans and antidumping duties, are firmly rooted in the protection
of markets, not people.
The newly updated, though only partially complete, United Nations
Conference on Trade and Development (UNCTAD) Trade Analysis
Information System (TRAINS) database makes it possible to give more
systematic insights into these kinds of questions. We take the example
of pharmaceutical products as the most useful implementation of new
data, the NTM-Map database is organized at the two-digit level. Of
course, pharmaceuticals are heavily regulated in most jurisdictions, and
important public policy objectives are furthered by many such regulations.
Nonetheless, the prevalence of NTMs is striking. Taking the sector as a
whole, 32 of the covered countries report that 100% of pharmaceutical
imports are covered by some kind of NTM. Only 13 report a coverage
ratio of less than 100%. Of those 13, coverage ratios range from 1% in Cote
d’Ivoire to just under 100% in Uruguay, with typical numbers in excess of
50%. This preliminary analysis indicates that NTMs are very common in
most countries in the pharmaceutical sector.
It is important to look at the type of NTMs being used, however. Some
may be important for public health and consumer protection, at least
if well administered, while others may be more protectionist in intent.
The NTM-Map database distinguishes five types of NTMs: sanitary
and phytosanitary measures (SPS), technical barriers to trade (TBTs),
customs formalities, contingent protection (antidumping, safeguards,

and countervailing duties), and quantity control measures (such as
licenses and quotas). Of these, clearly the first two are potentially the
most relevant to issues such as consumer protection.
Table 15.6 presents a breakdown of each economy’s NTMs, showing
coverage ratios for the five categories identified in the previous paragraph.
SPS and TBT measures are typically the most prevalent, which could
be in line with the public interest if the measures are appropriately
designed and administered. Indeed, the absence of these measures in
some countries (such as Cote d’Ivoire, Guatemala, and Senegal) is a
cause for concern. There need to be adequate quality controls in place
to ensure that pharmaceuticals, whether locally produced or imported,
are safe and effective.
Table 15.6 Percentage of Imports by Value Affected by Listed

Nontariff Measures, latest available year, World Integrated Trade
Solution – Trade Analysis Information System
Contingent Quantity
SPS TBT Customs Protection Control
(%) (%) (%) (%) (%)
Afghanistan 0 100 0 0 31
Argentina 96 100 97 0 100
Benin 0 85 85 0 100
Bolivia 78 100 0 0 0
Brazil 100 100 54 0 100
Burkina Faso 100 74 100 0 0
Cape Verde 0 100 0 0 100
Chile 86 100 64 0 0
China, People’s Republic of 0 100 0 0 66
Colombia 91 100 14 0 100
Croatia 16 100 5 0 2
Cuba 40 61 0 0 61
Côte d’Ivoire 0 0 1 0 0
Ecuador 81 100 0 0 0
El Salvador 100 100 0 0 0
Estonia 19 100 8 0 2
Table 15.6 continued
Contingent Quantity
SPS TBT Customs Protection Control
(%) (%) (%) (%) (%)
European Union 28 100 4 0 1
Gambia 0 100 0 0 0
Ghana 100 100 100 0 0
Guatemala 0 0 0 0 0
Guinea 100 100 100 0 0
Honduras 73 0 0 0 0
Hong Kong, China 11 100 0 0 11
India 70 100 0 1 0
Kazakhstan 100 99 0 0 75
Malawi 0 100 0 0 0
Mali 74 100 100 0 100
Mexico 100 100 0 0 0
Nepal 100 100 0 0 0
Nicaragua 1 100 0 0 0
Niger 0 92 100 0 100
Nigeria 0 100 98 0 83
Pakistan 0 96 0 39 100
Panama 3 95 0 0 0
Paraguay 94 95 55 0 0
Peru 89 93 0 0 6
Russian Federation 0 100 100 0 100
Rwanda 100 100 0 0 100
Senegal 2 0 100 0 0
Sri Lanka 100 100 100 0 0
Tajikistan 100 100 0 0 1
Togo 0 89 0 0 0
Turkey 100 96 0 0 0
Uruguay 57 100 40 0 54
Venezuela 83 99 0 0 0
SPS = sanitary and phytosanitary measures, TBT = technical barrier to trade.
Source: Authors.
The other categories of NTMs are more troubling from an access

and efficiency point of view. Quantity controls, such as licenses and
quotas, are applied by a number of countries. Although licensing may
be appropriate as a way of ensuring quality control, the risk is that
quantity control measures can be used to protect the domestic market
for incumbents, or reduce efficiency and access considerably. This area
is perhaps one that needs attention going forward. Customs formalities
also stand out in some countries. In line with recent advances in
trade facilitation, there is a clear rationale for streamlining customs
formalities. Although administration of SPS and TBT measures may
require some additional formalities at the border, they should be kept
as light as possible. Finally, Pakistan stands out for its extensive use of
contingent protection measures against foreign pharmaceuticals. There
is no public health rationale for these NTMs, and they are much more
likely to be protectionist in intent and effect.
Even though we lack systematic empirical evidence on NTMs
for health products in all countries, the studies demonstrate the
importance of NTMs. It seems that health products in developing
countries are subject to these additional trade barriers. The presence
of numerous NTMs translates into additional large costs for importers
and patients. We conjecture that import duties are only a small fraction
of the costs that are involved in importing health products. To ease
trade in health products, the reduction of NTMs is as important as
tariff elimination.
Overall, we have strong evidence that tariffs and NTMs both
considerably undercut some countries’ ability to move forward on
SDG 3. The effect of tariffs and NTMs on health products is to push
prices up, and limit availability on the domestic market. There is no
health rationale for putting in place tariffs that make it harder for
consumers to access important health-related goods. Indeed, the
opposite is true: increased openness would undoubtedly result in
lower prices and improved availability, which would help promote
improved health outcomes. Some NTMs might be justified to protect
public health. However, many NTMs seem to be more burdensome
than necessary, and even necessary NTMs need to be administered in
an efficient and transparent way. As a result, access to health products
is more expensive, delayed, or impossible. We still lack systematic
data to quantify combined impact of tariffs and unnecessary NTMs.
However, we can certainly state that both significantly hinder access
to health products and are thus bad for health.
15.3 Case Study 1: Vaccines

The previous section showed that a variety of countries continue to
apply active trade policies to health-related products, and it argued that
the result would be to decrease availability and increase cost, which is
a negative outcome in terms of SDG 3. So what do the data say about
trade policy and health outcomes? This section provides some basic
exploratory analysis, focusing on the example of vaccines.
The lens for looking at trade and vaccination rates as a health
outcome is logistics, an internationally traded service.1 The rationale for
expecting a connection between the two is that vaccines require careful
handling if they are to be moved from port or factory to the hinterland
in a usable state. To measure trade policy, the World Bank’s Logistics
Performance Index (LPI) is used, specifically the subindex measuring
the competence and quality of logistics services—a variable that should
be linked to trade policy. Results are presented using the immunization
rate for diphtheria, pertussis, and tetanus, but similar conclusions follow
if the measles immunization rate is used instead.
Figure 15.6 shows the association between the two variables. The
line of best fit is upward sloping, in line with the contention that better
logistics and trade facilitation performance is associated with better
handling of vaccines, which in turn increases the immunization rate. The
association is statistically significant at the 1% level (R2 = 0.16). Moreover,
the association between these two variables remains strong even when
confounding influences are accounted for. Shepherd and Pasadilla (2011)
report results from an OLS regression of the immunization rate on the
LPI logistics competence index, with a set of control variables including
per capita gross domestic product (GDP), the percentage of GDP spent
on health, and an index of government effectiveness from the World
Governance Indicators. The coefficient on the LPI remains statistically
significant at the 1% level. In addition, an interaction term with per
capita GDP is negative, which indicates that the association between
logistics performance and the vaccination rate is stronger in lower-
income countries. These results hold even if a dummy is introduced for
sub-Saharan African countries, the region where vaccination is most
problematic and logistics weakest. The evidence in this case connecting
better trade policy—in this case improved logistics and trade facilitation—
with improved health outcomes in terms of SDG 3 is strong.
1
This section draws on Shepherd, B., and G. Pasadilla. 2011. Trade in Services and
Human Development: A First Look at the Links. In Service Sector Reforms:
Asia-Pacific Perspectives, edited by P. Sauve, G. Pasadilla, and M. Mikic. Tokyo: Asian
Development Bank Institute.
Figure 15.6 Correlation between Logistics

Competence and Diphtheria, Pertussis, and Tetanus
Immunization Rate, latest available year
1
.8
DPT Immunization Rate
.6
.4
.2
1 2 3 4
LPI Logistics Competence Index
DPT Immunization Rate Fitted values
DPT = diphtheria, pertussis, and tetanus, LPI = Logistics Performance Index of the World Bank.
Source: Shepherd and Pasadilla (2011).
Case Study 2: Insulin

Trade openness is typically a necessary, but not sufficient, condition
to ensure that prices are lower compared with a closed regime.
In the field of pharmaceuticals, prices are often regulated and/
or the pharmaceutical companies enjoy monopoly power. In this
subsection, we would like to study the case of insulin, which is the
main drug to counter diabetes. As diabetes has become a major public
health problem around the world, insulin trade has also increased
rapidly. In contrast to most other drugs, insulin has two dedicated
HS subheadings. Most insulin products are traded under HS 300331
“medicaments containing insulin (not in measured doses or put up for
retail sale).” HS 300431 covers medicaments containing insulin put
in packings for retail sale, for which international trade is more than
99% (in value terms) compared with international trade of HS 300331.
For our analysis, we will therefore only study trade flows and tariffs
for HS 300431.
Figure 15.7 Evolution of Volumes and Values

of Harmonized System Code 300431, 1995–2013
Total volume (million units) Total value ($ billion)

1995–2013 1995–2013
30
10
25
8
20
Volume
Value
6
15
10 4
5
2
0 0
1995 2000 2005 2010 2013 1995 2000 2005 2010 2013
Year Year
Source: Helble and Aizawa (2017).
As we can see in Figure 15.7, trade in insulin has increased drastically

over the last 2 decades, both in terms of volume (kilogram) and value
(US dollars). The expansion is particularly marked after 2000.
Figure 15.8 illustrates the import values of medicaments
containing insulin among Organisation for Economic Co-operation and
Development (OECD) countries and non-OECD countries, setting the
value in 1995 as 100. The need for insulin appears to be growing in both
country groups. However, whereas OECD countries started to import
much more from 2000 onward, non-OECD countries followed only a
few years later. From 2000 to 2013, insulin imported in value terms by
OECD countries grew by 13.96% annually while that imported by non-
OECD countries grew by 15.05%.
The global insulin market is dominated by three major
pharmaceutical companies: Novo Nordisk, Eli Lilly, and Sanofi-
Aventis. However, more and more local manufacturers in off-patent
countries have become active in the market, especially in the People’s
Republic of China, India, and the Russian Federation. The insulin
medicines produced by different producers yield comparable health
Figure 15.8 Evolution of Imports of Harmonized System

Code 300431 ($, indexed to 1995 = 100)
800
700
600
Change in volume
500
400
300
200
100
1995 2000 2005 2010 2013

Year
OECD countries Non-OECD countries
Volume in 1995 = 100

outcomes. However, the prices charged by different producers and

across countries differ considerably. Figure 15.9 shows the evolution
of the average landed unit prices2 for HS 300431 coming from
OECD countries and non-OECD countries. We observe that the
price for insulin imported from OECD countries is substantially and
continuously higher compared with the price levied by producers in
non-OECD countries.
The source of the traded insulin, however, is only one determinant
of the price. Helble and Aizawa (2017) analyze the trade and prices
of insulin for 186 importing countries between 1995 and 2013 and
study various determinants explaining the price differences across
countries and years. The authors find that pharmaceutical companies
systematically apply price discrimination. In other words, the higher
2
The unit price is defined as the ratio between value and weight. In the case of insulin,
the weight is in kilograms. Unit values are commonly used in the trade literature as a
proxy for prices per unit.
Figure 15.9 Evolution of Average Import Unit Prices of

Harmonized System Code 300431, 1995–2013
(simple average)
.40
.35
Average unit price
.30
.25
.20
.15
1995 2000 2005 2010 2013

Year
OECD countries Non-OECD countries

the national income per capita, the higher the price for insulin. More
interestingly, the authors find evidence that market forces attenuate
the potential for discriminating prices fully. Their study shows that
the greater the number of sources a country uses to import insulin
and the larger the volume, the lower the price tends to be. In addition,
institutional factors seem to play a role. In countries where most of
the expenditure is out-of-pocket, prices seem to be higher, indicating
that atomistic buyers have less negotiating power. Finally, lower tariffs
appear to have a significant effect on prices.
Overall, the study shows that trade has become a vital instrument
to fight diabetes through improving insulin availability across the
world. However, an open trade regime is not enough to guarantee low
prices. Pharmaceutical companies often attempt to discriminate prices
according to income levels. Governments can counteract by enlarging
the pool of source countries and by building up health systems that
lower out-of-pocket payments. This example shows that trade can be an
important force in promoting improved health outcomes, but of course it
cannot succeed alone; general health policy is vital. The key, as explored
in this chapter, is in getting the two to work productively together.
15.5 Conclusion and Policy Implications

This chapter has provided a first look at one important non-income
linkage from a more open trading system to the SDGs, specifically SDG
3, which deals with health. There is clear evidence that developing
countries apply tariffs and NTMs that have the effect of increasing
prices and decreasing availability of health-related products such
as pharmaceuticals, vaccines, and medical equipment. The case for
liberalizing trade in these products is strong. In addition, there is
compelling evidence that improving trade facilitation performance—
using the WTO’s Trade Facilitation Agreement as a starting point—
could be linked to improved handling of health-related products such as
vaccines, which in turn would boost usage. The case of insulin showed
that trade is key for the supply of insulin to patients across the world.
Studying the price differences across countries, we observed that the
price of insulin has various determinants. Pharmaceutical companies
typically charge higher prices in markets with higher per capita income.
The level of competition and size of the market are additional factors that
influence the final price. Government can try to leverage the competition
between manufacturers as well as their purchasing power to bring down
the price of insulin. Building up health systems that lower out-of-pocket
payments is another option to make insulin more affordable to patients.
One area of tension for trade and health outcomes is the protection
of intellectual property rights. That protection can promote innovation
by pharmaceutical companies, which, in turn, can improve patient
outcomes. But market size effects combined with the very high
development costs for new medications mean that even strong protection
of intellectual property rights has proved insufficient to generate
treatments for some common developing country ailments like malaria.
That said, private sector funding through foundations is changing that
position somewhat, by providing incentives for development-relevant
drug research.
It is important to remember that the principal constraint in terms
of improving people’s health in developing countries is the weakness of
the health services sector and delivery systems. For many conditions,
medicines are available and off-patent, which means they can be
produced quite cheaply, including by developing country manufacturers
of generics in countries such as India and Brazil. Facilitating the
movement of generic drugs to poorer developing countries is an
important health policy objective, but one that needs to be backed up by

public and private sector spending on health care, including through the
development of delivery infrastructure and professional services. We
therefore need to stress the importance of complementary policies such
as infrastructure and human resources development, as an adjunct to a
liberal trade policy in relation to health products.
Although trade has a relatively low profile in the SDGs and their
companion targets, it is by no means absent from the package of measures
available to policy makers to promote the SDGs. Trade economists need
to do more to show that trade can benefit sustainable development
through non-income channels. Work on liberalization of environmental
goods and services is another important example from outside health:
by the same reasoning as was presented here, liberalization in these
sectors can directly help achieve the SDGs by promoting sustainability.
Future policy research could usefully concentrate on identifying more
examples like health and the environment—areas in which trade can
promote sustainable development through non-income channels.
Similarly, analysts in other areas featured more prominently in the SDGs
should be looking to include trade in the conversation on how best to
promote sustainable and inclusive growth.
References
Helble, M. 2012. More Trade for Better Health? International Trade and
Tariffs on Health Products. WTO Staff Working Paper ERSD-2012-17.
Geneva, Switzerland: World Trade Organization.
Helble, M., and T. Aizawa. 2017. International Trade and Determinants of
Price Differentials of Insulin Medicine. Health Policy and Planning
32 (1): 1 –10.
International Trade Centre. 2011. Non-Tariff Measures and the Fight
against Malaria: Obstacles to Trade in Anti-Malarial Commodities.
Technical paper. Geneva, Switzerland: International Trade Centre.
Mehta, R. 2005. Non-Tariff Barriers Affecting India’s Exports: Dealing
with Non-Tariff Measures in Developing Countries—A Case Study of
India. Research and Information System for Developing Countries.
1 January.
Shepherd, B., and G. Pasadilla. 2011. Trade in Services and Human
Development: A First Look at the Links. In Service Sector Reforms:
Asia-Pacific Perspectives, edited by P. Sauve, G. Pasadilla, and
M. Mikic. Tokyo: Asian Development Bank Institute.
16
Trade in Health Services
Rupa Chanda
16.1 Introduction
Good health is integral to individual happiness and well-being as well

as overall economic and social progress. Healthy populations live longer
and are more productive. Hence, any efforts to promote sustainable
development, i.e., to improve the quality of life of all people within the
given resource and capacity constraints of our world are necessarily linked
directly and indirectly to health conditions and outcomes. This link runs
in both directions. While health is a key goal of sustainable development,
starting from the very first principle of the Rio Declaration, which states,
“Human beings are at the centre of concerns for sustainable development.
They are entitled to a healthy and productive life in harmony with nature,”
health in turn also contributes to sustainable development by providing
human capital for growth, by stimulating savings and investment, and
by enabling individuals and communities to benefit from and participate
in the development process. Health plays an integrating role across
the economic, social, and environmental dimensions of sustainable
development and also within each of these elements.
While the two-way link between health and sustainable
development is well accepted, the relationship between trade and
sustainable development remains much debated. Empirical evidence
across developing countries is mixed, with some benefiting from
greater participation in world markets in terms of gaining new
markets, obtaining lower product prices, better quality, increased scale
and choice of products, and others experiencing displacement of jobs
and production and greater divergence in outcomes across different
sectors and players within their economies. It is thus well recognized
that the relationship between trade and sustainable development is
complex and multifaceted, shaped by country-specific characteristics
and the prevailing regulatory and policy environment. The triad
between health, trade, and sustainable development is thus complex,
involving the impact of international agreements, trade liberalization,
400
Trade in Health Services401
and deregulation on health outcomes and access to health products and

services and consequently development objectives, the intermediating
role of health in linking trade with sustainable development goals,
and the role of development conditions in shaping the impact of trade
on health and vice versa. Further, the nature of the relationship varies
depending on the specific segment under consideration in the health
sector.
This chapter focuses on one part of the above triad, i.e., the
intersection of trade in health services, which is a specific segment
within the broader health sector, and sustainable development goals. As
the pathways connecting trade, health, and development are many, the
chapter specifically focuses on one aspect of this linkage—the impact of
health services trade on the realization of the Sustainable Development
Goals (SDGs) and the various modalities through which this impact
may occur. The focus on health services is motivated by the fact that
effective health services form the backbone of health interventions.
Accessibility, quality, capacity, organization, availability of human and
physical resources, and equity in the provision of health services are
essential for a health-care system to deliver desired health and related
sustainable development outcomes. The focus on the intersection of
health services and trade is motivated by the growing globalization and
tradability of services and the increasingly important role played by
the services sector and services trade in the growth and development
process of economies. Services exports have risen from $396 billion
in 1980 to $4.7 trillion in 2013 and can help provide key intermediate
inputs such as transport and communication, enhance economy-wide
competitiveness and productivity, and improve access to basic services
and thus in alleviating poverty.1
Within the services sector, health services have undergone
significant globalization, with growing cross-border investment flows,
mobility of health professionals and patients across borders; the use of
information and communication technologies to deliver cross-border
services; and the transfer of ideas, research, management skills, and
know-how between countries. International trade in health services is
thus increasingly creating possibilities for the health sector to contribute
to economic and social development with implications for equity,
efficiency, and quality, which are relevant in the context of the SDGs.
There is thus a need to understand the implications of globalization of
health services for realizing social and developmental objectives and the
1
UNCTADSTAT. http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx
?ReportId=17648 (accessed 15 March 2016).
potential trade-offs that may arise between these goals and commercial
considerations. Such an understanding would enable governments
to adopt policies that help balance competing concerns of efficiency
and equity in the context of health services. It would also provide
insights into how the international community can take advantage of
the development benefits arising from trade in health services while
addressing any adverse effects of such trade (Chanda 2001a, 2001b).
Keeping in view this context and motivation, this chapter is outlined
as follows. Section 16.2 following this introduction highlights those
SDGs that are directly or indirectly relevant to health. It also briefly
reviews existing work that relates health targets and indicators to the
SDGs and highlights the perspective of the World Health Organization
(WHO) on this relationship. Section 16.3 discusses the different modes
through which trade in health services takes place and their bearing on
the realization of relevant SDGs. The discussion highlights the positive
and negative implications of this trade and focuses on several segments
and modes, such as medical value travel, telemedicine, hospital services,
and mobility. Section 16.4 provides some country-specific examples to
illustrate the channels through which trade in health services can affect
sustainable development. Section 16.5 concludes by highlighting policies
and steps that can be taken at the national, regional, and multilateral
levels to leverage health services trade for meeting sustainable
development objectives.
16.2 Relating SDGs and Health Services

The SDGs are a set of crosscutting, interlinked goals, some of which
directly or indirectly relate to health.2 This section provides an overview
of the SDGs that are relevant in the context of health services to provide
a context for the discussion that follows in later sections regarding
the various pathways through which trade in health services affects
development objectives and the nature of this impact.
Although there has been some criticism that compared with the
Millennium Development Goals (MDGs) there is less focus on health
under the SDGs, a closer examination indicates that health underpins
many of the SDGs given the latter’s broad and integrated nature. The
one SDG that specifically pertains to health is SDG 3. Its aim is to
2
See ICSU and ISSC (2015) and the United Nations’ Sustainable Development Goals
at http://www.un.org/sustainabledevelopment/sustainable-development-goals/ for
the various SDGs (accessed 14 February 2017).
ensure healthy lives and promote well-being for all at all ages. The
subgoals within SDG 3 include specific health-related indicators that
highlight the importance of health both as an input and as an outcome
in the development process. Two of these subgoal specific indicators
that are of direct relevance to the discussion on health services trade
are SDG 3.8 and SDG 3.9c. The former aims at achieving universal
health coverage, including financial risk protection and access to
quality essential health-care services. The latter aims at substantially
increasing health financing and the recruitment, development, training,
and retention of the health workforce in developing countries, in
particular least developed countries and island states. Trade in health
services can play a role, positive or negative, in the realization of
these subgoals through its impact on the access, quality, affordability,
and equity in health services, via channels such as foreign exchange
earnings, through the intra-health sector distribution of resources
between different segments and players for investments in human
resources capacity and infrastructure, and through channels such as
cross-border transfer of knowledge, technology, and manpower. Trade
in health services can thus potentially both directly and indirectly
through its many externalities influence the attainment of SDG 3 and
specifically the two aforementioned subgoals.
Broadening the focus beyond SDG 3, there are also SDGs where
health is itself a contributor to the attainment of the goal. For instance,
SDG 8, which seeks to promote sustained, inclusive, and sustainable
economic growth; full and productive employment; and decent work
for all, is necessarily underpinned by existing health conditions and
health systems and the availability of and access to health services.
Again, trade in health can play an important direct and indirect role
in shaping these conditions through its impact on the growth of
the health sector and associated employment creation, by shaping
the possibilities for technology transfer, knowledge spillovers, and
resource mobilization, and through its impact on standards and
quality, among other channels. There are also SDGs where health
itself benefits from the progress toward those goals such as SDGs 1
and 2, which aim at ending poverty, promoting nutrition, and ensuring
food security among other objectives. Here, trade in other sectors,
not necessarily health services, such as trade in food and agricultural
products, pharmaceuticals, and basic goods would influence the
attainment of these development goals. At the broadest level, SDG 3
underpins the crosscutting role of health (and for that matter many
other sectors such as education) given its focus on the reduction of
inequality within and among countries. Access to health care is not
only essential for realizing this SDG but is also likely to improve in
Figure 16.1 Triad of Health and Sustainable Development
Economic growth and equity
Health
Health
Conservation of services
natural resources
and environment Social development
Source: Department of Health, South African Development Community, World Health Organization
(2002), p. 30.
the course of realizing this goal. Once again, trade in health services
can influence equity outcomes within the health sector by shaping the
access to quality and affordable health services.
Figure 16.1 illustrates the central role of health services in the nexus
that connects health and sustainable development. It also implicitly
captures the role that health services trade can play within this nexus.
The WHO perspective on the health and sustainable development
goals nexus and the bearing that trade has on this link is evident from
various WHO reports and statements. The latter indicate the WHO’s
view that there exist many synergies across the various SDGs that
are relevant to health. These include synergies that are direct such as
between health, education, nutrition, social protection, and conflict, and
synergies that are indirect such as between sustainable consumption
and health. In the WHO’s view, the SDGs provide a basis for enhancing
governance for health at the multilateral, regional, and national levels.
These include policies in a wide range of areas, in particular, trade,
migration, and intellectual property rights, which can impact positively
or negatively on health. In this context, governance frameworks such
as the General Agreement on Trade in Services (GATS), comprehensive
regional and bilateral preferential agreements that include services
and investment flows, and mobility arrangements between nations that
cover various facets of health services trade provide a tangible basis
for examining the implications of health services trade for the SDGs.
Hence, although health is seen as a public good sector and trade is seen
as a commercial activity that can be inimical to the interests of equity

and affordability that are expected to govern the functioning of such
social services, the WHO perspective as well as academic literature in
this domain suggests that the issue should be seen in a more nuanced
and balanced manner.3 Free trade in health services (and also health
products) could potentially improve access to health care in developing
countries, provided there are supporting regulatory and infrastructural
conditions. Barriers to health services trade can thus impede the
realization of the SDGs. The following section outlines what these
potential benefits could be and associated risks that must be recognized
and addressed through appropriate policies and regulations.
16.3 Modalities and Implications of Health

Services Trade
Globalization of health services has taken many forms and has been
driven by a variety of factors including advances in information and
communication technologies, growing ease of travel and mobility
across countries, increased private sector participation in health care,
liberalization of foreign direct investment, growing cross-border
collaborative arrangements in health sector training, research and
technology transfer, and growing demand for health services due to
rising incomes and demographic trends. The discussion that follows
briefly outlines the various modes by which health services trade takes
place and the resulting impact on development outcomes, including in
particular the SDGs noted above.4
16.3.1 Mode-Wise Trade in Health Services

GATS under the World Trade Organization (WTO) provides the
framework for understanding trade in health services. As per GATS,
there are four modes by which services are traded—(i) cross-border
delivery or mode 1, which refers to the physical delivery of a service across
borders such as in transport or business process outsourcing services;
(ii) consumption abroad or mode 2, which refers to the movement of
consumers to other countries to avail of services; (iii) commercial
3
See, WHO (January 2015), WHO (October 2015), WHO (January 2002) and UN
(May 2012) for discussion on the SDGs and health.
4
Much of the discussion in this section on the various modes of health services trade
draws upon Chanda (2001a and 2001b).
presence or mode 3, which refers to the establishment of a commercial

entity in the form of a branch, subsidiary, franchise, affiliate, or joint
venture and involves the movement of capital; and (iv) movement of
natural persons or mode 4, which refers to the temporary cross-border
mobility of service providers without the intent to become a citizen or
permanent resident in the other country. All four modes of GATS are
pertinent to health services trade.5
Cross-border delivery or mode 1 in health services involves the
shipment of clinical and data services captured in diagnostic reports and
samples channels through traditional mail channels and, increasingly,
the electronic delivery of health services using interactive, audiovisual,
and data communications for diagnostics, second opinions, lab testing,
surveillance, consultations, transmission of and access to specialized
data, records, and information, and continuing medical education and
upgrading of skills. Within mode 1, telehealth, which is the “integration of
telecom systems into the practice of protecting and promoting health” and
telemedicine, which is the incorporation of these systems into curative
medicine are growing in importance. According to a recent report, the
global telehealth market was valued at $2.2 billion in 2015 and is expected
to grow at a compound annual growth rate of 24% from 2015–2020 to
reach a market size of $6.5 billion by 2020.6 Countries are engaged in a
variety of telehealth services such as telepathology, teleradiology, and
telepsychiatry and many cross-border telemedicine initiatives have
emerged. For instance, telediagnostic, surveillance, and consultation
services are provided by United States (US) hospitals to hospitals in many
Gulf countries and to some countries in Central America. Telepathology
services are provided by India’s doctors to hospitals in Nepal and
Bangladesh, and telediagnostic services are provided by hospitals in the
People’s Republic of China’s coastal provinces to patients in Taipei,China;
Macau, China; and some Southeast Asian countries. There is also
considerable scope for related services such as medical transcription,
which are being increasingly outsourced to developing countries such
as India to reduce costs. With further advances in telecommunications
technologies and declining costs of electronic delivery, the scope for
mode 1-based trade in health services is likely to grow, not only among
developed countries but also increasingly from developed to developing
and from more advanced developing to poorer neighboring countries.
5
See WTO (January 2013) for an introduction to the GATS framework. See the full
GATS text at https://www.wto.org/english/docs_e/legal_e/26-gats.pdf (accessed
14 February 2017).
6
PRNewswire. 2015. http://www.prnewswire.com/news-releases/global-telehealth
-market-growing-at-24-cagr-to-2020-521726311.html (accessed 14 February 2017).
Consumption abroad or mode 2 in health services is the most

prevalent and longstanding form of trade in health services. It involves
the movement of consumers from one country to another for purposes
of diagnostics, treatment, and rehabilitation and follow-up services.
The estimates for the number of medical tourists globally per year vary
tremendously depending on the source, from a lower bound of 5 million
to an upper bound of over 40 million, with intermediate estimates
putting the number at around 14 million per year. The financial value of
mode 2 in health services trade is difficult to pin down but conservative
estimates place this in the range of $60 billion to $100 billion annually.
According to McKinsey, around 25% to 30% of these patients are
expatriates, another 30%–35% are seeking emergency care, and the
remainder are patients who go abroad to seek treatment (Horsfall and
Lunt (2015: 29–31). There is much debate on these numbers and values,
as highlighted in Helble (2011), but what is well accepted is the large
number of patients who are seeking treatment in other countries and
the growing importance of the medical tourism industry.7
Mode 2 in health services is driven by differences in cost, quality,
and availability of treatment across countries; as well as factors such as
natural endowments, existence of alternative medicines and treatment
procedures, long waiting lists for treatment in the source country;
and cultural, linguistic, and geographic proximity between sending
and receiving countries. It occurs among developed, developing, and
between developed and developing countries. It is common for affluent
patients in developing countries to seek specialized high quality
treatment overseas in developed country hospitals or in neighboring
developing countries with superior health care standards. It is also
common for persons in developed countries to seek quality treatment
at a fraction of the cost in developing countries, or to seek alternative
medicines and treatments and take advantage of natural endowments in
developing countries. For instance, patients from developed countries
such as the US and the United Kingdom can get bypass surgeries or
transplants done at one-fourth or one-fifth of the cost in high quality
corporate and super-specialty hospitals in developing countries such as
India, indicating the tremendous scope for gains from trade due to cost
differences. With escalating health-care costs and aging populations
in developed countries and increased portability of health insurance
7
There is also trade in related services under mode 2, such as in medical education and
training services, which involves movement of health professionals and students for
receiving medical and paramedical education and training abroad. Some developing
countries such as Thailand and India provide technical assistance in medical
education services by reserving seats for students from other developing countries.
following opening up of the insurance sector in many countries,

consumption abroad in health services is likely to grow in the future.
Glinos et al. (2010) capture this diversity in cross-border movement
of patients in terms of the motivation for treatment abroad and the
financing of such treatment.
Health services can also be traded through commercial presence or
mode 3, wherein hospitals, clinics, diagnostic and treatment centers,
and nursing homes may be established across countries. There may be
joint ventures, alliances, and management tie-ups between health-care
organizations across countries and regional networks of health-care
providers that may be engaged in delivering health care through modes
1 and 2 above. Such arrangements may involve acquisition of facilities,
management contracts, and licensing arrangements with some degree
of local participation to ensure access to certified and adequately
trained local persons and to ensure local contacts and commitment. The
growing trend toward commercial presence in health services is evident
from the many regional health-care networks and chains that have been
formed in recent years. For instance, the Singapore-based Parkway
Group has acquired hospitals in Asia and Britain and has created an
international chain of hospitals, Gleneagles International, through joint
ventures with partners in Malaysia, Indonesia, Sri Lanka, India, and the
United Kingdom. It has also set up a dental surgery chain through joint
ventures in Southeast Asia. The Raffles Medical Group in Singapore has
formed strategic alliances globally by developing triangular business
associations with health-care organizations from developed countries,
in partnership with host country investors. The aim of such companies
is to develop an integrated network of health-care companies offering a
range of high-quality and cost-effective health services. This trend has
been facilitated by the opening up of foreign direct investment (FDI) in
health care and with more and more governments encouraging private
sector participation in the provision of health services. There has also
been diversification of commercial presence in health services with the
spread of managed care and resulting opportunities for commercial
presence in management of health facilities and allied services.
Some countries are entering into contract-based management and
administration of foreign-owned or joint-venture hospitals. There are
also emerging opportunities for firms with experience in accreditation,
legislation, and medical standards. Another emerging area for
commercial presence is in medical and paramedical education with
many well-known medical schools of international repute, establishing
joint ventures with local medical schools.
Health services can also be traded through the temporary movement
of health personnel or mode 4, including doctors, specialists, nurses,
paramedics, midwives, technicians, consultants, trainers, health

management personnel, and other skilled and trained professionals.
Along with mode 2, this mode constitutes an important part of trade
in health services today. Both developed and developing countries are
engaged in health services trade via mode 4. There are mode 4 exports
from developing to developed countries such as from India and the
Philippines to countries in the Gulf region or from Cuba to countries in
Africa and the Caribbean on short-term contracts. The Middle East is
an important host market for a wide range of health professionals from
developed and developing countries, including doctors, nurses, X-ray
technicians, lab technicians, dental hygienists, physiotherapists, and
medical rehabilitation workers.
It is to be noted, however, that much of cross-border mobility of health
providers does not constitute mode 4 but rather is permanent migration
in search of higher wages, better working conditions, greater exposure
and professional development opportunities, and higher standards of
living in the destination market. Mode 4 trade in health services is a
subset of such movement, which is temporary in nature, usually under
bilateral contracts between institutions and/or governments and aimed
at addressing shortages such as of nurses or specialists in the receiving
market (Kingma 2007). However, it is difficult to estimate the size of
mode 4 trade in health services as such statistics, which clearly delineate
temporary from permanent cross-border movement in the health sector
and which are aligned with the guidelines laid down in the Manual on
Services of International Trade in Services (MSITS) (United Nations
2010) are not readily available.8
Table 16.1 summarizes the four modes by which health services may
be traded.
Across all 4 modes, the regulatory and policy environment as well
as existing physical and human resources capacity are very important
in determining the extent of health services trade. For instance, trade
in mode 1 is affected by restrictions on transfer of personal data under
data privacy and patient confidentiality regulations and by internet
8
Under MSITS (United Nations 2010), mode 4 covers the supply of services through
the presence of foreign service suppliers either in their individual capacity or on a
contractual basis or as intra-corporate transferees (i.e., either as direct employees
of a foreign service supplier or on contract through their affiliated firms). Such
movement must be temporary (though this period is not specified) and the purpose
should not be to enter the permanent labor market or for citizenship to qualify under
mode 4. However, immigration statistics as currently collected do not provide for
a clear distinction between mode 4 and larger cross-border mobility in different
services. Further, data on health services are scarce, making it even more difficult to
estimate the value of mode 4 trade in this sector.
Table 16.1 Characterizing Trade in Health Services

by GATS Modes of Supply
Trade in Goods
Trade in Health Trade in Ancillary Associated with
Services Services Health Services
Mode 1: Telemedicine, Distance medical Health-care
Cross-border including diagnostics, education and equipment
supply radiology training
Medical transcription, Drugs
back office
Medical research Medical waste
tools and databases
Medical insurance Prosthesis
Mode 2: “Medical tourism,” All activities
Consumption i.e., voluntary trip associated with
abroad to receive medical health tourism
treatment abroad (e.g., transport,
hotel, restaurant,
paramedical, local
purchases, etc.)
Medically assisted Local medical
residence for retirees education and
training of foreign
nationals
Expatriates seeking
care in country of
residence
Emergency cases
(e.g., accident when
abroad)
Mode 3: Foreign participation Foreign-sponsored
Commercial or ownership of education or training
presence hospital/clinic or centers
medical facilities (e.g.,
capital investments,
technology tie-ups,
collaborative
ventures)
Foreign-sponsored
medical research
facilities
Mode 4: Movement of doctors Movement of doctors
Presence of and health personnel and health personnel
natural persons for the purpose of for other purposes
commercial medical (e.g., education or
practice training)
GATS = General Agreement on Trade in Services.
Source: Author’s construction.
connectivity, bandwidth, and costs. Mode 2-based trade in health

services is affected by issues of insurance portability, cross-border
liability, and visa and foreign exchange regulations. Mode 3-based
trade in health services is mainly determined by FDI regulations and
associated conditions on foreign investors as well as the availability
of physical and other infrastructure and policies governing medical
equipment and supplies. Mode 4-based trade is affected by immigration
and labor market regulations in host countries as well as recognition and
licensing requirements. It is the most restricted mode of supply in health
services trade and for that matter for all services trade.9 Thus, clearly,
whether and how trade in health services trade affects the attainment
of relevant SDGs is partly a function of these aforementioned regulatory
and structural constraints and how they affect the availability, quality,
cost and distribution of health services, and related outcomes.
16.3.2 Developmental Implications: Potential Positives
Trade in health services may have both positive and negative implications
for the SDGs.10 The nature of this impact depends on the specifics of the
country and its national health-care system, the regulatory environment
governing the health sector and related sectors, the policies adopted to
facilitate or constrain this trade, and the associated externalities. The
discussion that follows first outlines the potential positive development
implications of health services exports and imports across the different
modes of supply, both direct and indirect. It then highlights through
country examples the nature and significance of this impact.
The standard way in which exports benefit a country is by
augmenting their foreign exchange earnings, thereby providing them with
macroeconomic stability through the balance of payments. This channel
is relevant even in the case of health services, whether it is cross-border
delivery of health services through telemedicine, or medical tourism-
related foreign exchange earnings or employee compensation and
remittances arising from cross-border mobility of medical personnel or
9
It is to be noted that health services are one of the least opened services sectors
under the WTO due to its public good and social service characteristic. Adlung
and Roy (2010) highlight that only 39% of WTO member countries have made
commitments in health services compared with 95% in tourism services, 81% in
financial services, and 78% in business services. The only other sector with such
limited scheduling by member countries is education services, for similar reasons.
10
The discussion in this section on the potential positive effects of trade in health
services draws upon Chanda (2001a and 200b), Adams and Kinnon (1997), Bettcher
et al. (2000), and UNCTAD/WHO (1997).
dividends and profits earned from investment overseas. Exports of health

services contribute to development resources through the current account
of the balance of payments. In all cases, the resources thus garnered can
potentially be used toward increasing capacity in the health sector, for
improving access to health care and other developmental needs. But far
more important than this channel are the additional spillover benefits
that trade can give rise to in the health sector and in the wider economy.
These externalities may take the form of improved infrastructure,
standards, technological upgradation, employment creation, and skilling
with associated development implications for equity, access, costs, and
quality. For instance, investments in physical infrastructure and human
resources associated with telemedicine exports could be leveraged to
deliver health services to remote and underserved areas and segments of
the population within developing countries, to alleviate human resources
constraints in these regions, to enable more cost-effective surveillance of
diseases, and to provide affordable, timely, and better quality of diagnostic
services in poor countries. Efficiency gains due to telemedicine exports
may also help increase the general efficiency of the health-care sector by
enabling the use of interactive methods and more rapid and up-to-date
services at lower cost. Hence, health services exports through mode 1
and the associated financial and infrastructural resources to support such
exports can enable developing countries to address gaps in their health-
care system and pursue key sustainable development goals of providing
equitable access to health care and improving health outcomes. In a
similar manner, exports of health services under mode 2 may not only
provide additional resources to improve the health-care system but can
also incentivize health-care providers to seek international accreditation
to attract foreign patients, to invest in new technologies, skills and
specializations, and to raise the overall standards and quality of health
care in the country. There could also be spinoff benefits in terms of return
migration of expatriate health-care professionals and improved retention
of domestic professionals, thereby augmenting the human resources
capacity in the health care sector. In the case of mode 4 exports, beyond
the foreign exchange earnings from overseas health-care personnel,
additional benefits can accrue from the upgrading and exchange of skills
and knowledge, development of specialized expertise, and associated
improvements in standards and practices upon return to the exporting
country.
Thus, across all these modes, health services exports can facilitate the
realization of the SDGs through pecuniary and nonpecuniary channels.
However, as is evident, these are “potential” and not automatically
guaranteed benefits. Much depends on how the resources generated from
exports are deployed in the economy, to whom they accrue, who capture
the benefits, and what developing country governments do to leverage

and share these resources through appropriate policy instruments to
meet development needs more widely. The key to realizing the outlined
additional benefits beyond the gains from export earnings is to utilize
the capacity, infrastructure, and quality gains resulting from health
services exports for the wider benefit of the health-care system.
In a similar way, imports of health services can also aid the
realization of the SDGs by alleviating capacity and quality constraints
and by improving access to health care. For instance, imports via mode
3, i.e., inward FDI flows in hospitals and diagnostics, provide additional
financial resources for investment in the health services sector through
the capital account of the balance of payments. Additional benefits
could take the form of upgraded quality, standards, and infrastructure;
associated inflows of human resources, technology transfer, employment
creation, development of skills, and specialization; and an overall
improvement in the productivity and standards of associated health
establishments, thus also potentially improving access to quality health
care. The availability of private capital and development of private
health-care establishments could also reduce the burden on government
resources and help it to focus on public providers. Affiliations and
partnerships with reputed health-care establishments in other countries
made possible by mode 3 imports can lead to transfer of technology,
management techniques, and best practices.
Likewise, countries that import health services through
consumption abroad can also benefit from such trade as mode 2 can
be a means to overcome shortages of physical and human resources in
their health-care sector and to address their need for specialized and
better quality services at affordable prices. According to one study, the
US health-care system would save $1.4 billion per year if only 1 in 10
patients were to go abroad for a limited set of 15 highly tradable, low risk
treatments (Mattoo and Rathindran 2005: Table 4, p. 20). Such imports
can also ease the stress on their health insurance systems and reduce
the waiting time for treatment. Telemedicine imports under mode 1 can
similarly provide wider access to health services at an affordable price.
The nature of development gains is similar across all modes, involving
a mix of capacity and quality. Once again, whether there is a wider
impact on development goals depends on how the aforementioned
benefits are spread among other segments of the economy and how they
are leveraged for others not directly associated with health services
imports. Thus, much depends on how governments innovatively spread
the benefits from health services imports to the wider economy such
as through tax policies, regulations concerning access and pricing, and
cross-subsidization requirements on the private sector.
16.3.3 Developmental Implications: Potential Negatives

