Foreign Assistance: U.S. Trade Capacity Building Extensive, but Its Effectiveness Has Yet to Be Evaluated
Published: 2005-02-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Many developing countries have expressed concern about their inability to take advantage of global trading opportunities. The United States considers this ability a key factor in reducing poverty, achieving economic growth, raising income levels, and promoting stability. U.S. trade capacity building assistance is designed to address these concerns. GAO (1) identified the nature and extent of U.S. trade capacity building; (2) described how agencies implement such assistance, including coordination; and (3) assessed whether agencies evaluate its effectiveness.
section_title: What GAO Found
paragraphs: U.S. trade capacity building is primarily a collection of existing trade and development activities placed under the umbrella of trade capacity building. The U.S. government initiated an annual governmentwide survey in 2001 to identify U.S. trade capacity building efforts, which it defined as assistance meant to help countries become aware of and accede to the World Trade Organization (WTO); implement WTO agreements; and build the physical, human, and institutional capacity to benefit from trade. U.S. agencies self-reported that they had provided almost $2.9 billion in trade capacity building assistance to over 100 countries from fiscal years 2001 through 2004. The Agency for International Development (USAID) reported providing about 71 percent of the trade capacity building funding. Agencies are coordinating their assistance through the trade capacity building interagency group formed in 2002 to help countries negotiate and implement U.S. free trade agreements. Most of the U.S. agencies we reviewed are not systematically measuring the results of their trade capacity building assistance or evaluating its effectiveness. Although some agencies have set program goals for building trade capacity, they have not generally developed performance indicators, compiled data, or analyzed the results in terms of building trade capacity. USAID's March 2003 strategy for building trade capacity includes a limited number of performance indicators. USAID officials have stated that developing such indicators is difficult but have begun work independently and with other international donors toward that end. Without a strategy for evaluating the effectiveness of its trade capacity building assistance, the United States cannot identify what works and what does not work to ensure the reasonable use of resources for these efforts.

section_title: Letter
paragraphs: Many developing countries have expressed concern about their inability to  take advantage of global trading opportunities because they lack the  capacity to participate in international trade. In 2001, the least-developed  countries called for technical assistance to strengthen their institutions and  trade-related infrastructure, and the World Trade Organization Doha  Ministerial Declaration stated that technical cooperation and capacity  building were important and should be used to help countries benefit from  the multilateral trading system. The United States considers the ability to  participate in and benefit from the global trading system key factors in  reducing poverty, achieving economic growth, raising income levels, and  promoting stability. In 2002, the President’s Trade Policy Agenda pledged  the United States would provide tools and training to countries needing  help to benefit from the global trading system. As a result, U.S. government  agencies have provided trade capacity building assistance through a variety  of programs to help these countries.
In response to your request for information about U.S. trade capacity  building assistance, this report (1) identifies the nature and extent of U.S.  trade capacity building assistance; (2) describes how agencies implement  such assistance, including coordination; and (3) assesses whether agencies  evaluate its effectiveness.
To address these objectives, we reviewed relevant agency documents and  analyzed available data on trade capacity building. We assessed the U.S.  Government Trade Capacity Building database, which reflects annual  governmentwide surveys initiated in 2001 about U.S. trade capacity  building activities and is administered by the U.S. Agency for International  Development (USAID). We determined that the required data elements in  the database are sufficiently reliable for the purposes of this review. We  focused our review on the six U.S. agencies funding and implementing 96  percent of the trade capacity building assistance, concentrating primarily  on USAID, because it provided the bulk of the funding, as well as the Office  of the U.S. Trade Representative (USTR). We conducted fieldwork in El  Salvador, Ghana, and Egypt, choosing these countries because they were  among the 20 countries receiving the most trade capacity building funding,  and they represented different regions and income levels (low and middle  income). In those countries, we reviewed USAID mission strategy  documents, contracts, and cooperative agreements with the host  governments. We also interviewed mission officials, contractors, and host  country government officials and visited several trade capacity building  projects. In addition, we reviewed relevant U.S. congressional documents  and legislation. Appendix I contains a full description of our objectives,  scope, and methodology. Appendix II elaborates on how USAID created its  trade capacity building database. Appendix III provides further details on  U.S. funding for trade capacity building assistance. In addition, we have  included information on the relationship between trade and economic  development in appendix IV.
We performed our work from September 2003 to November 2004 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Developing countries expressed reservations about undertaking further  trade liberalization at the 1999 Seattle WTO ministerial conference, as they  were still experiencing economic difficulties despite previous market  reforms. In response to developing country concerns, the 2001 WTO Doha  Ministerial Declaration said that technical assistance should be designed to  assist developing, least-developed, and low-income countries to meet their  WTO obligations and draw on the benefits of an open, rules-based  multilateral trading system. To implement the declaration, in December  2001, the WTO created the Doha Development Agenda Global Trust Fund  to help developing countries build capacity and establish a reliable basis  for funding WTO-related technical assistance (to which the United States  has contributed $3 million, to date). In addition, in November 2002, the  WTO and the Organization for Economic Cooperation and Development  (OECD) created a database to provide comprehensive information on  bilateral donor and multilateral/regional agency support for trade capacity  building.