As the impact of trade in health services depends on the policy
environment and how resources are used and distributed across different
segments of the health system, there can also be potential negative
effects of such trade, particularly with regard to equity and affordability.
Gains in capacity and quality need not necessarily translate into more
equitable and affordable access to health services. In the case of each
mode of health services trade, this trade-off is possible.11
Commercial presence imports of health services can generate resources
for investment, create employment, and yield many of the benefits noted
above. However, these gains may come at the cost of huge initial public
investments that may be needed to attract FDI and also domestic private
sector establishments into the sector. Typically, such establishments tend
to be super-specialty providers and thus in developing countries the
provision of public funds and subsidies in the form of cheaper land or
tax concessions or reduced duties on imports of medical equipment and
devices to attract foreign commercial presence could implicitly involve a
loss of revenues or a diversion of resources from other essential segments
such as primary health care or even other development objectives. This
diversion would need to be weighed against the aforementioned gains,
but there could be a negative effect on equity. Mode 3-based health
services imports could result in a greater skew between the public health-
care segment and a corporatized segment, which in turn could result
in outflow of health personnel (often the best and brightest) from the
public to exporting private sector segment, if there is wide divergence
in pay, working conditions, standards, exposure, and career progression
opportunities. Further, if mode 3 establishments are largely focused on
high-end technologies and treatments that do not address the needs of
the general population, or if they are too highly priced and thus cater to
only the affluent section of the population who can pay out of pocket or
to those who are adequately covered by insurance, then such imports
would not necessarily address the equity objectives under the SDGs.
The argument could be made similarly in the case of mode 3 exports as
resources invested by domestic providers overseas can potentially reduce
resources available for health-care investment domestically, though one
would need to weigh this loss against the earnings from providing services
in other markets and how they percolate to the wider domestic economy
as opposed to being appropriated by the exporters.
11
See Chanda (2001a and 200b), Adams and Kinnon (1997), Bettcher et al. (2000), and
UNCTAD/WHO (1997).
The possibilities for an adverse outcome are similarly present for

the other modes. The basis for this potential negative impact is common.
It stems from the fact that there is an opportunity cost to investing
resources to enable such exports, which could be at the expense of
equity, affordability, and other such development goals. For instance,
while mode 1 exports in the context of telemedicine services can have
many positive externalities in terms of enabling the telemedicine
infrastructure to be leveraged for providing health care to remote
and underserved areas domestically and not only for exports, there is
always the question of whether the resources invested in telemedicine
would have been better invested in basic health-care facilities, for
immunization, or curative facilities where there could be a bigger and
more direct impact on the poor. There is a possibility that the kinds of
technologies invested in for telemedicine exports may be too specialized
and thus would serve only a small segment of the population. The cost-
effectiveness and affordability of telemedicine facilities for the domestic
market would also shape the equity outcome and given the highly
capital-intensive nature of this mode, requiring huge investments in
telecommunications infrastructure and electricity, the opportunity cost
in terms of resource diversion from more directly linked development
outcomes can be high.
Exports based on mode 2 can likewise lead to a dual market structure,
with a high- quality, expensive, more specialized segment catering to
wealthy nationals and medical tourists and a lower-quality, resource-
constrained segment catering to lower- and middle-income people at
home. Differential pricing policies that may be adopted by exporters
under mode 2 could lead to “cream skimming” and squeezing out of
domestic patients to cater to higher-paying medical tourists, unless
there are requirements to also serve the local population or initiatives
to cross-subsidize between high- and low-paying segment (not only
between foreign and domestic patients but also between rich and poor
domestic patients). If subsidies are provided by the government to set up
such facilities that cater to foreign patients, without necessarily ensuring
that the resulting benefits highlighted above in terms of better standards
and quality of care accrue to domestic patients, then there is again the
opportunity cost of public funds being diverted or foregone from other
development purposes. These potential negative effects on affordability
and equity may arise if the gains are appropriated by the private players
and a limited segment of the population. The latter in turn depends on
the existing resource conditions, the regulatory frameworks governing
such establishments, and the tax and subsidy policies as these factors
shape the extent to which the benefits are spread more widely and can
avert such inequitable outcomes.
Finally, mode 4 exports of health services can impose costs on

developing economies. Even though outflows of health-care personnel
in this context are to be distinguished from permanent movement (or
brain drain), given shortage of quality human resources in the health
sector and publicly funded and subsidized education received by health
personnel in many developing countries, such exports can aggravate
existing shortages of quality manpower for the home population and
may involve a high opportunity cost where these subsidies could have
been spent in attaining other development outcomes. Again, these
negative equity consequences have to be weighed against the benefits
that may arise from foreign exchange earnings, upgrading of standards
and training, and various other positives highlighted above for this
mode. Whether this balancing can be done or not is again dependent on
the existing policies for developing human resources in health care, how
returning health professionals are integrated into the domestic health
system and their expertise utilized, how the earnings are invested back
in the economy, and other such policies affecting resource creation,
allocation, and utilization.
Overall, trade in health services is not unconditionally positive.
There can be undesirable ramifications for equity and access especially
in exporting countries. Whether these trade-offs in terms of increased
dualism in resource distribution and access, internal brain drain, or
overinvestment in certain segments of care arise or not is contingent
on the existing conditions in the health-care sector. It depends on the
availability of human and physical resources, the quality of infrastructure,
the degree of insurance penetration, pricing and subsidy policies, and, in
short, the overall structural and regulatory environment in the health as
well as related sectors.
16.4 Developing Country Experiences

Trade in health services has both positive and negative implications for
the SDGs. The channels for these effects are, however, difficult to trace or
quantify as they are mostly indirect, contingent on existing conditions.
But several country and regional cases illustrate how trade in health
services can enable the realization of the SDGs and also how absent an
appropriate policy environment and proactive steps to tap these gains
for the wider benefit of the health system and of society at large, trade in
health services may have adverse implications for the SDGs.
Several developing countries have proactively promoted exports
of health services. Their objective has been not only to earn foreign
exchange but to also increase the financial capacity of the overall health-
care system, to generate employment, and to upgrade national health-

care infrastructure and standards. The following discussion outlines the
experience of several developing countries with trade in health services.
16.4.1 Cuba
Cuba is a country that highlights how there can be developmental

benefits from health services trade both to the exporting country and to
recipient developing countries.12 Since the late 1980s, Cuba has adopted
an export strategy in health services focusing on all four modes. Exports
of health services are the most important source of foreign exchange
earnings for the country, rising from $20 million in 1994 to $30 million
in 1998. The government had set a target of over $8 billion in health
services exports, which was around 40% of total export earnings at the
time.13
Under mode 2, Cuba attracts foreign patients from countries
in Europe, the Russian Federation, and from Latin America and the
Caribbean to specialized clinics in the country that provide high-
quality care at competitive prices. The strategy has aimed at service
differentiation, such as focusing on treatment of certain kinds of skin
diseases that are incurable in other countries, and on the development
of new procedures and drugs such as for pigmentation, retinopathy, and
vitiligo. In 1995–1996, more than 25,000 foreign patients came to Cuba
for treatment, generating an estimated $25 million in sales of health
services to foreigners, up from $2 million in 1990. Most of the revenue
thus generated was invested back in the domestic health system.14
To facilitate exports under this mode, the government has provided
for easy payment facilities including payment with credit cards or any
convertible currency. Free or subsidized care is provided to patients
from some countries. There are also bilateral agreements between the
Cuban government and social security institutions of other Latin and
Central American countries to facilitate consumption abroad, with rates
agreed upon by both parties.
Cuba has further differentiated itself from many other countries
by combining health care with tourism. The government has created a
12
Much of this discussion on Cuba draws upon Chanda (2001b).
13
Frank, M. 2014. Cuba Ups Healthcare Sector Pay, Says Medical Exports Earnings
to Rise. Reuters. 21 March. http://www.reuters.com/article/cuba-reform-healthcare
-idUSL2N0MI0C920140321 (accessed 14 February 2017); Wasserman and Cornejo
(1999).
14
Feinsilver (2013: 120); UNCTAD (April 1997).
trading company called Servimed to sell combined tourism and health-

care packages in target markets that do not have adequate facilities or
countries with high costs of treatment. This is done with the help of
tour operators and travel agencies.15 At present, Servimed is providing
services to 15 countries, including Algeria, the People’s Republic
of China, Portugal, Jamaica, Qatar, Surinam, and Ukraine. Services
offered include treatment for retinitis pigmentosa, cosmetic surgery,
and dentistry. Since 2010, Servimed has been pursuing medical exports
for profit with renewed focus under the government’s recent attempt
to overhaul the country’s health-care system and generate revenues
from medical tourism and invest the profits in maintenance, repair, and
purchase of equipment for public health institutions. The idea is to use
medical tourism to generate revenues for development of the national
health-care system.16 Two smaller agencies have also been established
in health tourism to provide rehabilitative and convalescent health
services through resorts and spas.
The second area of focus has been movement of health personnel.
Cuba has adopted a strategy of sending health personnel abroad on
short-term remunerated contracts supervised by the Cuban Economic
Office. According to the World Bank, in 2010, Cuba had 6.7 physicians
per 1,000 inhabitants, the highest in the world. In some cases, exports
of health personnel are based on solidarity agreements and contracts
with foreign governments to provide manpower.17 These included
physicians, dentists, nurses, and middle-level health technicians. The
target markets are typically developing countries with a shortage of
health service providers. These include various African countries such
as Ghana, South Africa, Mozambique, Zambia, Guinea-Bissau, Angola,
poor Central American countries such as Nicaragua, and Middle Eastern
countries such as Libya. The rates have been largely subsidized by the
Cuban government. Hence, foreign exchange earnings from such mode
4 exports have not been very large given their development assistance
nature. In some countries, the government receives oil in exchange for
providing personnel. Cuba has become recognized as a global leader
in providing health-care services for people in poor and rural areas
and disaster zones. According to Cuban officials, professional services
15
Even as far back as 1988, Servimed made a profit of $4 million serving over
2,000 foreign patients. Chanda (2001 b).
16
See International Medical Travel Journal. 2011. Cuba Relaunches Servimed Medical
Tourism Service. 16 December. http://www.imtj.com/news/cuba-relaunches
-servimed-medical-tourism-service/ (accessed 14 February 2017).
17
Even as far back as 1991, 624 Cuban health professionals and technicians went to
24 countries to provide health services overseas. See Chanda (2001b).
exports by Cuban medical personnel, who number around 37,000 in 77

countries generate foreign exchange of around $8 billion a year.
In recent years, Cuba has been sending more and more doctors
overseas. It exported 11,400 doctors to Brazil. Health-care providers
who are sent abroad earn several times more than those serving at
home. Compared with a compensation of $30 per month in Cuba, those
serving abroad earn between $200 to over $1,000 per month. Recently,
the government has increased the salaries for those medical personnel
working in programs that provide free eye care to poor residents in
Caribbean and Latin American countries. The Cuban Ministry of
Public Health has also diversified into activities such as advisory and
consultancy services and provision of medical equipment maintenance
and medical information services as part of its strategy of exporting
professionals in health and allied areas. There have been complaints
by local residents that exports of medical personnel are affecting the
availability of manpower for the country’s free public health-care system.
Some doctors who are sent abroad do not return, but this number has
not been reported by the government.18
Cuba has also focused on establishing itself as an important
regional exporter of health services. It has a program for health service
exports directed at the countries of Latin America and the Caribbean.
It exports consulting services in biotechnology, pharmacy, and provides
medical information to countries such as the Dominican Republic and
Uruguay in the region and has joint ventures in health services with
firms in Argentina, Brazil, Mexico, and Colombia. Cuba also provides
telemedicine to countries in the region given its modern technology and
infrastructure investments in this area.
Through these different forms of health services exports, Cuba
has been successful in realizing several development objectives. These
include the goals of providing employment to qualified health service
providers, making use of excess capacity in the sector to make medical
and pharmaceutical products, generating resources for investment in
health-care infrastructure, and finding additional sources to finance
the public health system. To support this strategy, the government has
adopted a conscious policy of investing in necessary services such as
clinics, labs, biotechnology, technology for telemedicine, and in other
18
Cuba is also engaged in exports of medical education services. It provides training
and education to foreign students at specialized clinics in the country. According
to Wasserman and Cornejo (1999), the foreign exchange earnings from exports of
medical education services have been substantial. Scholarships are also provided
to study at Cuban medical schools against a commitment to return to practice in
underserved communities.
information services, including directing part of the foreign investment

in the country toward the health sector. The telecommunications sector
has received most of the foreign investment in the country and this has
facilitated the establishment of telemedicine links between all hospitals
and the provision of advanced services such as diagnostics, surgery,
second opinions, and epidemiology, to the remote areas of the country.
Cuba is one of the most advanced countries in the use of modern
technology within the region.
Cuba’s export strategy has also exploited the linkages between
health and other sectors such as education and tourism and used
exports of health services to promote value added in related areas.
Thus, the Cuban case shows that health services exports can provide
the basis for improving overall capacity in the health-care system
and the utilization of its resources. The key is to have policies that go
beyond pecuniary gains and that leverage health services exports for
wider spin-off development benefits in health and in other areas. The
Cuban case also shows that a successful export promotion strategy
in health services is compatible with active state involvement and
the preservation of a predominantly public health sector. It requires
an integrated perspective that coordinates measures across several
sectors and ministries.
16.4.2 Maghreb Region
The experience of two health services exporting nations—Tunisia

and Morocco in the Maghreb region—similarly provide evidence on
the potential gains that can accrue from such trade for developing
countries. Tunisia’s health tourism sector attracts around 150,000
international tourists per year and has emerged as the second most
popular destination in Africa for medical value travelers. It is known
for specializations such as thalassotherapy treatment, cosmetic
surgery, prosthetics, dental treatment, and skin treatment procedures
that use mineral elements in its Mediterranean shores for therapeutic
purposes. The Tunisian government has been trying to leverage
its geographic proximity to Europe and North Africa and become
a regional medical hub. It has a technical cooperation agency to
promote health services trade and has entered into bilateral technical
cooperation arrangements with other countries regarding the transfer
of foreign patients to Tunisia.
The export promotion strategy mainly consists of investment-
related fiscal incentives in the form of tax exoneration on medical
equipment and devices, exemption of value-added tax on medical
treatment for all foreign patients, a 50% tax break on all investments
related to medical institutions and infrastructure, strategic

partnerships with overseas hospitals and steps to attract private
investment by setting up medical cities and special investment zones
for companies that have medical expertise. As a result, Tunisia has
received foreign investment worth $40 million from Japan’s Tokusukai
Medical Corporation to set up its first private hospital, which will
employ some 1,200 Tunisian medical personnel. A $50 billion Tunisia
Economic City megaproject is under construction, which will provide
space to hospitals, clinics, research institutions, and other health and
wellness facilities. 19 This export promotion strategy is helping to
increase Tunisia’s capacity in health-care delivery to not only foreign
but also domestic patients. It is also ensuring that more resources
are mobilized by the health sector through foreign investments, with
spin-off benefits in other areas such as tourism, employment creation,
and research and development.
Similarly, a case study of Morocco finds that mode 2 exports have
actually increased the supply of health services for both foreigners and
locals. The opening of residences for retirees (that provide medical
services) has helped change the local attitude toward elders. There is
greater urgency to conform to international standards to export with
local demonstration effects. Further, doctors, nurses, and other health-
care personnel have been offered greater opportunities at home, thus
reducing their need to migrate to other countries. As with Tunisia, an
important source of gains in Morocco has been investment in health-
care facilities and related improvements in capacity and associated
employment and revenue gains. For example, Tasweek Real Estate
Development and Marketing has begun construction of a $40 million,
21,000-square-meter health-care complex in Marrakech Healthcare
City. This facility targets foreign retirees and medical tourists and has
the capacity to serve 5,000 patients a year, performing 85 procedures
a day, offering a variety of specialized medical procedures including
surgery, cardiology, and radiology.20 The Portuguese group Malo
Clinic is expected to open a €24.1 million clinic and surgery near
Casablanca, mainly targeting older retired Europeans, employing
19
Investment Climate Update: Medical Tourism. 2014. Africa’s Medical Tourism
Industry. https://www.uschamber.com/sites/default/files/021508_AfricaNewsletter
_MedicalTourism_FIN.pdf (accessed 14 February 2017).
20
Investment Climate Update: Medical Tourism. 2014. Africa’s Medical
Tourism Industry. https://www.uschamber.com/sites/default/files/021508
_AfricaNewsletter_MedicalTourism_FIN.pdf and Oxford Business Group. Just
what the doctor ordered: Medical tourism is providing a fillip for sector expansion.
http://www.oxfordbusinessgroup.com/analysis/just-what-doctor-ordered-medical
-tourism-providing-fillip-sector-expansion (accessed 29 September 2015).
around 40 specialists, along with hotel and spa facilities. The clinic
would specialize in laser eye, dental, and cosmetic surgery.21
However, in both these countries, there are concerns regarding
the potential adverse effects of promoting mode 2 exports, in terms of
aggravating the existing shortage of qualified doctors and nurses in the
country, diverting investment toward the needs of foreign patients and
rich domestic patients and away from development of basic health-care
infrastructure, and increasing the costs of medical care for domestic
patients. Concern has also been voiced regarding the extent to which
these facilities will be accessible to the local population and whether
and to what extent spillovers will arise for domestic patients. Clearly,
both these examples indicate the need for a proactive government policy
to ensure that such concerns are addressed and that health services
exports benefit the local population and the wider health-care system
more equitably.
16.4.3 Thailand
Thailand has earned a reputation as one of the leading exporters of

medical tourism services, including a large wellness tourism segment.
Millions of people come to Bangkok for medical care and undergo
procedures such as face-lifts and heart bypass surgeries. Thailand’s
hospitals provide excellent medical care and superior hospitality.
Service quality is promoted by an accreditation system promoted
by a government agency named the Institute of Hospital Quality
Improvement and Accreditation. Studies indicate mixed consequences
of health services exports with regard to objectives of universal access,
quality, and equity.
The gains highlighted by studies on Thailand’s experience with
health services exports include revenues from such exports and from the
value added generated by activities of patients and companions traveling
with them before and after the treatment. In 2008, it is estimated that
medical tourism generated around B46 billion to B52 billion in revenues
from the provision of medical services and another B12 billion–B13
billion from related tourism activities, amounting to a total contribution
of 0.4% of GDP. Based on various scenarios and assumptions, these
studies estimate a value added of B59 million to B110 billion from medical
21
International Medical Travel Journal. 2011. Opportunities for Moroccan Medical
Tourism. http://www.imtj.com/news/opportunities-moroccan-medical-tourism/
(accessed 29 September 2015).
tourism (NaRanong and NaRanong 2011).22 (It is worth noting, however,

that if one accounts for the costs of imported inputs such as drugs and
equipment to provide such services, the net value added is likely to
be much smaller). Another study finds improvements in management
practices, increased focus on service delivery and quality, standards,
information systems, maintenance of records, emergency preparedness,
and support services as a result of medical tourism exports.
One study points to numerous likely adverse effects of medical
tourism in Thailand, although it is difficult to make a direct link to
medical tourism. One of these effects is the increased demand for
health-care personnel, especially specialists by foreign tourists and
thus the availability of services for the local population. It is estimated
that the health-care system has to provide services to some 420,000 to
500,000 medical tourists annually with the existing health-care staff,
thereby aggravating existing human resources shortages and leading
to crowding out of domestic patients. The study notes that doctors in
Thailand have become too busy with foreigners thus neglecting Thai
patients. Evidence from two hospitals found that the time spent by a
physician on medical tourists exceeded that for domestic patients. A full-
time physician would be able to see only 14 to 16 foreign patients per day
on average compared with 40 to 48 (an average of 10 to 12 minutes per
patient) domestic patients. These studies also note that foreign medical
tourists tend to receive more intensive and costly treatments and thus
cause a skew in resources invested by health-care providers (NaRanong
and NaRanong 2011).
Another adverse effect found in some studies relates to costs. Private
hospitals operating in Bangkok were found to be maximizing their
profits, focusing on the well-paying foreign segment and ignoring the
lower- to middle-income domestic segment. There has been an increase
in the fees for self-paying Thais and the fees charged by private hospitals
catering to foreign patients tend to be higher than those catering to local
patients. According to 2003–2008 data on total charges per patient, for
five representative medical procedures, there was a substantial increase
of 10%–25% per year in the charges by most hospitals, accompanied
by complaints from middle- income Thais regarding rising health-
care costs in high-end hospitals, making them more dependent on the
universal health-care coverage scheme (NaRanong and NaRanong 2011).
Media sources also report that Thailand’s policy of promoting itself
as a destination for international patients is having harmful effects on
its public health-care system. Hospitals for medical tourists have lured
22
See also Janjaroen and Supakankunti (2000) for an earlier study on Thailand’s
medical tourism.
many highly skilled physicians and specialists out of public and teaching
hospitals as Thai doctors can greatly increase their salaries by taking
positions in private hospitals catering to international patients. Some
media sources also note that medical tourism has aggravated the rural–
urban gap by pulling physicians and nurses from rural hospitals and clinics
and concentrating them in Thailand’s cities. According to one study,
an additional 100,000 foreign patients seeking medical treatment in the
country could lead to an internal brain drain of 240–700 doctors, and most
Thais are likely to receive health-care services of lesser quality (reduced
access and shorter visiting times) (Arunanondchai and Fink 2007: 20).
In response to such findings, several steps have been recommended
to mitigate the aforementioned adverse effects. While one extreme
view has been to stop promoting Thailand as a destination for medical
tourism and to focus instead on promoting better access to health care
for its local people, a more balanced view has been to focus on increasing
the capacity of the health sector, especially the availability of physicians,
dentists, and nurses. Measures proposed include allowing certified
foreign physicians to provide medical services at least to foreign patients
without having to take a medical certification exam in the Thai language,
increasing medical staff training in public universities to full capacity,
and collaborating with private hospitals in training more specialists.
There are also proposals to spread the benefits of medical tourism to
Thai citizens, such as by levying a tax on medical tourists and using the
revenue to support medical training.
Some policies have already been adopted to mitigate the redistributive
effects of mode 2, such as introducing 3 years of compulsory public service
for medical graduates, providing financial incentives for rural doctors,
longer-term human resources planning to increase the supply of medical
graduates, and steps to maintain the quality of services provided by public
schemes by increasing the salary of physicians, nurses, and dentists in all
community hospitals.23 The budget for public health services, especially
to cover compensation, has increased by more than what would have been
the case in the absence of medical tourism. Overall, Thailand’s experience
with medical tourism exports confirms that the impact of health services
trade is contingent on the local conditions, in particular the existing
human resources conditions, the overall capacity of the health-care
system, and the presence of measures that proactively distribute the gains
from health services trade.
23
In 2008, the Ministry of Public Health changed its compensation scheme.
16.4.4 Indonesia
Indonesia presents the case of a developing country that is primarily an
importer of health-care services under modes 2, 3, and 4.24 Under mode 2,
affluent Indonesians go abroad to Singapore, Australia, Japan, Germany,
and the US for treatment. In mode 3, Indonesia has been a recipient of
FDI in hospitals and clinics since the 1990s, subject to recommendation
by the Ministry of Health and meeting certain conditions. Foreigners
can build whole new hospitals or jointly operate existing local hospitals
with local investors. The ministry issues licenses upon authorization
to the hospital, which is to be operated in accordance with Indonesian
standards. There is a requirement to accommodate more than 200 beds.
The main investors in Indonesia’s hospital services sector are Australia
and Singapore. Foreign investment in health services is mainly limited
to cities such as Jakarta, Surabaya, and Bali. There are foreign owned
or managed hospitals in Jakarta. To ensure that foreign commercial
presence yields benefits to the poorer sections, the government has a
policy of reserving 10% of hospital beds for the poor for in-patient
services, regardless of ownership status, although utilization rates
for these reserved beds have been low in most commercial hospitals
(Widiatmoko and Ganni 1999). Under mode 4, as Indonesia has a
shortage of high-quality doctors, nursing specialists, and resources
for management and administration of hospitals, foreign providers are
recruited to meet such needs. These include foreign hospital managers
who are hired to administer operations and medical and allied health
specialists whose role is limited to that of consultants as they are not
permitted to provide any direct medical services.
There are no studies to evaluate the costs and benefits of Indonesia’s
imports of health services. But there are likely to be beneficial effects on
capacity and quality of services. There are of course distributional effects,
as the FDI hospitals cater to the urban population, mode 2 imports are
available only to the affluent and the increased capacity from mode 4
imports is likely to accrue only to urban hospitals catering to the higher-
paying segments. However, a point to note is that such gaps in health-
care provision and dualism are present even in the absence of health
services imports. Further, one would need to weigh these distributional
effects against the counterfactual in terms of the quality and availability
of health services that would prevail in the absence of health services
imports. Hence, the key to benefiting from health services imports is
the presence of proactive measures to ensure the gains are distributed
24
Much of the discussion on Indonesia is based on Chanda (2001b).
to more segments of the population, such as by providing beds for the

poor in foreign investor hospitals and ensuring that these provisions
are implemented by the private sector and utilized by the local people.
Similarly, increased capacity from recruitment of foreign health
personnel may skew human resources more toward the richer segments,
but policies that aim to strengthen overall human resources capacity
in the health-care system, which create opportunities for pooling of
resources and sharing of knowledge and expertise between private and
public establishments can help mitigate this skew by ensuring other
positive externalities. Thus, how governments choose to condition
health services trade with requirements on providers and investment
in capacity plays an important role in determining the implications of
health services trade for the SDGs.
16.4.5 India
India is one of the most prominent developing countries engaged in

exporting health services. It exports health services primarily through
movement of health service providers to both developed and developing
countries (Chanda 2001b). India’s doctors, nurses, and technicians go
to the Middle East, the US, Canada, the United Kingdom, and Australia
on short-term contracts for training, and as economic migrants. India
has bilateral agreements with six Middle Eastern countries and some
others for providing private and government doctors on short-term
assignments. Such short-term exchange is aimed at alleviating the
shortage of health professionals in these countries while also providing
opportunities for greater exposure and skill upgrading for India’s
medical professionals and foreign exchange earnings for the country.
India also exports health services through consumption abroad given
the low costs and high quality of treatment provided at specialty
corporate hospitals that are of international standards. Patients come
for treatment from developed countries such as the United Kingdom
and the US as well as developing countries such as Bangladesh,
Nepal, Sri Lanka, and countries in the Middle East for surgery and for
specialized services in areas as wide ranging as neurology, cardiology,
endocrinology, nephrology, and urology. India’s main advantage in
this mode lies in the availability of highly qualified doctors, nurses,
paramedics, and hospital professionals and its ability to provide high-
quality but affordable treatment relative to that available in developed
countries. India is also known for exporting traditional and alternative
therapeutic services. India also exports telemedicine services in
diagnostics, radiology, and pathology to patients in neighboring
countries and to establishments in Central Asia. Under mode 3, India
is engaged in both imports and exports of health services. FDI is open

up to 100% in hospitals and there are cases of foreign companies that
have set up state of the art hospitals in leading cities. Nonresident
Indians have set up high-tech hospitals with 100% ownership (Chanda
2007). There are also several super-specialty corporate hospitals
built in collaboration between Indian and foreign companies. Some
Indian hospitals have also expanded their presence overseas through
investment and collaboration with foreign partners.
There has been some qualitative analysis of the costs and benefits
associated with India’s trade flows in health services (Chanda 2001a,
2001b, 2007, 2010, 2013; Martinez et al. 2011. For instance, it has been
cited by some researchers that the emergence of modern corporate
and investor-owned hospitals in the country under mode 3 imports is
helping to attract India’s health-care professionals working abroad, thus
stemming brain drain in this sector. Indian doctors working overseas
are taking pay cuts to work in India. These professionals are being
lured back by the emergence of world-class facilities due to increased
capital flowing into health care, the chance to be part of a new delivery
system, and the opportunity to give back to their country. In addition
to facilitating consumption abroad and improvements in the country’s
health infrastructure, commercial presence in health services has also
created other avenues for exports of health services. Some corporate
hospitals have diversified their activities to areas such as medical
studies, clinical trials, and research and generate additional resources
through fees for such services. Inward commercial presence is also
enabling investment in telemedicine facilities with potential benefits to
the local population.
At the same time, there have been concerns about the equity
implications of India’s trade in health services. Most of its mode 4
exports are not really short term in nature and constitute brain drain
to other countries, thus worsening the existing shortage of doctors,
nurses, and paramedics in the country.25 Moreover, as many of the
emigrating personnel have received training that is subsidized by
India’s government at public sector medical and nursing colleges, this
brain drain constitutes a loss of public investment in human capital. In
the context of mode 2 exports, there is a perception that the benefits
have been limited to foreign patients and to affluent urban patients,
thus aggravating the existing dual market structure between the private
and public health-care system in India, possibly further encouraging
25
Although there are an estimated 500,000 nurses in the country, there is still a
shortage of nurses due to the large numbers who emigrate to the Middle East and
other countries.
internal brain drain of the most qualified professionals from the public
health-care system to the private corporate hospitals, given the better
remuneration and working conditions in the latter. In a country where
only 10% of all doctors are in the government sector and the private
sector accounts for more than 60% of all hospitals and dispensaries,
such internal brain drain from the public sector has major negative
implications for equity and access to quality health services by the poor
(WHO 1999). There has also been criticism that the government has
often provided land at subsidized rates for corporate hospitals that are
leading exporters under mode 2 in prime locations of various cities but
that their facilities have not been available to the middle- and lower-
income segments given their high costs. Even though the government
has imposed conditions in some cases to reserve a certain number of
beds for poor and low-income patients and to provide treatment to these
groups at subsidized rates, evidence indicates that often such beds lie
vacant or are used by upper- and middle-income people on the basis of
connections (Chanda 2001b).
In general, there has been criticism of India’s government for
extending incentives and support for the promotion of medical tourism
by subsidizing the rich coming from developed countries, for not
ensuring that the benefits are spread to the lower-income segments of
the local population and that the requirement to serve poor patients
has not been enforced properly. There has also been criticism regarding
ethical violations, as in the case of surrogacy tourism by couples from
foreign countries who cannot afford expensive infertility treatment
at home or transplant tourism and environmental implications
due to disposal of medical waste resulting from such exports. Some
researchers have also noted that there is no evidence that the earnings
generated from health services exports have been invested in a manner
that meets larger developmental and equity objectives or for improving
the public health-care system or that the upgraded infrastructure and
facilities have helped in promoting research and development and
cutting edge procedures that serve national interests. Thus, as in the
case of other countries, trade in health services can be beneficial for
realizing sustainable development objectives but not unconditionally.
Much hinges on how the government prioritizes objectives of equity,
quality, and linkages with the wider health system.
16.5 Policy Takeaways

The main insight that emerges from the preceding discussion is that
trade in health services can help countries in meeting certain SDGs
such as improved access to health care and improved health outcomes.

However, the state of the health-care system, the regulatory environment,
what kinds of strategies are adopted by the government, and the extent
to which there are positive externalities determines whether these gains
are realized or not. The important point to note, however, is that some of
the negative equity consequences and concerns highlighted above often
exist even in the absence of health services trade. This is because many
of these potential negative effects are a result of internal factors and not
trade per se. Where the existing health-care system is already dualistic
in nature due to insufficient funding of public health care, inefficiencies,
and poor human resources management systems and inadequacies in
the regulatory framework, such imbalances are likely to exist in the
availability and quality of health services even without health services
trade.26
The question then is to what extent such trade may aggravate these
negative effects and to what extent governments proactively ensure
that the SDGs are achieved through their policies on pricing, subsidies,
insurance coverage, training of health sector resources, accreditation,
investment in health infrastructure, utilization of foreign exchange
earnings, regional and bilateral cooperation strategies, public–private
partnerships, and other arrangements, among others. The experience
of countries highlighted here indicate that if safeguards are in place
to ensure access for low-income segments, then trade can augment
resources for investment and can alleviate the pressure on the health
sector by expanding facilities for all.
There are two broad directions for policy action at the national
level, if trade in health services is to facilitate the realization of the SDGs
and mitigate the negative effects on development. The first is to address
structural issues in the health-care system, the key structural issues
being standards, infrastructure, human resources, and technology.
For instance, investment in human resources and human resources
management systems can help address the issue of brain drain, which
is a potential negative consequence of mode 4 trade in health services.
Similarly, increasing expenditures on health services and allocating
these expenditures more efficiently and in line with local needs, demand
conditions, and priorities can help address adverse consequences such
as cream skimming, dualism, and crowding out of local patients that
may arise from trade. This may involve expanding the supply of public
hospitals, clinics, beds, and improving efficiency in the public sector or
incentivizing the private sector for the same, which may in turn require
26
See Chanda (2001a, 2001b, 2002) for a discussion of these issues.
measures to subsidize the cost of establishments, financial incentives,

and channeling of taxes from such providers for investment in the public
health system.
The second area for policy action is to ensure synergies between
health services trade and the rest of the health-care system. To ensure
synergies, governments can facilitate tie-ups between trading and
non-trading health-care establishments, public–private partnerships
through the pooling and exchange of skills and technologies and
cooperation in training, cross-subsidization of poor patients in hospitals
engaged in health services trade, and the adoption of more inclusive
business models in trading establishments. The country experiences
show that public sector involvement can be important in promoting
health services exports and in shaping the benefits. Countries also need
to integrate trade in health services with other sectors of the economy
such as services including travel and tourism, insurance, education, and
telecommunication services.
In addition to national policies, there is also a role for multilateral and
regional cooperation to promote sustainable development in the context
of health services trade. GATS covers health services under two sectors—
professional services, where health personnel such as doctors, nurses,
and caregivers are covered; and the Health and Social Services sector,
where facilities such as hospitals, clinics, and diagnostic establishments
are covered. Although health services have hardly received commitments
from WTO member countries under both these categories and GATS
excludes services “provided in the exercise of governmental authority”—a
carve-out clause that is pertinent to health services—GATS can have
a bearing on quality and access to health services across countries.27
More liberal commitments in the various modes can facilitate such
trade and help low-income countries to improve their health systems
through increased commercial presence, telemedicine, medical tourism
imports, and personnel inflows. At the same time, the GATS commitment
structure also allows countries to inscribe conditions pertaining to
appropriateness of technology, quality certification, reservation of public
subsidies for domestic providers, etc., i.e., measures that ensure standards
of care, protection of consumers, and equitable outcomes. Discussions
on Domestic Regulation and Recognition under the aegis of GATS can
also facilitate the adoption of international standards and best practices,
promote cooperation on mobility of health personnel, and improve access
and quality of health services among member countries.
27
See WTO (1994) for GATS provisions.
Multilateral cooperation can be particularly important in

addressing the issue of brain drain. Countries could negotiate short-
term bilateral arrangements to facilitate cross-border movement of
health workers in line with host and home country supply and demand
conditions. This would yield benefits associated with increased
exposure and upgrading of skills for health professionals and foreign
exchange earnings while overcoming the problem of permanent
outflows. This cooperation could also involve compensation of sending
countries by host countries through assistance agreements or ensuring
that the latter’s health professionals return after serving a fixed period.
Cooperation on immigration and labor market policies, such as under
special visa schemes and recruitment programs for overseas health
professionals can also be pursued to regulate the movement of health
professionals. Bilateral cooperation is also required to promote links
between emigrating professionals and skilled nationals to reduce the
negative effects of brain drain in the sending countries and to promote
associated knowledge and skill transfer. Bilateral and regional
integration agreements that cover labor mobility or sector-specific
labor agreements can ensure such benefits accrue from mode 4-based
trade in health services without the attendant problem of brain drain.
Agreements among countries regarding ethical recruitment practices
can also help in mitigating the adverse effects of mode 4 in health
services (WHO 2004; Buchan and Delanyo 2004; Stilwell et al. 2003,
2004; Commonwealth Secretariat 2003).
As regional markets are important for trade in health services,
regional cooperation across all modes can also facilitate the realization
of the SDGs while addressing adverse effects. Regional and subregional
efforts concerning portability of insurance; tie-ups between health
providers across countries in a region through joint investments,
cross-referrals, and sharing of expertise; development of cross-border
payment systems; mobility of personnel; and harmonization of standards
can help augment capacity in the poorer countries and remote areas
within a region. Regional cooperation among neighboring countries to
serve patients in border areas that are subject to resource and quality
constraints can also be mutually beneficial.
In sum, trade in health services can be strategically used to address
several SDGs, although it may pose potential challenges for equity
and sustainability. As the preceding discussion highlights, countries
need to adopt a proactive approach to provide a supportive regulatory
and infrastructural environment so that the many potential gains
associated with health services trade can be facilitated and enhanced
while the associated negative effects can be minimized or prevented.
Such steps must be taken at the national, regional, and multilateral

levels and must involve a wide range of stakeholders, such as national
governments, international organizations, professional bodies, and
the health industry. Trade should therefore not be viewed in a narrow
way as a form of commercialization of health services, but rather as
a means to make health services more accessible, affordable, and of
better quality.
References
Adams O., and C. Kinnon. 1997. Measuring Trade Liberalization against
Public Health Objectives: The Case of Health Services. WHO Task
Force on Health Economics Technical Briefing Note (December).
Geneva, Switzerland: World Health Organization (WHO).
Adlung, R., and M. Roy. 2005. Turning Hills into Mountains? Current
Commitments under the GATS and Prospects for Change.
Economics Research and Statistics Division, Staff Working Paper
ERSD-2005-01. Geneva, Switzerland: WHO.
Arunanondchai, J., and C. Fink. 2007. Trade in Health Services in
the ASEAN Region. World Bank Research Working Paper 4147.
Washington, DC: World Bank.
Bettcher D., D. Yach, and G. Emmanuel Guidon. 2000. Global Trade and
Health: Key Linkages and Future Challenges. Bulletin of the World
Health Organization 78(4): 521–534.
Buchan, J., and D. Delanyo. 2004. International Recruitment of Health
Workers to the UK. London: DFID Health Systems Resource Centre.
Chanda, R. 2001a. Trade in Health Services. Working Paper for the
WHO Commission on Macroeconomics and Health WG 4. Geneva,
Switzerland: WHO.
Chanda, R. 2001b. Trade in Health Services. ICRIER Working Paper 70.
New Delhi: Indian Council for Research on International Economic
Relations.
Chanda, R. 2002. Trade in Health Services. Bulletin of the World
Health Organization, The International Journal of Public Health 80(2):
158–163. http://www.who.int/bulletin/archives/80%282%29158
.pdf (accessed 14 February 2017).
Chanda, R. 2007. Impact of Foreign Investment in Hospitals: Case Study
of India. Harvard Health Policy Review 8(2): 121–140.
Chanda, R. 2010. Constraints to FDI in Hospital Services in India.
Journal of International Commerce, Economics and Policy
1(1): 121–143.
Chanda, R. 2013. Medical Value Travel in India: Prospects and
Challenges. In Traveling Well: Essays in Medical Tourism, edited by
R. Labonte and R. Deonandan. Ottawa: University of Ottawa.
Commonwealth Secretariat. 2003. Companion Document to the
Commonwealth Code of Practice for the International Recruitment
of Health Workers, adopted at the Pre-WHA Meeting of
Commonwealth Health Ministers held in Geneva, Switzerland on
18 March. Mimeo.
Department of Health, SADC, WHO. 2002. Summary Report of
Meeting on Health and Sustainable Development (19–20 January).
Johannesburg: South Africa: Southern African Development

Community
Feinsilver, J. 2013. Fifty Years of Cuba’s Medical Diplomacy. In
Health Travels: Cuban Healthcare On and Off the Island, edited by
N. J. Burke. Berkeley, CA: University of California Medical
Humanities Press.
GATS (1994)
Glinos, I. A., R. Baeten, M. Helble, and H. Maarse. 2010. A Typology of
Cross-Border Patient Mobility. Health and Place 16: 1145–1155.
Helble, M. 2011. The Movement of Patients Across Borders: Challenges
and Opportunities for Public Health. Bulletin of the World Health
Organization 89: 68–72.
Horsfall, D., and N. Lunt. 2015. Medical Tourism by Numbers. In
Handbook on Medical Tourism and Patient Mobility, edited by
J. Hanefield, N. Lunt, and D. Horsfall. Cheltenham: United Kingdom:
Edward Elgar Publishers.
International Council for Sciences (ICSU) and International Social
Sciences Council (ISSC). 2015. Review of Targets for the Sustainable
Development Goals: The Science Perspective. Paris: ICSU/ISSC.
James, P. T. J. 2012. The Impact of Medical Tourism on Thai Private
Hospital Management: Informing Hospital Policy. Global Journal
of Health Science, Canadian Centre of Science and Education 4(1):
127–139.
Janjaroen, W., and S. Supakankunti. 2000. International Trade in Health
Services in the Millennium: A Case of Thailand. Bangkok: Centre
for Health Economics.
Kingma, M. 2007. Nurses on the Move: A Global Overview. Health
Services Research 42(3 Pt 2): 1281–1298. http://www.ncbi.nlm.nih
.gov/pmc/articles/PMC1955376/ (accessed 14 February 2017).
Martinez–Alvarez, M., R. Chanda, and R. Smith. 2011. The Potential
for Bi-lateral Agreements in Medical Tourism: A Qualitative Study
of Stakeholder Perspectives from the UK and India. Globalization
and Health 7(11). http://www.globalizationandhealth.com/content
/7/1/11 (accessed 14 February 2017).
Mattoo, A., and R. Rathindran. 2005. Does Health Insurance Impede
Trade in Health Care Services? World Bank Policy Research
Working Paper 3667. Washington, DC: World Bank.
NaRanong, A., and V. NaRanong. 2011. The Effects of Medical
Tourism: Thailand’s Experience. Bulletin of the WHO 89: 336–344.
http://www.who.int/ bulletin/volumes/89/5/09-072249/en/
(accessed 28 September 2015).
PRNewswire. 2015. Global Telehealth Market Growing at 24%
CAGR to 2020. MarketReports Hub. Chicago, IL. 13 August.
http://www.prnewswire.com/news-releases/global-telehealth-
market-growing-at-24-cagr-to-2020-521726311.html (accessed
14 February 2017).
Stilwell, B., K. Khassoum, P. Zurn, M. Vujicic, O. Adams, and M. Dal
Poz. 2004. Migration of Health Care Workers From Developing
Countries: Strategic Approaches to Its Management. Bulletin of the
World Health Organization 82(8): 595–600.
Stilwell, B., K. Diallo, P. Zurn, M. Dal Poz, O. Adams, and J. Buchan.
2003. Developing Evidence-Based Ethical Policies on the Migration
of Health Workers: Conceptual and Practical Challenges. Human
Resources for Health 28(1): 8.
United Nations. 2012. UN System Task Team on the Post-2015 UN
Development Agenda: Health in the Post-2015 UN Development
Agenda. Thematic Think Piece. New York, NY: United Nations.
United Nations. 2010. Department of Economic and Social Affairs—
Manual on Statistics of International Trade in Services. New York,
NY: United Nations, Statistics Division.
United Nations Conference on Trade and Development (UNCTAD)/
World Health Organization (WHO). 1998. International Trade in
Health Services: A Development Perspective, edited by S. Zarilli and
C. Kinnon. Geneva, Switzerland: UNCTAD/WHO.
UNCTAD. 1997. International Trade in Health Services: Difficulties
and Opportunities for Developing Countries. Background Note
by UNCTAD Secretariat TD/B/COM.1/EM.1/2 (7 April). Geneva,
Switzerland: UNCTAD.
US Chamber of Commerce. 2014. Investment Climate Update: Medical
Tourism, Africa Business Initiative. International Affairs 4(2) (June).
Wasserman, E., and S. Cornejo. 1999. Comercio de Servicios de Salud en
la Region de las Americas, coordinated and revised by C. Vieira and
M. Bolis. Programa de Politicas Publicas y Salud, Division de Salud
y Desarrollo Human, PS/OMS. Puerto Rico: Pan American Health
Organization.
Widiatmoko D., and A. Ganni. 2002. International Relations within
Indonesia’s Hospital Sector. In Trade in Health Services: Global,
Regional and Country Perspectives. Washington, DC: Pan American
Health Organization.
WHO. 2015. Health and the Sustainable Development Goals: WHO
Position Paper. Draft (7 October). Geneva, Switzerland: WHO.
WHO. 2015. Towards a Monitoring Framework with Targets and
Indicators for the Health Goals of the Post-2015 Sustainable
Development Goals. Draft (January). Geneva, Switzerland: WHO.
WHO. 2012. Positioning Health in the Post-2015 Development Agenda.
WHO Discussion Paper (October). Geneva, Switzerland: WHO.
WHO. 2004. Recruitment of Health Workers from the Developing World.

Geneva, Switzerland: WHO, Executive Board.
WHO. 1999. GATS and International Trade in Health Services in South
East Region. New Delhi: WHO, Regional Office for South East Asia.
World Trade Organization (WTO). 1998. Health and Social Services,
Background Note by Secretariat, Council for Trade in Services
(18 September). Geneva, Switzerland: WTO.
WTO. 2013. The General Agreement on Trade in Services: An
Introduction (31 January). Geneva, Switzerland: WTO, Trade in
Services Division.
WTO. 1994. The General Agreement on Trade in Services and Related
Instruments. Geneva, Switzerland: WTO. https://www.wto.org
/english/docs_e/legal_e/26-gats.pdf (accessed 14 February 2017).
Online news articles and websites:
Frank, M. 2014. Cuba Ups Healthcare Sector Pay, Says Medical Export
Earnings to Rise. Reuters. 21 March.
Knowledge at Wharton. 2015. How Cuba’s Health Care Sector Aims
to Gain a Greater Foothold (February). http://knowledge.wharton
.upenn.edu/article/how-cubas-health-care-sector-aims-to-gain-a
-greater-foothold/ (accessed 14 February 2017).
International Medical Travel Journal. 2011. Opportunities for Moroccan
Medical Tourism. 28 September. http://www.imtj.com/news
/opportunities-moroccan-medical-tourism/ (accessed 14 February
2017).
International Medical Travel Journal. 2011 Cuba Relaunches Servimed
Medical Tourism Service. 16 December. http://www.imtj.com
/news/cuba-relaunches-servimed-medical-tourism-service
/ (accessed 14 February 2017).
Oxford Business Group. n. d. Just What the Doctor Ordered: Medical
Tourism is Providing a Fillip for Sector Expansion. http://www
.oxfordbusinessgroup.com/analysis/just-what-doctor-ordered
-medical-tourism-providing-fillip-sector-expansion (accessed
14 February 2017).
PART IV
Other Linkages
between Trade
and the SDGs
17
Trade and Urbanization
Yuan Zhang and Guanghua Wan
17.1 Introduction
Modern humans have been increasingly concentrated in cities. The
United Nations forecasts that 60% of the world’s population will live
in urban areas by 2030. Since 2007, when the world’s urban population
exceeded its rural counterpart for the first time, the development
community has shifted some of its focus to urban areas. Urbanization
was a central theme of the World Bank’s World Development Report
2009. Regional multilateral institutions such as the Development Bank
of Latin America and the Asian Development Bank have also stepped up
their efforts to support the urban sector, and have begun to collaborate
on comparative studies of urbanization.
Urbanization is a broad term that includes a wide range of issues such
as spatial distribution of cities, architectural design, labor migration, and
size distribution of cities. In urban economics, urban development has a
threefold meaning: population urbanization, urban primacy, and urban
concentration (Moomaw and Shatter 1996). In the empirical literature,
urban primacy is usually measured by the share of the largest city’s
population in a country’s total urban population; urban concentration is
usually measured by the population share of big cities (generally being
defined as those with a population of more than 1 million) in total urban
population; and population urbanization is measured by the share of
urban population in total population.
For developing economies, population urbanization is often the
starting point of discussion or research on urban development. However,
it is believed that population urbanization in developing countries does
not differ fundamentally from the experience of developed countries
(Moomaw and Shatter 1996). Henderson (2005) states that urbanization
is a transient phenomenon, implying that attention should be focused
on urban primacy and urban concentration. These arguments or
statements are only applicable to the urbanized countries or regions, not
developing economies where the level of population urbanization has
439
Table 17.1 Population Statistics (1960–2011) (million)
1960 1970 1980 1990 2000 2010 2011

World
Total population 3,040 3,690 4,450 5,300 6,120 6,890 6,970
Population in cities 1,010 1,340 1,740 2,260 2,840 3,540 3,610
Population in 395.32 530.11 684.10 862.03 1,107.02 1,379.65 1,410.84
metropolises
Developing
countries
Total population 2,297 2,857 3,538 4,321 5,070 5,760 5,830
Population in cities 543 777 1,098 1,550 2,054 2,654 2,715
Population in 213.97 305.23 429.38 577.61 791.86 1,028.47 1,055.69
metropolises
Note: A metropolis is a city with a population of more than 1 million.
Data source: World Bank. World Development Indicators.
risen rapidly and will continue to rise in the decades to come. As shown
in Table 17.1, from 1960 to 2011, the population in the world rose from
3.04 billion to 6.97 billion, an increase of 129.28%, while the total urban
population increased 257.43% from 1.01 billion to 3.61 billion, and the
total population of cities with over 1 million residents increased 257.22%
from 395 million to 1.41 billion. These figures show that the growth rate
of urban population in the world (especially the population in larger
cities) is much faster than the growth rate of the world’s total population
in the past half-century.
Against the rising importance of population urbanization, little
has been published on the determinants of population urbanization in
developing economies. One of the determinants is openness, particularly
for Asia, where many economies adopt export-oriented policies and
international trade plays an increasingly important role. Recognizing
the shortage of research on the linkages between international trade
and urban development in developing countries, this chapter will
examine the effects of international trade on urban development,
especially focusing on the interlinkages between international trade and
population urbanization.
Our contribution is related to the United Nations’ Sustainable
Development Goals (SDGs). Goal 11 of the SDGs is to make cities
inclusive, safe, resilient, and sustainable. However, urbanization can
be accompanied by unemployment and poverty, malnutrition, ghetto
Trade and Urbanization441
houses, and so on. For example, if the speed of population urbanization

is too fast, but the agrarian sector cannot provide enough food to feed
the population, malnutrition would appear. If a developing country does
not adopt efficient trade policies, even if it has enough food to feed the
urban population, rapid population urbanization may result in a high
urban unemployment rate, or other problems of over-urbanization.
One may ask whether international trade encourages urbanization and
consequently enhances inclusiveness or unsustainability. In this chapter,
we will show that international trade, cereals or non-cereals trade, and
population urbanization spur economic development with structural
transformation. This indicates that the governments of developing
economies should allocate more resources to providing roads,
transportation, housing, and basic services to the urban population.
17.2 Literature Review

In this section, we will first review the literature on the relationship
between international trade and urban concentration and urban
primacy, and then summarize studies on the role of international trade
in the process of population urbanization.
17.2.1 International Trade, Urban Concentration,

and Urban Primacy
Early research on the determinants of urban concentration comes from
Williamson (1965). He argues that urban concentration will initially
increase and then decline with economic growth. This is confirmed by
some studies (Wheaton and Shishido 1981; Rosen and Resnick 1980).
More recently, Ades and Glaeser (1995) show that total population and
the share of the nonagricultural labor force are positively correlated with
urban concentration. They also explain that government policies and
politics play an important role in the process of urban concentration, i.e.,
government may adopt biased policies to favor residents in the country’s
largest city because this can help governments survive. As a result,
dictatorship and political instability encourage urban concentration.
Davis and Henderson (2003) find that investments in interregional
infrastructure and strengthened fiscal decentralization can reduce
urban concentration.
Another stream of literature focuses on the interlinkages between
trade openness and urban concentration, including the neoclassical
urban systems theory and new economic geography (NEG) theory.
Henderson (1982) develops the framework of neoclassical urban

systems under the neoclassical assumptions. He constructs a general
equilibrium model to explain the formation of urban systems in a
small open economy. Relying on this model, Rauch (1989) derives
that trade liberalization could encourage urban concentration. As
Henderson (1996) points out, trade changes the output structure of an
economy, causing changes in the number of different types of cities,
which affects urban concentration. Monfort and van Ypersele (2003)
argue that international trade leads to urban concentration. However,
Henderson (1996) indicates that the impact of trade liberalization
on urban concentration depends on country-specific geographic
characteristics, for example, the spatial heterogeneity between coastal
cities and inland cities. Based on a multisector Ricardo trade model,
Rauch (1991) shows that when the cost of domestic trade does not
change, trade liberalization promotes the growth of coastal or border
cities. Without considering other geographic characteristics, the size
of cities monotonically decreases when moving from coastal or border
areas to inland areas, because trade liberalization facilitates labor
migration from inland cities to coastal or border cities that have better
accessibility to foreign markets. Likewise, Brülhart, Crozet, and Koenig
(2004) show that external liberalization leads to urban agglomeration
of the border areas.
Krugman (1991) pioneered the NEG theory where transportation
cost, as a dispersion force, plays an important role in determining
a firm’s incentive to concentrate into some area with other firms.
As regional integration and trade liberalization can help reduce
transaction costs, they encourage agglomeration of economic
activities. Following Krugman (1991), Monfort and Nicolini (2000)
construct a two-country, four-region model where populations can
migrate freely inside a country, but cannot cross the border. They
find that regional integration inside a country and international trade
encourage agglomeration. Haaparanta (1988) sets up a standard NEG
model, taking inequality of factor endowments into account, and finds
that trade liberalization causes spatial production agglomeration to
regions with comparative advantages. If some industries exogenously
depend on some special regions, specialization of those industries with
comparative advantages would encourage the agglomeration in these
regions. Similarly, Paluzie (2001) believes that trade would encourage
agglomeration.
However, other NEG models show the opposite conclusion (e.g.,
Krugman 1996; Krugman and Elizondo 1996; Moncarz 2004; Behrens
et al. 2007). Krugman and Elizondo (1996) explain that a closed
economy tends to promote large metropolises with huge and relatively
affluent population concentration, which offer the best market access

(backward linkages) to manufacturing firms that serve the domestic
market. Meanwhile, huge cities can offer better access to inputs
including labor and intermediate inputs from other firms (forward
linkages). For these economies, implementing import-substitution and
trade liberalization policies will promote the relocation of firms that
serve foreign markets to areas with better access to foreign consumers
and intermediate products from abroad, decreasing concentration
in metropolises. Behrens et al. (2007) draw a similar conclusion
by developing a monopolistic competition model and assume two
centrifugal forces, one from the inability of farmers to migrate
freely and the other from a competition effect in regions with a high
concentration of firms.
The different conclusions can be attributed to different
assumptions that are made regarding how decreasing trade costs
affect centrifugal forces (Behrens et al. 2007; Crozet and Koenig
2004). They can also be attributed to a country’s industrialization
level relative to that of the rest of the world. For example, Alonso-
Villar (2001) argues that for those developing countries with low
levels of industrialization, firms might choose locations closer to
domestic markets to avoid fierce international competition, leading
to urban concentration.
Empirical studies on the relationship between international trade
and concentration do not arrive at same conclusions. The traditional
view maintains that only those large cities that serve as hubs and are
of concern to foreign trade partners can benefit from trade openness,
and consequently trade openness increases the concentration or
primacy of these cities (Linsky 1965; Berry 1961). However, others find
that international trade reduces urban concentration (Frankel and
Romer 1999; Karayalçin and Yilmazkuday 2014). Moomaw and Shatter
(1996) show that higher export orientation significantly reduces urban
concentration and urban primacy. Yet, some other studies find that the
effect of trade on urban concentration is insignificant (Ades and Glaeser
1995; Nitsch 2006; Junius 1999).
Finally, the impact of international trade on urban concentration
may also depend on different geographic features or the components of
trade. For example, De Ferranti et al. (1998) assert that international trade
may reduce urban concentration in Colombia because specialization in
agricultural exports might reduce spatial disparities through an increase
in farmers’ income in particular regions. Henderson (2000) finds that
trade increases urban concentration in port cities, but decreases urban
concentration if the primate city is not a harbor city. Using panel data
from Colombia, Guevara (2015) assesses the effect of regional trade
openness on agglomeration within regions and finds that the effect of

trade on urban concentration varies across regions. On the one hand,
trade has positive effect on spatial agglomeration within regions with
large home market and location advantages. On the other hand, trade
has negative effect on agglomeration within regions that lack access to
international trade or historical advantage. Gaviria and Stein (2000)
find that trade liberalization hinders the growth of major cities in inland
areas, but it has little effect on the population growth of port cities or
cities located near ports. After controlling the endogeneity in regression
models, Grajeda and Sheldon (2015) find that trade liberalization
reduces the size of the primate city, but helps increase the size of non-
primate cities.
Based on the above literature review, it appears difficult to
derive a general conclusion about the nexus between international
trade and urban concentration. What can be stated is that if a highly
industrializing economy adopts export-oriented strategies, and the
world market is big enough, trade liberalization will encourage the
concentration of harbor cities or border cities because they provide
better access to the world market.
17.2.2 Effect of International Trade on Population

Urbanization
The literature on population urbanization can be at least dated back to
the dual economy models, which explore the determination of rural–
urban migration, urban wages, rural–urban wage gaps, and urban
unemployment (Lewis 1954; Ranis and Fei 1961; Harris and Todaro
1970). According to Harris and Todaro (1970), urban unemployment
could be a normal phenomenon in developing economies since many
migrants are attracted by high expected rather than real income in urban
sectors. Some studies find that in many Asian economies, the speed of
population urbanization is faster than the speed of industrialization,
resulting in over-urbanization (Davis and Golden 1954). Pandey (1977)
and Bairoch (1988) attribute over-urbanization in some Asian economies
to rural–urban migration pushed by too-fast population growth and the
increasing pressure of population on agricultural land.
Other literature empirically tests the determinants of population
urbanization. For example, Davis and Golden (1954) and Graves and
Sexton (1979) find an S-shaped relationship between gross domestic
product (GDP) per capita and population urbanization in preindustrial
and developing countries. That is to say, as GDP per capita rises, the
rate of population urbanization in the early period increases slowly,
then accelerates before slowing down. Similarly, Moomaw and Shatter

(1996) find that population urbanization is positively correlated with
GDP per capita and industrialization. Using state-level panel data from
India, Pandey (1977) finds that industrialization is positively correlated
with population urbanization, while cropping intensity being a proxy
for agricultural development is negatively correlated with it. Brueckner
(1990) finds that the rural–urban income ratio, the ratio of commuting
costs to urban income, and the ratio of agricultural land rent to urban
income have significant effect on city size in developing economies. Davis
and Henderson (2003) show that government policies, such as price
controls and industrial protection, have indirect effect on population
urbanization through affecting industrial structures.
Very few empirical studies test the effect of international trade
on population urbanization in developing economies. Moomaw and
Shatter (1996) find that population urbanization rises with increases in
export orientation based on cross-country panel data. Jedwab (2013)
investigates the effect of crop exports on population urbanization
in Ghana and the Ivory Coast, and finds that the rate of population
urbanization increases with exports. However, using a panel of Asian
countries, Hofmann and Wan (2013) find that international trade (share
of import and export to GDP) is not significant in all regression models
on population urbanization. The mixed findings could be caused by the
use of different components of international trade. Using panel data
of developing Asia during 1993–2010, Zhang and Wan (2015) provide
evidence that international trade is generally negatively correlated
with the level of population urbanization. However, cereals and non-
cereals trade have different correlations with population urbanization:
the former is positively correlated while the latter is negatively
correlated with population urbanization. Similarly, Glaeser (2014) finds
that after the 1960s, there has been an explosion of poor megacities
in developing countries. He shows that agricultural prosperity can
lead to more population urbanization in a closed economy, but that
population urbanization increases with agricultural desperation in an
open economy. In the latter case, importing agricultural products while
exporting nonagricultural products may be a key driver of population
urbanization in poor countries.
An important question to be answered is whether the international
trade of agricultural products and manufactured goods has different
effects on population urbanization. So, the next section will examine the
interlinkages between different components of international trade and
urban development, especially focusing on the interlinkages between
cereals trade and population urbanization.
17.3 The Nexus of Trade–Population

Urbanization
In this section, a simple framework is first constructed to show that
grain imports and exports can affect population urbanization by
changing the constraints of domestic grain surplus on urbanization.
Evidence from economic history, the People’s Republic of China (PRC),
and India is then provided to highlight the theoretical hypotheses of
this framework.
17.3.1 A Simple Framework on Cereals Trade–Population

Urbanization
In a closed economy, the share of the population that can live in
urban areas is basically determined by the surplus of grain and food
produced by peasants because the urban sector can only be fed by the
agriculture sector. For example, if each peasant can feed one other
person, then the share of urban population in the long run could be
50% only; if each peasant can feed two other persons, then the share
of urban population could be as high as 75%. That is to say, the share
of surplus grain generally equals population urbanization in the long
term. This equilibrium in a closed economy has been realized and
discussed by anthropologists, economic historians, and development
economists (Skinner 1977; Zhao 1992; Zhang 1992; Johnson 1997,
2000).
Figure 17.1 illustrates such an equilibrium where two closed
economies have the same population but the agricultural productivity
of country B is higher than that of country A. Thus, country A has lower
population urbanization than country B.
We provide historical evidence from the PRC to illustrate such
equilibrium. In its early development stage, the PRC, the world’s most
populous country, experienced a grain shortage and could not sustain
population urbanization. Especially in the “Three Years of Economic
Hardship” from 1958 to 1960, the urban population sharply increased
while national grain output decreased dramatically (Figure 17.2), leading
to tens of millions of deaths due to starvation.
In order to deal with this problem, Nine Measures to Reduce the
Urban Population and Urban Food Consumption was issued by the
Central Committee Work Conference on 16 June 1961. It required that
the urban population be reduced by at least 20 million in the following
3 years. In May 1962, the central government further issued the Decision
to Further Cut Down Staffing and Reduce the Urban Population
Figure 17.1 Equilibrium between Grain Surplus

and Urbanization in Closed Economies
Country A Country B
Urban Urban
population population
Surplus Surplus
grain grain
Rural sector Rural sector
Source: Authors.
Figure 17.2 Total Grain Output and Urbanization

in the People’s Republic of China (1955–1965)
0.22
0.20
0.18
0.16
0.14
0.12
0.10
1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965
total output of grain urbanization
Note: The unit of measurement is trillion tons for total output of grain and % for urbanization.
Source: National Bureau of Statistics of the People’s Republic of China, www.stats.gov.cn
(Sun 2013) to ease the tension between urban population growth and
food shortage. Shanghai had also encountered food shortage before
that period. In response, the Shanghai government encouraged migrant
peasants to go back to their hometowns and join agricultural production,
and organized urban unemployed workers to go to Jiangxi Province and
other rural areas to take part in wasteland reclamation. According to
Chen (2011), from 1955 to 1956, more than 5 million urban citizens were
dispatched from Shanghai.
In an open economy, the equilibrium could be changed by
international trade. In this case, the share of urban population could
be higher or lower than the ratio of surplus grain to total grain output
produced by domestic peasants. For example, Glaeser (2014) argues
that globalization radically changes the process of urbanization.
Trade liberalization means that Port-au-Prince, for example, can be
fed with imported American rice. Urban growth can still take place
even in the face of rural deprivation, as in Kinshasa today. His model
shows population urbanization without improvement of agricultural
productivity. He also finds a sharp decline in the connection between
local agricultural productivity and urbanization between 1961 and
2010, which is compatible with the hypothesis that global food supply
has reduced the need to develop a domestic agricultural surplus before
building cities. Here, a new equilibrium is attained when the ratio of
surplus grain to total grain output produced domestically plus net
import of food equals to the share of urban population. This equilibrium
applies not only to cities like Port-au-Prince, but also to economies like
the PRC; Hong Kong, China; Japan; Singapore; and those that do not
have enough cultivated land or cannot produce enough food to feed
their citizens. Another side of the coin is that in countries such as Brazil,
Canada, France, and the United States, the ratio of surplus grain to
total grain output produced domestically is higher than the share of
urban population. Their international trade involves exporting surplus
grain to feed other countries’ population urbanization.
Figure 17.3 illustrates the new equilibrium in countries A and B,
which are now open economies. In this case, although agricultural
productivity of country A is lower, it still has a larger urban population
than country B. This is because country A can now import grains
produced by country B.
A good example is illustrated in Figure 17.4, where between 1000
and 1900 the global share of urban population more than quadrupled,
increasing from 2% to over 9%, and the increase occurred mostly
during 1800–1900.
Nunn and Qian (2011) attribute such an increase partly to the
introduction of potatoes from South America to Europe. Potatoes
Figure 17.3 Equilibrium between Grain Surplus

and Urbanization in Open Economies
Country A Country B
Urban Urban
population population
Surplus Surplus
grain grain
Rural sector Rural sector
Source: Author.
Figure 17.4 Total Population and Urbanization

of the World (1000–1900)
1,800 10 City population share (percent)

World population (millions)
1,200
600
0 1
1000 1100 1200 1300 1400 1500 1600 1700 1800 1900
Year
World population City population share
Source: Nunn and Qian (2011).

are native to South America and were widely adopted as a field crop
in Europe toward the end of the 17th century and the beginning of
the 18th century before spreading to the rest of the Old World (i.e.,
the entire Eastern Hemisphere), mainly by European sailors and
missionaries. Compared with other European staple crops, potatoes
provide more calories, vitamins, and nutrients per unit of output. As a
result, the introduction of potatoes led to rapid growth of population
and cities (Salaman 1949; von Fürer-Haimendorf 1964; Moomaw and
Shatter 1996). Using country-level data on population and population
urbanization, Nunn and Qian (2011) find in their empirical testing that
the introduction of potatoes from the New World to the Old World is
responsible for approximately one quarter of the growth in Old World
population and urbanization between 1700 and 1900.
What is not shown in Figure 17.3 is that country B can import
nonfarm products from country A after exporting food items. These
imports and exports entail equilibrium between rural and urban
sectors in both countries. Cross-border trade enables country A to
increase its population urbanization at the expense of country B’s
urbanization potential. Meanwhile, nonfarm exports of country A
will help sustain its urban sector and contain country B’s population
urbanization. Based on these arguments, the following two hypotheses
can be proposed:
ƀǇ Hypothesis 1: Cereals and non-cereals trades have different
effects on population urbanization.
ƀǇ Hypothesis 2: Net imports of cereals increase the importer’s
In the next section, we will test these two hypotheses using panel
data of 1993–2010 from 40 developing countries in Asia.
17.3.2 Empirical Evidence
Table 17.2 lists the definition of variables. Here “urbanization” is the

independent variable, measured by the share of urban population in
total population. Trade openness is measured by the share of imports
and exports in GDP. In order to investigate the different effects of
different components of trade on population urbanization, shares in
GDP of imports and exports, cereals imports and exports, non-cereals
imports and exports, cereals imports, cereals exports, and net cereals
imports will be controlled in the regression models. GDP per capita,
structure of GDP (share of primary industry in GDP, share of secondary
industry in GDP), average cereals yield, total population, land area, and
time trend are also controlled in the models. The last two in Table 17.2
Table 17.2 Definition of Variables
Variable Definition
urbanization Share of urban population (%)
trade Share of imports and exports in GDP (%)
trade_cereals Share of cereals imports and exports in GDP (%)
trade_other Share of non-cereals imports and exports in GDP (%)
impt_cereals Share of cereals imports in GDP (%)
expt_cereals Share of cereals exports in GDP (%)
netimp_c Share of net imports of cereals in GDP (%)
avgdp GDP per capita ($; log)
avcereals Average cereals yield (m ton; log)
totpop Total population (person; log)
surface Surface area (km; log)
gdp1_share Share of primary industry in GDP (%)
gdp2_share Share of secondary industry in GDP (%)
trend Time trend
neighbor_trade Average level of openness of neighboring countries (%)
top5cereals Total cereals output in Brazil, Canada, France, Russian
Federation, and the United States (kg; log)
GDP = gross domestic product, kg = kilogram, km = kilometer, m ton = million ton.
Sources: World Bank, World Development Indicators; Food and Agriculture Organization of the United
Nations.
are instruments that will be employed in the two-stage least squares

estimation.
Before running regression models, Figure 17.5 plots import, export,
and net import of cereals and population urbanization. It is clear that
cereals export is negatively correlated with population urbanization,
while import and net import are positively correlated with population
urbanization.
Following the literature, the following regression model is specified:
௜ǡ௧ ൌ ߚ଴ ൅ ߚଵ ‫݁݀ܽݎݐ‬௜ǡ௧ ൅ ෍ ߚଶ ܺ௜ǡ௧ ൅ ߚଷ ݉௜ ൅ ߚସ ݊௧ ൅ ܸ௜ǡ௧
where subscript i denotes country, t denotes year, tradei,t denotes

international trade and its components, mi and ni denote fixed effects,
and Xi,t denotes control variables. The share of secondary industry in
total GDP measures industrialization level.
Figure 17.5 Cereals Trade and Population Urbanization in Asia

100
80
60
40
20
0
0 2,000,000 4,000,000 6,000,000
Export_cereals
Urbanization Fitted values
100
80
60
40
20
0
0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000
Import_cereals
80
60
40
20
0
–6.00e+09 –4.00e+09 –2.00e+09 0 2.00e+09 4.00e+09
net_import_cereals
Note: The unit of measurement is % for urbanization and ton for cereals.
Sources: World Bank. World Development Indicators; Food and Agriculture Organization of the
United Nations.
Regression results of the ordinary least squares models are presented

in Table 17.3. Consistent with Krugman’s theoretical prediction that there
is a negative correlation between international trade and urbanization in
developing countries, the coefficients of trade openness are significant
and negative in four models.
Also, the coefficient of average cereal yield has positive effect on
population urbanization, as expected. The coefficients of GDP per capita
and total population are positive, indicating their positive correlation
with population urbanization. The coefficient of “surface” is negative in
all models, which indicates that larger land surface area results in lower
What about the effects of cereals and non-cereals trade on population
urbanization? Regression results of the OLS models are reported in
Table 17.3 Effect of International Trade on Population Urbanization
1 2 3 4
Trade –0.0299*** –0.0299*** –0.0286*** –0.0282***
(0.0079) (0.0079) (0.0079) (0.0080)
Avgdp 0.318 0.318 0.507 0.511
(0.555) (0.555) (0.570) (0.571)
Avcereals 0.291 0.291 0.209 0.216
(0.290) (0.290) (0.296) (0.297)
Totalpop 18.90*** 18.90*** 18.05*** 18.05***
(3.448) (3.448) (3.496) (3.501)
Surface –33.01*** –31.47*** –31.40***
(6.156) (6.244) (6.258)
gdp1_share 0.0442 0.0427
(0.0314) (0.0319)
gdp2_share –0.00904
(0.0315)
Trend 0.193** 0.193** 0.223*** 0.224***
(0.0839) (0.0839) (0.0864) (0.0866)
Constant –701.0*** –281.4 –348.4* –350.9*
(114.1) (177.8) (183.8) (184.3)
Country Fixed Effect YES YES YES YES
Observation 343 343 343 343
Note: The numbers in parentheses are standard errors, where *, **, and *** indicate significance levels of
10%, 5%, and 1%, respectively.
Sources: World, Bank World Development Indicators; Food and Agriculture Organization of the United Nations.
Table 17.4, from which three conclusions may be drawn. First, the
coefficient of “trade_cereals” is significant and positive in models 1 and
4, whereas that of “trade_other” is significant and negative in all models.
This is consistent with the first hypothesis. Second, after controlling
for the non-cereals trade, the coefficient of “impt_cereals” is significant
and positive in models 2 and 5, which indicates that cereals imports
can improve population urbanization, as predicted by the theoretical
hypothesis. Third, after controlling for the net import of cereals in models
3 and 6, “netimpt_c” is significantly positive, which suggests that the
higher the net imports of cereals, the higher the population urbanization.
This is also consistent with the second theoretical hypothesis.
The regression results in Table 17.4 may suffer from endogeneity for
two reasons. First, other things being equal, countries with a higher level
of population urbanization may need more food from other countries.
Second, trade of cereals may be correlated with the residual term in the
regression model. However, it is not easy to find instrument variables for
Table 17.4 Effect of International Trade Components

on Level of Urbanization
1 2 3 4 5 6
trade_cereals 0.435** 0.464**
(0.195) (0.190)
trade_other –0.0307*** –0.0308*** –0.0309*** –0.0317*** –0.0319*** –0.0323***
(0.0080) (0.0081) (0.0081) (0.0078) (0.0079) (0.0079)
impt_cereals 0.446** 0.480**
(0.206) (0.201)
expt_cereals 0.360 0.359
(0.489) (0.486)
netimpt_c 0.309* 0.343*
(0.185) (0.181)
avgdp 0.503 0.497 0.456 0.374 0.369 0.308
(0.567) (0.569) (0.569) (0.550) (0.552) (0.551)
avcereals 0.190 0.177 0.115 0.247 0.229 0.163
(0.295) (0.305) (0.303) (0.288) (0.299) (0.297)
totpop 14.71*** 14.65*** 15.74*** 15.08*** 14.99*** 16.14***
(3.748) (3.770) (3.704) (3.718) (3.743) (3.677)
surface –25.54*** –25.37*** –26.81*** –26.19*** –25.93*** –27.51***
(6.681) (6.774) (6.716) (6.637) (6.738) (6.676)

1 2 3 4 5 6
gdp1_share 0.0315 0.0311 0.0336
(0.0320) (0.0322) (0.0322)
gdp2_share 0.00227 0.00211 –0.00373
(0.0316) (0.0317) (0.0315)
trend 0.280*** 0.282*** 0.270*** 0.264*** 0.267*** 0.252***
(0.0892) (0.0900) (0.0898) (0.0875) (0.0885) (0.0882)
constant –478.6** –483.4** –459.3** –442.0** –449.3** –419.6**
(190.6) (193.1) (192.8) (186.6) (189.5) (188.9)
Country YES YES YES YES YES YES

Fixed Effect
Observation 342 342 342 342 342 342
Sources: World Bank. World Development Indicators; Food and Agriculture Organization of the United
Nations.
non-cereals trade and for cereals imports and exports. So, next we try to
find instruments only for net import of cereals and then test the causal
effect of trade on population urbanization. The instrumental variables
used in this chapter are the interaction terms of two variables: the
trade openness of neighboring countries and the total cereals yield of
the top-five cereals producers in the world (Brazil, Canada, France, the
Russian Federation, and the United States). We use these two variables
as instruments for the following reasons.
First, it is straightforward that a country’s trade openness can be
directly affected by its neighbors due to their shared borders. A country
is more likely to open if its neighbors have a high level of openness
(Rajan and Zingales 2003; Baltagi, Demetriades, and Law 2009).
In the following two-stage least squares estimations, trade openness of
neighbors will be lagged by 10 years.
Second, total cereals yield of those top-five grain producers and
exporters may have an immediate effect on supply and prices in the
global grain market. The cereals trade of Asian developing countries
will be affected directly by the total cereals production in those five
countries whose production is determined by climate, their agricultural
endowments, technological progress of agriculture, etc. These factors
are obviously unrelated to the socioeconomic variables in Asian
Finally, we use the interaction term of these two variables as an

instrumental variable because opening up is the precondition for the
aggregate grain output of the five main producers to affect urbanization
in the relevant countries in Asia. We expect this interaction variable
to have a positive effect on its cereals trade in the first stage regression
models.
Regression results of the two-stage least squares estimations
are reported in Table 17.5. It can be seen that the coefficient of the
instrumental is significantly positive in the first stage regressions,
which is consistent with theoretic predictions. From the second stage
regressions we can find that “netimpt_c” is significantly positive in
five models, which suggests that net import of cereals can improve the
level of population urbanization in developing Asia. Consistent with
the results from earlier studies, the coefficient of GDP per capita is
significant and positive in five models. Other results are broadly in line
with expectations.
Table 17.5 Effect of Cereals Trade on Population Urbanization

(Two-Stage Least Squares Estimation)
1 2 3 4 5
netimp_c 3.612*** 3.826*** 4.014*** 4.012*** 4.242***
(1.355) (1.443) (1.484) (1.484) (1.303)
avgdp 1.852*** 2.037*** 2.678*** 2.678*** 2.513***
(0.631) (0.628) (0.766) (0.766) (0.912)
totpop 4.015 3.655 5.146 5.155
(6.558) (6.902) (6.664) (6.665)
surface –1.713 –0.495 –2.722
(13.33) (14.09) (13.77)
gdp1 0.0149 0.00572
(0.0411) (0.0420)
gdp2 0.0268
(0.0354)
trend 0.286** 0.289** 0.238* 0.237* 0.327***
(0.128) (0.134) (0.123) (0.123) (0.0499)
Constant –604.8** –619.2** –517.8* –552.2*** –636.9***
(299.5) (314.8) (294.7) (140.8) (97.03)
1 2 3 4 5
Country Fixed YES YES YES YES YES
Effect
Stage-1 regression results
Instrumental 0.00035*** 0.00033*** 0.00033*** 0.00033*** 0.00039***
variable
(0.00012) (0.00011) (0.00011) (0.00011) (0.00011)
Number of 516 516 550 550 550
observation
Sources: World Bank, World Development Indicators; Food and Agriculture Organization of the United
Nations.
17.3.3 Evidence from the Comparison between the

People’s Republic of China and India
Table 17.6 shows that from 1971 to 2010, total population in the PRC
increased by more than 50% while that of India more than doubled.
However, the share of urban population in India only increased
10 percentage points, while that of the PRC increased more than
30 percentage points. As will be demonstrated, international trade and
grain surplus have played important roles in driving the different pace of
urbanization in the PRC and India.
Figure 17.6 depicts trade liberalization in the PRC and India from
1970 to 2008, measured by the ratios of export and import to GDP. Until
the end of the 1970s, the two ratios were higher in India than in the PRC,
Table 17.6 Comparison of Population Urbanization

between the People’s Republic of China and India
1971 1981 1991 2001 2006 2007 2008 2009 2010

Total PRC 8.52 10.01 11.58 12.76 13.14 13.21 13.28 13.35 13.41
Population
(100 million) India 5.51 6.89 8.52 10.33 11.20 11.37 11.53 11.69 11.86
Population PRC 17.26 20.16 26.94 37.66 44.34 45.89 46.99 48.34 49.95
Urbanization (%)
India 20.10 23.34 25.72 27.9 28.98 29.26 29.54 29.80 30.10
PRC = People’s Republic of China.

Sources: China Statistical Yearbook 2012; World Bank, World Development Indicators 2013.
Figure 17.6 Ratios of Export and Import to Gross Domestic Product

in the People’s Republic of China and India (1970–2008)
Export—GDP Import—GDP
35 45
30 40
35
25
30
20 25
15 20
15
10
10
5 5
0 0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
PRC India PRC India
PRC = People’s Republic of China, GDP = gross domestic product.