The Congress included trade capacity building in the African Growth and  Opportunity Act of 2000 to help eligible countries meet the act’s  requirements. The act provides that sustained economic growth in sub- Saharan Africa depends in large measure on the development of a receptive  environment for trade and investment. The act instructs the U.S. Customs  Service to provide technical assistance to beneficiary countries in  developing and implementing visa systems for textile transshipment and  for antitransshipment enforcement. In addition, the Congress, in the  Bipartisan Trade Promotion Authority Act of 2002, declared that among  the principal negotiating objectives of the United States are to strengthen  the capacity of the U.S. trading partners to promote respect for core labor  standards and to protect the environment. That act calls for the President  to seek to establish consultative mechanisms with parties to trade  agreements to promote respect for core labor standards and compliance  with International Labor Organization conventions on child labor, to  develop and implement standards for the protection of the environment  and human health, based on sound science. It provides for the President to  direct the Secretary of Labor to provide technical assistance to countries  wishing to establish trade agreements on its labor laws, if needed.
In providing funding for trade capacity building in the foreign operations  appropriations for fiscal years 2003 and 2004, the House appropriators  called trade capacity building a critical element of development assistance  because it can “be leveraged to generate economic growth, reduce poverty,  promote rule of law….” The Congress earmarked funds  appropriated in fiscal years 2003 and 2004 for trade capacity building.  Specifically, the Congress provided that not less than $452 million in fiscal  year 2003 should be made available for trade capacity building. Out of this  amount, $159 million and $2.5 million were earmarked for USAID and  USTDA, respectively. Similarly, in fiscal year 2004, the Congress provided  that not less than $503 million should be made available for trade capacity  building with $190 million earmarked specifically for USAID. The  appropriations for each of those fiscal years also provided for funding from  accounts managed by other agencies, including the Departments of State  and Treasury, although amounts were not specified for the individual  accounts.
section_title: U.S. Trade Capacity Building Is Existing Activities Labeled as Trade Capacity Building, Distributed Worldwide, and Primarily through USAID
paragraphs: U.S. trade capacity building is primarily a collection of existing activities  placed under the umbrella of trade capacity building by a U. S. government  survey. Initiated in 2001, this survey was to capture, qualitatively and  quantitatively, U.S. agencies’ existing activities promoting trade-related  capacity building in transitioning economies and developing countries.  The survey defined trade capacity building and asked agencies to place  their assistance into a range of categories and estimate funding obligated  for each category. U.S. trade capacity building is not a discrete area with its  own budget. However, 18 agencies have self-reported that they obligated  almost $2.9 billion for trade capacity building activities in over 100  countries from fiscal years 2001 through 2004. Overall, the assistance was  distributed worldwide, although the focus differed somewhat from region  to region. USAID reported providing 71 percent of the trade capacity  building assistance.
subsections: section_title: United States Categorizes a Range of Assistance as Trade Capacity Building
paragraphs: The U.S. government survey administered by USAID defined trade capacity  building as activities meant to help countries become aware of and accede  to the WTO; implement WTO agreements; and build the physical, human,  and institutional capacity to benefit more broadly from a rules-based  trading system. The survey asked agencies to place their assistance into  several categories, including WTO awareness, WTO agreements, trade  facilitation, human resources and labor standards, physical and economic  infrastructure, agriculture development, environmental sector trade and  standards, financial sector development, competition policy and foreign  investment incentives, and services trade development (table 1 provides  further information about these categories).
Agencies estimated their obligated funding for each category from 2001  through 2004. The largest obligations were for trade facilitation at 27  percent, followed by human resources and labor standards at 16 percent,  agriculture development at 12 percent, financial sector development at 11  percent, and physical infrastructure development at 8 percent. The  governance, transparency, and interagency coordination category and the  WTO-related category each received an estimated 6 percent of this  assistance (see fig. 1).
subsections: section_title: Trade Facilitation
paragraphs: According to the database, a significant portion of U.S. funding for trade  capacity building assistance, or 27 percent, supported trade facilitation  activities such as business services and training, export promotion,  customs operation and administration, and E-commerce development and  information technologies. For instance, to facilitate trade in El Salvador  and Ghana, USAID financed matching grants to artisans and small-to- medium-sized firms for business services training, product design, and  packaging. U.S. assistance helped several artisans and firms develop ways  to increase their capacity to market and export their products by improving  product design and packaging and arranging trade fair visits to the United  States and Europe (see figs. 2 and 3).
In another example of trade facilitation, U.S. Customs and Border  Protection officials trained Ghana’s Customs, Excise, and Preventive  Service officials in procedures to comply with the African Growth and  Opportunity Act textile visa enforcement system to prevent illegal  transshipment and use of counterfeit documents relating to the importation  of apparel products into the United States (see fig. 4).
The U.S. Department of Labor funds a number of programs to strengthen  labor systems and improve occupational safety and health. For instance, a  project in Central America seeks to improve labor law compliance, while  another project in Central America aims to reduce the incidence of  workplace injuries. In Ghana, USAID provided technical assistance to a  government committee drafting new labor legislation and focused on  increasing worker collective bargaining by encouraging workers to work  with members of the nonprofit and philanthropic sectors.
section_title: Agriculture Development
paragraphs: For agriculture development, assistance is used to extend the benefits of  trade to rural sectors and support trade-related aspects of agribusiness. In  Ghana and El Salvador, U.S. assistance is supporting Salvadoran and  Ghanaian food producers’ efforts to meet sanitary and phytosanitary standards through training. In El Salvador, U.S. assistance helped small- to-medium-sized farmers export fruits and vegetables (see fig. 5). U.S.  Department of Agriculture officials also helped African nations meet  export requirements under the African Growth and Opportunity Act by  sponsoring training on quality control, risk analysis, and food safety.