Source: World Bank. World Development Indicators 2010.
which corroborates the higher urbanization rate in India. This situation

was reversed right after the People’s Republic of China adopted reform
and opening-up policies at the end of the 1970s. Trade liberalization in
the PRC has accelerated since then, along with urbanization.
Table 17.7 shows the total and average output of cereals in the PRC
and India, which represent the availability of cereals from the domestic
agriculture sector.
Table 17.7 Output of Cereals in the People’s Republic of China and India
1971 1981 1991 2001 2006 2007 2008 2009 2010

Total PRC 207.86 272.81 395.66 396.48 450.99 456.32 478.47 481.56 496.37
output
India 84.50 104.10 141.90 162.50 170.80 177.70 197.20 192.40 178.00
(million
tons)
Per capita PRC 377.24 395.95 464.39 383.81 402.67 401.34 414.98 411.94 418.52
output
India 153.36 151.09 166.55 157.31 152.50 156.29 171.03 164.59 150.08
(kilogram)
Note: Per capita output equals total output divided by total population.
Data sources: China Rural Statistical Yearbook 2013; and Economic Survey of India 2012–2013, http://indiabudget
.nic.in/es2012-13/estat1.pdf
Table 17.7 shows that from 1971 to 2010, the total and average output
are much higher for the PRC than for India, indicating that peasants
in the PRC provide more surplus cereals than India’s peasants do. Per
capita cereals production in the PRC increased steadily, but this is not
the case for India.
Turning to grain trade, Table 17.8 and Table 17.9 report net export of
cereals in the PRC and India. Export of cereals outweighs import of cereals
in India, but the contrary was true in the PRC, especially after 2008.
Table 17.8 Net Export of Cereals in India (million tons)
1971 1981 1991 2001 2006 2007 2008 2009 2010

India –2.0 0.5 0.6 4.5 3.8 7.0 14.4 7.2 4.7
Source: Economic Survey of India 2012–2013. http://indiabudget.nic.in/es2012-13/estat1.pdf
Table 17.9 Net Export of Cereals in the People’s Republic of China

(million tons)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
10.73 5.32 0.86 0.54 –5.01 3.87 2.47 8.31 0.27 –1.83 –4.51 –4.29
Source: China Statistical Yearbook 2013.
Coupled with lower farming productivity, more export of cereals

in India not only hindered urbanization, it also resulted in serious
malnutrition (Gulati et al. 2012). For example, the 2016 global hunger
index released by the International Food Policy Research Institute said
that 38.7% of India’s children under 5 years are stunted due to lack of
food,1 and 42% of underweight children and 32% of stunted children in
the developing world are in India.
The above comparison once again illustrates that grain surplus as
determined by farm productivity and international trade, especially
trade of cereals and grain, exerts very crucial impacts on population
urbanization in developing economies.
1
News Today. 2016. 15% of India’s population are undernourished. 12 October.
http://newstodaynet.com/nation/15-indias-population-are-undernourished
(accessed 15 November 2016).
17.4 Policy Implications

Developing countries have seen a rapid rise in population urbanization
and urban concentration after the 1960s. At the same time, they have
actively participated in the process of globalization. However, possible
interlinks between population urbanization and openness in developing
economies have been ignored in the present literature. First, we argue
that there is an equilibrium between grain surplus and population
urbanization in developing economies and explain why cereals trade
can affect population urbanization. Then, historical evidence, empirical
tests, and case studies from the PRC and India are employed to test two
theoretical hypotheses.
Notwithstanding urban diseases such as congestion, ghetto housing,
and crime, the following policies are proposed to make urbanization
more sustainable and inclusive.
First, given the interlinkages between trade and urban concentration,
economies adopting an export-oriented strategy may see more
concentration in harbor or border cities. While one of the goals of the
United Nations’ SDGs is to “[by 2030] provide access to safe, affordable,
accessible and sustainable transport systems for all, improving road
safety, notably by expanding public transport, with special attention to
the needs of those in vulnerable situations, women, children, persons
with disabilities and older persons.” Thus, more public goods and
services shall be provided to these cities, including more roads, schools,
hospitals, and so on. Our research points out the direction of such
investment providing public goods and services.
Second, as more poor megacities emerge, the challenges of poverty
alleviation and weak governance may reduce the ability to address the
negative externalities that come with density (Glaeser 2014). Thus,
improving governance is urgent to cope with the externality of density.
In addition to social protection and unemployment insurance, priority
areas of intervention include efficient public policies to cope with crime,
intelligent traffic management systems to cope with traffic congestion,
public housing to shelter the poor or those in ghetto houses, and
sanitation facilities.
Third, one of the goals of the SDGs is to “support positive economic,
social and environmental links between urban, peri-urban and rural
areas by strengthening national and regional development planning.”
This chapter shows that agricultural development can loosen the
grain constraint and promote population urbanization. Consequently,
investment in agriculture, including irrigation, soil improvement, and
technology upgrades, can help promote population urbanization and
economic growth. Technology assistance from developed countries

on improving labor productivity or gross output of food in developing
countries is also helpful to fulfill the goals of the SDGs.
Fourth and finally, for small developing countries, or countries that
have limited agricultural endowments, importing grains is a possible way
to promote sound and orderly population urbanization and sustainable
economic growth.
References*
Alonso-Villar, O. 2001. Large Metropolises in the Third World: An
Explanation. Urban Studies 38(8): 1359–1371.
Ades, A., and E. Glaeser. 1995. Trade and Circuses: Explaining Urban
Giants. The Quarterly Journal of Economics 110(1): 195–227.
Bairoch, P. 1988. Cities and Economic Development. Chicago: University
of Chicago Press.
Baltagi, B., P. Demetriades, and S. H. Law. 2009. Financial Development
and Openness: Evidence from Panel Data. Journal of Development
Economics 89(2): 285–296.
Behrens, K., C. Gaigne, G. I. P. Ottaviano, and J. F. Thisse. 2007.
Countries, Regions and Trade: On the Welfare Impacts of Economic
Integration. European Economic Review 51: 1277–1301.
Berry, B. 1961. City Size Distributions and Economic Development.
Economic Development and Cultural Change 9: 573–587.
Brueckner, J. K. 1990. Analyzing Third World Urbanization: A Model
with Empirical Evidence. Economic Development and Cultural
Change 38(3): 587–610.
Brülhart, M., M. Crozet, and P. Koenig. 2004. Enlargement and the EU
Periphery: The Impact of Changing Market Potential. The World
Economy 27: 853–875.
Chen, Xi. 2011. The Population Decrease and Food Supply in Shanghai
1955–1956. Contemporary China History Studies 18(3).
Crozet, M., and S. P. Koenig. 2004. EU Enlargement and the Internal
Geography of Countries. Journal of Comparative Economics 32:
265–279.
Davis, K., and H. Golden. 1954. Urbanization and the Development of
Pre-industrial Areas. Economic Development and Cultural Change 3:
6–26.
Davis, J., and J. Henderson. 2003. Evidence on the Political Economy of
the Urbanization Process. Journal of Urban Economics 53: 98–125.
De Ferranti, D., G. E. Perry, W. Foster, D. Lederman, and A. Valdés. 1998.
Beyond the City: The Rural Contribution to Development. World
Bank Latin American and Caribbean Studies 32333. Washington,
DC: World Bank.
Frankel, J. A., and D. Romer. 1999. Does Trade Cause Growth? American
Economic Review 89: 379–399.
Gaviria, A., and E. Stein. 2000. The Evolution of Urban Concentration
around the World: A Panel Approach. Research Department Working
*
The Asian Development Bank refers to “China” as the People’s Republic of China.
Paper Series. No. 414. Washington, DC: Inter-American Development

Bank.
Glaeser, E. 2014. A World of Cities: The Causes and Consequences of
Urbanization in Poorer Countries. Journal of the European Economic
Association 12(5): 1154–1199.
Grajeda, M. R., and I. Sheldon. 2015. Trade Openness and City Interaction.
In The Region and Trade: New Analytical Directions, edited by
A. Batabyal and P. Nijkamp. pp. 267–318. www.worldscientific.com
/doi/abs/10.1142/9789814520164_0010 (accessed 15 November
2016).
Graves, P., and R. Sexton. 1979. Over-Urbanization and Its Relation to
Economic Growth for Less Developed Countries. Economic Forum
8(1): 95–100.
Guevara, C. 2015. The Effect of Trade on Agglomeration within Regions.
GATE Working Paper No. 1530. France: University of Lyon.
Gulati, A., A. Ganesh-Kumar, G. Shreedhar, and T. Nandakumar. 2012.
Agriculture and Malnutrition in India. Food and Nutrition Bulletin
33(1): 74–86.
Haaparanta, P. 1998. Regional Concentration, Trade, and Welfare.
Regional Science and Urban Economics 28: 445–463.
Harris, J., and M. Todaro. 1970. Migration, Unemployment and
Development: A Two-Sector Analysis. American Economic Review
60(1): 126–142.
Henderson, J. V. 1982. Systems of Cities in Closed and Open Economies.
Regional Science and Urban Economics 12(3): 325–350.
____. 1996. Ways to Think about Urban Concentration: Neoclassical
Urban Systems Versus the New Economic Geography. International
Regional Science Review. 19 (1–2): 31–36.
____. 2000. The Effects of Urban Concentration on Economic Growth.
NBER Working Paper No. 7503. Cambridge, Massachusetts:
National Bureau of Economic Research.
____. 2003. The Urbanization Process and Economic Growth: The
So-What Question. Journal of Economic Growth 8(1): 47–71.
____. 2005. Urbanization and Growth. In Handbook of Economic Growth,
1st Edition, edited by P. Aghion and S. Durlauf. Volume 1. Elsevier.
pp. 1543–1591.
Hofmann, A., and G. Wan. 2013. Determinants of Urbanization. ADB
Economics Working Paper Series No. 355. Manila: Asian Development
Bank.
Jedwab, R. 2013. Urbanization without Structural Transformation:
Evidence from Consumption Cities in Africa. Technical report.
Department of Economics, George Washington University.
Johnson, D. 1997. Agriculture and the Wealth of Nations. American

____. 2000. Agricultural Adjustment in China: Problems and Prospects.
Population and Development Review. 26(2): 319–334.
Junius, K. 1999. Primacy and Economic Development: Bell Shaped or
Parallel Growth of Cities? Journal of Economic Development 24:
1–22.
Karayalçin, C., and H. Yilmazkuday. 2014. Trade and Cities.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2149567
Kofmann, A., and G. Wan. 2013. Determinants of Urbanization.
ADB Economics Working Paper Series No. 355. Manila: Asian
Development Bank.
Krugman, Paul. 1991. Increasing Returns and Economic Geography.
Journal of Political Economy 99: 483–499.
____. 1996. Urban Concentration: The Role of Increasing Returns and
Transport Costs. International Regional Science Review 19: 31–36.
Krugman, P., and R. L. Elizondo. 1996. Trade Policy and the Third World
Metropolis. Journal of Development Economics 49: 137–150.
Lewis, A. 1954. Economic Development with Unlimited Supplies of
Labour. The Manchester School 22: 139–191.
Linsky, A. 1965. Some Generalizations Concerning Primate Cities.
Annals of the Association of American Geographers 55: 506–513.
Moomaw, R., and A. Shatter. 1996. Urbanization and Economic
Development: A Bias toward Large Cities? Journal of Urban
Economics 40: 13–37.
Moncarz, P. 2004. Unilateral Trade Liberalisation and the Spatial
Distribution of Economic Activity within a Country. Working
paper of Nottingham Centre for Research on Globalisation and
Economic Policy. University of Nottingham. http://128.243.80.167
/gep/documents/conferences/2004/pg-conf-2004/pedromoncarz
-postgrad04.pdf (accessed 15 January 2016).
Monfort, P., and R. Nicolini. 2000. Regional Convergence
and International Integration. Journal of Urban Economics 48:
286–306.
Monfort, P., and T. van Ypersele. 2003. Integration, Regional
Agglomeration and International Trade. CEPR Discussion Paper
No. 3752. London: Centre for Economic Policy Research.
Nitsch, V. 2006. Trade Openness and Urban Concentration: New
Evidence. Journal of Economic Integration 21(2): 340–362.
Nunn, N., and N. Qian. 2011. The Potato’s Contribution to Population
and Urbanization: Evidence from a Historical Experiment. The
Quarterly Journal of Economics 126(2): 593–650.
Paluzie, E. 2001. Trade Policies and Regional Inequalities. Papers in

Regional Science 80: 67–85.
Pandey, S. M. 1977. Nature and Determinants of Urbanization in a
Developing Economy: The Case of India. Economic Development
and Cultural Change 25(2): 265–278.
Rajan, R. G., and L. Zingales. 2003. The Great Reversals: The Politics
of Financial Development in the Twentieth Century. Journal of
Financial Economics 69(1): 5–50.
Ranis, G., and J. Fei. 1961. A Theory of Economic Development. American
Rauch, J. E. 1989. Increasing Returns to Scale and the Pattern of Trade.
Journal of International Economics 26: 359–369.
____. 1991. Comparative Advantage, Geographic Advantage and the
Volume of Trade. The Economic Journal 101: 1230–1244.
Rosen, K., and M. Resnick. 1980. The Size Distribution of Cities: An
Examination of the Pareto Law and Primacy. Journal of Urban
Economics VIII: 165–186.
Salaman, R. 1949. The History and Social Influence of the Potato.
Cambridge, Massachusetts: Cambridge University Press.
Skinner, G. W. 1977. The City in Late Imperial China. Stanford, California:
Stanford University Press.
Sun, J. 2013. The Change of Population in China: 1959–1961. Internal
Manuscript of Social Science in China, Vol. 4.
United Nations. 2009. World Urbanization Prospects: The 2009 Revision.
New York.
Von Fürer-Haimendorf, C. 1964. The Sherpas of Nepal: Buddhist
Highlanders. Berkeley: University of California Press.
Wheaton, W., and H. Shishido. 1981. Urban Concentration, Agglomeration
Economies and the Level of Economic Development. Economic
Development and Cultural Change 30(1): 17–30.
Williamson, J. 1965. Regional Inequality and the Process of National
Development. Economic Development and Cultural Change 13(4):
3–45.
Zhang, Y., and G. Wan. 2015. International Trade and the Urbanization
in Developing Countries: Evidence from Asia. Social Sciences in
China 36(2): 186–204.
Zhang, Peigang. 1992. New Development Economics. Zhengzhou, People’s
Republic of China: Henan People’s Publishing House.
Zhao, G. 1992. Cities and Towns in the History of China. The Journal of
Chinese Social and Economic History 2: 5–18.
18
Trade, Infrastructure,
and Development
Marcelo Olarreaga
18.1 Introduction
Sustainable Development Goal 9 recognizes the importance of regional
and international infrastructure to achieve inclusive development.
This chapter uses an international trade perspective to examine how
regional, national, or international infrastructure can affect economic
development.
There is ample literature focusing on the interrelationships between
trade, infrastructure, and development. Often, it suggests that these
relationships reinforce the positive impact that investments in both
national and international infrastructure have on international trade,
and, by extension, on development. This chapter, however, aims to
better understand why these positive, reinforcing relationships are not
always observed. In particular, the role played by initial conditions and
complementarities is analyzed to explain the heterogeneity of outcomes
vis-à-vis trade reform or investments in national and international
infrastructure.
The objective is not to determine whether trade or infrastructure
investment is good for development; instead, it is to inform policy makers
on their timing so that they can help—rather than hinder—development.
This chapter also aims to identify other reforms, policies, institutions,
and investments to ensure that trade and infrastructure have a positive
impact on development.1
1
It is important to note that this chapter focuses on economic growth rather than
sustainable development. The latter is multidimensional; trying to capture the
impact of trade and infrastructure on development would transform this chapter into
a volume by itself.
466
Trade, Infrastructure, and Development467
First, the relationship between trade and economic growth is

examined from both theoretical and empirical perspectives to highlight
the importance of initial conditions in explaining the heterogeneity
of outcomes. Second, the literature on the relationship between
infrastructure and trade is examined. The last section of the chapter
examines whether policy makers should invest their marginal funds on
national or international infrastructure.
18.2 Does Trade Promote Growth?

Classical growth theory demonstrates that decreased marginal returns to
accumulation of capital result in declining growth in a closed economy.
The only source of long-term growth in such models is productivity.
Ventura (1997) showed that in the presence of capital accumulation and
diminishing returns, international trade allows for long-term growth.
He provided a multisector open economy version of the classical growth
model where international trade allows factor price equalization to beat
diminishing returns to capital, which leads to positive long-term growth
without any need for productivity growth.
The key in Ventura’s model is that as capital accumulates, the
comparative advantage of the economy changes, which alters the
composition of aggregate production per the Rybczynski theorem. These
changes in the structure of production allow the capital-accumulating
country to beat declining marginal returns, and lead to long-run growth. In
other words, international trade transforms the classical growth model into
an AK model. However, restructuring the production bundle in an economy
does not automatically lead to higher growth. Matsuyama (1992) provided
an example of this, showing that if trade pushes an economy toward
specialization in a sector with low “learning” or growth opportunities, this
can lead to lower aggregate economic growth through a composition effect.
When a theory provides ambiguous answers, researchers turn to
empirical evidence. Although early empirical literature tend to suggest
that trade liberalization is associated with higher growth, Rodríguez
and Rodrik (2000) showed that most of this literature was plagued with
methodological issues, including the definition of trade reforms, which
often used not only trade-related reforms, but also macroeconomic
reforms (e.g., Sachs and Warner 1995), and issues of endogeneity and
measurement (e.g., Edwards 1998; Frankel and Romer 1999) leading to
biased results. Moreover, the use of cross-sectional data from different
countries at various levels of development with diverse initial conditions
implicitly assumed that the response to trade reforms is homogeneous,
but this is unlikely.
Wacziarg and Welch (2008) addressed most of the criticisms

in Rodríguez and Rodrik (2000). Making use of the within-country
variation in openness to trade and economic growth with a difference-in-
difference estimator, they controlled for initial conditions and estimated
that when economies open up to trade, gross domestic product (GDP)
growth increases, on average, by 2 percentage points (Figure 18.1). They
also provided evidence that the mechanism through which GDP grows
is due to a sharp increase in investment following trade reforms.
Feyrer (2009a), using a methodology similar to Frankel and Romer
(1999), estimated an elasticity of income per capita with respect to trade
of 0.5. This circumvented the problem in Frankel and Romer (1999),
who used time-invariant geography determinants of bilateral trade to
instrument for aggregate trade when explaining variations in income
per capita across countries, by using a measure of the time-varying
impact of geographic distance on trade (i.e., with technological progress
in the international transport sector, the same geographic distance does
not have the same impact across time). Feyrer, therefore, instrumented
Figure 18.1 Gross Domestic Product Growth

before and after Trade Liberalization
5
–1
–2
–20 –10 0 10 20
yearT
Growth Average Growth (before T)
Average Growth (after T) Growth (3-year MA)
y-axis = percentage points.

Source: Wacziarg and Welch (2008).
international trade flows using a measure of time-varying distance;

this enabled using bilateral fixed effects to control for time-invariant
institutional determinants of income per capita (and trade), which, as
argued by Rodríguez and Rodrik (2000), are important omitted variables
in Frankel and Romer.2
The literature is growing on firm productivity and trade
liberalization, which has tended to show that within-firm productivity
increases with trade reforms through two main channels: (i) a larger
variety of cheaper intermediate inputs and stronger competition, and
(ii) a composition effect due to the exit of less-productive domestic firms
(Pavcnik 2002; Amiti and Konings 2007; Khandelwal and Topalova
2011). The growth in aggregate productivity through these two channels
then partly explains the positive impact of trade reforms on GDP growth.
Similarly, the literature on exporting firms and productivity has tended
to show that exporting firms are more productive, but that this is mainly
due to a selection effect that more productive firms become exporters
(Bernard and Jensen 1999). Although most of the existing evidence is for
developed countries, recent empirical work using developing country
data shows some evidence of “learning-by-exporting,” in which firms
become more productive as they start exporting (Van Biesebroeck 2005).
An issue not addressed by recent empirical literature on trade and
growth is the potential heterogeneity in the impact of trade reforms
on growth. It is only on average that opening up to trade leads to the
2-percentage-point-higher growth in Wacziarg and Welch (2008) and
Feyrer (2009a). Perhaps the more interesting question is why some
countries grow faster and others slow down when they open up to trade.3
Freund and Bolaky (2008) were among the first to search for
systematic differences. Their focus was on whether the sign and size
of the impact depend on the flexibility of business regulations in each
country. To take advantage of new opportunities offered by trade
openness, factors of production need to be reallocated from sectors with
relatively low productivity to those with relatively high productivity.
For this to occur, business regulations must ensure that firms can exit
and enter sectors without facing large costs. Figure 18.2 illustrates the
2
Feyrer (2009b) also exploited the idea that the impact of geographic distance can
be time varying by using the changes in maritime shipping distance resulting from
the closing of the Suez Canal in 1967 and its reopening in 1975. He argued that the
shock provoked by the opening and closing of the canal was exogenous and showed
that the induced changes in trade had a positive and statistically significant impact
on trade flows.
3
Important inputs into this process are early case studies of episodes of trade reforms
in a selected number of developing countries (CUTS International 2008), which
explained the heterogeneity of experiences across countries.
Figure 18.2 Gains from Trade with and without Entry Costs
Panel A: Gains from Trade with No Entry Costs

P supply P
supply
Autarky price
Gains World price
from Gains
trade from
World price trade
Autarky price
demand demand
Import market Q Export market Q
Panel B: Gains from Trade with Entry Costs

P supply P supply
Gains
from
trade
Autarky price
Gains
from World price
trade
World price
Autarky price
Loss from
trade due to
unemployment
demand demand
Import market Q Export market Q
Source: Author.
importance of entry barriers in determining the gains from trade in a

two-sector model with an import-competing and exported good. Panel
A illustrates the classic gains from trade when there are no entry costs,
while panel B shows the additional losses associated with trade when
entry costs do not allow resources to be redeployed from low to high
productivity sectors and, as a result, are unemployed.
Freund and Bolaky (2008) empirically examined the role played by
regulations in determining the impact of trade on income per capita.
They split countries in their sample into those with above-median
regulations and those with below-median regulations in terms of the

flexibility granted for the entry and exit of firms. They showed that a
positive relationship exists between trade and income per capita, but
only in countries with above-median regulations. The relationship is
negative, although not statistically significant, for countries with below-
median regulations. These results are robust to the introduction of
control variables, such as rule of law, distance to the equator, a dummy
indicating whether the country is landlocked, and population size.
Chang, Kaltani, and Loayza (2009) built on Freund and Bolaky
(2008) in exploring how other types of complementarities affect the
relationship between trade and growth in a dynamic panel containing
22 developed countries and 60 developing countries, with, on average,
11 observations per country. Using interaction terms, they examined
how the impact of trade reforms on economic growth varies depending
on education enrollment, financial depth, inflation, telecommunications
infrastructure, governance, labor market flexibility, and firm entry and
exit flexibility. They found that higher education enrollment, financial
depth, better governance, and telecommunications infrastructure,
as well as more labor market and firm entry and exit flexibility, shift,
from negative to positive, the impact on GDP growth of a one standard
deviation increase in the log of trade–GDP ratio. Thus, they showed that
initial conditions do matter and can change the impact of trade reforms
on economic growth from positive to statistically insignificant or even
negative.
18.3 The Role of Infrastructure

As further shown by Chang, Kaltani, and Loayza (2009), the quality
of infrastructure (proxied by the number of main telephone lines per
capita in their paper) is an important determinant of the impact of trade
reforms on economic growth. At the bottom of the sample in terms of
quality of infrastructure, increases in trade openness lead to negative
growth, while at the top of the distribution, trade openness leads to
positive GDP growth.4
Yet the number of telephone lines is only a partial indicator
of infrastructure. Other literature has examined how many other
dimensions of hard infrastructure (e.g., telephone lines and other
4
Poor infrastructure may vitiate increases in trade openness, potentially leading
to negative GDP growth, because, as in Freund and Bolaky (2008), it hampers
reallocating resources to more productive uses.
information and communications technology infrastructure, ports, and

roads) and soft infrastructure (e.g., border and transport efficiency, and
the business and regulatory environment) affect international trade
flows. Most of this literature has used the empirical workhorse of studies
in international trade—the gravity equation.
Nordås and Piermartini (2004) were an early example, although
their results were not very robust to the introduction of infrastructure
variables in the gravity framework. One problem with their approach
is that the gravity framework is intended to explain the variation in
bilateral trade flows, and infrastructure variables are measured at the
aggregate level (i.e., the quality of the importer’s port is the same no
matter from whom one is importing). They built a bilateral index of
infrastructure that combines the levels in the importing and exporting
country, which implicitly assumed that they are perfect substitutes for
each other.
Helble, Shepherd, and Wilson (2009) focused on how the degree of
transparency in setting trade policy affects bilateral trade flows among
the Asia and Pacific countries. However, they had the same issue as
Nordås and Piermartini (2004), as transparency in trade policy varies at
the importer or exporter level, but they circumvented this by accepting
potential bias due to the absence of multilateral resistance terms in
their gravity specification. Their measure of trade policy transparency
partly captured measures of soft infrastructure (e.g., the degree of trade-
related corruption, efficiency of customs and border agencies, logistics
indicators, as well as the degree of uncertainty in trade policy), and they
addressed the problem of endogeneity using ex-British colonies’ tending
to have more transparent trade regimes. While the degree to which
this supposition—being an ex-British colony satisfies the exclusion
restriction—cannot be tested (as there is only one instrument), this is
one of the rare studies that recognized the problem of endogeneity.
Their results showed that transparency in trade policy setting in an
importing country positively affects bilateral trade flows, while exporter
transparency in trade policy settings seems to have a more ambiguous
impact (Table 18.1).
Francois and Manchin (2013) examined the impact of infrastructure
and institutional quality on bilateral trade flows using a gravity setup
that controlled for zero trade, as well as multilateral resistance, using
a method proposed by Baier and Bergstrand (2009). To control for
endogeneity of infrastructure and institutional quality, they used
their lagged values, like many others in the literature, but these may
be inadequate instruments given the important time persistence
of variables such as infrastructure and institutions. Nevertheless,
consistent with other results in the literature, they found that both
Table 18.1 Impact of Importer and Exporter

Transparency on Trade Flows
Diff. Homog.
All Goods HS > 27 HS > 83 Goods Goods
GDP Importer 0.605*** 0.596*** 0.599*** 0.577*** 0.641***
[0.023] [0.016] [0.018] [0.021] [0.028]
GDP Exporter 0.660*** 0.745*** 0.789*** 0.770*** 0.557***
[0.020] [0.017] [0.016] [0.770] [0.026]
Tariff (RG Weighted) –0.701 –1.421 –2.121 0.138 –0.875
[0.588] [0.988] [1.603] [1.194] [0.702]
NTB (RG Weighted) 0.414 –0.951** –1.881** 0.076 1.057***
[0.469] [0.439] [0.805] [0.023] [0.367]
Import Transparency 1.828*** 1.864*** 2.583*** 3.889* 1.987
[0.302] [0.373] [0.401] [2.533] [2.049]
Export Transparency –0.406 –0.856*** –0.681*** 3.071* 1.939
[0.260] [0.239] [0.199] [2.113] [1.749]
Observations 29,376 21,114 4,284 76,500 50,694
GDP = gross domestic product, HS = harmonized system code, NTB = nontariff barriers to trade,
RG Weighted = reference group weighted.
Notes: Robust standard errors in brackets; * significant at 15%; ** significant at 10%; significant at 5%.
Estimation method in Poisson QML. Importer and exporter transparency are instrumented by British
colonization of the importer and exporter. First-stage F-statistics are 374.68*** and 306.88***, respectively.
Reference group weighting is included to circumvent endogeneity problems.
Source: Helble, Shepherd, and Wilson (2009).
infrastructure and institutional quality are important determinants of

bilateral trade.
Portugal-Perez and Wilson (2012) also used the gravity framework
to examine the impact of hard and soft infrastructure on bilateral
trade flows. They found that physical infrastructure is the most robust
determinant of bilateral exports, whereas the impact of other variables
often changes sign depending on specifications or the estimators used.
Djankov, Freund, and Pham (2010) used a difference gravity
equation to solve the problem that most infrastructure variables do
not have a bilateral dimension, which is the variation in data used to
estimate gravity equations.5 They found that soft infrastructure does
5
The problem with the difference gravity equation is that results are sensitive to the
choice of reference countries.
matter for international trade; for example, an extra day in the number
of days necessary to clear customs in an exporting country leads to
a 1% reduction in exports. They also controlled for potential reverse
causality, as countries that rely more on export markets may invest
more on export infrastructure. To address this, they used a sample of
landlocked countries and instrumented the time to export with the
time to export in neighboring countries. Note that it is unclear that
this solved the potential omitted variable bias, as the time to export
in neighboring countries may be a direct determinant of exports in
landlocked countries.
Helble (2014) focused on international transport infrastructure,
examining how shipping and air cargo connections and frequency
among Pacific countries affect their bilateral trade flows. The variables
of interest (i.e., direct connectivity and frequency) had a bilateral
dimension, and the setup addressed the problem of zeroes and
multilateral resistance, as well as endogeneity, using measures of direct
connectivity and frequency for passenger flights rather than shipping
and cargo flights. The instrumental variable results suggested that
having a direct connection and high connection frequency have a large
and statistically significant impact on bilateral trade flows.
There is also recent literature on the importance of soft and hard
infrastructure on exports at the firm level, more neatly identifying
the causal effect. It also has focused more on national rather than
international infrastructure. One example is Volpe and Blyde (2013),
who utilized the damage caused to roads by a Chilean earthquake (i.e.,
a natural experiment) to identify the impact of road deterioration on
firms’ exports, depending on their location. They used a difference-
in-difference estimator where the change in exports of firms that
were unaffected by the earthquake serves as a counterfactual for
those firms that were close to damaged roads. They discovered a large
negative and statistically significant effect of the earthquake on firms’
exports.
Volpe et al. (2014) used a similar empirical approach to examine the
impact of shipping costs on exports. Using another “natural experiment,”
that is, the closing of the main bridge between Argentina and Uruguay
due to an environmental dispute, they investigated how the closing led
to higher shipping costs and how it affected exports between the two
countries. They found a very large impact; a 1% increase in shipping
costs caused a 7% decline in exports.
Some literature also has focused on the impact of soft
infrastructure projects related to customs efficiency on firm exports.
Volpe, Carballo, and Graziano (2015) noted how the functioning of
customs, and in particular the time it takes to clear them, affects firms’
export values. In other words, they addressed a similar question as
Djankov, Freund, and Pham (2010), but used firm-level data to identify
the causal impact.6 Endogeneity and reverse causality, in particular,
are problematic, as larger and more frequent exporters may face
shorter (or longer) customs delays. Utilizing Uruguayan customs data
at the transaction level, they solved this with the random allocation
of shipments to expedient customs channels, which they used as an
instrument for the time spent at customs. They found that customs
delays have a negative, large, and statistically significant impact on the
value of export shipments.
An interesting point made by Carballo et al. (2016a) is that the time
spent at customs is endogenous, as firms will choose different channels
or whether to export depending on the length and frequency of delays.
Therefore, any ranking of customs efficiency based on actual time spent
will be biased by a composition effect. More importantly, they showed
that the impact of customs delays is heterogeneous across firms; in
particular, new firms are more elastic to them. This may be because
unexpected delays hurt the reputation of new firms more than that of
established firms.
Another question is whether export programs aimed at facilitating
trade for small firms are effective. An example of such a program is
Peru’s Exporta Fácil, which allows for the export of small shipments (i.e.,
below $2,000 and a maximum of 30 kilograms) through Peru’s postal
system using simplified export procedures. Carballo, Schaur, and Volpe
(2016a) examined its impact on exports and found that the program
boosts exports mainly through the extensive margin, allowing smaller
firms to enter new markets with new products. The survival rate of new
exporting firms seems also to be much larger for those firms using the
program. Trade facilitation programs can, therefore, have larger impacts
on smaller firms.
Indeed, the development of online platforms such as eBay,
Alibaba, and Amazon that allow small firms to access customers in
distant countries, combined with trade facilitation programs such as
Exporta Fácil, has the potential for making trade more inclusive by
allowing smaller, less-productive firms in various countries to reach
international customers. Lendle et al. (2016) showed that geographic
distance matters much less for online platforms than offline, and that,
6
They also had information of the actual time spent by each shipment at customs,
rather than the time reported by a few customs operators, as in the World Bank’s
Doing Business database.
through feedback mechanisms, they allow for the creation of a good

reputation at a relatively low cost. This explains why small firms
can access a large number of distant export markets and have higher
survival rates than offline firms (Lendle et al. 2013). This literature also
suggests that the combination of trade facilitation programs with those
providing access to online platforms to small firms in remote areas can
be effective for spreading the benefits of globalization where they are
most needed.
More generally, the simplification of customs procedures through
the introduction of electronic customs single windows (Carballo et al.
2016b) or implementation of authorized economic operator programs
(Carballo, Schaur, Volpe 2016b) that simplify procedures for trustworthy
firms generate increases in firms’ exports along both the intensive and
extensive margins.
18.4 National Versus International

Infrastructure
As shown by the previously reviewed literature, national and
international infrastructure tend to have a positive impact on exports.
However, should public investment in infrastructure be targeted toward
national or international infrastructure?
Recent evidence by Atkin and Donaldson (2015) suggested that the
answer to this question may be country-specific. They showed that in
Ethiopia and Nigeria, national trade costs may be 4–5 times larger than
in the United States, implying a greater need for investment in national
infrastructure in Ethiopia and Nigeria.
Martin and Rogers (1995) put forward a theoretical model of firm
location that addresses this question, with a focus on GDP per capita.
In their model, trade integration implied that, in the presence of
economies of scale, firms tend to locate in countries with better national
infrastructure, as they offer lower costs to serve all markets. Better
international infrastructure magnifies the industrial relocation of firms
toward a country with better national infrastructure.
This, of course, has implications for developing countries, which
tend to have poor infrastructure. Investment in national infrastructure
will help the relocation of firms to developing countries, which become
more attractive. However, investment in international infrastructure
will make it more attractive to serve the developing country market
from countries with better national infrastructure. Thus, if investment
in national and international infrastructure unambiguously makes

infrastructure-rich countries more attractive, this is not the case
for countries with poor infrastructure—only investment in national
infrastructure will make countries with poor infrastructure more
attractive to investors.
The prediction of Martin and Rogers (1995) has not been empirically
tested due to a measurement problem (i.e., it is difficult to distinguish
between national and international infrastructure, as it cannot be
known if the road from the firm to the port qualifies as national or
international) and an endogeneity problem in trying to assess the impact
of infrastructure on income.
This study tries to circumvent these two issues. The measurement
problem is partly solved by new databases with bilateral trade costs
made available by Novy (2013) and Arvis et al. (2015), who used these
data and the gravity framework to back out costs between countries. It is
important to note that trade costs do not only imply bad infrastructure,
but they are affected by it in turn. Moreover, the logic of Martin and
Rogers (1995) carries over to other determinants of national and
international trade costs.
One problem with the existing bilateral trade cost data set is that
the methodology only captures costs relative to the geometric national
trade average in an exporting and importing country. To test Martin and
Rogers (1995), a measure of international trade costs relative to national
ones in each country is needed—not one relative to the average domestic
costs of an importing and exporting country. Thus, this study must work
at the regional rather than country level to focus on intraregional (as a
proxy for national) to extraregional (i.e., international) infrastructure.
The 22 United Nations geographic regions are used (four in the Americas,
five in Asia, five in Africa, four in Europe, and four in the Indian Ocean),
and then the ratio of intraregional to extraregional trade costs for each
are measured.
Note that this does not completely solve the problem. The
intraregional trade costs now capture the average intraregional trade
costs relative to the geometric mean of national costs within the
region, which is the type of measure necessary. However, to only use
this measure would potentially suffer from an omitted variable bias,
as extraregional trade costs are excluded. However, using the ratio
of intraregional to extraregional trade costs is problematic, as the
extraregional trade costs are actually given by the ratio of those relative
to the geometric mean of national costs in the region and rest-of-the-
world trading partners. The assumption necessary is at the regional
level, as the ratio of regional to extraregional national trade costs
is relatively constant across time and can be captured by a regional

dummy.7
The endogeneity problem of national and international
infrastructure is usually addressed using an instrumental variable
estimator, but, as discussed above, it is difficult to identify a variable
that will correlate with infrastructure (or trade costs) but otherwise
not correlate with international trade or income. The solution to this
is not to focus on the impact of national or international infrastructure,
but on the ratio of national to international infrastructure (i.e., the ratio
of international to national trade costs). The idea is that if national and
international infrastructure (i.e., trade costs) are likely to be endogenous
to economic activity, the ratio is less likely to be affected by economic
activity. In other words, the identifying assumption is that anything that
may be simultaneously affecting infrastructure and income is affecting
national and international infrastructure in a similar way, so it does not
create an endogeneity problem.
Further, any omitted variable bias that is country- or time-specific is
addressed by using a set of country- and time-specific fixed effects. The
test of the Martin and Rogers (1995) prediction is given by:
݈݊‫ݕ‬௥ǡ௧ ൌ ߙ௥ ൅ ߙ௧ ൅ ߚ݈݊‫ݎ‬௥ǡ௧ ൅ ߜ‫ܦ‬௥ǡ௧ ൅ ߛ‫ܦ‬௥ǡ௧ ݈݊‫ݎ‬௥ǡ௧ ൅ ߳௥ǡ௧ (1)
where ‫ݕ‬௥ǡ௧ is a measure of economic activity (GDP per capita)

in country r at time t, ‫ݎ‬௥ǡ௧ is the ratio of intraregional (national) to
extraregional (international) trade costs; this ratio is positively correlated
with the ratio of international to national infrastructure; ‫ܦ‬௥ǡ௧ is a dummy
taking the value of 1 when region r at time t has a level of intraregional
to extraregional trade costs that are above the median (trade costs above
the median imply that infrastructure is below the median, everything
else being equal); ‫א‬௥ǡ௧ is an identical and independently distributed error
term; Ds are fixed effects that control for anything that is region or time
invariant; and ߚ, ߛ, and ߜ are parameters to be estimated.
The parameter of interest is ߛ, which, according to Martin and
Rogers (1995), is expected to be negative. Indeed, in countries with
poor infrastructure, an increase in the ratio of regional to international
trade costs (i.e., a reduction in the ratio of national to international
7
Note that there is a tension with the argument here. As the region level is aggregated,
country-specific shocks are averaged out; however, because the rest of the world
becomes smaller (as the unit of observation becomes the region) the averaging out of
specific shocks in the rest of the world becomes less effective. As an alternative, the
same econometric specifications are run at the country level, and then the country-
fixed effects will capture the ratio of national trade costs to rest-of-the-world national
trade costs.
Table 18.2 Intraregional to Extraregional Trade Cost Ratio

and Gross Domestic Product per Capita, 1995–2012
Dummy Dummy
Dummy at 50th at 50th Dummy Dummy
No at 50th Percentile Percentile at 25th at 75th
Dummy Percentile (intra) (country) Percentile Percentile
Log (intra/ 0.10 0.31** 0.22 0.15 0.36** 0.20*
extra) (0.09) (0.10) (0.09) (0.21) (0.16) (0.09)
Dummy –0.46** –0.33** –4.28** –0.32 –0.21*
for high (0.11) (0.11) (1.63) (0.21) (0.10)
intra/extra
Dummy –0.74** –0.62** –0.92** –0.29 –0.30
high* log (0.18) (0.18) (0.33) (0.20) (0.24)
(intra/extra)
R2 0.53 0.55 0.55 0.21 0.53 0.53
Number of 354 354 354 2,481 354 354
observations
Notes:
1. All columns contain region- and year-fixed effects.
2. Robust standard errors are in parentheses.
3. ** stands for statistical significance at the 1% level, and * for statistical significance at the 5% level.
4. In the first column, no dummy is introduced to split regions into high and low intraregional to
extraregional trade costs.
5. In the second column, each year’s median is used to split regions into high and low intraregional to
extraregional trade costs.
6. In the third column, the 25th percentile is used, and in the fourth column, the 75th percentile of the
distribution of intraregional to extraregional trade costs every year.
7. The fifth column uses the distribution of intraregional trade costs to split the sample at the median.
8. The sixth column uses country-level data rather than region-level data, and the ratio is then of national
to international trade costs (the inverse of the estimates in Arvis et al. 2015).
Source: Author’s estimation.
infrastructure) should lead to a reduction in economic activity in the

region. The results of the estimation of equation 1 are reported in
Table18.2.
The first column reports a regression of the ratio of GDP per capita
on intraregional to extraregional trade costs, as well as region- and
year-fixed effects, suggesting that a correlation does not really exist
between the two. However, as the second column illustrates, once the
nonlinearities in Martin and Rogers (1995) are allowed and an interaction
of the ratio of intraregional to extraregional trade costs are introduced
with a dummy that signals that the ratio is above the median of the
distribution, a negative, large, and statistically significant coefficient
is obtained in the interaction of the relative cost of intraregional to
extraregional trade costs, with a dummy variable indicating that the
region has above-median intraregional to extraregional trade costs—
the prediction of Martin and Rogers (1995). In countries where the

intraregional infrastructure is relatively bad, a deterioration of the ratio
of intraregional to extraregional infrastructure hurts growth. Note that
deterioration in this ratio can be achieved by improving the extraregional
infrastructure while leaving the intraregional infrastructure unchanged.
Thus, in countries with relatively poor national infrastructure relative
to international infrastructure, priority should be given to investments
in national infrastructure.
In the third column, the distribution of intraregional trade costs is
used instead of the distribution of intraregional to extraregional trade
costs to split the sample at the median, and similar results are obtained to
the ones in the second column. The reason for this robustness test is that
the intraregional trade costs at the regional level are not contaminated
by the national trade costs in the rest of the world.
In the fourth column, the level of observation is the country—
not the region. As discussed above, the measures of international
trade costs in Arvis et al. (2015) are actually the ratio of international
trade costs to the geometric mean of national trade costs between the
importer and exporter. As long as all countries are small, the rest-of-
the-world national trade costs may be captured by the year dummies.
Because their measure is the ratio of international to national costs, the
inverse is taken to make them comparable with the intraregional (as a
proxy for national) to extraregional (as a proxy for international) trade
costs. Results in the fourth column confirm that the coefficient on the
interaction is negative and statistically significant.
In the fifth and sixth columns, how sensitive the results are to
splitting of the sample at the median is tested. In the fifth column, the
same is split at the 25th percentile, and in the sixth column, it is at the
75th percentile. Although the coefficient on the interaction is always
negative, it is not statistically significant, which suggests that results are
not very robust to the choice of threshold. This may have been expected
from the Martin and Rogers (1995) model, which did not specify the
level of threshold at which the change in regime occurs. Nevertheless,
these results call for some further robustness or confirmation that a split
at the median is reasonable.
To examine whether the split of the sample at the median is a
reasonable assumption, a Hansen (2000) threshold model estimation is
followed, rewriting equation 1 as a two-regime model:
݈݊‫ݕ‬௥ǡ௧ ൌ ߙ௥ ൅ ߙ௧ ൅ ߛ‫ܦ‬௥ǡ௧ ݈݊‫ݎ‬௥ǡ௧ ൅ ߩ൫ͳ െ ‫ܦ‬௥ǡ ൯݈݊‫ݎ‬௥ǡ௧ ൅ ߳௥ǡ௧ (2)
where ߛ captures how the ratio of intraregional to extraregional

trade costs affects GDP per capita in a regime with relatively high
intraregional to extraregional trade costs (i.e., relative poor intraregional

infrastructure), and ߩ captures the impact on GDP per capita of
intraregional to extraregional trade costs when in a regime with
relatively low intraregional to extraregional trade costs (i.e., a relatively
good intraregional infrastructure).
The threshold at which one shifts from one regime to another is
estimated as follows. Equation 2 is estimated for all the percentiles of the
distribution of intraregional to extraregional trade costs by constructing
a new dummy ‫ܦ‬௥ǡ௧ for each percentile. The estimated threshold is
the one that minimizes the sum of squared residuals.8 The results are
reported in Table 18.3.
The first column estimates equation 2 using an exogenous threshold
at the median. It is the equivalent of the second column in Table 2 and
confirms that for countries with intraregional to extraregional trade
costs above the median, an increase in the ratio leads to a decline in
Table 18.3 Identifying the Two Regimes
Dummy at 50th Estimated

Percentile Threshold
Dummy*Log (Intra/Extra) –0.44** –0.41**
(0.16) (0.16)
(1-Dummy)*Log(Intra/Extra) 0.31** 0.32**
(0.10) (0.10)
R2 0.55 0.55
Number of observations 354 354
Notes:
1. All columns contain region- and year-fixed effects.
2. Robust standard errors are in parentheses.
3. ** stands for statistical significance at the 1% level, and * for statistical significance at the 5% level.
4. In the first column, each year’s median is used to split regions into high and low intraregional
to extraregional trade costs.
5. In the second column, a Hansen (2000) threshold model is used.
6. The optimum threshold is estimated at the 54th percentile and is statistically different from zero
(see also Figure 3).
8
Following Hansen (2000), the statistical significance of the threshold is tested as
follows. The threshold is statistically different from zero at the ߙΨconfidence level
if the likelihood ratio statistics described by the expression ݊ሺܵሺͲሻ െ ܵ ‫ כ‬ሻ (where ܵ ‫כ‬is
the minimum sum of squared residuals at the estimated threshold, ܵሺͲሻሻ is the sum
of squared residuals if the threshold is set at 0, and n is the number of observations is
greater than െʹሺͳ െ ξͳ െ ߙሻ.
Figure 18.3 Sum of Squared Residuals

of the Estimation of the Threshold Model
Local polynomial smooth
11.2
11.0
SSR
10.8
10.6
10.4
0 20 40 60 80
pctile
95% Cl SSR lpoly smooth
kernel = epanechnikov, degree - 0, bandwidth = 2, pwidth = 4.6
SSR = sum of squared residuals.