Under the category of financial sector development, U.S. assistance  supports reforms in banking and securities markets and implementation of  laws and regulations that promote trade-related investment to provide an  enabling environment for international trade. For instance, several U.S.  Treasury officials have worked to reform Ghana’s banking and tax systems.
Specifically, these U.S. officials have helped the government of Ghana to  restructure the funding relationship between the Ministry of Finance and  the Central Bank, improve tax collection procedures, and strengthen the  financial sector.
section_title: Physical Infrastructure Development
paragraphs: U.S. assistance for physical infrastructure development helps establish  trade-related telecommunications, transport, ports, airports, power, water,  and industrial zones. For instance, according to USAID, U.S. assistance to  improve the telecommunications sector helps Egypt’s ability to increase  trade and investment (see fig. 6). U.S. telecommunications infrastructure  projects have led to the installation of hundreds of thousands of telephone  lines, serving more than 4 million Egyptians. Joint U.S.-Egyptian  investments in the sector have supported the institutional strengthening of  Egypt Telecom and the improvement and expansion of  telecommunications networks throughout Egypt. Under a current  telecommunications project, a state-of-the-art network operations center is  being constructed, and several initiatives to strengthen the  telecommunications infrastructure system are being carried out.
U.S. trade capacity building supports an array of activities to help  developing countries participate fully in the WTO and the global trading  system generally and to implement their current and future trade  commitments. For example, U.S. assistance helped create a WTO unit  within the Egyptian Ministry of Foreign Trade to enable the ministry to  participate in international trade negotiations and implement trade  agreements. Moreover, this assistance provided training to unit officials on  trade policy formulation and equipment to allow these officials to develop  statistics and databases related to trade.
section_title: Governance, Transparency, and Interagency Coordination
paragraphs: This assistance supports institutional reform to improve governance and  make policies more transparent. It also helps different ministries function  more effectively in the trade policy arena. For example, in Ghana, U.S.  assistance has supported workshops for the government, the private  sector, and civil society to discuss and develop Ghana’s trade policy.
section_title: U.S. Trade Capacity Building Distributed Globally
paragraphs: The United States supports trade capacity building assistance globally,  covering six regions including Asia, Central and Eastern Europe, the  former Soviet Republics, Latin America and the Caribbean, the Middle East  and North Africa, and sub-Saharan Africa. The Middle East and North  Africa received the most funding, or 24 percent (see fig. 7).
Funding per category of trade capacity building varied by region (see fig.  8). Overall, the trade facilitation category dominated with about a third of  the funding in each region except for sub-Saharan Africa (about 27 percent)  and Asia (about 17 percent). In Asia, the human resources and labor  standards category received the most trade capacity building funding. In  the former Soviet Republics, assistance for financial sector development  received 20 percent of the funding.
section_title: USAID Provides the Bulk of Trade Capacity Building
paragraphs: USAID provides most of the funding for trade capacity building assistance,  with $423 million (71 percent), $477 million (75 percent), $554 million (73  percent), and $611 million (68 percent) in each of fiscal years 2001, 2002,  2003, and 2004, respectively (see fig. 9).
Other key funding agencies, in decreasing order of funding during the 4- year period, were the U.S. Departments of Labor and State at  approximately 15 percent and 4 percent, respectively, and the Overseas  Private Investment Corporation and USTDA, both with about 2 percent.  The other main providers of trade capacity building over the past 4 years  include the U.S. Departments of Agriculture, Energy, and the Treasury (see  table 2).
section_title: Agencies Implement Assistance Based on Broad Criteria and Are Beginning to Incorporate Trade Capacity Building into Their Approach to Assistance
paragraphs: Agencies have traditionally implemented trade and development assistance  based on broad criteria such as national security and foreign policy  considerations. Some agencies are beginning to incorporate trade capacity  building into their approach to trade and development assistance. For  instance, the Departments of State and Agriculture, USAID, and USTDA are  taking into account trade capacity building in their planning. USAID is  training its staff on trade capacity building concepts, designing funding  instruments for trade capacity building, and starting to identify trade  capacity building activities for budgeting purposes. Several agencies are  focusing assistance on countries participating in trade preference  programs and trade agreements with the United States. Agencies are also  recasting some of their assistance to focus on trade capacity building  through coordination via the trade capacity building interagency group  formed in June 2002 to facilitate countries’ participation in free trade  agreement negotiations with the United States.
subsections: section_title: Agencies Implement Trade and Development Assistance Based on Broad Criteria
paragraphs: U.S. agencies are providing assistance to recipients based on broad criteria.  Agency officials cited national security and foreign policy considerations,  which are often driven by the Department of State, regional factors, and the  countries’ expressed needs, as important factors in determining how to  match assistance to recipients.
Following are examples of how some agencies have applied broad criteria  in choosing recipients and types of trade and development activities:  National security: Agency officials cited the prevention of terrorism as  driving assistance to certain areas. For example, the Department of  State asked the U.S. Department of Agriculture (USDA) to provide  assistance for rural development in Afghanistan. In addition, USTDA  officials stated that national security has gained prominence in their  work since September 11, 2001, particularly in the area of air and sea  transportation.
Foreign policy: Agency officials said foreign policy was an important  factor in directing assistance to certain countries. For example, USDA is  helping Colombia develop alternative crops to reduce illicit drug  production. In addition, USTDA considers foreign policy when it  responds to requests from U.S. ambassadors and other Department of  State officials.
Regional considerations: Agency officials sometimes tailor their  assistance to particular regions. For example, USTDA officials said that  they try to create geographic balance in their portfolio and work with  regional clusters when it makes sense to share information among  nearby countries, such as working with India and Pakistan on a  telecommunications conference. In addition, USAID officials stated that  they have worked on regional economic growth in Central America, for  example, by taking stock of each government’s capabilities through  diagnostic tools.
Country needs: Agency officials said that countries’ expressed needs  are an important factor (in conjunction with other factors) in selecting  trade capacity building activities and recipients. USDA officials stated  that they have used responses from a WTO questionnaire to develop a  benchmark for developing country needs regarding plant, animal, and  human health requirements. USTDA officials said that they have  specialized in translating country needs into projects by conducting  feasibility studies and arranging for the appropriate technical  assistance. Department of Labor officials considered country needs by  working directly with labor ministries. For example, Labor officials said  that they respond to requests from Central American countries for help  in identifying inspection systems, expediting dispute resolution outside  the courts, and informing the public about Central American countries’  labor laws. Finally, according to USAID officials, their agency’s strength  lies in having resident country missions, which allow staff to gain insight  into countries’ motivations and needs regarding trade. Generally, USAID  field missions have the lead in devising program-planning requirements  for USAID assistance.
section_title: Some Agencies Are Beginning to Incorporate Trade Capacity Building into Their Approach to Assistance
paragraphs: Some agencies, USAID in particular, are beginning to focus on trade  capacity building in managing their assistance. For instance, the  Department of State, USAID, USDA, and USTDA are incorporating trade  capacity building into their planning. USAID is training its staff on trade  capacity building concepts, designing trade capacity building-specific  funding instruments, and beginning to identify trade capacity building  activities for budgeting purposes. Several agencies have also provided  assistance to support trade agreements and trade preference programs.
USAID and USDA have incorporated trade capacity building in their fiscal  year 2005 congressional budget justifications. For example, USAID  included as a key initiative for fiscal year 2005 trade capacity building in  support of WTO and bilateral U.S. government trade objectives. In addition,  in their joint strategic plan for fiscal years 2004 through 2009, the  Department of State and USAID stated that they “will strengthen the  capacity of developing and transitional economies to participate in, and  benefit from, trade by enhancing their ability to respond positively to global  opportunities….” USAID also called trade capacity building a key result of  its economic growth strategic goal in its fiscal year 2003 annual  performance and accountability report. USDA included a strategic  objective to “support international economic development and trade  capacity building” under its strategic goal of enhancing economic  opportunities for agricultural producers. Furthermore, USTDA included a performance goal in its 2004 performance plan to provide capacity building  activities to support USTR in trade negotiations.
In addition, both USAID and USDA have issued formal strategies for  providing trade capacity building. USAID’s 2003 strategy, Building Trade  Capacity in the Developing World, emphasizes that while ongoing  activities address a variety of trade capacity building needs, USAID will  focus new activities on helping countries participate in and implement  trade agreements and take advantage of trade opportunities. Ways to  increase trade opportunities include strengthening economic policies;  removing trade barriers; and building well-functioning economic, political,  and legal institutions. USDA’s strategy targets its trade capacity building  initiatives on promoting science and rules-based regulatory frameworks for  agricultural trade and supporting improved understanding of agricultural  biotechnology and expanded trade in safe food products developed by  biotechnology.
USAID is training its headquarters and field staff on trade issues, including  the WTO framework and principles, the current multilateral negotiating  agenda, and trade capacity building best practices. USAID has also  conducted seminars for its economic officers in the field missions on its  approach to trade capacity building.
USAID is also using specialized contract mechanisms to fund trade  capacity building assistance quickly. For instance, its “trade capacity  building support mechanisms” provide quick funding (new requests for  technical assistance can be addressed “in as little as” 3 weeks) to help  USAID missions help countries assess their trade constraints and prioritize  their trade-related technical assistance needs. The project also provides  short-term technical assistance to assist missions in designing,  implementing, monitoring, and evaluating trade-related technical  assistance, such as technical training for trade officials and trade  workshops for public and private sector leaders. USAID reports that these  assessments have focused on integrating trade into poverty reduction  strategies and negotiating and implementing free trade agreements.
USAID officials are beginning to attribute, or identify, funding for trade  capacity building activities for budgeting purposes. For example, in  budgeting for each of their strategic objectives, USAID is identifying  amounts to be attributed to activities that are considered trade capacity  building. The purpose is to ensure that funding reflects the priorities of the  agency and the Congress. However, one USAID official said that this was  particularly difficult for trade capacity building because it was relevant to  multiple strategic objectives, and funding was programmed in more than  one office.
Several agencies considered supporting countries participating in trade  preference programs and trade agreements with the United States to be an  increasingly important factor driving their trade and development  assistance. For instance, a USDA official stated that there has been a  change in thinking regarding the role of the Foreign Agricultural Service in  developing countries. Traditionally, the mission of the Foreign Agricultural  Service has been to promote U.S. agricultural exports. Officials said that  the African Growth and Opportunity Act of 2000 has made the Service more  aware of the limitations that developing countries have in exporting their  agricultural products and that helping them to do so will “win friends” in  multilateral trade negotiations. For instance, the Foreign Agricultural  Service worked with the Animal and Plant Health Inspection Service to  help the act’s recipients set up animal and plant inspection systems for  exporting their products. The Department of Labor has provided trade  capacity building assistance to improve countries’ enforcement of their  labor laws, in response to requests from USTR consistent with authority in  the Bipartisan Trade Promotion Authority Act of 2002. For example, it has  allocated funds to strengthen the capacity of labor ministries in Central  American countries to enforce their national labor laws. A USAID official  said that USAID’s work to help Central American countries has become  more market-oriented, and improved social and economic conditions have  laid the foundation for negotiating and implementing CAFTA.