Note: Each blue dot gives the SSR of the regression for each percentile of the distribution of
intraregional to extraregional trade costs. The SSRis minimized at the 54th percentile. The red line
provides the estimation of a local polynomial, and the gray area for the 95% confidence interval.
GDP per capita, while for countries with a ratio of intraregional to

extraregional trade costs below the median, an increase in the ratio
leads to an increase in GDP per capita. The second column estimates a
Hansen (2000) threshold model.
Figure 18.3 shows the sum of squared residuals of regressions for
different percentiles. The minimum is achieved at 54%, slightly above
the median. The threshold is statistically different from zero, and results
are very similar to the ones reported for the median in the first column.
Thus, the threshold model confirms that there are two regimes. For
countries with relatively low intraregional to extraregional trade costs,
the priority should be to reduce extraregional trade costs by investing in
extraregional trade infrastructure so that the ratio increases and leads to
increased GDP per capita. In countries with relatively high intraregional
to extraregional trade costs, the priority should be to reduce intraregional
trade costs by investing in intraregional infrastructure so that the ratio
declines and leads to increased GDP per capita. These results confirm
the theoretical predictions in Martin and Rogers (1995).
18.5 Conclusion
The survey of the literature on trade, infrastructure, and development
shows that trade openness has, on average, had a positive impact on
economic growth, but some important heterogeneity across countries
exists in this relationship. In particular, how much countries benefit
from further integration into global markets depends on the initial
conditions in each country. Among these initial conditions, the quality
of infrastructure matters. Microeconometric and macroeconometric
evidence shows that better national and international infrastructure
lead to higher levels of trade. This is also true for both soft and hard
infrastructure associated with trade facilitation. Importantly, trade
facilitation programs that aim to help small exporters have a large
impact along the product- and market-extensive margins of small firms.
However, as theoretically shown in a location model by Martin
and Rogers (1995), more trade does not necessarily mean higher
economic activity in a country investing in international infrastructure.
If countries with relatively poor national infrastructure and therefore
higher domestic production costs invest in international infrastructure,
they will help orient the relocation of firms toward other countries with
better national infrastructure and lower costs.
This chapter further shows that this prediction is supported by data
on international trade costs, in particular those estimated by Arvis et al.
(2015). Increases in the ratio of national to international trade costs hurt
GDP per capita in countries with relatively high national to international
trade costs, but helps GDP per capita in countries with relatively low
national to international trade costs. This implies that in countries
with relatively poor national infrastructure relative to international
infrastructure, the priority should be given to improvements in
national rather than international infrastructure. Similarly, in countries
with relatively poor international infrastructure relative to national
infrastructure, the priority should be given to improvements in
international rather than national infrastructure.
Another implication of the Martin and Rogers (1995) model is that
investment in soft infrastructure (e.g., trade facilitation programs)
enhances growth as long as it promotes exports, which is supported by
the existing empirical evidence. However, it is important to note that
90% of aid-for-trade is granted to hard infrastructure.
Sustainable development by definition is much broader than
economic growth. The impact that investment in national versus
international infrastructure may have on other dimensions of
development is questionable. The relationship is unlikely to be linear,
and further work should explore this question. Different trade-offs on
investments in infrastructure must also be noted and explored: quality

versus quantity, maintenance versus new infrastructure, financing with
user fees versus subsidies, or universal services versus cost efficiency.
The answers to these questions are likely to be country- and investment-
specific and depend to a large extent on the development objectives of
each country.
References
Inputs and Productivity. American Economic Review 97(5):
1611–1638.
Arvis, J., B. Shepherd, Y. Duval, C. Utoktham, and A. Raj. 2015. Trade
Costs in the Developing World: 1995–2012. ARTNeT Working Paper
121. Bangkok: United Nations Economic and Social Commission for
Asia and the Pacific.
Atkin, D., and D. Donaldson. 2015. Who’s Getting Globalized? The Size
and Nature of Intranational Trade Costs. Unpublished.
Baier, S., and J. Bergstrand. 2009. Bonus versus OLS: A Simple Method
for Approximating International Trade-Cost Effects Using the
Gravity Equation. Journal of International Economics 77(1): 77–85.
Bernard, A., and B. Jensen. 1999. Exceptional Exporter Performance:
Cause, Effect, or Both? Journal of International Economics 47(1):
1–26.
Carballo, J., A. Graziano, G. Schaur, and C. Volpe, 2016a. Endogenous
Border Times. Unpublished.
____. 2016b. The Border Labyrinth: Information Technologies and Trade
in the Presence of Multiple Agencies. Unpublished.
Carballo, J., G. Schaur, and C. Volpe 2016a. Posts as Trade Facilitators.
Unpublished.
____. 2016b. Trust No One? Security and International Trade.
Unpublished.
Chang, R., L. Kaltani, and N. Loayza. 2009. Trade Can Be Good
for Growth: The Role of Policy Complementarities. Journal of
CUTS International. 2008. Trade Development–Poverty Linkages:
Reflections from Selected Asian and Sub-Saharan African Countries.
Volume I: Country Case Studies. Jaipur: Jaipur Printers.
Djankov, S., C. Freund, and C. Pham. 2010. Trading on Time. Review of
Edwards, S. 1998. Openness, Productivity and Growth: What Do We
Really Know? Economic Journal 108(447): 383–398.
Feyrer, J. 2009a. Trade and Income: Exploiting Time Series in Geography.
National Bureau of Economic Research (NBER) Working Paper
14910. Cambridge, MA: NBER.
____. 2009b. Distance, Trade, and Income: The 1967 to 1975 Closing of
the Suez Canal as a Natural Experiment. NBER Working Paper
15557. Cambridge, MA: NBER.
Francois, J., and M. Manchin. 2013. Institutions, Infrastructure and
Trade. World Development 46(C): 165–175.
Frankel, J., and D. Romer. 1999. Does Trade Cause Growth? American
Freund, C., and B. Bolaky. 2008. Trade, Regulations, and Income. Journal
Hansen, B. 2000. Sample Splitting and Threshold Estimation.
Econometrica 68(3): 575–603.
Helble, M. 2014. The Pacific’s Connectivity and Its Trade Implications.
Asian Development Bank Institute (ADBI) Working Paper 499.
Tokyo: ADBI.
Helble, M., B. Shepherd, and J. S. Wilson. 2009. Transparency and
Regional Integration in the Asia Pacific. The World Economy 32(3):
479–508.
Khandelwal, A., and P. B. Topalova. 2011. Trade Liberalization and
Firm Productivity: The Case of India. The Review of Economics and
Statistics 93(3): 995–1009.
Lendle, A., M. Olarreaga, S. Schropp, and P. Vézina. 2013. eBay’s Anatomy.
Economic Letters 121(1): 115–120.
____. 2016. There Goes Gravity: eBay and the Death of Distance. Economic
Journal 126(591): 406–441.
Martin, P., and C. Rogers. 1995. Industrial Location and Public
Infrastructure. Journal of International Economics 39(3–4): 335–351.
Matsuyama, K. 1992. Agricultural Productivity, Comparative Advantage
and Economic Growth. Journal of Economic Theory 58(2): 317–334.
Nordås, H., and R. Piermartini. 2004. Infrastructure and Trade. World
Trade Organization (WTO) Staff Working Paper ERSD-2004-04.
Geneva: WTO.
Novy, D. 2013. Gravity Redux: Measuring International Trade Costs with
Panel Data. Economic Inquiry 51(1): 101–121.
Pavcnik, N. 2002. Trade Liberalization, Exit and Productivity
Improvements: Evidence from Chilean Plants. Review of Economic
Studies 69(1): 245–276.
Portugal-Perez, A., and J. S. Wilson. 2012. Export Performance and
Trade Facilitation Reform: Hard and Soft Infrastructure. World
Development 40(7): 1295–1307.
Rodríguez, F., and D. Rodrik. 2000. Trade Policy and Economic Growth:
A Skeptic’s Guide to the Cross-National Evidence. In NBER
Macroeconomics Annual 2000, edited by Ben Bernanke and Kenneth
Rogoff. Cambridge, MA: NBER.
Sachs, J., and A. Warner. 1995. Economic Reform and the Process of
Global Integration. Brookings Papers on Economic Activity 1995(1):
1–118.
Van Biesebroeck, J. 2005. Exporting Raises Productivity in Sub-Saharan

African Manufacturing Firms. Journal of International Economics
67(2): 373–391.
Ventura, J. 1997. Growth and Interdependence. Quarterly Journal of
Economics 112(1): 57–84.
Volpe, M. C., and J. Blyde. 2013. Shaky Roads and Trembling Exports:
Assessing the Trade Effects of Domestic Infrastructure Using
a Natural Experiment. Journal of International Economics 90(1):
148–161.
Volpe, M. C., J. Carballo, P. Garcia, and A. Graziano, 2014. How Do
Transport Costs Affect Firms’ Exports? Evidence from a Vanishing
Bridge. Economics Letters 123(2): 149–153.
Volpe, M. C., J. Carballo, and A. Graziano. 2015. Customs. Journal of
Wacziarg, R., and K. Welch. 2008. Trade Liberalization and Growth:
New Evidence. World Bank Economic Review 22(2): 187–231.
19
Facilitate Trade for
Development: Aid for Trade
William Hynes and Frans Lammersen
19.1 Introduction
Meeting at a special summit at the United Nations in September 2015,
world leaders committed to an ambitious global agenda: Transforming
our World: The 2030 Agenda for Sustainable Development. The Agenda
is a plan of action for people, planet, prosperity, peace, and partnership
with the Sustainable Development Goals (SDGs) at its core. The SDGs
are aimed at promoting inclusive, sustainable, and resilient growth and
development. International trade can help realizing the SDGs as a key
transmitter of goods and services, technology, knowledge, and behavior.
Successive rounds of multilateral trade liberalization, increasing
numbers of preferential market access schemes and regional free trade
agreements as well as expanding South–South trade have created many
more trading opportunities for developing countries.
To fulfill the potential of trade, developing countries and particularly
the least developed require technical and financial assistance to
connect and compete in international markets. Obsolete or ill-adapted
infrastructure, limited access to trade finance, the complexity and cost
of meeting an ever broadening array of standards, and cumbersome
and time-consuming border procedures all price too many developing
country firms out of international markets. During the last 10 years,
the global community has promoted aid for trade to help developing
countries tackle these obstacles. A total of $300 billion has been
disbursed for financing aid-for-trade programs and projects since the
Initiative was launched in 2006. Moreover, middle-income countries
received an additional $190 billion in other trade-related official flows.
There is now abundant evidence suggesting that aid for trade has
been effective in reducing trade and transport costs, promoting trade
expansion, and achieving economic and social objectives.
488
Facilitate Trade for Development: Aid for Trade489
Aid for trade is part of SDG 8 aimed at promoting sustained, inclusive,

and sustainable economic growth, full and productive employment and
decent work for all. The goal calls to “increase aid-for-trade support for
developing countries, in particular least developed countries (LDCs),
including through the Enhanced Integrated Framework” (United
Nations 2015). This echoes the call in the Addis Ababa Action Agenda
of the Third International Conference on Financing for Development
that “Aid for Trade can play a major role and should strive to allocate
an increasing proportion going to least developed countries, provided
according to development cooperation effectiveness principles” (United
Nations 2015).
Both the SDGs and the aid-for-trade objectives are dependent
on integrated policy approaches and trade-offs. Achieving the SDGs
requires a transformation of the world economy. This implies that aid for
trade should contribute to economic objectives of developing countries
by helping their firms connect to international markets, expand trade,
and strengthen its contribution to inclusive economic growth; to social
objectives by reducing poverty and inequalities; and to environmental
objectives through preserving the environment and adapting to
climate change while exploiting comparative advantages in low-carbon
production and environmental goods and services. In addition, aid for
trade can help developing countries build resilience and adjust to shocks
that ripple through international markets.
The chapter analyzes how aid for trade can best help achieve the
2030 Agenda for Sustainable Development. It will do so by reviewing
past aid-for-trade priorities, policies, and programs and assessing their
contribution to sustainable development. Special attention will be paid
to the role of aid for trade in promoting (green) growth and reducing
poverty for men and women. This, together with a review of the aid-for-
trade literature will be used to propose approaches to better facilitating
trade for development and strengthening the contribution of aid for
trade to the 2030 Development Agenda. Particular attention will be paid
to the role the private sector can play.
19.2 Aid for Trade

History shows openness to trade to be a key ingredient for economic
success and raising living standards. Countries that have pursued an
outward-oriented development strategy with trade liberalization at its
center not only outperformed inward-looking economies in terms of
aggregate growth rates, but also succeeded in lowering poverty rates
and registering improvements in other indicators of social progress.
However, developing countries require assistance to analyze, negotiate,

and implement trade agreements and benefit from the resulting increased
market access, while some have argued that the costs of implementing
multilateral trade agreements are substantial and reflect little awareness
of the capacity constraints of developing countries (Finger and Schuler
2000).
The first World Trade Organization (WTO) Ministerial Conference,
held in 1996, acknowledges that the least developed countries faced
these types of constraints. This led to the creation of the Integrated
Framework, which was mandated to improve the capacity of the least
developed countries for trade policy formulation and implementation.
However, the Integrated Framework had modest success and trade
rarely featured as a priority of either donors or recipients (WTO
2006a). Although donors did scale up their support to build capacities
for designing trade policy and regulations, especially at the start of the
Doha Round in 2001, a larger, more holistic effort was needed.
The UN Millennium Project (2005) called for supporting the poorest
countries by putting in place measures to enhance competitiveness
and productivity as well as to address adjustment costs. A significant
increase in “aid for trade”—that is, development assistance dedicated to
increasing the recipient country’s trade capacity—would help to ensure
that more countries benefit from trade opportunities. Domestic supply
constraints and high operating costs are the main reason for the lack
of trade growth and diversification in many of the poorest developing
countries. Prowse (2006) argued that without action to improve supply
capacity, reduce transport costs, facilitate movement of goods across
borders, connect farmers to markets, among others, trade opportunities
cannot be fully exploited and the potential gains from trade will not be
maximized.
At the Sixth WTO Ministerial Conference held in Hong Kong, China
in 2005, ministers recognized the need to move beyond just offering
increased market access. Consequently, they launched the Aid for Trade
Initiative to “help developing countries, particularly LDCs, build the
supply-side capacity and trade-related infrastructure that they need
to implement and benefit from WTO Agreements and more broadly
to expand their trade.” Furthermore, “effective aid for trade should
enhance growth prospects, reduce poverty, complement multilateral
trade reforms, and distribute the global benefits of trade more equitably
across and within developing countries” (WTO 2006b).
The remainder of this section reviews tools to identify binding
trade-related constraints first. Next, it assesses the extent to which
the aid-for-trade objectives have been met since the Initiative was
established 10 years ago. In particular, the section will discuss whether
trade has been mainstreamed as a priority in the development strategies

of partner and donor countries, whether donors have increased their
support, and whether this support has been effective.
19.2.1 Identifying Constraints

Developing countries are often confronted by two types of binding
constraints. It is unrealistic to address all needs and implement all
required reforms simultaneously. Political capital for reform is at least
as scarce as financial resources and both should be invested where
maximum impact can be expected. Thus, rather than indiscriminately
tackling a country’s laundry list of needs, the focus should be on
identifying and tackling the most binding constraints, i.e., addressing
first those that can have the greatest impact on expanding trade and
promoting economic growth. Sound sequencing of reforms and projects
are also critical in the design and implementation of effective aid-for-
trade interventions.
Various diagnostic tools are available for identifying binding
constraints. Stakeholder consultation, benchmarking, diagnostic trade
integration studies, and value chain analysis can all be used to pinpoint
the trade needs and constraints preventing developing countries from
expanding trade. All these methods have advantages, but also suffer
from various shortcomings and limitations. Hallaert, Cavazos Cepeda,
and Kang (2011) suggest combining the different diagnostic tools in an
appropriate framework to achieve prioritization. Combining the various
tools can help overcome the shortcomings and limitations of each
diagnostic tool. It can also provide evidence for use in confirming the
conclusions of any single approach and reduce the risks of misdiagnosis
or capture by vested interest.
An adaptation of the growth diagnostics—originally developed
by Hausmann, Rodrik, and Velasco (2006) for guiding growth
strategies—can provide an appropriate framework. By shifting the
focus from growth to trade, this framework can be easily adapted
by local authorities and development practitioners. The framework
employs a decision tree to prioritize reforms and “get the biggest bang
for the reform buck.” At each node of the decision tree, stakeholder
consultation, benchmarking, and a value-chain approach can be
used to rank the constraints. Drawing on a tool from the Enhanced
Integrated Framework (EIF) for least developed countries, a
Diagnostic Trade Integration Study action matrix can then be used
to identify the actions and reforms needed, as well as the sources of
potential external financial support and technical assistance. This
approach would have the advantage of increasing participation and
ownership by stakeholders and, consequently, the chances of success

of the reforms and of aid-for-trade interventions.
19.2.2 What Has Been Achieved?
Prioritizing Trade as a Tool for Development

Central to the Aid for Trade Initiative is the notion that trade should be
(better) prioritized in the strategies of developing countries and donor
agencies. Brenton and Gillson (2014) find that while progress has
been observed in mainstreaming trade in the strategies of developing
countries, capacities among them remain rather uneven. The high
number of developing countries that have actively participated in
successive monitoring exercises that underpin the biennial Global
Reviews of Aid for Trade, as well as a recent review of the Diagnostic
Trade Integration Studies undertaken by the Executive Secretariat of
the EIF, suggest that progress in this area continues. In addition, most
donor agencies have reported that they have specific aid-for-trade
strategies and some donors such as the European Commission and the
United Kingdom are now in the process of updating these. Sometimes
this is being done in the context of their broader private sector
development strategy such as, for instance, in the case of Germany and
the Netherlands.
Setting Aid-for-Trade Benchmarks

Prioritizing trade as a tool for economic growth and poverty reduction
was expected to result in securing “additional, predictable, sustainable
and effective financing for building trade capacities in developing
countries” (WTO 2006a). To assess additionality and ensure accurate
accounting at the global level, WTO members agreed on aid-for-trade
benchmarks that were based on donor reporting to the Organisation for
Economic Co-operation and Development (OECD) Creditor Reporting
System (CRS). These CRS proxies include official development assistance
(ODA) and other official flows (OOF) to help developing countries
elaborate trade development strategies, negotiate trade agreements, and
implement their outcomes; build roads, ports, and telecommunications
networks to better connect domestic firms to the regional and global
markets; support the private sector in exploiting their comparative
advantages and diversifying their trade; help countries pay for the costs
associated with trade liberalization such as tariff reductions, preference
erosion, or declining terms of trade; and, finally, other trade-related
needs if identified as trade-related priorities in the national development
strategies of partner countries (Figure 19.1).
Figure 19.1 Aid-for-Trade Creditor Reporting System Proxies
Building productive
Trade-related capacity
Infrastructure Banking and financial
Other
Trade policy and regulations services Trade-related
Transport and storage trade-related
Trade development Agriculture, forestry adjustment needs
Communications
and fishing
Energy
Industry and mining
Tourism
Source: OECD (2006a).
More Aid for Trade

Since the Aid for Trade Initiative was launched in 2006, a total of
$298 billion in ODA has been disbursed by bilateral and multilateral
donors for financing aid-for-trade programs and projects. Support
for programs aimed at reducing the infrastructure gap in developing
countries received $155 billion, while programs targeted at building
productive capacities took $133.9 billion. Aid for trade in its narrowest
sense of support for trade policy and regulation attracted a total
of $9.4 billion and $183.1 million was spent on easing trade-related
adjustment cost; one of the original arguments for the Aid for Trade
Initiative. To date, almost 85% of total aid for trade has financed projects
in four sectors: transport and storage (28.6%), energy generation
and supply (21.6%), agriculture (18.3%) and business services (5.5%)
(Figure 19.2). Geographically, 146 developing countries mainly in Asia
(38.2%) and Africa (35.7%) received aid-for-trade assistance. In terms
of population, the least developed countries took $11.1 per capita in aid
for trade, the highest amount compared with other income groups and
almost double the overall average aid for trade per capita.
In 2015, ODA commitments reached $53.8 billion, an additional
$31.5 billion or 141% in real terms compared with the 2002–2005
baseline average (Figure 19.3). This increased the share of aid for
trade in sector-allocable aid from an average of 32.5% during the
Figure 19.2 Aid-for-Trade Disbursements

Trade Policy and Regulation
Transport and Storage
Communications
Energy Generation and Supply
Business and Other Services
Banking and Financial Services
$298 billion Agriculture
Forestry
Fishing
Industry
Mineral Resources and Mining
Tourism
Source: OECD/DAC Creditor Reporting System.
Figure 19.3 Official Development Assistance and Other Official

Flows Trade-Related Commitments 2002–2014
Sector Distribution ($ billion 2015 prices)
70
ODA OOF 60
60 53.8
48.2 46.7
50
38.3 43.5
40
29.3 24.8
30
22.3 14.7
20
10
0
g. 8
01
1 4 15 g. 8
01
1 4 15
av 00 2 201 20 av 00 2 201 20
5 2 9– 5 2 9–
00 6– 0 1 2– 00 6– 0 1 2–
–2 0 20 20 –2 0 20 20
2 20 2 20
200 200
Building Productive Capacity Economic Infrastructure

Trade Policy and Regulations
ODA = official development assistance, OOF = other official flows.

baseline period to 33.3% in 2015. Thus, within the expanding ODA

budget envelope the share of aid for trade has increased even more.
The 2.2 basis point increase could be considered as additional aid
for trade.
In addition, $248 billion in gross trade-related OOFs has been
disbursed since 2006. The large increase was a countercyclical payout
coordinated by the international finance institutions after the 2007–
2008 financial crisis. Most of this non-concessional funding supported
projects in economic infrastructure (47.5%) and building productive
capacities (51.6%) and almost exclusively in middle-income countries
(96%). Asia is also the main beneficiary of trade-related OOF at
$103.3 billion, or 41.6%% of the total support. At $40.8 billion, Africa is
surpassed by Latin America and the Caribbean and also Europe with
$42.2 billion and $58.4 billion, respectively.
Positive Empirical Findings

The significant amounts of ODA and OOF spent on supporting
developing countries upgrade their infrastructure, invigorating the
private sector, and streamlining trade policies should show results.
Empirical findings confirm that aid for trade, in general, is effective
at both the micro and macro level. The impacts, however, may vary
considerably depending on the type of aid-for-trade intervention,
the income level, the sector at which the support is directed, and the
geographic region of the recipient country. For example, Viijl and
Wagner (2012) shows that the quality of infrastructure is significantly
positively correlated with aid to infrastructure. Ferro, Portugal–Perez,
and Wilson (2012) find that a 10% increase in aid to transportation,
information, communication and technology, energy, and banking
services is associated with increases of 2.0%, 0.3%, 6.8%, and 4.7%,
respectively, in the exports of manufactured goods from the recipient
countries. Cirera and Winters (2015) observe a positive impact on
exporting and importing times, but factors other than aid for trade
explain different experiences of structural change in sub-Saharan
African countries.
An evaluation of USAID (2010) trade assistance, which focused
on export expansion, trade policy reforms, increased participation in
trade agreements, and efficiency gains from trade facilitation assistance,
finds that each additional United States (US) dollar increases the value
of developing country exports by $42 2 years later. Helble, Mann, and
Wilson (2012), assessing the relationship between different aid-for-
trade categories and trade performance, find that a 1% increase in aid-
for-trade facilitation could generate a $415 million increase in global
trade. OECD/WTO (2013a) finds that $1 invested in aid for trade is on
average associated with an increase of nearly $8 in exports from all

developing countries and an increase of $20 in exports from the poorest
countries. These effects were found to be even more pronounced for
exports of parts and components. Hühne, Meyer, Nunnenkamp (2014)
establish that aid for trade increases recipient exports to donors as well
as recipient imports from donors with the former dominating the overall
positive effects. This corroborates similar findings and contradicts the
skeptical view that donors grant aid for trade primarily to promote their
own export interests.
Aid for trade also has great potential to reduce trade costs. Cali
and te Velde (2011) found that an increase of $1 million in aid-for-
trade facilitation associated with a 6% reduction in the cost of packing,
loading, and shipping. Busse, Hoekstra, and Königer (2012), using panel
data for 99 developing countries for the period 2004–2009, show that
aid for trade is closely associated with lowering trade costs and therefore
may play an important role in helping developing countries benefit from
trade. Gnangnon and Roberts (2015) find that a 1% increase in the aid for
trade is associated with a 7.3-point rise in export diversification at the
intensive margin and a 1.16-point rise in improvement of export quality.
Lee and Ries (2016) find that a 10% increase in annual aid for trade from
the five biggest bilateral donors (i.e., Japan, the US, France, Germany, and
the United Kingdom) translates to 25 additional greenfield investment
projects per year in the recipient countries.
Martuscelli and Winters (2014) conclude on the basis of a literature
review that trade liberalization generally boosts income and thus
reduces poverty, with gains for workers in the export sector and losses
for those working in the import-competing sectors. De Melo and Wagner
(2015) confirm these findings and show that aid for trade has also helped
reduce poverty through other channels. For example, targeted aid to
building productive capacities in agriculture and insurance schemes
to remove risks can raise the productivity of households close to the
poverty line. Road rehabilitation can also reduce the monopsonistic
power of traders in remote areas, thereby raising the incomes of the
poor selling agricultural products.
Case Stories Illustrate Successes

The empirical findings are illustrated by the results reported in the 111
case stories, which the public and the private sector submitted in the
context of the 2015 OECD/WTO monitoring exercise (Figure 19.4).
The case stories about aid-for-trade priorities, policies, and programs
mention 299 results in total. The most important ones are export market
diversification (47 times), an increase in employment, including for
women (45 and 27 times, respectively), and an increase in foreign and
Figure 19.4 Aggregate Results from 111 Aid-for-Trade Case Stories
Export market diversification

Increase in employment
Increase in foreign investment
Increase in domestic investment
Increase in women’s employment
Increase in consumer welfare
Increase in per capita income
Poverty reduction
Import market diversification
Increase in remittances
0 5 10 15 20 25 30 35 40 45 50
Notes: Not available in aid-for-trade monitoring exercise 2017. Multiple responses were allowed.
Source: OECD/WTO Aid-for-Trade Case Stories (2015).
domestic investment (37 and 33 times, respectively). These results are

followed by a rise in per capita income (25 times) and poverty reduction
(18 times). The findings are rather similar to those reported in the 2011
monitoring exercise. However, any conclusion from the collection of
case stories must be tempered by the awareness of its selection biases
(Newfarmer 2014).
Critical aid-for-trade success factors mentioned in the case stories
were country ownership at the highest political level and active local
participation. Integrated approaches to development, for instance, by
combining public and private investment with technical assistance, also
increase the success rate. Equally, long-term donor commitment and
adequate and reliable funding are considered essential. Other factors
highlighted were leveraging partnerships including with providers
of South–South cooperation and keeping project design flexible to
facilitate adjustments in initial plans (Figure 19.5).
19.3 Aid for Trade and the SDGs

The international community has been struggling to reconcile the
economy with nature and society. Gro Harlem Brundtland in her famous
1987 report, Our Common Future, called for governments to change their
Figure 19.5 Success Factors Mentioned in the Case Stories
National ownership
Local participation
Integrated programs
Reliability of external funding
Feedback with stakeholders
Flexibilityin project design
Leveraging partnership
Sustained donor interest
Intergovernmental cooperation
0 20 40 60 80 100 120 140
Notes: Not available in aid-for-trade monitoring exercise 2017. Multiple responses were allowed.
Source: OECD/WTO Aid-for-Trade Case Stories (2015).
approach to economic growth. She set out the vision for a new era—
growth that is forceful and at the same time socially and environmentally
sustainable. Realizing this vision has proved elusive, but gradually the
relevant policy signposts have been put in place. Analytical frameworks
have been broadened to better assess the nexus between economic
growth and inequality on the one hand (inclusive growth), and between
environment and growth on the other (green growth) (OECD 2011c;
World Bank 2012). This section largely deals with the contribution
aid for trade can make to inclusive growth and green growth. Less
progress has been made on the social–ecology nexus and further work
is needed to better examine the distributional, employment, and skills
implications of the transition to environmentally sustainable growth. It
could be argued that environmental challenges are truly social problems
that arise largely because of income and power inequalities (Laurent
and Pochet 2015).
The Millennium Development Goals focused mostly on the social
sectors. Less systematic attention was paid to economic growth,
industrialization, and jobs as well as environmental sustainability and
climate change. A key lesson of the Millennium Development Goals was
that sustained change cannot be achieved through one-dimensional
or single-sector goals. The SDGs with their broader focus require a
response that incorporates multidimensionality into policy design. This

involves identifying trade-offs, complementarities, and unintended
consequences of policy choices to improve and better target policy advice.
Such integrated approaches to policy help address economic challenges
in a more realistic and effective fashion. It privileges collaboration
and coherence in addressing integrated problems, removing the
compartmentalized approach that has limited aid and trade policies and
their effectiveness. It also requires a more sophisticated policy design
in which systemic spillovers can be beneficial as well as damaging.
Consideration of these trade-offs is best undertaken at the national level
where policy makers can optimize among different trade-offs. To make
sense of sustainable development, it is necessary to think about the
interrelationships between the different pillars (Figure 19.6).
The development community has long recognized that the
vicious circle of underdevelopment linking high population growth,
poverty, malnutrition, illiteracy, and environmental degradation
can be broken only through policies that integrate the objectives of
promoting sustainable economic growth; enabling broader stakeholder
participation in the productive processes; a more equitable sharing
of their benefits; and ensuring environmental sustainability (OECD
Figure 19.6 The Pillars of Sustainable Development
Sustainable
Development
Inclusive growth Ʒ Green economy Ʒ Social ecology
Environment
Economic
Social
The Pillars of Sustainable Development
Source: Authors.
1989). Yet, integrated approaches are also challenging to execute, while

experience with multi-sector programs have been mixed so far.
Implementing aid-for-trade projects and programs has required
an integrated understanding of economic systems and their interaction
with other systems that follow their own internal logic. A central
debate over the last 10 years has been whether the focus of aid for
trade should be narrow or broad. Many commentators have made
the case that the definition of aid for trade was too broad and this
diminished its effectiveness (Adhikari 2011). But the WTO Task Force
recommendations and ongoing OECD/WTO monitoring process have
continually linked aid for trade to a broader set of objectives including
poverty reduction, green growth, and gender equality. In pursuit of
the SDGs, this broader approach makes even more sense and aid for
trade can and should contribute to multiple goals. In addition, there is
mounting support for the idea that by strengthening the role that trade
plays in development, aid for trade can help developing countries build
capacities that in turn can contribute to a healthier environment and
to fighting poverty. Unfortunately, donors and partner countries do not
always prioritize these broader objectives.
The 2017 aid-for-trade monitoring exercise indicated that many
partner countries, as well as donor countries, have high hopes that
aid-for-trade can contribute to improving a country’s capacity to
achieve the SDGs. Expectations are particularly high regarding aid
for trade’s contribution to economic growth and poverty eradication
through inclusive and sustainable development and financing for
development. This confirms that countries themselves see trade as an
effective enabler, or a means of implementation. Partner and donor
countries both consider overwhelmingly (90% and 91%, respectively)
that aid for trade contributes to SDG 9 (i.e. industry, innovation,
and infrastructure). Their views on the SDG 8 (i.e., decent work and
economic growth) differ somewhat with 78% of the partners and 92%
of the donor countries considering aid for trade relevant. The same is
true for SDG 1 (i.e., no poverty) with percentages of 59% and 72% or
reducing inequalities with 60% and 50%, or zero hunger with 49% and
38%, respectively. More shared views are there on the contribution of
aid for trade to affordable and clean energy, 51% and 48%, respectively
(Figure 19.7).
19.3.1 Inclusive Growth
As noted above, the bulk of aid for trade is committed to improving

economic infrastructure and building productive capacity. Both play
an important role in reducing trade and transport costs, improving
Figure 19.7 Contribution of Aid for Trade

to the Sustainable Development Goals
Aid for trade relevance to SDGs
1. No poverty
2. Zero hunger
3. Good health and well-being
4. Quality education
5. Gender equality
6. Clean water and sanitation
7. Affordable and clean energy
8. Decent work and economic growth
9. Industry, innovation, and infrastructure
10. Reduce inequalities
11. Sustainable cities and communities
12. Responsible consumption and production
13. Climate action
14. Life below water
15. Life on land
16. Peace, justice, and strong institutions
17. Partnership for the goals
Partners Donors 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Source: OECD/WTO 2015 Aid-for-Trade monitoring exercise.
the business environment, and connecting local firms to regional and

global value chains. There is now abundant evidence to suggest that aid
for trade helps to boost economic growth and depending on the pace
and pattern reduces poverty (SDG 1). The relationship between trade
openness, growth, and poverty reduction is complicated, but there
is little doubt that changes in trade, directly and indirectly, affect the
welfare of households (Higgins and Prowse 2010). Aid for trade can be
targeted to enhance inclusive growth.
Economic Infrastructure
SDG 9 calls for resilient infrastructure, including regional and trans-
border infrastructure to support economic development. Goal 9a is
about facilitating sustainable and resilient infrastructure development
in developing countries through enhanced financial, technological,
and technical support to African countries, least developed countries,
landlocked developing countries, and small island developing states.
Annual commitments to transportation and storage averaged $12 billion
between 2006 and 2015 (Figure 19.8). This has contributed to the
improvement of roads and rail. Buys, Deichmann, and Wheeler (2006)
and Shepherd and Wilson (2008) have found that road improvements
can have substantial positive effects on trade volumes. It also plays a
Figure 19.8 Aid for Economic Infrastructure

($ million 2015 prices)
35
30
25
20
15
10
0
. 11
vg 06 07 09 08 10 12 13 14 15
5a 20 20 20 20 20 20 20 20 20 20
0
–20
02
20 Transport and storage Energy generation and supply Communications
role in reducing poverty by connecting rural producers to markets, and

improving access to health services and education.
A lack of electricity can dramatically affect production costs and
reduce export competitiveness and, thus, trade performance. But the
cost of unreliable electricity can be even greater. Unreliable electricity
not only requires the purchase of generators, but can damage machinery
and equipment used in production due to fluctuation in power intensities
(Hallaert, Cavazos Cepeda, and Kang 2011). Several donors are involved
in strengthening electrical transmission and build infrastructure for
distribution from power sources to end users. Aid committed to the
energy sector has expanded significantly from an average of $5 billion
between 2002 and 2005 to $14 billion between 2012 and 2015. These
efforts contribute to SDG Goal 7: Energy for All. This in turn can
contribute to services delivery and better education outcomes.
It is also argued that aid can catalyze investment by crowding in
the private sector. However empirical studies on the effect of aid on
foreign investment indicate ambiguous relationships with inconsistent
results. Harms and Lutz (2006) suggest that higher volumes of aid have
no effect on private foreign investment. Conversely, Selaya and Sunesen
(2008) show that aid invested in complementary inputs such as social
and economic infrastructure draws in foreign capital, while aid directly

invested in physical capital crowds out private foreign investments.
In addition, Eden and Kraay (2014) find that on average every dollar
invested in public infrastructure in developing countries crowds in $2
of private investment.
Development agencies have traditionally worked with developing
countries to promote conditions for a dynamic private sector,
strengthening the role of individual initiative, private enterprise, and
the market system. Developing countries have an obligation to ensure
that their economy is not stifled by overregulation, corruption, and
powerful state and private monopolies. While countries claim they want
to improve the conditions for investment, powerful colluding interests
may prevent any reforms that threaten a privileged position or ulterior
purpose. Also, while improvements can be politically difficult, they do
not necessarily lead to an immediate investment reaction (Moss 2010).
To help countries improve their business environment, development
agencies support interventions using ODA funding which lower the
costs of investment, reduce risks, improve competition, and develop
capacity.
In practice, aid for the private sector encompasses many types of
activities. Most bilateral and multilateral donors provide support to
the enabling environment, but others go beyond this. White (2004)
shows that donors mostly support the business environment, including
macroeconomic strategies, governance issues, and policy, legal, and
regulatory frameworks. Altenburg and von Drachenfels (2006) suggest
that a range of complementary public policies is needed to create
competitive sectors and overcome internal constraints, especially in
small-scale economies. Some have argued that too much effort has
been focused on achieving easily measured but low-impact regulatory
reforms and too little on relieving important physical constraints such
as a lack of infrastructure.ű
1
The most common area of work among members of the Donor Committee on
Enterprise Development (DCED) is in creating business-enabling environments,
including a focus on infrastructure, improving the education and health of workers,
and enhancing economic reform and governance. Small and medium-sized enterprise
development is a cornerstone of more than two-thirds of DCED members. Others
pursue trade and export issues, gender equity, and youth empowerment as well as
public–private partnerships. Business engagement is the latest area of work for many
members—donors engage the private sector to increase the level of development
outcomes in private sector core goals and involve business in formulating the
government’s international development policy making.
Figure 19.9 Aid for Building Productive Capacities

25
20
15
10
0
. 11
vg 06 07 09 08 10 12 13 14 15
5a 20 20 20 20 20 20 20 20 20 20
0
– 20
02 Business and other services Banking and financial services
20
Agriculture, forestry, and fisheries Industry and mining
Building Productive Capacities

Agriculture remains a key economic activity for developing countries
and a vibrant sector will help to make progress on SDG 2 to end
hunger, achieve food security, and promote sustainable agriculture.
Goal 2.4 aims to double agricultural productivity by 2030. This requires
improvements in technology and management practices, expanded
access to markets and credit, increased organizational and market
efficiency, and restoration and protection of resiliency in production
and livelihood systems. Aid for building productive capacities has been
mostly targeted to agriculture with an average of $8.8 billion per year
between 2012 and 2015 (Figure 19.9). Aid for agricultural development
improves productivity through investments that foster increasing
returns to land, labor, and capital. A recurring feature of aid projects in
agriculture is an emphasis on rural poverty and food security.
Strengthening the capacity of domestic financial institutions to
encourage and expand access to banking, insurance, and financial services
for all is the focus of SDG 8.10. For the private sector to grow, access to
finance is essential. Aid for banking has increased by $950 million between
2012 and 2015. This supports central banks, financial intermediaries,
credit lines, microcredit, and credit cooperatives. In addition to credit,
a healthy business and investment environment requires trade and

business associations, legal and regulatory reform, private sector
institution capacity building and advice, trade information, and public–
private sector networking at trade fairs. These business services received
funding of $1.9 billion in 2015, decreasing by 13% from 2014. The tourism
sector has attracted less concessional resources but sustainable tourism
creates jobs and promotes local cultures and products (Goal 8.9).
Trade Capacity Building

Goal 16.8 aims to broaden and strengthen the participation of developing
countries in the institutions of global governance. Aid-for-trade policy
and planning includes support to ministries and departments responsible
for trade policy, trade-related legislation, and regulatory reforms, policy
analysis, and implementation of multilateral trade agreements, e.g.,
technical barriers to trade and sanitary and phytosanitary measures.
It also covers costs associated with mainstreaming trade in national
development strategies. Flows for overall trade policy and regulations
increased 18% from 2014 reaching $1.1 billion in 2015 (Figure 19.10),
while support for trade policy and management has stagnated, averaging
just under $600 million between 2010 and 2015. Support for multilateral
negotiations is negligible and has declined but it could be useful to
strengthen developing country involvement at the WTO.
Figure 19.10 Aid-for-Trade Policy and Regulations

1,600
1,400
1,200
1,000
800
600
400
200
0
2002–2005 avg. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Trade Policy and Admin. Management Trade Facilitation

Regional Trade Agreements Multilateral Trade Negotiations
Trade Education/Training

Aid-for-trade facilitation covers support provided for the

simplification and harmonization of international import and export
procedures (e.g., customs valuation, licensing procedures, payments,
and insurance), customs departments, and tariff reforms. After several
years of expanding support for trade facilitation, flows declined in 2015
to $320.3 million. Nevertheless, $3.5 billion was committed between
2006 and 2015. Improving customs procedures can counteract
smuggling and trade of illegal drugs. It also has positive health effects
in that it reduces the incidence of sexually transmitted diseases in the
vicinity of border crossings (Jouanjean, Gachassin, and te Velde 2016).
Trade-Related Adjustment
Another way in which aid for trade could contribute to more inclusive
growth is through trade-related adjustment. Aid-for-trade-related
adjustment helps developing countries tackle the costs associated with
trade liberalization, such as tariff reductions, preference erosion, or
declining terms of trade. Aid for trade could mitigate and compensate
for the adverse impacts of these trade changes, particularly when they
affect poor people. At the time, there were hopes that an imminent
conclusion of the Doha Round would increase the demand for aid-
for-trade-related adjustment. Support peaked at $53 million in
2011 and subsequently declined (Figure 19.11). The reform of the
Figure 19.11 Aid-for-Trade-Related Adjustment

60
50
40
30
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
Trade-Related Adjustment

European Union (EU) Sugar Regime in 2006 involved a loss of quotas

and gradual reductions in the price guaranteed by the EU. It forced
EU Sugar Protocol countries to introduce measures to improve the
competitiveness of their sugarcane sectors, and to mitigate the negative
economic and social impact of the reform. Much of the reported flows
were part of this initiative.
19.3.2 Gender Equality
Another important dimension of inclusive growth is gender equality.