section_title: Trade Capacity Building Interagency Group Coordinates Assistance on Free Trade Agreement Negotiations
paragraphs: Another new trade capacity building initiative was the formation, shortly  after the November 2001 Doha ministerial, of the trade capacity building  interagency group dedicated to coordinating trade capacity building in  support of free trade agreements, which USTR co-chairs with USAID. The  Assistant U.S. Trade Representative for Trade Capacity Building said that  U.S. success at the negotiating table depends upon the meshing of trade  and aid. In fact, the trade capacity building interagency group has spun off  special working groups to facilitate specific trade negotiations such as  CAFTA, bilateral agreements with Morocco and the Dominican Republic,  and the free trade agreement negotiations with the Andean region. The  CAFTA working group met in tandem with CAFTA negotiating groups to  help CAFTA countries develop national strategies for implementing the  agreement. These trade agreement-specific working groups are led by  USTR.
subsections: section_title: The Trade Capacity Building Interagency Group
paragraphs: Agency officials told us that they meet as frequently as once a month to  coordinate trade capacity building at the policy level and that the meetings  are informal and have no written guidelines or minutes. A USTR official  said that the U.S. Trade Representative places primary importance on  coordinating trade and development policy and that this has been critical to  the successful negotiation of free trade agreements with Morocco, Central  America, and Chile. According to one interagency group participant, USTR  informs the group about progress in ongoing free trade agreement  negotiations and any trade capacity building needs emerging from the  negotiations. Agency attendees then exchange information about their  trade capacity building activities to determine whether any might meet  negotiating countries’ needs. Although USTR might suggest possible trade  capacity building initiatives, specific trade capacity building projects do  not typically emerge from the meetings but are worked out later. One  official said that USTR likes to go into negotiations with information on  what trade capacity building assistance agencies are already providing  countries. The meetings are mostly informational, ensuring that all U.S.  agencies “speak with one voice” on trade capacity building, according to  this official. Another official said that USTR’s role was to persuade the  other agencies to provide funding for trade capacity building to support the  free trade agreements and that the agencies then provide what they can.
section_title: The Working Group Dedicated to CAFTA
paragraphs: A CAFTA-dedicated trade capacity building working group met in tandem  with the six CAFTA negotiating groups during each of the nine rounds of  CAFTA negotiations. Each CAFTA country prepared a national strategy to  define and prioritize its trade capacity building needs. U.S. agencies, five  international institutions, corporations, and nongovernmental  organizations were to provide trade capacity building assistance.  According to a USAID official, the CAFTA trade capacity building working  group had no direct role in the negotiations and did not influence the  outcome of the negotiations. Rather, it strove to ensure that countries were  made aware of the trade capacity building assistance available or already  provided to them. The trade capacity building assistance that emerged  from the CAFTA trade capacity building working group included both  reorienting existing activities and creating new ones. For example, USAID  funds in Honduras were redirected to establish a trade unit in one of the  Honduran ministries, helping it determine staffing needs and providing  some office equipment. An example of a new initiative coming out of the  working group was a commercial law diagnostic tool and a new regional  program to help countries meet the customs reforms called for in a CAFTA  chapter.
According to participants, the CAFTA country national strategies and the  process for creating them were important tools for prioritizing and  focusing CAFTA countries’ trade capacity building needs. One USAID  official explained that, at first, CAFTA countries created “wish lists” that  were somewhat unrealistic, asking for projects beyond the scope of donor  resources. An official in the USAID mission to El Salvador stated that the  mission and other donors have worked with the El Salvador Ministry of  Economics to develop trade capacity building project profiles, a common  template to prioritize trade capacity building needs. Ultimately, the profiles  reflected the needs and priorities of both sides. The National Action Plan  for Trade Capacity Building issued in July 2003 by the government of El  Salvador emerged in part from this exercise. The plan lays out what trade  capacity building is needed to help El Salvador prepare for, participate in,  and implement CAFTA and transition to free trade. According to USAID  officials, the Ministry of Economics used the plan in its strategic planning.  One USAID official stated that the national plans are meant to be flexible as  needs change but should impose discipline on donors and recipients to stay  within agreed-upon priorities. Government of El Salvador officials stated  that the CAFTA trade capacity building process helped donors to better  coordinate their assistance and will encourage the enforcement of  environmental laws.
section_title: Benefits of Interagency Group and Working Groups Cited by Participants
paragraphs: A USDA official said that the trade capacity building interagency group  meetings have given agencies insight into U.S. views on free trade  agreements and have sometimes alerted USDA to agriculture policy issues  about which it was unaware. A USTDA official stated that the interagency  meetings have improved coordination among agencies and helped USTDA  focus on trade capacity building activities with the most value to recipients  and donors. They also said that USTR and other agencies have become  more aware of what each is doing to provide trade capacity building. In  addition, the meetings have helped agency officials form relationships and  contacts to better provide trade capacity building.
U.S. agency officials in Washington had positive comments about the  CAFTA trade capacity building coordination process. One USDA official  called the process an agile mechanism to provide assistance quickly and  pull the right people together to provide it. A USTDA official said that the  process had helped negotiators “sell” CAFTA to CAFTA countries because  countries are getting concrete help on specific projects such as port  modernization that have tangible benefits. An official from the Department  of State called it a rapid response mechanism. Officials from the  Departments of Labor and the Treasury and USAID stated that the system  allowed donors to identify country needs and avoid duplication. For  example, USAID was able to plan its customs work appropriately when the  Inter-American Development Bank informed the CAFTA trade capacity  building working group that it was providing a regional customs program.
section_title: Most Agencies Are Not Systematically Monitoring, Measuring, or Evaluating Their Assistance in Terms of Building Trade Capacity
paragraphs: For the most part, the six agencies we reviewed are neither systematically  monitoring nor measuring program performance against program goals in  terms of building trade capacity, neither are they evaluating the  effectiveness of their trade capacity building activities. While some of the  agencies we reviewed have set program goals for building trade capacity,  generally, most have neither developed performance indicators related to  trade capacity building, nor have they compiled performance data and  analyzed the results in terms of building trade capacity. USAID presented  goals for building trade capacity in its March 2003 strategy, Building Trade  Capacity in the Developing World, with a limited number of performance  indicators to monitor or measure results and measure performance against  those goals. USDA’s trade capacity building strategy does not include  performance indicators. Although USAID officials have called developing  trade capacity building performance indicators difficult, they are working  toward that end independently and with other donors.
Among the six agencies we reviewed, only USAID and USDA have  strategies for trade capacity building other than what is contained in  strategic plans and annual performance plans. As shown in table 3, USAID’s  2003 strategy lays out goals with a limited number of trade capacity  building performance indicators to measure performance against goals.  USDA’s trade capacity building strategy, which focuses on promoting a  rules-based regulatory framework for agricultural trade and on supporting  better understanding of agricultural biotechnology, contains no  performance indicators. A performance indicator is a specific value or  characteristic to measure output or outcome. An “output measure” records  the actual level of activity or whether the effort was realized and can assess  how well a program is being carried out. An “outcome measure” assesses  the actual results, effects, or impact of an activity compared with its  intended purpose.
USAID has acknowledged the difficulty of developing a set of trade  capacity building performance indicators for missions to use in their  performance monitoring plans. A USAID official stated that the agency had  not, to date, developed a set of trade capacity building indicators because  most of the agency’s trade capacity building activities focus broadly on  economic development, whose benefits are difficult to quantify. Although  currently many missions use increased exports as an indicator, one USAID  official pointed out that exports can increase for reasons unrelated to trade  capacity building. The USAID official also said that coming up with  indicators is sometimes less of a problem than collecting the data, which  can be hard to come by in many developing countries. For instance, USAID  contractors may have to rely on a country’s private sector to obtain data on  value-added products since the local government would not collect such  data. On a small project, with individual firms, this would be feasible, but it  would be costly for a whole sector, the official said. Furthermore, another  USAID official stated that USAID has struggled to help missions  understand the distinction between economic development projects and  trade capacity building projects. For instance, the official said that,  although USAID had undertaken many agricultural projects in the past,  many project activities were not linked to markets and trade. One USDA  official said, however, that he considered the development of new  institutions, laws, and regulations to be good performance indicators for  trade capacity building efforts.
Despite the challenges of monitoring and measuring the results of trade  capacity building assistance, USAID is working on its own and through the  international community to develop trade capacity building performance  indicators for missions to use in their performance monitoring plans.  USAID has contracted for a consultant’s study and expects to have a draft  report on trade capacity building indicators in the near future.  Furthermore, USAID is not alone in dealing with the difficulties of  evaluating trade capacity building efforts, as other countries face the same  issues. USAID has been collaborating with other country donors through  the OECD’s Development Assistance Committee to develop a common  framework for results monitoring and assessment of trade capacity  building efforts. To date, the OECD committee members have discussed a  flexible “tool kit” of trade capacity building indicators, in recognition that  the wide range of trade capacity building projects would argue against  using the same indicators for all trade capacity building activities.
Based on our interviews, U.S. agencies have not specifically conducted  program evaluations to assess the effectiveness of their trade capacity  building efforts. Program evaluation is an assessment of the effects of a  program or policy that can measure unintended results, both good and bad,  and can be used to validate or find error in a program’s basic purposes and  premises. GPRA called for agencies to improve congressional decision  making by providing more objective information on the relative  effectiveness and efficiency of their programs and spending.
According to agency officials with whom we spoke, some agencies have  evaluated their activities but not in relation to trade capacity building. For  instance, Department of Labor officials stated that Labor evaluates its  projects against project-specific objectives that are not trade capacity  building objectives. USTDA officials stated that they have a set of measures  for the development effectiveness of each of their activities. USTDA  officials stated further that, while they have recently developed a system  for evaluating the development impact of their activities over the next 6  years, the system is not meant to measure trade capacity per se. USTDA  officials do believe, however, that their development impact measures will  in most cases ultimately serve as a good proxy for measuring trade capacity  building impact. Examples of effectiveness in the USTDA system would  include the percentage of activities that lead to the adoption of market- oriented reforms or result in the transfer of advanced technology to  increase productivity. Finally, USTDA officials emphasized that few of their  trade capacity building activities are mature enough to be evaluated. The  Department of State evaluates the effectiveness of its International Visitor  Leadership Program with general anecdotal feedback from participants.  One USDA official said that the agency has not done any assessments  specifically of the effectiveness of its trade capacity building efforts, but  that USDA did do program evaluations. For example, one USDA evaluation  concluded that a refrigeration project resulted in improved refrigeration  management and a reduction in perishable losses of one company of 60  percent.