Gender is a relatively minor objective in aid-for-trade projects,
amounting to 16% of flows in 2014 (Figure 19.12). Aid for trade can help
advance gender equality (SDG 5) and empower women by expanding
access to economic opportunities, particularly for sectors with a high
share of women. It can also enable access to technology and information
to promote the economic empowerment of women. In particular,
reducing trade costs for small and medium-sized enterprises (SMEs)
will contribute to making trade more inclusive as it may allow SMEs to
expand employment and increase wages. Gender equality can benefit
from this, given that many SMEs are owned by women and employ more
women than men.
Figure 19.12 Aid for Trade with a Gender or Environment Objective

(shares in total aid for trade)
40
36
32
28
Environment
24
20
%
Gender
16
12
8
4
0
2006 2007 2008 2009 2010 2011 2012 2013 2014

19.3.3 Green Growth

There have been long-running concerns that without major action
irreparable damage would be done to the resource base and natural
environment in developing countries. These problems could become
increasingly intractable and expensive, compromising current and future
development prospects. In developing countries, poverty is both a cause
and result of environmental degradation. Integrating the economic and
environmental pillars of sustainable development provides the basis
for green growth. This approach involves wiring together economic,
environmental, technological, financial, and development aspects into a
coherent framework. This is key to achieving SDGs 13–15. Aid for trade
contributes in various ways to Goal 13 on climate change by promoting
low-carbon energy and transport infrastructure. Goal 14 on oceans is
related to building productive capacity in sustainable fishing, while Goal
15 covers building capacities in sustainable forestry.
Experience suggests that green growth can open up new sources of
growth through greater efficiency and productivity of natural resources,
innovation, and new markets for green technologies, goods, and services.
Climate change and policies taken to mitigate it will shift patterns of
comparative advantage. These potential changes in trade patterns,
including new opportunities arising from achieving low-carbon
standards, present trading opportunities for developing countries.
An integrated approach is needed to tackle climate change, energy
sustainability, biodiversity loss, food security, and poverty alleviation.
Developing countries can shift to lower-carbon paths while
promoting development and reducing poverty, but this depends on
financial and technical assistance available domestically and especially
from high-income countries (Stern 2009). A possible avenue to assist
the transition to green growth is through aid-for-trade programs
aimed at increasing the participation of poorer developing countries in
international trade while at the same time strengthening environmental
goods and services trade-related infrastructure and minimizing supply-
side constraints (OECD 2012).
Trade is indispensable for accelerating the diffusion of green
growth. Aid for trade will help ensure that trade plays this key role in
transmitting new knowledge, technology, and behavior to developing
countries. OECD ministers recognized the importance of aid for trade
for achieving green growth with a declaration at the 2010 Ministerial
Council Meeting that “in light of our shared interest in fostering
sustainable and inclusive growth, we will pursue efforts to facilitate
trade and investment in environmental goods and services and to
promote effective Aid for Trade.”
Environmental objectives are central to a number of aid-for-trade

projects and programs.Ų Typical examples of aid-for-trade projects with
environmental objectives include infrastructure projects designed with
comprehensive and integrated environmental protection and management
components; activities promoting sustainable use of energy resources (power
generation from renewable sources of energy); and energy conservation.
Examples of aid for productive capacities include environmental projects
such as sustainable management of agricultural land and water resources;
sustainable forest management programs, combating land degradation
and deforestation; sustainable management of sea resources; adoption
and promotion of cleaner and more efficient technologies in production
processes; measures to suppress or reduce pollution in land, water, and air
(e.g., filters); increasing energy efficiency in industries; and sustainable use
of sensitive environmental areas for tourism (OECD 2011c).
The proportion of aid for trade with an environmental objective,
and thus contributing to the promotion of green growth has been
trending upward over time. While it averaged just 20% in 2007, as of
2014, the level stands at almost 40% (Figure 19.12). Almost half of total
aid for trade with an environment objective is in the form of support
for renewable energy—wind, solar, biogas, etc. A significant amount is
also reported under low-carbon transportation systems, i.e., mass urban
transit and rail. Sustainable agriculture also attracts significant levels of
support. Japan and Germany are the two largest donors and provided
55% of total aid for trade with an environmental dimension in 2014.
19.4 Means of Implementation: Finance

for Development
The vision underpinning the 2030 Sustainable Development Agenda is
broad and ambitious. It calls for an equally broad and ambitious financing
strategy. The resources required are immense, as much as $4.5 trillion
per year according to some estimates (Sachs and Schmidt–Traub 2014).
The first International Conference on Financing for Development,
which took place in 2002 in Monterrey, Mexico, highlighted that trade in
many cases is the single most important external source of development
2
Since 1998, the Development Assistance Committee (DAC) has monitored aid,
targeting the objectives of the Rio Conventions through its Creditor Reporting
System (CRS) using the so called “Rio markers.” Every aid activity reported to the
CRS should be screened and marked as either (i) targeting the Conventions as a
“principal objective” or a “significant objective,” or (ii) not targeting the objective.
finance (United Nations 2002). The Addis Ababa Action Agenda no

longer emphasizes this role of trade as a source of finance. Instead, the
Agenda highlights domestic resource mobilization and foreign direct
investment as the main source for financing development. International
trade is mainly referred to as an engine for inclusive economic growth
and poverty reduction. The remainder of this section puts ODA and
OOF in the context of other development finance flows and highlights
its continued relevance, especially for low-income countries.
19.4.1 Official Development Assistance Remains Critical

The Addis Ababa Action Agenda stresses the need for a significant
additional development finance contribution from the private sector,
although it also highlights the indispensable role of ODA in financing
the SDGs. Until quite recently, ODA was the main external source of
finance for development. Increasingly, it is being considered as only
a part of the overall funding for development. That said, ODA, and
other forms of official assistance continue to play a significant role in
bolstering domestic development efforts in many countries. Used well,
aid can generate large payoffs in terms of reducing poverty, meeting
basic needs, and helping nations build human and institutional capacity.
While aid has eradicated diseases, prevented famines, and done
many other good things, its effects on growth is often difficult to detect
given the limited and noisy data that is available. Arndt, Jones, and
Tarp (2010) found that it was reasonable to assume that aid worth
1% of a country’s gross domestic product raised economic growth by
0.1% a year on average during the period 1970–2000. That is a small,
but helpful impact. Clemens et al. (2012) found that aid causes some
degree of growth in recipient countries, although the magnitude of this
relationship is modest, varies greatly across recipients, and diminishes
at high levels of aid.
Since 2000, ODA levels have doubled in real terms, but remain
well below the long-established United Nations target for developed
countries of providing 0.7% of gross national income in ODA—averaging
about 0.3% in 2014. At nearly $162 billion in 2015, ODA represented only
19.2% of all official and private flows from the 29 member countries
of the OECD’s Development Assistance Committee (DAC) and the
international financial institutions. In addition, developing countries
received $80.6 billion in “other official flows” provided by public
bodies at close to market terms. Private finance at market terms to
$137 billion and private grants reached $35.6 billion. Remittances stood
at $427.7 billion (Figure 19.13).
Aggregate flows should be examined with care. The extraordinary
period of expanding private inflows may not reflect future trends
Figure 19.13 Flows to Developing Country by Development

Assistance Committee Members and Multilateral Agencies
(2015 constant, $ billion)
1,000
900
800
700
600
$ billion
500
400
300
200
100
0
2000–2002 2004–2006 2008–2010 2012–2014
ODA OOF Net private grants Private flows at market terms Remittances
ODA = official development assistance, OOF = other official flows, DAC = (OECD’s) Development
Assistance Committee.
Source: OECD–DAC–CRS aid activity database and the World Bank World Development Indicators.
and there are a number of reasons to believe that such flows were the
result of temporary circumstances. Developing countries are going to
be facing a much tougher global environment moving forward. The
commodity super-cycle that saw huge inward investment and windfalls
for resource-exporting countries is coming to an end as demand from
the People’s Republic of China slows. The post-crisis response and
exceptional measures taken by OECD countries including prolonged
low interest rates and unconventional monetary policy distorted the
development finance landscape. It sparked a search for yield in emerging
and developing countries leading to overinvestment in these countries
(as well as asset-price bubbles) and underinvestment in OECD countries
(OECD 2015). As international interest rates normalize, capital that had
flowed to developing countries is returning back to developed countries as
conditions there improve. For instance, in 2015 private flows to developing
countries at market prices dropped almost 60% compared with 2014.
Southern providers of development cooperation are also
increasingly important global players (Table 19.1). The People’s Republic
of China is now a major source of development assistance, particularly
Table 19.1 Estimates of Concessional Finance for Development

(Official Development Assistance-Like Flows) of Key Providers
of Development Cooperation that Do Not Report to the Creditor
Reporting System (gross disbursements, $ million)
Country 2010 2011 2012 2013 2014 Source

1
Brazil 500 NA NA NA NA Institute of Applied Economic
Research and Brazilian
Cooperation Agency
Chile 16 24 38 44 49 Ministry of Finance
PRC 2,564 2,785 3,123 2,997 3,401 Fiscal Yearbook,
Ministry of Finance
Colombia 15 22 27 42 45 Strategic institutional plans,
Presidential Agency of
International Cooperation
Costa Rica NA NA NA 21 24 Annual Budget Laws
2
India 708 794 1,077 1,223 1,398 Annual Reports,
Ministry of Foreign Affairs
Indonesia 10 16 26 49 56 Ministry of National
Development Planning
Mexico NA 99 203 529 NA Mexican Agency for
International Development
Cooperation
Qatar 334 733 543 1,344 NA Foreign Aid reports,
Ministry of Foreign Affairs
South 154 229 191 191 148 Estimates of Public
Africa2 Expenditures, National Treasury
CRS = Creditor Reporting System, NA = not available, ODA = official development assistance,
Notes:
(i) Data includes only development-related contributions. This means local resources, financing from
a country through multilateral organizations earmarked to programs within that same country, are
excluded. Moreover, as for reporting countries, coefficients are applied to core contributions to
multilateral organizations that do not exclusively work in countries eligible for receiving ODA. These
coefficients reflect the developmental part of the multilateral organizations’ activities.
(ii) The part channeled through multilateral organizations is (partly) based on websites of multilateral
organizations, www.aidflows.org and data from United Nations Department of Economic and Social
Affairs (DESA) except for Brazil and India.
Brazil’s development cooperation is significantly higher according to the official figures published by the
Brazilian government. The OECD uses these data but, for the purposes of this analysis, only includes in its
estimates (1) activities in low and middle-income countries; and (2) contributions to multilateral agencies
whose main aim is promoting economic development and welfare of developing countries (or a percentage
of these contributions when a multilateral agency does not work exclusively on developmental activities in
developing countries). The OECD also excludes bilateral peacekeeping activities. Brazil’s official data may
exclude some activities that would be included as development cooperation in DAC statistics, and so are
also excluded from the OECD estimates that are based on Brazil’s own data.
Figure 19.14 External Financial Flows to Developing Countries

by OECD Members and International Financial Institutions
(Share of total, 2013)
per capita GNI (log scale)
Per cent
(<= $1,045 =>) (<= $4,124 =>) (<= $12,754 =>)
80
70
60
FDI
50
40
30 Remittances
20
OOF
10
ODA
0
LICs LMICs UMICs
FDI = foreign direct investment, GNI = gross national income, LIC = lower-income country,
LMIC = lower-middle-income country, ODA = official development assistance, OECD = Organisation
for Economic Co-operation and Development, OOF = other official flows, UMIC = upper-middle-
income country.
Source: OECD–DAC–CRS aid activity database and World Bank World Development Indicators.
in Africa. In addition, the People’s Republic of China accounts for 20%

of all foreign direct investment in developing countries. India is also
becoming increasingly active, especially in neighboring countries and
in Africa. Based on their own experience, Brazil and Mexico assist Latin
American neighbors.
The distribution of ODA is very different from other financial flows.
Also, ODA performs very different functions from other financial flows.
Given its unique mandate to directly target development, improve
welfare, and reduce poverty, ODA remains essential in supporting many
countries, especially the poorest with little access to private finance and
low levels of domestic resources. For almost three-quarters of countries
with government spending of less than $500 per person, ODA is the
largest international resource flow they receive (Figure 19.14).
While the relative importance of ODA compared with private
investments is decreasing in the lower-middle-income countries (LMICs)
and upper-middle-income countries (UMICs), it can still contribute to
their development through mobilizing private flows, leveraging private

investment, and facilitating trade. For instance, market failures or even
missing markets might impede linking-up the large pools of savings in
developed countries and the opportunities for high-return investments
in developing countries. Obstacles include, among others, the absence of
bankable projects and the lack of capacity among institutional investors.
Multilateral development banks and national development finance
institutions can address these market failures through targeted financial
interventions, thereby leveraging substantially larger amounts of private
financing participation (OECD 2016).
However, the development merits of such “blended financing”
will depend on the specific transactions and projects being developed.
Moreover, the rhetoric around “blended finance” may be misleading.
The development community has coalesced around the objective of
“turning billions into trillions.” But that is an argument about what
is desirable, not about what is possible. If it costs as much to catalyze
private finance as to provide the equivalent public finance, it does not
help to close the financing gap (Carter 2015). Also, blended finance runs
the risk of returning to the ineffective practice of tying aid money to
procurement from the donor country
Donor support for private investment has come in for criticism,
and policy makers seeking to maximize the role that private finance
can play in development must recognize its limitations. In developing
countries, the private sector is dominated by micro, small, and medium-
sized enterprises; yet they find it particularly difficult to access external
private financing sources. Close to 80% operate in the informal economy,
which not only reduces the government’s tax base and can impact decent
working practices, but is also a major obstacle for both enterprises’ and
workers’ access to finance, insurance, social safety nets, and formal
commercial opportunities.
19.5 Partnerships: Engaging the Private Sector

Private sector development has long been considered a key component
for promoting economic growth and reducing poverty. The renewed
emphasis on the private sector in development is in fact not new at
all, but a return to earlier development approaches. The dominant
interpretation of development has always revolved around economic
well-being and economic growth. What has changed is the role of the
state vis-à-vis the market and non-state actors. Despite periods with
more attention for the role of the state, basic needs, redistribution,
social service provision, or good governance, the undercurrent of
international development approaches have continuously favored

the market, with economic growth, trade, and financial liberation
presented as the main pathways to development (Kindornay and
Reilly-King 2013).
Using aid to support private sector development though has a
mixed record. Schulpen and Gibbon (2002) critically reviewed private
sector development policies, arguing that they were shaped mostly
by the nature and interests of the private sector in donor countries
themselves, incorporated a high proportion of tied aid, and failed
basic tests of coherence. Moss (2010) claims that donor attempts to
address the investment constraints that hinder private sector growth,
while constructive and positive, have been inefficient and sometimes
haphazardly deployed. The lack of selectivity, prioritization, or strategic
focus has hampered the effectiveness of aid.
The United Kingdom’s Independent Commission for Aid Impact
Assessment of the Department for International Development’s private
sector work identified failures to develop a realistic, well-balanced,
and joined-up country-level portfolio of programs. A major constraint
for donors is that objectives essential for private sector development,
including regulatory reform and relaxation of international trade rules,
lies not only outside its control but also outside its core competencies
as an aid agency (ICAI 2014). More recent reviews are more positive.
For example, a European Union (EU) evaluation of private sector
development programs found that while there is broad consensus on
the importance of private sector development for job creation, linkages
between EU support for private sector development and employment
generation have remained very distant (EC 2013). The evaluation also
found that the EU has made valuable contributions to the development
of the private sector in middle-income countries, notably through policy
dialogue, alignment, and the clarity of the EU’s role in private sector
development.
Current opinions, however, transcend the traditional approach
to development. In this view, the private sector is an actor that could
and should be directly involved in addressing development challenges.
Although already noticeable at earlier occasions, the role of the private
sector was stressed at the 2011 High Level Forum on Aid Effectiveness in
Busan. Participants recognized the private sector as a key partner and on
equal footing with all other development actors. They agreed to “enable
the participation of the private sector in the design and implementation
of development policies and strategies to foster sustainable growth and
poverty reduction” (OECD 2011a: 10).
What could be considered new is the underlying multi-actor approach.
In the face of complex, cross-border, cross-issue problems, the importance
of cooperation between societal sectors has gained recognition. The

awareness has grown that not only governments but all societal actors will
need to play their part in addressing development challenges. This multi-
actor approach to confronting 21st century development challenges has
been accompanied by the redefinition of the role and nature of business
and is mirrored in the increased attention to the active role of firms in
development. It may not be about state or business or civil society, but
about state and business and civil society. Attributing enterprises an active
role, and therefore responsibility, as key actors in development, is central
in the current “private turn” (Vaes and Huyse 2015).
With a growing number of companies looking to the developing
world for new markets, the private sector has a profound interest
in trade-related infrastructure, an educated workforce, and quality
standards for inputs to their goods. Companies are embracing the
concept of “inclusive growth” and they realize that it is in their core
business development interests to build capacity in their target markets.
International companies contribute more and more to building trade
capacities in developing countries. Increasing connectivity and the
fluidity of trade and investment along supply chains, thereby promoting
transfers of capital, knowledge, and skills, socioeconomic upgrading will
stimulate trade. Thus, the time is ripe for exploring new partnerships
between the public and private sector (OECD/WTO 2015).
The pivotal role of the private sector has always been recognized in
the Aid for Trade Initiative and considerable progress has already been
made. A new generation of programs is emerging, involving donors,
partner countries, and private firms both in developing and donor
countries. Some of these programs focus on human capacity building.
Insofar as the workforce is deficient in specific skills, foreign companies
often establish training programs. While benefiting the company in
the short run, such programs can contribute to sustainable long-term
benefits and country-wide spillover effects for the country. Other
programs are focused on transfers of technology, know-how, and efforts
to improve the business environment such as through providing access
to finance for suppliers. While benefiting the instigating company, the
efforts to improve the business environment can be expected to have
positive spillover effects, including to local SMEs (World Bank 2011).
An important conduit for capacity building is the incorporation
of local companies into regional or global value chains. This can span
any link in the chain, ranging from design to production, assembly,
packaging, marketing, and distribution to consumption. In most cases,
SMEs in developing countries are establishing links to global value
chains that are involved in the agribusiness industry. Assistance in
meeting quality and safety standards is important to help incorporate
local producers. Promoting the inclusion of small producers into global

value chains is fundamental to fighting poverty: 75% of the world’s poor
live in rural areas and of these, 86% depend on agriculture. If small-scale
producers are able to link to the chain while at the same time obtaining
assistance to help with needed certification for products (e.g., organic
production), they will be able to take much better advantage of market
access opportunities (OECD/WTO 2013).
Trade facilitation is a major concern for the private sector as red tape
and inefficiencies in border management and corridor performance can
raise transport costs substantially. Initiatives and projects led by firms
and industry groups range from road safety initiatives in Africa to more
efficient customs processes through customized software development
in Africa, Asia, and Latin America. With the 2013 WTO Agreement on
Trade Facilitation, this area has become a focal point of public–private
cooperation. For instance, Canada, Germany, the United States, and the
United Kingdom sponsor the efforts of the Centre for International
Private Enterprise, the International Chamber of Commerce, and the
World Economic Forum who have joined forces to launch the Global
Alliance for Trade Facilitation.
The results of these programs have been judged as largely positive:
they have helped firms develop new products, increase their exports,
and save costs. In addition, the results are aligned with the objectives of
the development community, such as improved workers’ skills, better
working conditions, improved health among workers, job creation,
poverty alleviation, and improved environmental performance.
Consumers have also benefited from lower prices. The main drivers of
the engagement are company-based and relate to firms’ core business
strategies, while the corporate social responsibility agenda of firms also
explains their actions in this area (OECD/WTO 2015).
Strengthening private sector engagement further could be achieved
by creating shared multi-stakeholder value and building platforms for
project-based collaboration.ų Such reinforced partnerships could be
3
Innovative financing involves nontraditional development approaches such as public–
private partnerships, and catalytic mechanisms that (i) support fund-raising by tapping
new sources and engaging investors beyond the financial dimension of transactions,
as partners and stakeholders in development; or (ii) deliver financial solutions to
development problems on the ground. In general, the use of concessional funds to
mobilize private investment has to be carefully considered. Doing so should not damage
sustainable local capital markets or undermine market-determined private flows. Among
the various approaches, there is an interest in how to develop ODA-backed public–
private partnerships that can encourage investment, not least in the infrastructure
sector. Public–private partnerships hold much promise as a means of bringing together
public and private—as well as local and international—resources and expertise, but
much is required from all involved to realize their potential (OECD 2006b).
forged by scaling up and systematically including the private sector

in the four different stages of the aid-for-trade project life cycle. In
the first place, the views of the private sector could be solicited to
provide information about obstacles to be removed or incentives to be
improved. Second, the private sector could share best practices they
have observed from other aid-for-trade programs or from programs
they have implemented themselves. Third, governments, donors,
and private companies could join forces to scale up their actions and
maximize the impact. And finally, the private sector could provide
evidence of success or failure.
Expanding the partnership with the private sector should respect
international agreements that discipline the potential distortion of
trade flows with aid money. Thus, involving the private sector in donor
programs should not reintroduce the bad practice of tying aid to donor
companies. The OECD Arrangement on Officially Supported Export
Credits offers an extensive framework for the orderly use of officially
supported export credits, while the 2001 DAC Recommendation
unties ODA to the least developed countries and heavily indebted
poor countries. Furthermore, the WTO Agreement on Subsidies and
Countervailing Measures contains binding disciplines for the use of
subsidies.
19.6 Ensuring Accountability

The United Nations report on the follow-up and review of the 2030
Agenda for Sustainable Development calls for a voluntary, effective,
participatory, transparent, and integrated monitoring framework.
The report encourages member states to conduct reviews of progress
at the national and subnational levels. These national reviews should
be country-led and country-driven and provide incentives for helping
to translate the Agenda into a nationally owned vision with clear
objectives and geared toward accelerating implementation. The
reviews should also aim to enable mutual learning across countries
and regions and help all countries to enhance their national policies
and institutional frameworks. Finally, it should mobilize necessary
support and partnerships for the implementation of the SDGs. The
report argues that the value of a unified and universal approach to such
reviews can be found in the WTO Trade Policy Review Mechanisms
(United Nations 2016).
In addition, an annual high-level Political Forum on Sustainable
Development will be tasked with “assessing progress, achievements
and challenges faced by developed and developing countries” and

ensuring “that the Agenda remains relevant and ambitious.” The
annual meetings of the high-level political forum, held under the
auspices of the Economic and Social Council, should pave the way for
its quadrennial meeting under the auspices of the General Assembly.
The WTO in collaboration with the OECD has created a similar
review framework to track progress in implementing the Aid for Trade
Initiative. The next section will draw some lessons learned.
19.6.1 Shining a Spotlight

The OECD/WTO monitoring framework consists of three
accountability mechanisms with different but complementary
objectives. At the local level the framework aims at fostering local
ownership and ensuring that trade-related needs are prioritized in
national development strategies and adequately funded by the donor
community. At the regional level the objective is to focus attention
on regional trade-related constraints and galvanize collective action
to tackle them. Finally, at the global level the Initiative provides a
spotlight on what is happening at the local and regional levels, what is
not, and where improvements are needed.
The monitoring exercise collects qualitative and quantitative
information from a number of different sources such as self-assessments
from developing and developed countries and international financial
institutions, statistical data on aid-for-trade proxies extracted from the
OECD Creditor Reporting System (CRS), and country profiles that show
links between development finance inputs and trade and development
results. This information is buttressed by case stories on aid-for-trade
programs, research from international governmental organizations and
nongovernment organizations, findings from independent evaluations,
and academic research (Figure 19.15).
19.6.2 A Trade and Development Results Framework
A number of efforts have been made to move the aid-for-trade results

agenda forward. The OECD provided a comprehensive overview of
existing evaluation approaches, methods, and processes and proposed
a menu of trade-related indicators (OECD 2011b, 2013b). In addition, a
number of attempts have been made in the literature to develop indicators
for monitoring trade capacity, trade performance, and aid-for-trade
results. The International Finance Corporation (IFC, The World Bank
Group) Doing Business Project has played a major role in promoting the
Figure 19.15 Aid-for-Trade Monitoring Framework
QUALITATIVE
Partner Donor Case
assessment assessment stories Evaluations
DEMAND RESPONSE OUTCOMES IMPACTS
OECD/CRS OECD/CRS Trade-related SDGs

indicators
QUANTITATIVE
CRS = Creditor Reporting System, OECD = Organisation for Economic Co-operation and Development,
SDG = Sustainable Development Goal.
Source: Authors.
culture of results by monitoring selected indicators and benchmarking

countries against each other. In addition, Doing Business contains a
Trading Across Borders indicators series that specifically measures a
country’s trade facilitation capabilities. The OECD’s trade facilitation
indicators measure a country’s trade facilitation capabilities that identify
areas for action and enable the potential impact of reforms to be assessed.
Estimates based on the indicators provide a basis for governments to
prioritize trade facilitation actions and mobilize technical assistance and
capacity-building efforts for developing countries in a more targeted way
(OECD 2015). The aim is to compare a country’s performance on the basis
of selected indicators allowing for country group benchmarking. The
results chain framework describes the causal sequence of development
interventions based on four main elements: (i) inputs and activities,
(ii) direct outputs, which in turn lead to (iii) intermediate outcomes that
contribute to (iv) long-term impacts (Figure 19.16).
Subsequent initiatives have attempted to provide a more or less
comprehensive list of trade-related indicators, sometimes aggregated
in synthetic indexes and country fact sheets or global rankings. These
have included the World Trade Indicators collected by the World
Bank Institute, which contains a broad set (about 500 variables) of
trade policy and outcome indicators for 211 countries and territories,
and the World Economic Forum (WEF) Global Competitiveness and
Figure 19.16 Aid-for-Trade Results Framework
INPUTS OUTPUTS OUTCOMES IMPACTS
Support for Reduction of trade More open, rule-based Direct and indirect
trade policy obstacles at the border and non-discriminatory job creation
and regulations and beyond the border; trading system
mainstreaming of trade
Increased level
Increased competitiveness and predictability
and attractiveness for FDI of income
Trade-related Improved market
economic connectivity,
infrastructure infrastructure, Increased exports/ Diffusion of
and basic services export market shares technology and
and foreign reserves knowledge
Building Improved regulatory Diversification of trade Economic and

productive environment, improved increased participation social upgrading
capacities market performance in GVCs
Better and more

Reduced trade costs and sustainable use
prices of imports/inputs of resources
Trade-related Adjustment to sectors

adjustment facing a trade shock;
Provision of safety nets
FDI = foreign direct investment, GVC = global value chain.

Source: OECD (2015).
Enabling Trade indexes, which contain over 100 indicators (based on

available statistics and on surveys) of relevance to trade, supply chain
management, and competitiveness issues. Some more specific indexes
have also been developed, for example, by the World Bank in the field of
logistics (Logistics Performance Index, LPI).
19.6.3 Accountability at the Local Level
The aid-for-trade country profiles transpose the idea behind project-

based analytical tool to the macro level and allow for tracing a possible
sequence of aid-for-trade interventions to achieve trade and development
objectives.Ŵ The country profiles therefore present indicators in four
4
Information on aid-for-trade country profiles can be found at http://www.oecd.org
/aidfortrade/countryprofiles/
sections: Development Finance, Trade Costs, Trade Performance, and

Development Indicators. The country profiles do not posit a causal
link; they do not attempt to test or estimate the causal impact of aid on
trade at the macro level. Instead, they give a dynamic perspective on
development of a specific country. In this sense, the sequence traced is
one of contribution, not attribution. Where such contribution can be
discerned, the country profiles provide ground for further in-depth,
country-based discussion fueled by further research. In this sense, the
country profiles contribute to a greater understanding of the important
role that aid-for-trade flows play in a country’s achievement of the trade
and development objectives targeted by these flows. This could also
provide a model for the SDG country discussions.
The Task Force on Aid for Trade recommended that an “assessment
of Aid for Trade—either as a donor or as a recipient—should be included
in the WTO Trade Policy Reviews.” This was reinforced by the agreement
at the December 2006 General Council that a general assessment of aid
for trade should be included in future trade policy reviews. The 2010–
2011 WTO aid-for-trade work program sought to operationalize these
recommendations through “systematically integrat[ing] an analysis of
national aid-for-trade strategies and experience as part of the Trade
Policy Review (TPR) process.” It was further agreed that there would
be a series of pilot TPRs and that based on their further consideration
would be given to “including an aid-for-trade analysis in future TPRs.”
Six pilot TPRs were completed and the process was welcomed by
WTO members, especially by developing countries who considered
that an inclusion of aid for trade brought additional value to the TPR
process. It was also clear that the process led to additional internal
coordination on aid-for-trade issues. However, the failure to put in place
a more systemic follow-up mechanism where the country under review
and its development partners can have a dedicated focus on aid for trade
undermined the full integration of aid for trade in the Trade Policy
Review Mechanism. Since 2012, aid-for-trade sections are no longer
included in the Trade Policy Review Mechanism.
This absence of national aid-for-trade discussions points to a
more general problem that may also manifest itself with the SDGs.
The aid-for-trade discussion is well established at the global level in
particular at headquarters of regional economic communities and in
intergovernmental organizations. At the country level, both in OECD
capitals and in donor–recipient discussions, the focus of the debate
is still very much sectoral, such as for instance on infrastructure, or
rural development, or private sector development. Only in cases where
countries focus their development strategies explicitly on improving
trade performance does aid for trade resonate at the country level and
among stakeholders beyond the government agencies that are directly

involved. Given country heterogeneity, not all countries should prioritize
improving trade performance. In some countries a focus on governance
or social sectors might be more appropriate.
The SDGs acknowledge that different countries have different
priorities at different stages of development and should set their own
development trajectory with their own targets and performance
indicators. Introducing such management systems more broadly requires
considerable investments in human and institutional capacity building.
Once these investments have been made, these management systems do
provide powerful tools to ensure that aid and development finance does
contribute to meeting the ambitious development objectives. As stressed
in the Paris Declaration on Aid Effectiveness and outcome documents
of subsequent high-level meetings such as in Accra and Busan, the
ultimate objective is to ensure that aid and other forms of development
finance are fully integrated in national schemes. More specifically,
country-based approaches will increase transparency and objectivity of
decision making, promote alignment of donors with partner country’s
sustainable development objectives and targets, reduce parallel results
reporting processes, increase mutual accountability, and allow for
country comparisons. This works best in countries where the political
leaders work cohesively toward common objectives and it requires
internal consensus on policy objectives and leadership through multiple
levels of public administration and feedback mechanism (OECD 2013).
19.7 Conclusions
The Millennium Development Goals showed that sustained
improvements are unachievable through one-dimensional or silo
approaches. The SDG with their comprehensive scope and universal
coverage require a response that incorporates multidimensionality into
policy design. The aid community has long recognized that the vicious
circle of underdevelopment can only be broken through policies that
integrate the objectives and requirements of promoting sustainable
economic growth, enabling broader participation of all the people in the
productive processes and a more equitable sharing of their benefits and
ensuring environmental sustainability.
This involves identifying trade-offs, complementarities, and
unintended consequences of policy choices to improve and better target
policies. Such integrated approaches should help to address economic,
social, and environmental challenges in a more realistic and effective
manner. Moreover, it should privilege collaboration and coherence in
addressing integrated problems, removing the compartmentalized

approach that has limited the effectiveness of policies. Finally, it requires
a more sophisticated policy, which systemic spillovers can be beneficial
as well as damaging.
The SDGs and aid for trade are both dependent on integrated
policy approaches and trade-offs. This implies that aid for trade should
contribute to economic objectives of developing countries by helping
them connect their firms to international markets, expand trade, and
strengthen its contribution to inclusive economic growth; to social
objectives by reducing poverty and inequalities; and to environmental
objectives by preserving the environment and adapting to climate change
while exploiting comparative advantages in low-carbon production and
environmental goods and services. In addition, aid for trade can help
developing countries build resilience and adjust to shocks that ripple
through international markets.
Implementing effective aid-for-trade projects and programs has
always required an integrated understanding of economic systems and
their interaction with other systems that follow their own logic. Such
a holistic approach has been the essence of the success of the Aid for
Trade Initiative, together with its flexibility to adapt to changes in the
trade and development landscape and its inclusive partnerships with
different donor communities, the private sector, and civil society.
The 2030 Agenda for Sustainable Development calls to “increase
aid-for-trade support for developing countries, in particular least
developed.” This echoes a similar appeal in the Addis Ababa Action
Agenda. The Tenth WTO Ministerial Conference in Nairobi also
highlighted the need for continuing the Aid for Trade Initiative. It is clear
that international trade can help realize the SDGs as a key transmitter
of goods and services, technology, knowledge, and behavior. High trade
costs, however, continue to inhibit many developing countries from
fully exploiting their trade and development potential. In particular,
landlocked and small and vulnerable economies (notably geographically
remote island economies) face inherent challenges in this regard.
Consideration of trade-offs is best undertaken at the national level
where policy makers can optimize among different conflicting demands.
National discussion about comprehensive challenges among different
policy communities and stakeholders prove to be difficult if there is
no strong political leadership and national engagement. The challenge
to agree on local trade-related goals and indicators appears to be less
daunting than in some other areas such as those related to people and
planet.
References
Adhikari, R. 2011. Evaluating Aid-for-Trade Effectiveness on the Ground:
A Methodological Framework. Geneva, Switzerland and Kathmandu:
International Centre for Trade and Sustainable Development and
South Asian Watch on Trade, Economy, and Environment.
Altenburg, T., and C. von Drachenfels. 2006. The New Minimalist
Approach to Private-Sector Development: A Critical Assessment.
Development Policy Review (4): 387–411.
Arndt, C., S. Jones, and F. Tarp. 2010. Aid, Growth, and Development:
Have We Come Full Circle? WIDER Working Paper 2010/096.
Helsinki: United Nations University World Institute for
Development Economics Research (UNU–WIDER). https://www
.wider.unu.edu/publication/aid-growth-and-development-0
Busse, M., R. Hoekstra, and J. Königer. 2012. The Impact of Aid for
Trade Facilitation on the Costs of Trading. Kyklos 65: 143–163.
doi: 10.1111/j.1467-6435.2012.00531.x
Buys, P., U. Deichmann, and D. Wheeler. 2006. Road Network Upgrading
and Overland Trade Expansion in Sub-Saharan Africa. Washington,
DC: World Bank.
Brenton P., and I. Gillson. 2014. Diagnostic Trade Integration Studies
and their Updates under the Enhanced Integrated Framework—
A Retrospective. In Aid for Trade: What Have We Learned? Which Way
Ahead?, edited by O. Cadot and J. de Melo. London and Clermond–
Ferrand, France: Centre for Economic Policy Research (CEPRI)/
Foundation pour les études et recherches sur le développement
international (FEDRI).
Cali, M., and D. W. te Velde. 2011. Does Aid for Trade Really Improve
Trade Performance? World Development, Elsevier 39(5): 725–740.
Carter, P. 2015. Why Subsidise the Private Sector? London: Overseas
Development Institute. http://www.odi.org/sites/odi.org.uk/files
/odi-assets/publications-opinion-files/9948.pdf
Cirera, X., and L. A. Winters. 2015. Aid for Trade and Structural
Transformation in Sub-Saharan Africa. Commonwealth Trade
Policy Discussion Papers 2015/01. London: Commonwealth
Secretariat.
Clemens, M., S. Radelet, R. Bhavnani, and S. Bazzi. 2012. Counting
Chickens when they Hatch: Timing and the Effects of Aid on
Growth. The Economic Journal 122(561). http://onlinelibrary.wiley
.com/doi/10.1111/j.1468-0297.2011.02482.x/suppinfo
Eden, M., and A. Kraay. 2014. “Crowding In” and the Returns to
Government Investment in Low-income Countries. Policy Research
Working Paper Series 6781. Washington, DC: World Bank.
Ferro, E., A. Portugal–Perez, and J. Wilson. 2012. Aid to the Services

Sector: Does it Affect Manufacturing Exports. Paper prepared for
the workshop Aid for Trade: What Have We Learnt? Which Way
Ahead? Geneva, Switzerland: FERDI/International Trade Centre.
Finger, J. M., and P. Schuler. 2000. Implementation of Uruguay Round
Commitments: The Development Challenge. The World Economy
23: 511–525.
Gnangnon, S., and M. Roberts. 2015. Aid for Trade, Foreign Direct
Investment and Export Upgrading in Recipient Countries. WTO
Staff Working Paper ERSD-2015-10. http://www.econstor.eu
/bitstream/10419/125798/1/845007181.pdf
Hallaert, J., R. Cavazos Cepeda, and G. Kang. 2011. Estimating the
Constraints to Trade of Developing Countries. OECD Trade Policy
Papers 116. Paris: Organisation for Economic Co-operation and
Development.
Harms, P., and M. Lutz 2006. Aid, Governance, and Private Foreign
Investment. Economic Journal 116(513): 773–790.
Hausmann, R., D. Rodrik, and A. Velasco 2006. Getting the Diagnosis
Right. Finance and Development 43(1): 16.
Helble, M., C. Mann, and J. Wilson. 2012. Aid-for-trade Facilitation.
Review of World Economics (Weltwirtschaftliches Archiv) 148(2):
357–376.
Higgins, K., and S. Prowse. 2010. Trade, Growth and Poverty: Making
Aid for Trade Work for Inclusive Growth and Poverty Reduction.
ODI Working Paper 313. London: Overseas Development Institute
(ODI).
Hühne, P., B. Meyer, and P. Nunnenkamp. 2014. Who Benefits from
Aid for Trade?—Comparing the Effects on Recipient versus Donor
Exports. Journal of Development Studies 50(9): 1275–1288.
Independent Commission for Aid Impact (ICAI). 2014. DFID’s Private
Sector Development Work. ICAI Report 35. London: ICAI.
Jouanjean, M. A., M. Gachassin, and D. W. te Velde. 2016. Regional
Infrastructure for Trade Facilitation: Impact on Growth and Poverty
Reduction—A Literature Survey. http://www.odi.org/sites/odi.org
.uk/files/odi-assets/publications-opinion-files/9693.pdf
Kindornay, S., and F. Reilly–King. 2013. Investing in the Business of
Development: Bilateral Donor Approaches to Engaging the Private
Sector. http://www.ccic.ca/_files/en/what_we_do/2013-01-11_The
%20Business_of_Development.pdf
Laurent, E., and P. Pochet. 2015. Towards a Socio-Ecological Transition:
Solidarity in the Age of Environmental Challenge. Brussels:
European Trade Union Institute. ISBN 978-2-87452-382-3.
Lee, H.-H., and J. Ries. 2016. Aid for Trade and Greenfield Investment.
World Development 84(August): 206–218. http://dx.doi.org/10.1016/j
.worlddev.2016.03.010
Martuscelli, A., and L. Winters. 2014. Trade Liberalisation and
Poverty: What Have We Learned in a Decade? London: CEPRI.
http://www.cepr.org/active/publications/discussion_papers
/dp.php?dpno=9947
Melo, J. de, and L. Wagner. 2015. Aid for Trade as Finance for the Poor.
Clermond–Ferrand, France: FEDRI.
Moss, T. 2010. A Doing Business Facility: A Proposal for Enhancing
Business Climate Reform Assistance. Washington DC: Center for
Global Development.
Newfarmer, R. 2014. Aid for Trade: What Can We Learn from the Case
Studies. In Aid for Trade: What Have We learned? Which Way Ahead?,
edited by O. Cadot and J. de Melo. 2014. London and Clermond–
Ferrand, France: CEPRI/FEDRI.
1989. Development Co-operation in the 1990s. Paris: OECD Publishing.
OECD. 2006a. Aid for Trade: Making it Effective—The Development
Dimension. Paris: OECD Publishing. DOI: http://dx.doi.org
/10.1787/9789264028609-en
OECD. 2006b. Promoting Pro-poor Growth: Private Sector Development.
Paris: OECD.
OECD. 2011a. Busan Partnership for Effective Development
Co-operation. Paris: OECD.
OECD. 2011b. Strengthening Accountability in Aid for Trade—
The Development Dimension. Paris: OECD Publishing. DOI:
http://dx.doi.org/10.1787/9789264123212-en
OECD. 2011c. Green Growth Strategy. Paris: OECD Publishing.
OECD. 2012. Aid for Trade and Green Growth: State of Play. Paris: OECD
Publishing.
OECD. 2013. Aid for Trade and Development Results: A Management
Framework—The Development Dimension. Paris: OECD Publishing.
DOI: http://dx.doi.org/10.1787/9789264112537-en
OECD. 2014a. Development Co-operation Report 2014: Mobilising
Resources for Sustainable Development. Paris: OECD Publishing.
DOI: http://dx.doi.org/10.1787/dcr-2014-en
OECD. 2014b. All on Board: Making Inclusive Growth Happen. Paris:
OECD Publishing.
OECD. 2015. OECD Trade Facilitation Indicators: An Overview of
Available Tools. http://www.oecd.org/tad/facilitation/TFIs
-overview-available-tools-september-2015.pdf
OECD. 2016. Blended Finance and Sustainable Development Partnership

Initiative, Development Co-operation Directorate. Paris: OECD.
OECD/WTO. 2013a. Aid for Trade at a Glance 2013: Connecting to Value
Chains. Geneva, Switzerland: World Trade Organization (WTO)/
Paris: OECD Publishing. DOI: http://dx.doi.org/10.1787/aid_glance
-2013-en
OECD/WTO. 2013b. Aid for Trade and Development Results: A
Management Framework—The Development Dimension. Paris: OECD
Publishing. DOI: http://dx.doi.org/10.1787/9789264112537-en
OECD/WTO. 2015. Aid for Trade at a Glance 2015: Reducing Trade Costs
for Inclusive, Sustainable Growth. Paris: OECD Publishing. DOI:
http://dx.doi.org/10.1787/aid_glance-2015-en
Prowse, S. 2006. Aid for Trade: Increasing Support for Trade
Adjustment and Integration—A Proposal. In Economic Development
and Multilateral Cooperation, edited by S. Evenett and B. Hoekman.
London: Palgrave–Macmillan.
Sachs, J., and G. Schmidt–Traub. 2014. Financing Sustainable
Development: Implementing the SDGs through Effective
Investment Strategies and Partnerships. http://unsdsn.org/
resources/publications/financing/
Schulpen, L., and P. Gibbon. 2002. Private Sector Development: Policies,
Practices and Problems. World Development 30(1): 1–15.
Selaya, P., and E. R. Sunesen. 2008. Does Foreign Aid Increase Foreign
Direct Investment? University of Copenhagen Department of
Economics Discussion Paper 08-04. Copenhagen: University of
Copenhagen.
Shepherd, B., and J. S. Wilson. 2008. Trade Facilitation in ASEAN
Member Countries: Measuring Progress and Assessing Priorities.
Policy Research Working Paper 4615. Washington, DC: World Bank
Development Research Group Trade Team.
Stern, N. 2009. Possibilities for Africa in Global Action on Climate
Change. Presentation to the African Partnership Forum Special
Session on Climate Change. 3 September. Addis Ababa. www.uneca
.org/apf/documents/LordSternAFPpresentation.ppt
UN Millennium Project. 2005. Trade for Development. Task Force on
Trade. London: Earthscan.
United Nations. 2002. Monterrey Consensus of the International
Conference on Financing for Development. http://www.un.org
/esa/ffd/monterrey/MonterreyConsensus.pdf
United Nations. 2015. Addis Ababa Action Agenda of the Third
International Conference on Financing for Development.
http://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA
_Outcome.pdf
United Nations. 2016. Report of the Secretary-General on Critical

Milestones towards Coherent, Efficient and Inclusive Follow-up
and Review at the Global Level. http://www.un.org/ga/search
/view_doc.asp?symbol=A%20/70/684&Lang=E
United States Agency for International Development (USAID). 2010.
From Aid to Trade: Delivering Results: A Cross Country Evaluation
of USAID Trade Capacity Building, Washington, DC: USAID.
http://pdf.usaid.gov/pdf_docs/PDACR202.pdf.
Vaes, S., and H. Huyse. 2015. Private Sector in Development
Cooperation: Mapping International Debates, Donor Policies, and
Flemish Development Cooperation. Leuven, Belgium: Koninklijke
Universiteit Leuven.
Vijil, M., and L. Wagner. 2012. Does Aid for Trade Enhance Export
Performance? Investigating the Infrastructure Channel. The World
Economy 35(7): 838–868.
White, S. 2004. Donor Approaches to Improving the Business
Environment for Small Enterprises. Washington, DC: Working
Group on Enabling Environment Committee of Donor Agencies for
Small Enterprise Development.
World Bank. 2011. The Role of International Business in Aid for Trade
Building Capacity for Trade in Developing Countries. http://www
-wds.worldbank.org/external/default/WDSContentServer/WDSP
/IB/2014/02/10/000442464_20140210114014/Rendered/PDF
/846350WP0Box382123B00PUBLIC00AFTWB4.pdf
World Bank. 2012. Inclusive Green Growth. Washington, DC: World
Bank Publishing.
World Trade Organization (WTO). 2006a. An Enhanced Integrated
Framework: Report of the Chairman of the Task Force on an
Enhanced Integrated Framework, Including Recommendations,
WT/IFSC/W/15. Geneva, Switzerland: WTO.
WTO. 2006b. Recommendations of the Task Force on Aid for Trade,
WT/AFT/1. Geneva, Switzerland: WTO.
20
Conclusion: Directions
for Future Research
and Policy Making
20.1 What is the Role of Trade in Promoting