USAID reported in May 2004 that it has conducted fewer program  evaluations overall since instituting its performance measurement system  under GPRA, replacing them with annual reports “that measure progress  toward specific goals on a country by country basis” rather than evaluating  the effectiveness of the program as a whole. In addition, one USAID official  said that USAID moved away from using formal evaluations about 10 years  ago because of lack of personnel. In October 2004, USAID issued the  report, USAID Trade Capacity Building Programs: Issues and Findings,  which examined issues related to USAID’s trade capacity building  assistance programs. The report concluded that USAID should collect and  analyze more trade capacity building data to monitor results and use those  results to conduct program evaluations. It also said that USAID should  conduct more and better evaluations of its trade capacity building projects  to know what approaches work best and under what conditions.
While several of the agencies we reviewed emphasized trade capacity  building in their strategic plans or annual performance plans, and two  agencies have produced trade capacity building specific strategies, the lack  of performance data linked to trade capacity building limits their ability to  monitor and measure current results. In addition, without evaluations  identifying what trade capacity building activities are effective, the  agencies will have difficulty determining whether their efforts are  achieving their overall trade capacity building goals. Finally, as we discuss  in appendix IV, greater openness to international trade can have a variety of  effects, both positive and negative, on different aspects of developing  countries’ domestic economies. Therefore, evaluating the effectiveness of  trade capacity building efforts is important to identify those that build trade  capacity and those that do not and to determine if any negative effects  should be mitigated.
section_title: Conclusion
paragraphs: The executive branch and the Congress have elevated trade capacity  building as a crucial tool for U.S. trade and development policy. This  warrants a comprehensive, coordinated approach to its delivery, based on  solid evidence of its effectiveness in generating economic development and  growth through trade. The challenge is that the estimated $2.9 billion in  U.S. trade capacity building assistance covers multiple categories of  assistance across numerous types of trade and development programs that  have many goals and are implemented by multiple agencies. The cross- cutting nature of this assistance argues for a coordinated approach to its  implementation. The trade capacity building interagency group has  demonstrated that a coordinated approach is possible under the right  circumstances by bringing agencies together to deliver relevant, focused,  and timely technical assistance to countries participating in free trade  agreements. The cross-cutting nature of trade capacity building also makes  it difficult to evaluate. While agencies track the results of individual  activities, they do not consistently do so in terms of building trade capacity,  in part, due to the relative newness of the concept and the lack of a  common framework for evaluation. USAID is working independently and  in conjunction with other country donors to develop a common set of  indicators to monitor and measure performance and to assess trade  capacity building effectiveness. Without evaluating the effectiveness of its  trade capacity building assistance, the United States cannot ensure the  reasonable use of resources devoted to such assistance, determine whether  the assistance is helping countries participate in and benefit from trade,  and credibly demonstrate that trade capacity building is a useful U.S. trade  and development policy.
section_title: Recommendations for Executive Action
paragraphs: To provide more objective information on the progress of U.S. trade  capacity building efforts and allow the United States to assess their  effectiveness, we make the following two recommendations:  The Administrator, U.S. Agency for International Development, and the  U.S. Trade Representative, as co-chairs of the trade capacity building  interagency group, in consultation with other agencies that fund and  implement trade capacity building assistance, should develop a cost- effective strategy to systematically monitor and measure program  results and to evaluate the effectiveness of U.S. trade capacity building  assistance.
The Administrator, U.S. Agency for International Development, should  direct the agency to set milestones for completing its efforts to develop  trade capacity building performance indicators to be used by (1) its field  missions to monitor and measure the results of their trade capacity  building efforts and (2) its relevant agency bureaus to conduct periodic  program evaluations. The U.S. Agency for International Development  should share its findings with other agencies that fund and implement  trade capacity building assistance.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft report to the Office of the U.S. Trade Representative,  the U.S. Agency for International Development, the Departments of  Agriculture, Labor, State, and the Treasury, and the U.S. Trade and  Development Agency. We received technical comments from the Office of  the U.S. Trade Representative, the U.S. Agency for International  Development, the Departments of Labor and State, and the U.S. Trade and  Development Agency. The Department of Agriculture provided no  comments. We received written comments from the U.S. Agency for  International Development, the Office of the U.S. Trade Representative,  and the Department of the Treasury, which are reprinted in appendixes V  through VII.
The U.S. Agency for International Development agreed with our two  recommendations. Regarding our first recommendation, USAID  emphasized the importance of considering the large number of agencies  involved, the diversity of trade capacity building programs, and the cost- effectiveness of different approaches to monitoring and evaluating trade  capacity building activities. In addition, USAID believed that developing a  monitoring and evaluation system should be done selectively, starting with  programs with the clearest links to building trade capacity. Regarding our  second recommendation, USAID noted that the Administrator had directed  the agency to reinstate its overall project evaluation efforts, and that  USAID had several ongoing efforts to support the recommendation. USAID  noted, however, that standard indicators designed to report on agencywide  trade capacity building program performance will not be sufficient to  monitor the effectiveness of all aspects of every trade capacity building  project. USAID country missions will need to continue to develop  specialized indicators that are tailored to local goals, opportunities,  constraints, and needs.
The Office of the U.S. Trade Representative reiterated the important role of  trade capacity building in linking trade and development by providing  developing countries with the tools to maximize trade opportunities  offered by multilateral and bilateral trade agreements and trade preference  programs. In addition, USTR believed that the discussion in the report  about interagency coordination demonstrated the importance of linking  trade capacity building needs with the needs generated by trade  negotiations.
The Department of the Treasury complimented our assessment, stating that  the report provided a good example of cooperation and mutual support  between the Department’s Office of Technical Assistance and USAID in  providing trade capacity building. Treasury also emphasized that its role in  helping countries to institute financial reforms contributed to building  trade capacity.