Sustainable Development?
The chapters in this book have shown that trade has been, and continues
to be, one of many economic mechanisms that can promote sustainable
development. But the various contributions have also emphasized that,
in many cases, the links are not unidirectional or unconditional. Instead,
many factors come into play in mediating the relationship between trade
and sustainable development. It is therefore important to accommodate
a wide range of policy areas when designing trade policies that can
support broader development objectives.
Although clear-cut cases where traditional trade policies have
sustainable development implications are relatively few, it is worth
signaling one important, but relatively under-examined, mechanism.
Tariffs and nontariff measures affect the relative prices of goods in
consumption, which can have direct development implications. Some
groups in society—the poor, women, or other marginalized groups—may
consume differently from dominant groups. The political economy of
protection means that trade measures might increase the relative prices
of goods that account for a higher proportion of marginalized people’s
consumption basket, thereby disadvantaging them in a direct and
ongoing way. The precise extent to which this is happening in particular
countries is an empirical question. Techniques exist to examine it,
combining information on trade policy with detailed household surveys.
For instance, Nicita et al. (2014) show that trade policy in sub-Saharan
Africa tends to redistribute income from rich to poor households, thus
530
Conclusion: Directions for Future Trade and Policy Making531
constituting some hallmarks of a “pro-poor” trade policy. There is

scope to repeat that analysis for other regions, as the result depends on
precise consumption and production patterns, in addition to applied
trade policies. The same methodology could also be applied to better
understanding a dynamic discussed in the chapter by Shepherd and
Stone, namely the gender implications of trade policy. Since household
surveys distinguish female-led from male-led households, conducting a
similar analysis would enable seeing the extent to which applied trade
policies are “pro-women.”
Another case of traditional trade policies having direct
developmental effects relates to what might be termed “development
products,” like medicines, vaccines, medical supplies, and treated
bed nets. Although relief operations are typically exempted from
tariffs, countries in nonemergency situations, but where development
needs are serious, often subject these products to a range of tariffs
and nontariff measures. The combined effect is to increase prices and
decrease availability. Clearly, that is highly undesirable with respect
to sustainable development. In this case, trade has a clear role to play
in bringing poor people key products for treatment and prevention of
common sicknesses at the lowest possible cost. In another area, there
have been efforts to liberalize trade in “environmental goods and
services” as a priority, i.e., without waiting for liberalization of other
sectors. These efforts became stalled in the World Trade Organization
(WTO), but the Asia-Pacific Economic Cooperation (APEC) successfully
established a product list among its member economies, and work is
ongoing to free up trade in these products. The global commitment to
sustainable development suggests that countries should also agree on
a list of development products for priority liberalization. The list needs
not be comprehensive or cover all aspects of development, but the case
for applying it to medical and health-related products is overwhelming.
Of course, just making these goods available at the lowest possible cost
does not make up for a dysfunctional or understaffed health system.
But even when such difficulties are in evidence, there is simply no
development-based argument for making medicines, vaccines, and
other health products more expensive than they need to be—yet that is
what activist trade policy in this area does.
Countries do not need to wait for a regional or plurilateral initiative
to lower their tariffs on health products. Reducing tariffs unilaterally is
the most effective and direct tool to bring down health product costs.
Countries need to ensure, however, that the lower tariffs translate into
lower prices. In most countries, the procurement of medicines and
other health products is complex, involving various public and private
actors. The final price paid by the health care facility or the patient
might differ considerably from the imported price. Reducing tariffs and
other nontariff barriers is the first step to bring prices down. However,
a careful examination of the entire supply chain behind the border is
typically needed to ensure that health products are sold at the lowest,
yet market-based price.
A similar logic for reducing trade barriers to improve health
outcomes applies to trade in services. Adequate access to education
and health services will be a backbone for achieving the Sustainable
Development Goals (SDGs). However, most countries remain highly
reluctant in opening both sectors, despite the considerable benefits. One
difference with respect to goods trade is that increased trade in health
services is not unconditionally positive. The chapter by Rupa Chanda
highlights how, due to most countries’ chronic shortage of health care
workers, the increased export of services might negatively impact
equity and access. For example, liberalizing health care services trade
under mode 2 (allowing foreign patients to purchase medical treatment
at home) can generate foreign exchange earnings and new employment
opportunities. At the same time, the inflow of foreign patients might
exacerbate the existing health care worker shortage and divert human
resources. Proper regulations are needed to avoid this outcome while
maximizing the opportunities arising from a more open services trade
regime.
Moving beyond these examples, several other chapters clarify the
role that “new” trade policies play in mediating the trade–sustainable
development relationship. Labeling is one issue that the trading system
needs to come to terms with. Private sustainability standards, covering
social as well as environmental issues, are proliferating. This process is
problematic from a global governance standpoint, as the emerging rules
of the game are strongly shaped by the preferences of consumers in the
rich northern markets. There is, of course, a strong case for developing
countries to become more involved in global standard-setting platforms,
but that is a long-term process that requires significant developments
in human, financial, and institutional capacity. In the short-to-medium
term, it will simply not be possible for developing countries to participate
adequately in these highly specialized and technical bodies, so it is
important that independent observers and international organizations
ensure that developing country perspectives are incorporated in the
design of key standards.
Notwithstanding these issues, the propagation of standards and
labels through global value chains nonetheless holds promise for the
social and environmental aspects of development. Large lead companies
are increasingly seeking to put in place transparent supply chains, with
rigorous labor and environmental standards, along with regular audits.
Ikea has taken this step in the furniture sector, and large “fast fashion”
companies like Zara and H&M have done it in apparel. Of course,
monitoring remains far from perfect, which means that compliance
is similarly patchy. Nonetheless, there appear to have been significant
steps forward in this area in recent years, with the prospect for more in
the future.
The emphasis in this book has been on “trade and…” subjects, rather
than the traditional arguments for the gains for trade, based on income
and productivity. We consider those mechanisms to be important, but
trade economists need to move beyond them if we are to be heard in the
context of the SDGs. Increasing incomes is only one part of sustainable
development, and the influence of the trade community will be
correspondingly lessened if we focus only on that.
20.2 Complementary Policies

A key point that cuts across most of the chapters is that trade policy
on its own is not enough to ensure progress toward achieving the
SDGs. Following the logic of domestic distortions, it is also important
that developing and developed countries alike focus on a range of
complementary policies that help ensure the efficiency gains from trade
can indeed support economies, societies, and the environment.
One key area that needs to be addressed is tax policy. Trade has
distributional consequences, but it does not follow that trade policy is
the best way of effecting redistribution. It can be used in contexts where
other mechanisms are not reasonably available, but typically, the general
taxation system—income, corporations, and consumption taxes—is
better suited to raising revenue, and the general government budget
can allocate those resources better than trade can. Financing public
goods is an important part of developing countries’ policy agenda, and
that necessitates a stable revenue base. Some developing countries rely
heavily on trade taxes to support these kinds of policies, and cannot
suddenly move to a relatively liberal trade stance without first developing
the governmental infrastructure that allows for efficient revenue raising
from income (personal and corporate) and consumption.
In addition to tax policy, it is also important to develop specific
labor and environmental regulations. Although some trade agreements
try to incorporate these issues, it is typically difficult to deal with them
in other than a general way internationally. Preferences differ across
countries, and development level plays a role in that, but it is important
that all countries commit to developing appropriate regulations and
standards. Participation in global value chains, which can be a vector
for norm dissemination in this context, is one mechanism that can drive
progress, but fundamentally the effort needs to be domestic. There
are other cases where international coordination can be profitable, for
instance, climate change, but the voluntary nature of commitments
in that case again indicates that the main thrust of policy has to be
domestic. Trade can play a role in labor and environmental issues, as
indicated in the chapters of this book, but it is no substitute for effective,
targeted domestic policies.
20.3 Tracking Performance

One particularly weak point of the SDGs’ trade approach lies in
measurement, performance tracking, and evaluation. The SDGs have
many associated indicators, but the trade indicators are overly simplistic,
and in some cases not soundly anchored in economists’ understanding of
the benefits of trade. Only three indicators are explicitly devoted to trade,
in addition to the inoffensive suggestion of tracking the proportion of
tariff lines applied to least developed countries’ (LDCs) and developing
countries’ exports that are zero duty. The three indicators (17.10.1–
17.10.3) are worldwide weighted average tariff; developing countries’ and
LDCs’ share of global exports; and average tariffs faced by developing
countries, LDCs, and Small Island Developing States. The nature of
these indicators suggests that there was scant real consultation with
the trade community. Developing countries’ share of world exports,
for example, suggests a purely mercantilist approach to analyzing the
benefits from trade: exporting is good, but importing is not. Tracking
average tariffs suggests that those measures are the primary barrier
faced by developing country exports, when trade economists typically
agree that, at least for access to developed country markets, nontariff
measures and frictional barriers are more important. In light of the
many and varied links between trade and sustainable development
brought out in this book, it is very disappointing that the highest-level
monitoring effort for trade in the SDG context is so misguided.
Of course, the decentralized nature of research and policy work
means that the official United Nations SDG monitoring effort is not
the only forum that can track trade-related indicators in a sustainable
development framework. The Group of 20 (G20) countries, for example,
have committed to reduce trade costs by 15%. That measure is much more
appropriate than tariffs, because it covers nontariff measures, as well as
behind-the-border policies that have trade impacts. It emphasizes the
overall goal of reducing the transaction costs associated with importing
and exporting, but is not prescriptive as to the exact steps needed in
particular country contexts. APEC has previously had success with such
an approach through its Trade Facilitation Action Plans (e.g., Shepherd
2016). Indications are that international organizations like the World
Bank and the Organisation for Economic Co-operation and Development,
both of which have extensive experience in measuring and analyzing
trade costs over time, will be monitoring the G20 commitment. This
kind of approach is much better suited to maintaining and deepening
a relatively global market for goods than the overly restrictive and
simplistic indicators identified by the SDGs.
The G20 initiative is welcome, and provides a much stronger basis
for examining the sustainable development implications of trade than
does the SDGs’ indicators framework. However, the available sources on
trade costs, such as the United Nations Economic and Social Commission
for Asia and the Pacific (UNESCAP)–World Bank Trade Costs Database
(Arvis et al. 2016) are necessarily highly aggregate. Moreover, they
measure trade costs in their entirety, i.e., the complete price wedge
between production and consumption. In tracking performance on
trade policy, it is necessary to relate these overall measures back to their
policy components. Arvis et al. (2016) take some steps in that direction,
by looking at policies like logistics and trade facilitation, connectivity,
and regional integration. But clearly, much more detail is necessary.
This work presupposes a significant data collection effort on
applied trade policies, focusing on nontariff measures and behind-the-
border policies. Indeed, nontariff measures are particularly important
from a sustainable development standpoint, because they include
social and environmental standards and labeling requirements. The
United Nations Conference on Trade and Development (UNCTAD),
in cooperation with other international organizations, has been
collecting new data on nontariff measures, and now covers 56 countries
(counting the European Union [EU] as one). This new TRAINS dataset
is an important resource, and researchers need to connect it with data
on trade costs to assess the extent to which different types of nontariff
measures contribute to them. But there are also important limitations.
Many countries are still not covered by the database. Moreover, there
is as yet little prospect of obtaining panel data, due to the difficulty
and expense of collecting data. From a development point of view, it
is also significant that the TRAINS classification only includes public,
mandatory measures; it does not capture private standards or labels,
which this book has shown play an important role in mediating the
trade-sustainable development relationship. It will therefore be
important to collect additional data to encompass these measures, but
experience suggests that this kind of work has problems in terms of
classification and source data availability. Nonetheless, the returns are
high, and indeed this aspect of data collection represents an important

intermediate step in better understanding the relationship between
trade and sustainable development, and tracking it across countries
and through time.
Welcome though it is, even the G20 initiative tracks trade policy,
in a broad sense, but not its development impacts. It will be important
for researchers and policy analysts to make use of new and established
data sources alike to identify clear mechanisms linking trade and
sustainable development, with all the ambiguity that relationship
entails. Increasingly, it will be important to put quantitative flesh on the
analytical bones, by using data to estimate causal relationships. That
exercise is always fraught from a technical point of view, but changes
in development policies over the coming years will hopefully provide
natural experiments that can be exploited to plausibly identify causal
effects.
Several areas addressed in this book suggest future research efforts
with a performance measurement emphasis. First comes gender. There
is relatively little robust research on trade in gender, mainly due to
lack of data. That constraint should loosen somewhat in coming years,
as trade projects increasingly need to incorporate gender aspects. As
a result, it should increasingly be possible to examine issues like the
extent to which the gender wage gap persists in internationally engaged
versus domestically oriented firms, and the effects of trade opening on
both female employment and net income in female-headed households,
taking into account income and price effects. Theoretical ambiguity in
many of these relationships mandates establishing credible baselines
across a range of countries, and allowing for significant cross-country
variation in results. Identifying the country-level factors that influence
outcomes will be an important contribution that will have immediate
flow on policy implications.
A second high-priority area is the environment. Although there is a
burgeoning literature on trade and the environment, it is important to
develop high-impact studies that maximize micro-data usage. Macro-
level trade sustainability initiatives are difficult to assess because
implications vary considerably across countries, and even across
firms within a country. It will be important to look at instances of
environmental standard-setting and labeling to identify how that affects
the link between trade and environmental quality, including climate
change. Arguably the most important point is the counterfactual:
in assessing the impact of trade on environmental compliance in
developing countries, the comparison should not be with what happens
in developed countries, but instead with what domestically oriented
firms in the same country do. In other contexts, such as trade and wages,
there is clear evidence that although internationally engaged firms in

developing countries pay less than in developed countries, those wages
are still typically higher than those prevailing among domestically
oriented firms in the country in question. Developing empirical results
where the counterfactual is clear and easily understood is important in
terms of avoiding confusion in the public debate.
Although this discussion has focused on areas where fresh research
would be particularly welcome, it is also important to highlight two
areas where there is extensive research, but where the results are not yet
widely disseminated. Both areas move away from broader sustainable
development issues to look at income effects as they pertain to trade
and inequality, and trade and poverty. The latter is well understood in
terms of theory, and there are extensive empirical applications, some
of which have been reviewed in this book. Nonetheless, there is a
clear gap in understanding between policy makers and the public. It is
important to return this work into the foreground, not just to highlight
its results, but to clarify the ambiguous place from which it starts, i.e.,
that trade can be good or bad for poor households depending on their
production and consumption patterns. That nuance is greatly needed, as
trade economists are increasingly seen in policy discourse as excessively
emphasizing the gains from trade, and not enough the potential costs—
even though both are well accounted for, even in textbook models.
By contrast, trade and inequality is currently producing extensive
and complex theoretical and empirical contributions. Since there is
no simple or universal relationship, the emphasis therefore needs to
be on identifying the ways in which trade can interact with domestic
institutions, particularly tax policy and labor laws, to produce different
observed changes in inequality across countries. The issue is very
much at the forefront of policy debates around the world, so the trade
community needs to tackle it squarely and with nuance.
20.4 Dealing with the Anti-Trade Backlash?

The project that gave rise to this volume was conceived in early 2016,
before the current backlash against trade symbolized by the United
Kingdom’s decision to the leave the EU, and the election of Donald
Trump in the United States (US). The consequences of these for the
global trade architecture are potentially profound. The Trans-Pacific
Partnership, a trade agreement in the Asia and Pacific region, appears
doomed: US ratification is required for entry into force, but President
Trump has pulled the US out of the agreement. The Trans-Atlantic
Trade and Investment Partnership, which links the US and the EU, has
hit difficulties with public opinion on both sides of the Atlantic. Even
more worryingly, President Trump has suggested that the US may
adopt unilateral trade policies to deal with supposed “unfair” practices
by countries like Mexico and the People’s Republic of China (PRC)—
an act that could be outside WTO rules. The multilateral trading
system is under considerable stress, probably the most severe since the
establishment of the WTO in 1995.
It is important to keep these developments in perspective, however.
In particular, it is important to recall that many countries view trade
very positively, particularly developing countries. Data from the Pew
Research Center (2014) show that 87% of respondents in developing
countries believe that trade is good, while 66% believe that it creates
jobs, and 55% believe that it increases wages. Indeed, for an agreement
like the Trans-Pacific Partnership, the recent attitude of the US appears
quite anomalous: from Viet Nam to Japan, the other countries involved
are generally enthusiastic about the agreement, and some appear to be
exploring proceeding without the US. For the most part, developing
countries recognize the constructive role trade can play in their
sustainable development strategies.
Based on the available evidence, the “trade backlash” appears
limited to the US, and some countries within the EU. Particularly
with the EU, it is important not to see these markets as monoliths.
Northern European countries, like the Netherlands and the Nordics,
are generally supportive of trade liberalization. One factor that likely
makes this possible is that they have generous social welfare programs
that protect those displaced by trade. It is important to recognize that
trade can create losers as well as winners, in developed countries and
developing ones alike. Trade economists have traditionally proposed
programs like Trade Adjustment Assistance in the US to protect against
unemployment, and assist in retraining. The political evidence suggests
that these programs are inadequate. However, in the US, the problem
is symptomatic of broader issues with the social welfare system, which
is less developed than in most other parts of the developed world.
Pro-trade forces in developed countries need to develop innovative
strategies to help people move from sunset to sunrise sectors. But the
problem is not easily solved, as skills are often markedly different by
sector—particularly in the move from manufacturing to services—and
geography is a significant barrier. Trade economists have traditionally
assumed that, in integrated markets like the US, people who lose jobs
or incomes as a result of trade liberalization will be willing to move to
where the labor market is better. But the careful empirical work of Autor
et al. (2016) suggests that that process is in fact held back by significant
frictions, which means that adjustment costs are higher and longer
lasting than previously thought. Reducing these frictions, as well as

preventing the worst dislocation impacts, is a key priority for the US
and other developed countries.
Where does this leave trade in the context of the SDGs? The current
political dynamic is something of a paradox: much of the world remains
convinced that trade can be part of a robust development strategy, but
it is impossible to move forward with multilateral liberalization, or even
most mega-regionals, in the absence of US leadership. The stage is set
for other large countries that see the value of the global trading system
to replace traditional US stability. In Asia, it seems likely that Japan
will play a leading role in pressing for continuing liberalization, given
that trade-driven productivity growth is a key part of Prime Minister
Abe’s economic policy agenda. The PRC has also indicated that it will
play a leadership role, although its approach to liberalization is less
comprehensive. It is unclear whether a trade regime underpinned at
least in part by the PRC will be more or less supportive of sustainable
development than one supported by the US. Given ongoing difficulties
with the PRC’s environmental and social regulation, and the country’s
preference for not intervening in regulatory matters elsewhere, it is
likely that the agenda will be more narrowly focused. Such an approach
can potentially support economic growth and development, but big
questions like climate change, labor rights, and “new” issues like
intellectual property and services will likely see less progress than had
been anticipated.
The SDGs are a joint obligation of developed and developing
countries. Trade as an implementing mechanism now faces real
challenges as a result of that bargain. Developing countries seem keen
to move forward, but some important developed countries now face
substantial political difficulties in doing the same. There is reason to
question the commitment of some developed countries to maintaining
relatively open markets for developing country exports. It will therefore
be important for the trade and development communities to be vigilant
in working against protectionist impulses, and in promoting the
necessary complementary policies that can ensure that trade is a broad-
based engine for sustainable development.
20.5 Conclusion
This book has brought together contributions from experts around the
world to examine the ways in which trade interacts with sustainable
development, and can ultimately support implementation of the SDGs.
The SDGs themselves do not give great prominence to trade, so it will be
up to the trade community to develop policy stances and analytical work

that can help policy makers make full use of trade’s potential to promote
economies, societies, and the environment. By examining the key ways
in which trade interacts with economic, social, and environmental
objectives, we hope this volume will cultivate deeper insights and
creative policy solutions that can benefit developing and developed
countries alike.
Attitudes toward trade naturally vary across countries and ebb and
flow over time. The trade community will need to focus on two separate
tasks in the SDG context. Developed countries need to renew efforts to
develop a pro-trade consensus, and that means making serious efforts to
tackle perceived environmental and social problems that are associated
with increased trade integration. Trade economists will need to move
away from their favored ground of narrow trade policy to address a
wider policy range, most specifically redistribution and environmental
and social regulations.
At the same time, developing countries need to focus on how
trade can continue to develop given the strong consensus that already
exists. Developing countries will need to increasingly provide their
own demand for imports, as market access in some developed markets
looks unpredictable (Helble and Ngiang 2016). Reinvigorating South–
South trade through increasing liberalization is one important priority.
But at the same time, trade specialists in developing countries will also
need to deal with social and environmental issues, again moving into
the territory of complementary policies. Finally, developing countries
also need to ensure that the benefits from trade opening continue to be
distributed inclusively. Many developing countries, especially in Asia,
have so far been able to use trade opening as a tool to effectively fight
poverty. However, as these economies further develop and integrate
into the global economy, continued economic restructuring is needed.
Smart policies are needed to minimize the negative impacts of these
adjustments. Trade can be a powerful engine for promoting sustainable
development, but the agenda for the trade community in the current
climate is an ambitious one.
References*
Arvis, J.-F., Y. Duval, B. Shepherd, C. Utoktham, and A. Raj. 2016. Trade
Costs in the Developing World: 1996-2010. World Trade Review
15(3): 451–474.
Autor, D., D. Dorn, and G. Hanson. 2016. The China Shock: Learning
from Labor Market Adjustment to Large Changes in Trade. Working
Paper No. 21906. NBER.
Helble, M., and B. Ngiang. 2016. From Global Factory to Global Mall:
East Asia’s Changing Trade Composition. Japan and the World
Economy 39: 37–47.
Nicita, A., M. Olarreaga, and G. Porto. 2014. Pro-Poor Trade Policy
in Sub-Saharan Africa. Journal of International Economics 92(2):
252–265.
Pew Research Center. 2014. Faith and Skepticism about Trade, Foreign
Investment. http://www.pewglobal.org/2014/09/16/faith-and
-skepticism-about-trade-foreign-investment/
Shepherd, B. 2016. Did APEC’s Trade Facilitation Action Plans Deliver
the Goods? Journal of Asian Economics 43: 1–11.
*
The Asian Development Bank refers to “China” as the People’s Republic of China.
Index
A anticompetitive practices, 228, 240
Addis Ababa Action Agenda of the anti-deforestation promise, 230
Third International Conference on antidiscrimination laws, 125
Financing for Development, 57, 489 antidumping and countervailing duties,
Agenda for Sustainable Development 258, 388
(2030), 524 antidumping measures, 388–89
agricultural trade and hunger anti-free-trade NGOs, 11
agricultural land endowments, 90 anti-globalization movement, 10, 77
dietary diversity and quality, 96–98 antimalarial products, 387
food price volatility, impacts on, 93–96 anti-poor biases of trade policies, 41
food security and agricultural trade anti-poverty and anti-hunger SDGs, 277
policy, 87–89, 98–110 anti-trade backlash, 537–39
income changes from trade, 89–91 anti-trade groups, 12–13
market prices vs. shipment by shipment, anti-trade literature, 12
108–9 antitrust policies, 70
nutritional diversity in production vs. in APEC. See Asia-Pacific Economic
food supply Cooperation
price insulation, 99–104 Argentina
productivity gains from trade, 91–92 globalization and within-country
protection, changing the level of, 98–99 inequality, 186
safeguard, price-based, 105 health products, high applied tariffs on,
safeguard mechanism, proposed special, 383
104–5 health service, joint ventures in, 419
safeguards, quantity-based, 109–10 income inequality and share of trade to
substitution effects, 92–93 GDP, 186
trigger level, the, 106–7 Mercosur, 67
aid-for-trade shipping costs on exports, 474
accountability, 518–19, 521–22 wage inequality, 190
for economic infrastructure, 501 ASEAN. See Association of Southeast
gender equality, 507 Asian Nations
for green growth, 508 Asia-Pacific Economic Cooperation (APEC)
inclusive growth, 500–507 APEC common trade facilitation
initiative (2006), 7, 288, 490, 492–93, performance target, 49
516, 519, 524 APEC List of Environmental Goods, 260
monitoring exercise, OECD/WTO, 496, fossil fuel subsidy reform, 240
500, 516–17 higher education, international
monitoring framework, OECD/WTO, guidelines for, 366
519 list of member economies, 531
private sector engagement partnerships, Trade Facilitation Action Plans, 535
514–18 Association of Southeast Asian Nations
productive capacities, building, 504–5 (ASEAN), 152, 192
related adjustment, 506 Australia
SDGs, 497–500 droughts and water shortages, 295
trade as tool for development, 492 education opportunities abroad, 354
trade capacity building, 505–6 globalization adjustment fund, 165
trade-related adjustment, 506–7 higher education, foreign direct
Aligning Policies for a Low-Carbon investment for, 343
Economy (OECD–IEA–NEA–ITF), Illegal Logging Prohibition Regulation,
247, 252, 269 237
542
Index543
international branch campuses (IBCs), Canada. See also North American Free
343 Trade Agreement (NAFTA)
private education, 341 cereals producer, top, 455
public universities and revenue- CITES, 218–19
generating activities, 343 environmental assessments, 208
regional trade agreements, 259 globalization adjustment fund, 165
students, international, 358 NAFTA and clause to “protect” its
Trade Adjustment Assistance program, freshwater from exports, 308
165 surplus grain to total grain output, 448,
virtual water exporters and importers, 455
309–10 tertiary education, 341
water management review, 310 Trade Adjustment Assistance program,
water resources, renewable, 309 165
water scarcity, 310–11 Canada–US Free Trade Agreement, 159.
wheat exports to Japan, 309–10 See also North American Free Trade
Agreement (NAFTA)
CBD. See Convention on Biological
B
Diversity
biodiversity
CBE. See Cross-Border Education
accounting, 207
CCC. See Copenhagen Consensus Center
based innovation and sourcing, 221
Centre for International Private
based livelihoods, 218
Enterprise, 517
conservation and sustainable use,
Chile
220–22
fisheries exports, 274
conservation of, 213
globalization and within-country
conventions, 219
inequality, 186
environmental agreements, 212
health products import duties, 383
loss (SDG 15), 58, 210–11, 213–14
income inequality and share of trade to
products, 211–12, 219
GDP, 186
sustainable management of, 212
private education, 341
BioTrade Initiative, 220–21, 240
tertiary education, 341
Brazil
Chilean earthquake, 474
agricultural land endowments, 111
CITES. See Convention on International
emerging markets, 275
Trade in Endangered Species of Wild
forest area, FSC and PEFC certified, 235
Fauna and Flora
globalization and within-country
cities and communities, sustainable
inequality, 186
SDG11, 58
health products, high applied tariffs on,
climate change, action on
383
SDG 13, 5, 58, 252, 508
health services, joint ventures in, 419
climate change and trade. See also
income inequality and share of trade to
biodiversity; greenhouse gas (GHG)
GDP, 186
climate change, trade system’s resilience
informal employment, 162
to, 267
land endowment per person, 90
domestic policies related to trade,
negative consumption effects, 67
260–63
regional inequality, 197–98
environmental goods trade
TBT notifications, 323
liberalization, 259–60
wage inequality, 190
GHG emissions and trade, 253–57,
255–56, 257
C Regional Trade Agreements (RTAs), 259
Cambodia renewable energy markets, local-
fisheries exports, 274 content requirements in, 261, 264,
Gini coefficient, 184 509
higher food prices and poverty, 99 services, barriers to trade in, 263–65
544Index
trade rules, potential misalignments CPC. See Central Product Classification

with international, 257–60 Cross-Border Education (CBE), 347, 359
World Trade Organization, multilateral Cuba
agreements under, 257–59 fisheries exports, 274
Codex Alimentarius for food safety, 321 health personnel, 418
Colombia health products, applied tariffs on, 383
globalization and within-country health services, joint ventures in, 419
inequality, 186 health services trade, 409, 417–20
health services, joint ventures in, 419
income inequality and share of trade to D
GDP, 186 deforestation, 229–32, 240. See also Forest
informal employment, 162 Carbon Partnership Facility; Forestry
private education, 341 Stewardship Council (FSC); Reducing
tariff reduction and employment of Emissions from Deforestation and
female blue-collar workers, 129 Forest Degradation (REDD+)
urban concentration, 443–44 DFQF. See duty-free, quota-free
wage inequality, 190 Diagnostic Trade Integration Study,
Conference of the Parties (COP) 491–92
COP 16: Strategic Vision: 2008–2020, 215 Doha Development Agenda, 25, 42
COP 17: CITES, 216 negotiations, 19–20, 110, 112, 353
COP 21: Paris Agreement, 232–33, proposal, 105, 109
240–41, 313 SSM proposals, 107, 110, 112
US delegation and polar bears, 218 Doha Round. See also MDG Gap Reports
consumption and production, sustainable advocacy for retaliatory tariffs and trade
responsible wars, 13
SDG 12, 58, 278 aid-for-trade-related adjustment, 506–7
Convention on Biological Diversity (CBD), GATS negotiations, 303
211–12, 213, 220, 240 MDG Trade Task Force report, 19
Convention on International Trade in trade policy and regulations, 490
Endangered Species of Wild Fauna WTO Ministerial in Hong Kong, China
and Flora (CITES) (2005), 8, 12, 19, 51, 104–5, 490
CITES COP 17 and rhino horn, 216 WTO negotiations, 287
CITES-listed specimens, permits and duty-free, quota-free (DFQF), 35, 42, 45, 51
certificates to track shipments of, 215
CITES management authorities, 242 E
CITES-permitting, 241 Ecolabel Index, 223
conservation, structured approach to, Ecuador, 218, 231
214–15 education, quality
COP 16, guidance document adopted SDG 4, 43, 58
at, 215 education services and the SDGs
International Consortium on education, ensuring quality of, 365–67
Combatting Wildlife Crime, 216 education services, main drivers and
local communities, livelihoods of, 217–19 trends in, 338–39
species survival, ensuring international education services modes of supply and
trade does not threaten, 219 SDGs, 354–61
sustainable trade of listed species, 220 education services trade, PTAs relevant
sustainable use and trade, tools to to, 361–64
support, 240 education services trade and
Washington Convention (1976), 211 international trade agreements,
Working Group on CITES and 347–48
Livelihood, 215 education services trade and the SDGs,
COP. See Conference of the Parties regulatory challenges of, 364
Copenhagen Consensus Center (CCC), foreign direct investment flows, changes
23–25 in, 343–44
Index545
GATS and education services, 349–53 job quality, including formal vs. informal
GATS and higher education services, employment, 162–63
350–51 labor market policies, 163–64
GATS flexibilities and the SDGs, 352–53 manufacturing, global production shifts
GATS modes of supply and different in, 153–57
provisions for education services, MDGs, employment in, 140–43
349–50 outsourcing services, 154–57
higher education services, demographic SDGs, employment in the, 146
changes and other factors shaping sector shifts, 160–62
demand for, 339–40 skills and education to enhance trade
information and communication benefits, 167–68
technologies, 344–45 trade adjustment assistance, 164–65, 538
mode 1: CBE (cross-border supply) trade agreements, design and
including distance education, 349, implementation of, 166–67
354, 359, 362 trade and employment, concepts and
mode 1: ICT to increase education trends in, 146–57
opportunities by cross-border energy, affordable and clean
education (CBE) including distance SDG 7, 58, 502
education, 359–61 Enhanced Integrated Framework (EIF),
mode 2: student mobility, increasing 41, 52, 489, 491
education opportunities abroad Environmental Goods Agreement, 260
with, 349–50, 354, 356–57, 361 environmental goods and services, 2,
mode 3: foreign direct investment 301–2, 398, 489, 508, 524, 531. See
increases domestic access, develops also Trade Facilitation Agreement
skilled human resources, and for Environmentally Sensitive
enhances local education capacity, Products
350, 352, 354, 357–58 environmental labeling and information
mode 4: supply of qualified teachers and schemes (ELIS), 222–23
promoting academic mobility, 350, environmental sustainability, 498–99, 523
359, 362–63 environment and trade
private education provision, government certification, beyond, 235–36
funding reforms and growth of, certification and illegal logging laws,
341–43 238–39
universal access and service, 367–69 certification industry, 227–29
EEZ. See exclusive economic zone certification of voluntary standards for
EGF. See European Globalization sustainable timber, 234–35
Adjustment Fund CITES and livelihoods of local
EIF. See Enhanced Integrated Framework communities, 217–19
ELIS. See Environmental labeling and CITES: legal, traceable, and sustainable
information schemes trade, 214–16
Emissions Trading System (ETS), 255. See environmentally sensitive goods and
also greenhouse gas (GHG) relevant services, trade facilitation
employment, decent work and economic agreement for, 241–43
growth environmentally sensitive products,
SDG 8, 41, 58, 403, 489, 500 evolving attitudes to trade in, 211–12
employment and trade forests: certifiable and the (il)legal,
comparative advantage, adjusting to, 232–33
149–51 legal reform in producing and exporting
comparative advantage, changes in, countries, 237–38
151–52 logging (illegal) and illicit trade,
employment and gains from trade, legislating against, 236–37
146–49 natural resources, how trade and
employment and job quality from environment analysis is applied to
liberalized trade, 157–63 trade in, 207–10
546Index
natural resources, trade and voluntary F

approaches to, 229–32 FAO. See Food and Agriculture
policy coherence, 231 Organization
REDD+: results-based payments, 233–34 FDI. See foreign direct investment
sustainability, governmental regulations FiBL. See Research Institute of Organic
for, 213–14 Culture
sustainability outcomes, how trade is a fisheries and trade
means of implementing regulations aquaculture practices, sustainable, 283
for, 210–12 climate change mitigation and
sustainability standards, voluntary, adaptation measures, 283
225–27 fish and fisheries, current and future
sustainability standards-cum- needs, 281
certification, voluntary, 222–25 fish and fish trade, reducing corruption
sustainable development SDG 15 and 12 in, 282
targets, 250–51 fisheries, enhancing women’s position
sustainable trade in wildlife products: in, 282
support from the International fisheries and marine protected areas,
Trade Centre, biotrade, and union 282–83
for ethical biotrade, 219–22 fisheries subsidies, 280–81, 286–87
sustainable use, trade-related initiatives fishing, the illegal, unreported, and
for, 239–41 unregulated, 273, 279–80, 284–86
ETS. See Emissions Trading System fish stocks, open access and common
EU. See European Union property of, 279–80
EU CARIFORUM Economic Partnership fish trade and SDGs, 273–76, 278–79
Agreement, 209 SDGs, policy conditions enabling fish
EurepGAP, 326 trade in support of, 279–83
European Globalization Adjustment Fund SDGs, trade measures and policy
(EGF), 165 options supporting, 284–89
European Union (EU) tariffs and nontariff measures, 288–89
agricultural land endowments, 90 FLEGT. See Forest Law Enforcement,
Emissions Trading System (ETS), 255 Governance and Trade
European Globalization Adjustment Food and Agriculture Organization (FAO)
Fund (EGF), 165 timber and forest products, value of
fish and fish products imports, 272, 275 global exports of, 236
fisheries trade and sustainability, 272 women’s vs. men’s income spent on
Forest Law Enforcement, Governance household food, 122
and Trade (FLEGT), 237–38, 242, 244 food safety, labeling, and trade. See
higher education commitment, 353 also environmental labeling and
private sector development, aid to information schemes (ELIS)
support, 515 labels, food safety and WTO, 320–21
private sector development programs, labels and food safety defined, 319–20
515 nontariff barriers, trade effects of, 317–19
Sugar Regime, 507 private standards, 326–28
TBT notifications, 323 public standards, 326
trade backlash, 538 TBT agreement, and SPS measures,
Trade Commissioner and the 321–25
“Millennium” Round, 10 foreign direct investment (FDI)
TRAINS dataset, 535 capital, technology, and technical and
water-related services, trade in, 303 managerial skills, 344
European Union Timber Regulation in developing countries, 153, 513
(EUTR), 235, 237–38 in education, 6
EU Sugar Protocol countries, 507 for financing development, 510
exclusive economic zone (EEZ), 279, 285, government reforms in funding and
287 changes in, 338
Index547
in health care, 408 SDG 5, 58, 278, 507

health services, globalization of, 405 gender inequality, 18, 129–30
higher education, investment in, 343–44 General Agreement on Tariffs and Trade
international technology transfers, 305 (GATT)
international trade and investment, climate change, GATT discourages
rapid economic globalization by, 176 countries from pursuing policies
research and development activities, on, 258
344 environmental grounds, countries can
sources of technology and knowledge, justify policies on, 257
32 foreign investment and tailor made tariff
trade barriers reduction and constraints cuts, 12
on FDI, 305 free trade, core principles for, 257
women-owned firms, 133 labels, 320
Forest Carbon Partnership Facility, LCR in breach of, 263
233–45 LDC exports by 2020, double global
Forest Law Enforcement, Governance and share of, 43
Trade (FLEGT), 237–38, 242, 244 multilateral agreements, 257
Forestry Stewardship Council (FSC), protection of humans and animals from
234–35, 238 food-borne illness and other harmful
France substances, 321
bilateral aid for trade donors, 496 regional inequality and trade
cereals producer, top, 455 liberalization, 197
higher education, 354 services and intellectual property rights,
price transmission, 69 11
surplus grain to total grain output, 448, SPS Agreement, 321
455 TBT Agreement, 320
water transfers, cross-country, 308 Uruguay Round, 11, 320–21
free trade agreement (FTA). See General Agreement on Trade in Services
also North American Free Trade (GATS). See also tariffs and nontariff
Agreement (NAFTA) measures (NTMs)
Association of Southeast Asian Nations, Article VII, 367
192 Cuba and health services trade, 417–20
multilateral trade liberalization, 488 education services, 349–53
People’s Republic of China and Costa education services, GATS modes of
Rica, 209 supply and different provisions for,
People’s Republic of China and Peru, 349–50
209 flexibilities and the SDGs, 352–53
South–South trade, 488 health services mode 1: cross-border
US–Peru, 209 delivery, 405–6, 409, 412–13, 415
FSS. See Forestry Stewardship Council health services mode 2: consumption
FTA. See free trade agreement abroad, 405, 407, 409, 411–13, 415,
417, 421–22, 424–25, 427–28, 532
G health services mode 3: commercial
G20. See Group of 20 branch, subsidiary, franchise,
G20-OECD Framework for Disaster Risk affiliate, or joint venture involving
Management, 267 movement of capital, 405–6, 408,
Gambia, The, 77 411, 413–14, 425–27
GATS. See General Agreement on Trade health services mode 4: temporary
in Services cross-border mobility of service
GATT. See General Agreement on Tariffs providers, 406, 408–9, 411–12, 416,
and Trade 418, 425, 427, 429, 431
GDP. See gross domestic product higher education services, 350–51
gender equality, 118, 122–25, 129, 136, 279. India and exporting health services,
See also inequalities, reducing 426–28
548Index
Indonesia and health-care services trade facilitation programs and access to

imported, 425–26 online platforms to small firms, 476
Maghreb Region, Morocco and health transfer of ideas, research, management
tourism, 420–22 skills, 401
Thailand and medical tourism services, urbanization, radically changes process
422–24 of, 448
generalized system of preferences (GSP), wage gap increasing in developing
51 countries, 190–93
Germany wage inequality, 190
bilateral aid for trade donors, 496 within-country inequality, 183–89
price transmission, 69 global value chain (GVC)
Ghana capacity building, 516
health personnel, 418 consumers and producers, shared values
health products, high applied tariffs on, between, 328
382–83 domestic policies, international trade
tertiary education, 341–42 and investors, 267
trade liberalization, 77 education, cross-border, 347
GHG. See greenhouse gas education, tertiary, 347
Global Alliance for Trade Facilitation, 517 education services, 345–46
GlobalGAP, 226, 307, 326–27 fishery products, processed, 274
globalization global knowledge economy and GVC,
backlash, 1 345–47
climatic disruptions, 301 global production changes, 153
cross-border investment flows, 401 global shocks, OECD definition of, 267
equality and, 4 global trade of more than $20 trillion, 345
European Globalization Adjustment inclusion of small producers into GVC,
Fund (EGF), 165 517
fishing, illegal and unreported, 272 inclusive growth, 501
foreign direct investment and, 176 large firms designed tailor-made
global inequality, 182–83 liberalization, 12
growing inequality and, 6 logistics networks, streamlined
health professionals and patients international, 263
mobility across borders, 401 MDG Trade Task Force report, 19
of health services, 405 multilateral trade negotiations, 19
health services and trade, 401 post-2008 trade growth slowdown,
ICT to deliver cross-border services, 401 38–41
increased trade and lower barriers to power relationships between actors, 329
trade, 142 reexport phenomenon, 274
inequalities in developing countries, 177 SMEs in developing countries, 516
inequality worsened by, 6–7 SMEs’ participation, 346–47
job losses and job creation, 154 standards and labels, 532
major force shaping economies, 139 telecommunications, international, 34
middle class, 340 TIVA database, identifying vulnerability
performance of the labor market and, to shocks with, 267
149 trade patterns and more countries
population urbanization and urban engaged in trade, 119
concentration, 460 vector for norm dissemination, 533–34
regional inequality, 195–98 WTO negotiations by tailor-made
regions hard hit by import competition, liberalization with GVC, 12
169 youth population, 337–38
role of trade and, 97 greenhouse gas (GHG). See also climate
safety and environmental concerns, 317 change and trade
skilled labor, availability of, 344 climate change mitigation and
subsistence producers and, 88 adaptation measures, 283
Index549
Emissions Trading System (ETS), 255 health services, mode-wise trade in,
forestation and forest degradation, 405–11
232–33 health services and SDGs, 402–5
GHG emissions and trade, 253–57 health services trade, modalities and
international trade contributes to GHG, implications of, 405–16
5 India, 426–28
SDGs and GHG reduction, 252 Indonesia, 425–26
technologies important for addressing Maghreb Region, 420–22
GHG, 260 mode 1: cross-border supply, 405–6, 409,
trade and climate change, 252 412–13, 415
gross domestic product (GDP) mode 2: consumption abroad, 405, 407,
average annual growth rate of per capita 409, 411–13, 415, 417, 421–22, 424–25,
GDP, 33 427–28
education spending, tertiary, 341 mode 3: commercial presence, 411,
GDP growth before and after trade 413–14, 425–27
liberalization, 468 mode 4: presence of natural persons,
global financial crisis, 34 411–12, 416, 418, 425, 427, 429, 431
international trade’s effect on Thailand, 422–24
population urbanization, 444 heavily indebted poor countries (HIPC),
LPI logistics competence index, 392 22, 518
Murray-Darling basin’s economic HIPC. See heavily indebted poor
activities, 309 countries
nonagricultural employment, persons HIV/AIDS, 376
employed in informal sector of, 143 Hong Kong, China
poverty reduction, 73 education students, distance, 360
SDG 11, 299 globalization and within-country
trade–GDP ratios and Gini Index for inequality, 186
selected East Asian countries, 184 income inequality and share of trade to
trade–gross domestic product ratios GDP, 186
(%), 176 manufacturing firms shifted, 160–61
water shortage reduces world’s GDP, PRC trade-induced effects on
295 employment, 160
working poverty rate and labor students studying wholly overseas, 360
productivity rates, 143 trade and investment by the PRC, 160
Group of 20 (G20), 240, 267, 534–36 WTO Ministerial (2015), 8, 12, 19, 51,
GSP. See generalized system of 104–5, 490
preferences HS. See Harmonized System
GTS. See Working Group on Soy hunger, zero
GVC. See global value chain aquaculture production, 283
fish trade, 277, 279, 282
H MDG, 140–41
Harmonized System (HS) SDG 2, 41, 58, 87–88, 111, 275, 278
bulk water, customs classify, 308 SDG 14, 272
health products, 377
non-environmental uses of goods, 260 I
health and well-being, good IBC. See international branch campus
SDG 3, 43, 58, 402–3 Iceland, 341
health services and trade ICT. See Information and communication
Cuba, 417–20 technology
developing country experiences, 416–17 IEA. See International Energy Agency
developmental implications: potential IISD. See International Institute for
negatives, 414–16 Sustainable Development
developmental implications: potential illegal, unreported, and unregulated
positives, 411–13 fishing (IUU), 273, 279–80, 284–86
550Index
ILO. See International Labour inequality, global, 177–83

Organization inequality, regional, 195–98
India inequality, wage, 190–95
business process outsourcing, 154 trade–GDP ratios and Gini Index for
education opportunities abroad, 354 selected East Asian countries, 184
fisheries exports, 274 wage gap in developing countries:
Gini coefficient, 184 theoretical explanations, 190–92
globalization and within-country Information and communication
inequality, 186 technology (ICT), 34, 359–61
health products, high applied tariffs on, international branch campus (IBC), 343,
382-83 352, 357, 358–60
health services, mode 3, 408 International Chamber of Commerce, 517
health services and trade, 426–28 International Consortium on Combatting
income and consumption inequality, 187 Wildlife Crime, 216
income inequality and share of trade to International Energy Agency (IEA), 255
GDP, 186 International Finance Corporation (IFC),
inequality, increases in, 175 519
insulin producer, off-patent, 394–95 International Institute for Sustainable
international branch campuses (IBCs), Development (IISD), 223–25
358 International Labour Organization (ILO),
nonagricultural employment, persons 118, 137, 145
employed in informal sector of, 143 International Office of Epizootics, 321
regional inequality, 196–97 International Organization of Standards
virtual water exporters and importers, (ISO), 321
309 International Plant Protection
water scarcity, 311 Convention, 321
Indonesia International Trade Centre (ITC), 219–20,
fisheries exports, 274 222–23, 225, 246, 387, 399
Gini coefficient, 184 International Union for Conservation of
health-care services, importer of, 425–26 Nature and Natural Resources (IUCN),
health services, mode 3, 408 219
health services and trade, 425–26 INTERPOL, 215–16, 246
higher education, low public funding Iran, 382
for, 341 ISO. See International Organization of
large population and many poor Standards
households, 34 Israel, 323
nonagricultural employment, persons Italy, 162, 341–42
employed in informal sector of, 143 ITC. See International Trade Centre
regional inequality, 198 IUCN. See International Union for
tertiary education, 341 Conservation of Nature and Natural
trade–GDP ratio decline, 143 Resources
UN Environment Programme Financial IUU fishing. See illegal, unreported, and
Initiative, 231 unregulated fishing
women in the labor force, 129
industry, innovation, and infrastructure J
SDG 9, 42, 58, 500–502 Japan
inequalities, reducing. See also gender agricultural products are highly
equality protected, 91
SDG 10, 42, 58, 278 bilateral aid for trade donors, 496
inequality and trade earthquake and tsunami (2011), 267
income inequality, within-country, fish and fish products imports, 272, 275
183–89 foreign students, 339–40
inequality, developing vs. developed Global 30 Project, 339–40
countries, 178–82 land endowments for agriculture, 90, 111
Index551
private education, 341 M

Trans-Pacific Partnership (TPP), 538 Maghreb region, Morocco, 420–22
US and Japan trade of cars, compact Malawi, 77
trucks, and heavy motorcycles, 70 Malaysia
virtual water exporters and importers, education services, 358
310 education students, distance, 360
foreign education and middle class
L families, 340
LDCs. See least developed countries forest area, FSC and PEFC certified, 235
least developed countries (LDCs) Gini coefficient, 184
Aid for trade, 489 health services, mode 3, 408
aid-for-trade assistance, 493 income inequality declined, 187
aid in financing development, 7 industrialization, capital- and
DAC recommendation unties ODA and technology-intensive, 187
LDC, 518 international branch campuses (IBCs),
duty-free, quota-free (DFQF), 35 358
education and internet access, 345 middle-income country, 188, 340
education professionals, shortage of, 364 nonagricultural employment, persons
Enhanced Integrated Framework (EIF), employed in informal sector of, 143
491 “regional hubs” for international
fisheries share in total exports for top students, attracting foreign
LDCs and SIDS exporters, 274 universities to create, 358
health financing and recruitment, trade–GDP ratio decline, 184
development, training, and retention water exported to Singapore, 305
of health workforce, 403 women in the labor force, 129
health products, high tariffs on, 383 Manual on Services of International Trade
MDG Target 8.B: address special needs in Services (MSITS), 409
of, 22 marine ecosystems. See also oceans, seas,
preferential trade agreements, 35 and marine resources, sustainably use of
SDG 8, 489 SDG 14, 275
SDG 9, 501–2 massive open online course (MOOC), 360,
SDG 17, 25–26 361, 368, 370
SDG’s, first of 17, 61–62 MDG Gap Reports. See also Doha Round;
SDG trade indicators, 534 Millennium Development Goals
supply issues in, 19 (MDGs)
trade as target 13 for LDCs, 12 international trade realities, out of touch
trade liberalization, 364 with, 19
water crisis, 295 MDG Trade Task Force report, 19–20
WTO Ministerial Conference (2005), 8, “mega” PTAs omitted by, 9–10, 25
12, 19, 51, 490 reports, missed opportunity and
low-carbon “revealed” preferences, 14, 17–20
Aligning Policies for a Low-Carbon reports failed to bridge MDGs and
Economy, 252 SDGs, 9–10
energy and transport infrastructure, 508 trade, climate, and water communities,
goods, 257, 264 20
industries, 5, 258 WTO and PTAs, 19
power generation equipment, 261 WTO negotiations and uninspired, 27
prices, 234 MDGs. See Millennium Development
production and environmental goods Goals
and services, 489, 524 medical products and pharmaceuticals
standards, 508 case study 1: vaccines, 392
transition, 258, 261, 263–65 case study 2: insulin, 393–397
transportation systems, 509 health products, international trade of,
LPI logistics competence index, 392 378–89
552Index
health products, tariffs on, 379–86 WASH goal and universal access to
health products, trade and trade policies water, 295
in, 376–77 welfare of people and the developing
Mercosur, 67–68 world improved, 139–40
Mexico MOOC. See massive open online course
domestic markets poorly most favored nation (MFN)
interconnected, 70 GATS and educational services, 349
emerging markets, 275 GATT, Article XI, 320
globalization adjustment fund, 165 tariffs, 51, 380
globalization and within-country WTO, multilateral agreements under, 257
inequality, 186 MSITS. See Manual on Services of
health services, joint ventures in, 419 International Trade in Services
higher food prices and poverty, 99
income inequality and share of trade to N
GDP, 186 NAFTA. See North American Free Trade
MDG preparatory phase, 15 Agreement
NAFTA, 67 Nairobi Ministerial Declaration, 104
tertiary education, 341 Nationally Determined Contributions
Trade Adjustment Assistance program, (NDCs), 255
165 NEG. See new economic geography
trade growth driven by international Netherlands, 162, 230, 341, 492, 538
supply chains, 38–39 new economic geography (NEG), 441–42,
Trump and “unfair” trade practices, 463
538 New York Declaration on Forests, 232
wage inequality, 190 New Zealand, 97, 343
MFN. See most favored nation NGO. See nongovernment organization
Millennium Development Goals Nigeria
(MDGs). See also MDG Gap Reports; distance education students, 360
Sustainable Development Goals national trade costs, 476
(SDGs); trade’s role: from MDGs to Nigeria Living Standards Survey, 76
SDGs pharmaceutical products, bans import of
eight goals and twenty-one targets, 21, 22 various, 387–88
health services, 402 poorest households vs. richer
MDG and SDG, production process households, 76–77
differences, 14–20 students studying wholly overseas, 360
MDG and SDG outputs: targets and nongovernment organization (NGO)
indicators, 20–26 aid-for-trade programs, 519
MDG Gap reports failed to bridge anti-free-trade NGOs, 11
MDGs and SDGs, 9–10 CITES and conservation, 218–19
MDG output, 20–22 environmental and developmental
MDG preparation phase: pro-trade NGOs, 229
agenda, 10–12 environmental NGOs, 228–29, 234
MDG preparatory phase, 14–16 fisheries share in total exports for top
MDG production process: 16, 20–21 LDCs and SIDS exporters, 274
MDG targets 8.A and 8.B, 22 forest sustainability, 222
MDG Trade Task Force report, 15, GATS Article VII, 367
19–21 labels and food safety guidelines, 328
poor countries, aid perspective MDG production process: the inputs, 16
targeting, 9 OECD countries, 11
primary education, 337 sanitary and phytosanitary (SPS), 288
SDGs vs. MDGs, 9 Save The Rhino, 216
social sector focus, 498 standards, certification, and capacity
trade issues, SDGs vs. MDGs, 6 building, 226
UN approval in 2000, 296, 298 standards used by private actors, 212
Index553
subsidies, trade-distorting, capacity- health products, 6, 379, 391, 397

enhancing, and inequality investment, policies that impede, 52
generating, 280 investment and services trade, 43
sustainability initiatives, 211 market access for developing countries,
sustainability standards, 236 42–43
sustainable use, trade-related initiatives pharmaceuticals and other medical
for, 239 products, 2
targets to cut forest loss and restore pharmaceutical sector, 388
degraded forests, 232 SDG 15 and, 208
tariffs and nontariff measures (NTMs), tariffs and NTB, 288–89
387 tracking performance, 534–35
Technical Barriers to Trade (TBT), 288 trade cost reductions, 45, 50
trade facilitation agreement for trade-impeding effects of NTB, 51
environmentally sensitive goods and North American Free Trade Agreement
relevant services, 241 (NAFTA). See also free trade
voluntary sustainability standards (VSS), agreement (FTA)
222, 239, 242 Canada and clause to “protect” its
World Wildlife Federation and freshwater from exports, 308
Greenpeace, 229 Canada–US Free Trade Agreement
WTO, multilateral agreements under, (1994), 159
257 compliance mechanism, 166
nontariff barriers (NTBs). See also dispute mechanism, 166
Technical Barriers to Trade (TBT formal employment increased vs.
Agreement) informal employment and self-
climate change, hamper, 2 employment, 162
on developing countries, 323 Mexico, trade liberalization, wage
environmental goods, 2, 260 increases, and employment of
exports, developing vs. developed women, 128
countries, 318 Mexico and unemployment, 159, 197
fisheries and aquaculture fish products, trade liberalization and changes in
288–89 regional inequality, 197
fisheries trade, international, 288 trade liberalization and sustained
labeling and food safety regulations, 6, underperformance of the southern
318 US states, 198
marine ecosystem and employment, 277 US job losses, 159
medicines and other health products, NTBs. See nontariff barriers
531–32 NTM. See nontariff measure
sanitary and phytosanitary measures, NTM-Map database, 388–89. See also
321–25 Trade Analysis Information System
service sector, 155 NTMs. See tariffs and nontariff measures
supply chain and market-based price,
532 O
trade effects of, 317–19 oceans, seas, and marine resources,
trade effects of NTB, 317–19 sustainably use of. See also marine
trade gains, stymied potential, 6 ecosystems
trade restrictions, 6, 277 SDG 14, 42, 58, 272, 275, 278, 280, 508
trade restrictiveness of, 321 OECD. See Organisation for Economic
nontariff measure (NTM) Co-operation and Development
conformity assessment segment of VSS, Open Working Group (OWG). See also
227 Sustainable Development Goals (SDGs)
cost reduction, 52 SDG output: goals and targets, 22–25
“development products,” like medicines, SDG preparatory phase, 16–17
vaccines, medical supplies, 531 Organisation for Economic Co-operation
export market access barriers, 45 and Development (OECD)
554Index
Aid for trade, 51 People’s Republic of China (PRC)

aid-for-trade, case stories, 496–97 agricultural land endowments, 90
aid-for-trade for green growth, 508 animal products, demand for, 90–91
Aligning Policies for a Low-Carbon antidumping and countervailing duties
Economy, 252 on US polysilicon precursors, 258
climate change and global value chains Apple iPhone, 153
(GVCs), 267 cereals trade role in population
Creditor Reporting System (CRS), 492 urbanization, 7
Environmental Goods Agreement, 260 development assistance, major source
environmental labeling and information of, 511–12
schemes (ELIS), 222–23 droughts and water shortages, 295
Guidelines for Quality Provisions in education opportunities abroad, 354
Cross-Border Higher Education, 366 education services, 358
OECD Development Assistance education students, distance, 360
Committee (DAC), 510 emerging markets, 275
OECD Principles for Country Risk fish and fish products imports, 272, 275
Management, 267 fisheries exports, 274
post-crisis response by OECD countries foreign direct investment in developing
included low interest rates and countries, 513
unconventional monetary policy, 511 foreign education and middle class
Principles for Country Risk families, 340
Management, 267 forest area, FSC and PEFC certified, 235
pro-trade agenda, 11 globalization and within-country
R&D professionals from the developing inequality, 186
world in OECD countries, 356 global trade growth rates, high, 32
services trade policies, monitoring, 49 income inequality and share of trade to
Services Trade Restrictiveness Index GDP, 186
(STRI), 264–65 inequality, increases in, 175
sustainability and consumers survey, 224 insulin producer, off-patent, 394–95
TFA for environmentally sensitive goods international branch campuses (IBCs),
and relevant services, 241 358
TIVA database, identifying vulnerability natural resources from Africa and Latin
to shocks with, 267 America, 32
OWG. See Open Working Group net export of cereals in, 459
regional inequality, 196–97
P resource exporting countries, 511
Pakistan TBT notifications, 323
education students, distance, 360 telediagnostic services, 406
health products, high applied tariffs on, trade agreement between PRC and
382–83 Costa Rica, 209
higher education, low public funding trade agreement between PRC and Peru,
for, 341 209
large population and many poor Trump and “unfair” trade practices,
households, 34 538
nonagricultural employment, persons urbanization, constraints of domestic
employed in informal sector of, 143 grain surplus on, 446, 457–58
pharmaceuticals, protection measures US antidumping and countervailing
against foreign, 391 duties on solar panels, 258
students studying wholly overseas, 360 US–People’s Republic of China (PRC)
tertiary education, 341 duopoly, 10
partnership for sustainable development, water availability, shifting climate
global patterns are impacting, 295
PEFC. See Programme for the Peru
Endorsement of Forest Certification Exporta Fácil, 475
Index555
People’s Republic of China and Peru private sustainability standards (PSS),

Trade Agreement, 209 212, 226, 273, 532. See also voluntary
UN Environment Programme Financial sustainability standards (VSS)
Initiative, 231 Programme for the Endorsement of Forest
US–Peru Free Trade Agreement, 209 Certification (PEFC), 234–35, 238, 248
US–Peru Trade Promotion Agreement, PSS. See private sustainability standards
237 PTA. See preferential trade agreement
vicuña population, 218
Philippines, The Q
business process outsourcing, 154 quantity-based SSM (Q-SSM), 109–10
Gini coefficient, 184
large population and many poor R
households, 34 RCA. See revealed comparative advantage
nonagricultural employment, persons R&D. See research and development
employed in informal sector of, 143 Reducing Emissions from Deforestation
trade–GDP ratio decline, 184 and Forest Degradation (REDD+), 231,
worker migration, 156 233–34, 238, 240–41
poverty reduction regional trade agreement (RTA)
anti-poverty and anti-hunger SDGs, 277 bilateral or plurilateral trade and
aquaculture production, 283 investment agreements, 259
fish trade, 277, 279, 282 interrelationships between trade and
SDG 1, 41, 58, 275, 278, 375, 403, 500–501 growth and environmental effects,
poverty reduction and trade 209–10
issues, additional, 71–73 rules agreed to bilaterally or
mechanisms, illustrating the, 74–76 plurilaterally through RTA, 257
net consumers and net producers, 63–65 TPP, the TTIP, and the African TFTA, 289
price transmission, 69–71 trade and trade-induced growth
trade and complementary policies, detrimental for the environment, 208
80–81 trade cost estimates broken down into
trade and poverty: microeconomic their determinants, 49
mechanisms, 63–76 trade in fish and fish products, 287
trade liberalization and poverty, 76–80 unilateral IUU trade measures linked
wage income and prices of non-traded in a cohesive network with broad
goods, 65–69 country coverage, 285
PRC. See People’s Republic of China US–Peru Trade Promotion Agreement,
preferential trade agreement (PTA) 237
education professionals, facilitate renewable energy, 261, 264, 509
mobility of, 359 Republic of Korea
education services, trade in, 361–64 agricultural land endowments, 90, 111
Gap Reports, “mega” PTAs omitted by, agricultural products are highly
9–10, 25 protected, 91
higher education, WTO member education opportunities abroad, 354
commitments in, 361 health products import duties, 383
international framework governing land endowments for agriculture, 90
trade, 338 private education, 341
private higher education in PTAs, 168 tertiary education, 341
commitments for, 362 trade and investment by the PRC, 160
restrictions, 361 research and development (R&D)
tariffs for firms are often zero, 35 agricultural products exports, 91
trade in services, 131 PTAs covering, competition from imports may induce
361 R&D, 192
WTO, 37 horizontal FDI and, 344
WTO and PTA, complementarities technology and innovation transfers,
between, 19 304–6
556Index
of US imports vs. exports, 152 South Africa, 80, 295

Viet Nam traditional medicine producer, special and differential treatment (SDT)
221 aid for trade and trade agreements, 51
complementary policies, 533–34 core element that developing countries
performance, tracking, 534–37 historically pursued in UNCTAD
Research Institute of Organic Culture and WTO, 51
(FiBL), 223, 225 SDG 10, 42
revealed comparative advantage (RCA), 152 Special Safeguard Mechanism (SSM), 89,
Rio Earth Summit, 214 98, 104–5
RTA. See regional trade agreement SPS. See sanitary and phytosanitary
Russian Federation Sri Lanka, 143, 408
cereals producer, top, 455 SSM. See Special Safeguard Mechanism
emerging markets, 275 STRI. See Services Trade Restrictiveness
insulin producer, off-patent, 394–95 Index
Sustainable Development Goals (SDGs). See
S also Millennium Development Goals
sanitary and phytosanitary (SPS) (MDGs); Open Working Group (OWG);
aid-for-trade policy and trade capacity trade’s role: from MDGs to SDGs
building, 505 aid for trade and, 497–500
NTM-Map database distinguishes five anti-poverty and anti-hunger, 277
types of NTMs, 388–89 complementary policies of developing
OECD and water infrastructure, 307 and developed countries, 533–34
TBT agreement, and SPS measures, development efforts guide to 2030 time
321–25 horizon, 1
WTO agreements on TBT and, 288, 320 education and health services, 532
WTO standards on TBT and, 92 education services modes of supply and,
Saudi Arabia, 295–96 354–61
SBTC. See skill-biased technological education services trade and SDGs,
change regulatory challenges of, 364
SDGs. See Sustainable Development Goals employment in the SDGs, 146
SDT. See special and differential treatment end poverty in all its forms everywhere
Services Trade Restrictiveness Index (SDG 1), 61–62
(STRI), 264–65, fishery trade measures and policy
SIDS. See small island developing states options, 284–89
Singapore fish trade and SDGs, 278–83
education students, distance, 360 GATS flexibilities and SDGs, 352–53
“regional hubs” for international GHG reduction and SDGs, 252
students, attracting foreign health services and SDGs, 402–5
universities to create, 358 human development and protection of
students studying wholly overseas, 360 planet earth, xv
water imported from Malaysia, joint obligation of developed and
dependence on, 305 developing countries, 539
women in the labor force, 129 output: SDG goals and targets, 22–25
skill-biased technological change (SBTC), output: SDG indicators in trade matters,
192–95 25–26
small island developing states (SIDS) SDG 1: End poverty in all its forms
fisheries share in total exports for top everywhere, 41, 58, 61–62, 275, 278,
LDCs and SIDS exporters, 274 375, 403, 500–501
SDG 9, 501 SDG 2: End hunger, achieve food
SDGs 17.12, 26 security and improved nutrition, and
tracking performance with indicators, promote sustainable agriculture, 41,
534 58, 87–88, 111, 278
societies, peaceful, and inclusive SDG 2.4: Double agricultural
SDG 16, 2, 58 productivity by 2030, 504
Index557
SDG 3: Ensure healthy lives and SDG 14.6: Prohibit certain fish subsidies,
promote well-being for all at all ages, 231
43, 58, 402–3 SDG 15: Protect, restore, and promote
SDG 3.8: Health services trade, 403 sustainable use of terrestrial
SDG 4: Ensure inclusive and equitable ecosystems, sustainably manage
quality education and promote forests, combat desertification, halt
lifelong learning opportunities for and reverse land degradation and
all, 43, 58 halt biodiversity loss, 58, 207–8,
SDG 5: Achieve gender equality and 210–13, 229, 231–32
empower all women and girls, 58, SDG 15.a: Mobilize and increase
278, 507 financial resources to conserve and
SDG 6: Ensure availability and sustainably use biodiversity and
sustainable management of water ecosystems, 210, 213–14, 251
and sanitation for all, 58 SDG 15.b: Mobilize resources to finance
SDG 7: Ensure access to affordable, sustainable forest management and
reliable, sustainable, and modern provide incentives to developing
energy for all, 58, 502 countries for management, including
SDG 8: Promote sustained, inclusive conservation and reforestation, 210,
and sustainable economic growth, 232, 251
full and productive employment SDG 15.c: Enhance global support to
and decent work for all, 41, 58, 403, combat poaching and trafficking of
489, 500 protected species, and increase local
SDG 8.9: Sustainable tourism creates communities capacity to pursue
jobs and promotes local cultures and sustainable livelihood opportunities,
products, 504 251
SDG 8.10: Strengthen domestic financial SDG 15.1: Ensure conservation,
institutions to encourage and expand restoration and sustainable use of
access to banking, insurance, and terrestrial and inland freshwater
financial services, 504 ecosystems and their services, 207,
SDG 9: Build resilient infrastructure, 213, 232, 250
promote inclusive and sustainable SDG 15.2: Promote sustainable
industrialization and foster management of forests, halt
innovation, 42, 58, 500–502 deforestation, restore degraded
SDG 10: Reduce inequality within and forests and increase afforestation
among countries, 42, 58, 278 and reforestation, 207, 232, 250
SDG 11: Make cities and human SDG 15.3: By 2030, combat
settlements inclusive, safe, resilient desertification, restore degraded
and sustainable, 58 land and soil, including land
SDG 12: Ensure sustainable affected by desertification, drought
consumption and production and floods; and strive for a land
patterns, 58, 278 degradation-neutral world, 207, 260
SDG 12.c: Rationalize inefficient fossil SDG 15.4: By 2030, ensure the
fuel subsidies, 231, 317 conservation of mountain
SDG 12.6.1: Number of companies ecosystems, including their
publishing sustainability reports, biodiversity, in order to enhance
23 their capacity to provide benefits
SDG 13: Take urgent action to combat that are essential for sustainable
climate change and its impacts, 5, 58, development, 207, 250
252, 508 SDG 15.5: Take urgent and significant
SDG 14: Conserve and sustainably action to reduce the degradation
use the oceans, seas and marine of natural habitats, halt the loss of
resources for sustainable biodiversity and, by 2020, protect
development, 42, 58, 272, 275, 278, and prevent the extinction of
280, 508 threatened species, 207, 250
558Index
SDG 15.6: Promote fair and equitable SDG 17.12: Realize timely
sharing of the benefits arising from implementation of duty-free and
the utilization of genetic resources quota-free market access on a
and promote appropriate access to lasting basis for all least developed
such resources, as internationally countries, consistent with WTO
agreed, 25, 207 decisions, including by ensuring
SDG 15.7: Take urgent action to end that preferential rules of origin
poaching and trafficking of protected applicable to imports from LDCs
species of flora and fauna and are transparent and simple, and
address both demand and supply of contribute to facilitating market
illegal wildlife products, 207, 250 access, 25–26
SDG 15.8: By 2020, introduce measures SDG 17.12.1: Average tariffs faced by
to prevent the introduction and developing countries, LDCs and
significantly reduce the impact of SIDS, 26
invasive alien species on land and SDG 17.14: Enhance policy coherence for
water ecosystems and control or sustainable development, 231
eradicate the priority species, 207, SDG 17.15: Respecting each country’s
250 policy space and leadership to
SDG 15.9: By 2020, integrate ecosystem establish and implement policies for
and biodiversity values into poverty eradication and sustainable
national and local planning, development, 42
development processes, poverty SDG and MDG, differences in
reduction strategies and accounts, production processes of, 14–20
207, 250 SDG and MDG outputs: targets and
SDG 16: Promote peaceful and indicators, 20–26
inclusive societies for sustainable SDG output: goals and targets, 22–25
development; provide access to SDG output: indicators in trade matters,
justice for all; and build effective, 25–26
accountable and inclusive SDG preparatory phase, 16–17
institutions at all levels, 2, 58 SDGs and targets, trade policy and
SDG 16.8: Strengthen participation of trade-related measures referenced
developing countries in institutions in, 41–42
of global governance, 505 SDGs lack of interest in trade, 1, 12–13
SDG 17: Strengthen the means of 17 goals and 169 associated targets, 1, 17
implementation and revitalize the targets (169) to be implemented by both
global partnership for sustainable developing and developed countries,
development, 42, 58, 231 xv
SDG 17.10: Promote a universal, rules- trade can contribute to achieving the
based, open, non-discriminatory and SDGs, 1–2
equitable multilateral trading system trade indicators, 534
under the WTO, including through trade issues, SDGs vs. MDGs interest
the conclusion of negotiations under in, 9
its Doha Development Agenda, trade linkages of all 17 SDGs, 2
25–26, 42 trade measurement, performance
SDG 17.10 is rewording of MDG, 25 tracking, and evaluation, 534–37
SDG 17.10.1: Worldwide weighted tariff trade measures and policy options
average, 25–26 supporting SDGs, 284–89
SDG 17.11: Significantly increase the UN defined and addressed a wider
exports of developing countries, agenda than MDGs, 9
with a view to doubling the least water agenda, 296–301
developed countries’ share of global
exports by 2020, 25–26, 42 T
SDG 17.11.1: Developing countries’ and Taipei,China, 119, 130, 160, 302, 406
least developed countries’ share of tariffs and nontariff measures (NTMs)
global exports, 26 about, 288–89
Index559
countries in non-emergency situations about, 388–89, 535

with serious development needs, WITS-TRAINS, 122
531 trade and GHG emissions, 253–57
direct development implications, 530 trade and post-2015 development agenda
health products, high applied tariffs on, Aid For trade, implications for, 51–52
383 global value chains and post-2008 trade
health products, tariffs on, 379–86 growth slowdown, 38–40
health products such as growth, trade, and trade policy, 33–38
pharmaceuticals, vaccines, and the 17 SDGs, 58
medical equipment, 6 sustainable development and trade,
Technical Barriers to Trade (TBT 41–44
Agreement). See also nontariff barriers trade cost indicators as a focal point for
(NTBs); World Trade Organization using trade for development, 48–50
(WTO) trade for development, leveraging,
aid-for-trade, 505 44–48
aid for Trade and water infrastructure, Trade Facilitation Agreement (TFA)
307 developing countries, 242
EU and TBT notifications, 323 health-related products, improved
labels and food safety regulations in handling of, 6, 397
trade, 320–21 trade cost reduction agenda using trade
nongovernment organization (NGO), cost indicators, 50
288 trade costs and supply chain frictions, 50
notifications by development status Trade Facilitation Agreement for
(1995–2015), new, 323 Environmentally Sensitive Products,
NTM-Map database, 388–89 5, 241–42
SDG 16.8, 505 Trade in Services Agreement (TiSA),
TBT Agreement, and SPS measures, 303–04
321–25 Trade-Related Aspects of Intellectual
WTO agreements on TBT and SPS, 259, Property Rights (TRIPS Agreement),
288, 320 376
WTO standards on TBT and SPS, 92 trade’s role: from MDGs to SDGs. See
terrestrial ecosystems also Millennium Development Goals
SDG 15, 58, 207–8, 210–13, 229, 231–32 (MDGs); Sustainable Development
TFA. See Trade Facilitation Agreement Goals (SDGs)
TFTA. See Tripartite Free Trade Area MDG 8 Gap Reports: missed
Thailand opportunity and “revealed”
climate change and flooding, 267 preferences, 14, 17–20
fisheries exports, 274 MDG and SDG, production process
foreign education and middle class differences, 14–20
families, 340 MDG and SDG outputs: targets and
Gini coefficient, 184 indicators, 20–26
health services and trade, 422–24 MDG preparation phase: pro-trade
medical tourism services, 422–24 agenda, 10–12, 14–16
nonagricultural employment, persons SDG output: goals and targets, 22–25
employed in informal sector of, 143 SDG output: indicators in trade matters,
Socio-Economic Survey, 64 25–26
TiSA. See Trade in Services Agreement SDG preparatory phase, 16–17
TPP. See Trans-Pacific Partnership SDGs preparation: lack of interest in
trade, infrastructure, and development trade, 12–13
infrastructure, national vs. international, TRAINS. See Trade Analysis Information
476–82 System
infrastructure, role of, 471–76 Transatlantic Trade and Investment
Trade Analysis Information System Partnership (TTIP), 161–62, 285, 289
(TRAINS). See also NTM-Map Trans-Pacific Partnership (TPP)
database behind-the-border measures, 289
560Index
fisheries, local and national, 278 government-dependent institutions

IUU platforms in, 285 with commercial linkages, 343
Trump pulled US out of the agreement, health services, mode 3, 408
537–38 higher education, foreign direct
unemployment rate expected to fall for investment for, 343
all countries, 162 Independent Commission for
United States, 19, 538 Aid Impact Assessment of the
Tripartite Free Trade Area (TFTA), 285, Department for International
289 Development, 515
TRIPS Agreement. See Trade-Related international branch campuses (IBCs),
Aspects of Intellectual Property Rights 343
TTIP. See Transatlantic Trade and international students, higher fee-
Investment Partnership paying, 343
Turkey, 38–39, 143, 341 Overseas Development Institute, 231
price transmission, 69
U private education, 341
UEBT. See Union for Ethical BioTrade public universities and revenue-
Uganda, 77 generating activities, 343
Ukraine, 418 students, international, 358
UN. See United Nations United Nations (UN). See also Food and
UN Climate Summit (Sept. 2014), 232 Agriculture Organization (FAO);
UN Conference on Trade and Millennium Development Goals
Development (UNCTAD). See also (MDGs); Sustainable Development
Trade Analysis Information System Goals (SDGs)
(TRAINS) Addis Ababa Action Agenda of the
BioTrade Initiative, 220–21, 240 Third International Conference on
OECD and vulnerability to shocks Financing for Development, 57, 489
identified with TIVA database, 267 Framework Convention on Climate
regulatory activities of CITES, UNCTAD Change, 252
complements, 219 Istanbul Programme of Action, 43, 56
UN Economic and Social Commission for Office on Drugs and Crime, 216
Asia and the Pacific (UNESCAP), 49, poverty eradication goal, 61–62, 81
51, 535 SDGs adopted 2015 by UN members,
UN Environment Programme Financial xv, 41
Initiative, 231 trade policy and trade-related measures
UNESCAP. See UN Economic and Social referenced in SDGs and targets,
Commission for Asia and the Pacific 41–42
UNESCAP–World Bank Trade Costs 2030 Agenda for Sustainable
Database, 49, 535 Development, 41
UNESCO. See United Nations World Food Summit, 87
Educational, Scientific and Cultural United Nations Educational, Scientific
Organization and Cultural Organization (UNESCO)
UN Forum on Sustainability Standards education, ensuring quality, 365, 366
(UNFSS), 224–26228–29, 249. See also education, public vs. private expenditure
voluntary sustainability standards (VSS) on, 351
UN Framework Convention on Climate Guidelines for Quality Provisions in
Change, 233, 252 Cross-Border Higher Education, 366
Unilever, 230, 236 United States (US). See also Trans-Pacific
Union for Ethical BioTrade (UEBT), 219, Partnership (TPP)
221–22 agricultural land endowments, 90
United Kingdom (UK) antidumping and countervailing duties,
backlash against trade, 537 258
bilateral aid for trade donors, 496 Bangladesh exports to, 42
education abroad, 354, 360 bilateral aid for trade donors, 496
Index561
cereals producer, top, 455 fisheries exports, 274

CITES, 218–19 Gini coefficient, 184
droughts and water shortages, 295 Trans-Pacific Partnership, 538
education opportunities abroad, 354 Volkswagen (VW), 27–28
environmental assessments, 208 Voluntary Partnership Agreement (VPA),
exporters pay higher wages, 128 237–39, 242
fish and fish products imports, 272, 275 voluntary sustainability standards
gap between the rich and the poor, 175 (VSS), 4, 212, 222–27. See also private
national trade costs, 476 sustainability standards (PSS)
organic labeling, 319 VPA. See Voluntary Partnership
price transmission, 69 Agreement
private education, 341 VSS. See voluntary sustainability
public universities and revenue- standards
generating activities, 343 VW. See Volkswagen
social welfare system issues, 538
students, international, 358 W
surplus grain to total grain output, 448, WASH. See Water Access, Hygiene and
455 Sanitation
TBT notifications, 323 Washington Convention (1976), 211
telediagnostic, surveillance, and Water Access, Hygiene and Sanitation
consultation services, 406 (WASH), 294–96, 300
tertiary education, 341 water and sanitation, 58, 298
Trade Adjustment Assistance, 164, 538 SDG 6, 58
trade backlash, 537–38 water and trade
trade of cars, compact trucks, and heavy direct effect: bridging water services,
motorcycles, 70 infrastructure, and technology gaps,
Trans-Pacific Partnership, 537–38 301–7
Trump and “unfair” trade practices, 538 SDGs better water agenda, 296–301
US–People’s Republic of China (PRC), 10 technology and innovation transfers,
US–Soviet Union relationship, 10 304–6
United States Lacey Act, 237 trade and infrastructure, 306–7
United States–Peru Trade Promotion trade in water services, 301–4
Agreement, 209, 237 virtual water indirect effect, 307–9
UN Millennium Project (2005), 490 virtual water: trade in goods as solution
urbanization and trade to water scarcity, 309–13
cereals trade–population urbanization WHO. See World Health Organization
framework, 446–50 women and trade
literature review, 441–45 empirical evidence, 127–28
PRC vs. India, 457–59 literature, findings from previous,
trade–population urbanization, nexus 128–30
of, 446–59 women consumers, 121–23
urban concentration, urban primacy, women cross-border traders, informal,
and international trade, 441–44 127
urbanization, effect of international women-owned businesses, 126, 133
trade on population, 444–45 women workers, 123–26
Uruguay, 419, 474 World Bank Enterprise Surveys, 130–34
Uruguay Round, 10–11, 104, 109–10, 317, Working Group on Soy (GTS), 229–30,
320–21 242
US. See United States World Bank. See also Technical Barriers to
USAID, 495–96 Trade (TBT)
V Aid for Trade Initiative and private
Venezuela, 383 sector, 516
Viet Nam Doing Business database, 519
education services, 358 Enterprise Surveys, 130–34
562Index
Forest Carbon Partnership Facility, labels and food safety, 320–21

233–45 Millennium Round, 10
I-TIP Services, 303 multilateral agreements under, 5, 257–59
Logistics Performance Index (LPI), notifications by development status
392, 521 (1995–2015), new, 323
Private Participation in Infrastructure OECD/WTO monitoring exercise, 496,
Database, 306 500, 516–17
Services Trade Restrictiveness Index, PRC joined (2006), 158–59
46–47 SDG 10: reduced inequalities, 42
World Development Indicators, 179 SDG 17.12: duty-free and quota-free
World Development Report 2009, 439 market access, 26
World Trade Indicators, 520 Services Sectoral Classification List, 350
World Economic Forum, 517 tariff data from WITS-TRAINS, 122–23
World Health Organization (WHO), 388, TFA agreement at Bali (2012), 241
402 Trade Facilitation Agreement, 6, 397
World Trade Organization (WTO). See Uruguay Round, 10–11, 104, 109–10,
also General Agreement on Trade 320–21
in Services (GATS); Organisation Uruguay Round and Agreement on
for Economic Co-operation and Agriculture, 317
Development (OECD); preferential Work Programme on Electronic
trade agreement (PTA); sanitary Commerce, 363
and phytosanitary (SPS); tariffs and WTO. See World Trade Organization
nontariff measures (NTMs); Technical WTO Ministerial Conferences. See also
Barriers to Trade (TBT Agreement); World Trade Organization (WTO)
Trade-Related Aspects of Intellectual Bali (2012), 241
Property Rights (TRIPS); WTO Cancun (2003), 19
Ministerial Conferences Hong Kong, China (2005), 8, 12, 19, 51,
Aid for trade, 8 104–5, 490
Dispute Settlement Panel, 323 Nairobi (2015), 524
Integrated Framework, 490 Seattle (1999), 10
intellectual property rights protection, Singapore (1996), 490
376
international trade regime, 2 Z
I-TIP Services, 303 zero deforestation pledge, 229–30, 232, 240
WIN–WIN
How International Trade Can Help Meet the Sustainable Development Goals
The recently agreed Sustainable Development Goals (SDGs) are expected to guide
development through the 2030 time horizon. The 17 SDGs cover many areas, such
as poverty, health, sustainable development, and the environment. Given that trade
is not an end in itself, there is no specific SDG goal for trade, but it is recognized as
an important means of implementation. The objective of this book is to demonstrate
to the international development community, including policy makers in developing
countries, the contribution that international trade can make to achieving the
SDGs. Economists have long argued that trade can promote income growth, which
can then support sustainable development. But there are also more direct linkages
between trade and sustainable development, for instance by affecting the price and
availability of important goods and services for development, such as health and
education. This book maps out a triple-win scenario when good trade policy spurs
international trade, contributes to development-friendly outcomes, and supports the
achievement of the SDGs.
About the editors

Matthias Helble is a senior economist and co-chair of the Research Department,
Asian Development Bank Institute.
Ben Shepherd is the principal at Developing Trade Consultants.

3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008 Japan
Tel +81 3 3593 5500
www.adbi.org

Trade and The Post-2015 Development Agenda

Uploaded by

Copyright:

Available Formats

Trade and The Post-2015 Development Agenda

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Trade and The Post-2015 Development Agenda

Uploaded by

Copyright:

Available Formats

WIN–WIN

How International Trade Can

Edited by Matthias Helble and Ben Shepherd

ASIAN DEVELOPMENT BANK INSTITUTE

ASIAN DEVELOPMENT BANK INSTITUTE

All rights reserved.

ISBN 978-4-89974- 081-0 (Print)

By making any designation of or reference to a particular territory or geographic

ADB recognizes “China” as the People’s Republic of China.

Note: In this publication, “$” refers to US dollars.

Figures, Tables, and Boxes v

PART I: Poverty, Hunger, and Inclusive Growth

PART II: Sustainable Growth

11. Trade and Sustainable Fisheries 272

PART III: Education and Health

PART IV: Other Linkages between Trade and the SDGs

8.2 Gross Domestic Product per Capita Growth Rates

15.9 Evolution of Average Import Unit Prices of Harmonized

17.4 Effect of International Trade Components on Level

Dale Andrew is an international economist, recently retired from the

Pamela Apaza is legal affairs officer in the Trade in Services and

Irene Brambilla is a professor of economics at Universidad Nacional de

Rupa Chanda is a professor of economics, Indian Institute of

Matthias Helble is a senior economist and co-chair of the research

Bernard Hoekman is a professor and director of the Global Economics

Alin Horj is consultant at the Investment Division, Directorate for

William Hynes is a senior economist at Office of the Secretary General

Frans Lammersen is the principal administrator of the Development

Will Martin is a senior research fellow at the International Food Policy

Patrick Messerlin is professor emeritus of economics at Sciences Po

Dionisius A. Narjoko is a researcher at the Economic Research Institute

Marcelo Olarreaga is professor of economics at the University of Geneva.

Guido G. Porto is a professor of economics at Universidad Nacional de

Andrew Prag is an environmental policy analyst at the Organisation for

Ben Shepherd is the principal at Developing Trade Consultants.

Susan Stone is the director of the Trade, Investment and Innovation

U. Rashid Sumaila is professor and director of the Fisheries Economics

Shujiro Urata is a professor at the Graduate School of Asia-Paciﬁc

Paul Vandenberg is a senior economist at the Asian Development Bank

Alexandre Le Vernoy is an International Consultant at Groupe

Norbert Wilson is a professor at the Friedman School of Nutrition

Guanghua Wan is principal economist, Economic Research and

Yuan Zhang is a professor of economics at China Center for Economic

AFT Aid for Trade

IUU illegal, unreported, and unregulated

UNCTAD UN Conference on Trade and Development

The Sustainable Development Goals (SDGs) were adopted in September

The editors of this book would like to acknowledge a number of

In September 2015, the members of the United Nations (UN) agreed

countries use tariff and nontariff measures on pharmaceuticals and

informal cross-border traders. Trade theory offers rich implications for

is limited empirical evidence of improved environmental outcomes. The

sustainable consumption and production patterns. He argues that trade

communication technology and a higher mobility of health professionals

how to improve development partnerships. Finally, the chapter draws

2.2 Dramatic Changes in the Political, Business,

2.2.1 The MDG Preparation Phase: Still a Pro-Trade Agenda

countries, including those in the developed world, were waiting until

2.2.2 The SDGs’ Preparation: Lack of Interest in Trade

Agriculture 14.3 13.5 51.2 19.4 –

ƀǇ )&ǇŹǇ(Industry, Innovation and Infrastructure) notes the need