We will send copies of this report to appropriate congressional committees  and to the U.S. Trade Representative; the Administrator, USAID; the  Secretaries of the Departments of Agriculture, Labor, State, and the  Treasury; and the Director, U.S. Trade and Development Agency. We also  will make copies available to others upon request. In addition, the report  will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-2717 or at jonesy@gao.gov. Another GAO contact  and staff acknowledgments are listed in appendix V.
section_title: Objectives, Scope, and Methodology
paragraphs: The Chairman and Vice Chairman of the House Subcommittee on National  Security, Emerging Threats, and International Relations, Committee on  Government Reform, asked us to provide information about U.S. trade  capacity building assistance. This report (1) identifies the nature and  extent of U.S. trade capacity building; (2) describes how agencies  implement such assistance, including coordination; and (3) assesses  whether agencies evaluate its effectiveness. To address these objectives,  we reviewed agency information on trade capacity building programs. We  visited overseas missions in Egypt, El Salvador, and Ghana; we chose these  countries because they were among the 20 countries receiving the most  trade capacity building funding, and they represented different regions and  income levels (low and middle income). We initially interviewed officials  from 12 U.S. agencies responsible for trade capacity building activities. We  then narrowed this down to the six agencies that funded and implemented  96 percent of trade capacity building assistance. These agencies were the  Departments of Agriculture, Labor, State, and the Treasury, the U.S. Agency  for International Development (USAID), and the U.S. Trade and  Development Agency. We also interviewed officials from the Office of the  U.S. Trade Representative, an agency with a coordination role. We  concentrated our review on USAID as it provided the bulk of the funding.
To describe the nature and extent of trade capacity building, we reviewed  documents from the World Trade Organization regarding the Doha  ministerial conference in 2001 and subsequent international work on the  Doha Development Agenda. We also reviewed documents from the  Organization for Economic Cooperation and Development and the United  Nations Conference on Trade and Development. To determine the U.S.  definition of trade capacity building, we examined congressional  documents providing guidance on funding and implementation, as well as  relevant U.S. legislation, and relevant agency documents. We also  examined the guidance and definitions specified in the U.S. government  trade capacity building survey administered by USAID. We surveyed  economic literature on the relationships among trade, economic growth,  and development in developing countries. We examined U.S. government  reports on trade capacity building assistance, annual agency reports, and  agency trade capacity building planning and project documents. Because  USAID—as the primary funder of trade capacity building—administers  foreign aid through a decentralized organizational structure, we visited  USAID missions in Egypt, El Salvador, and Ghana to observe a range of  trade capacity building activities. At the missions overseas, we examined  program documents and interviewed USAID officials to understand the  types of trade capacity building programs the missions manage. In addition,  in conjunction with our work at the missions, we held meetings with other  key U.S. government officials, USAID contractors, host government  ministry officials, and various trade capacity building recipients. We  analyzed data from the U.S. Government Trade Capacity Building database  to identify the major funding categories, agencies, and recipients of trade  capacity building assistance. To assess the reliability of the U.S. Trade  Capacity Building database, we reviewed the survey instruments used to  collect the data, examining country activity sheets and survey forms, and  performed our own data reliability tests. We also interviewed the USAID  contractor that manages the data collection and analyzed the steps the  contractor took to ensure data reliability. For example, we asked the  contractor how the survey data were collected, what quality checks were  performed, and what other internal controls were in place. In Washington,  D.C., we asked U.S. officials at the Departments of Agriculture and Labor  and the U.S. Trade and Development Agency a standard set of data  reliability questions. In El Salvador and Ghana, we conducted data  reliability interviews with officials at the USAID missions. We determined  that the data in the database were sufficiently reliable for the purposes of  identifying the major categories of trade capacity building funding, the  agencies funding the trade capacity building programs, and the regions and  countries receiving trade capacity building funding.
To examine how agencies implement trade capacity building assistance, we  examined agency documents on trade capacity building activities, strategic  plans, and other relevant documents. We asked agency officials about  factors affecting agency decisions concerning the type of assistance  provided, the countries selected as recipients, and the amount of funding.  We focused our interviews on officials at USAID, the U.S. Trade and  Development Agency, and the Departments of Agriculture, Labor, State,  and the Treasury at this stage because these agencies reported  implementing and funding 96 percent of the trade capacity building  assistance in fiscal years 2001 to 2003 (we obtained 2004 data at the end of  the review). To assess how U.S. agencies coordinate the allocation of trade  capacity building assistance, we reviewed published reports on trade  capacity building activities, agency strategies, and program documents. In  Egypt, El Salvador, and Ghana, we interviewed U.S. officials responsible  for implementing trade capacity building activities, as well as host  government officials in Egypt, El Salvador, and Ghana. We observed one  meeting of the interagency group on trade capacity building.
To assess whether agencies evaluate the effectiveness of their trade  capacity building efforts, we analyzed U.S. agency project documents,  annual reports, performance and accountability reports, and reports on  trade capacity building. Using interview responses and analyses of the  reports and documents related to trade capacity building, we examined  these agency efforts against the Government Performance and Results Act  of 1993 criteria for performance monitoring and program evaluation. We  also examined performance and monitoring principles used by multilateral  donors and international organizations that we identified by reviewing a  GAO analysis of relevant U.S. legislation and Organization for Economic  Cooperation and Development documents.
We conducted our work between September 2003 and November 2004 in  accordance with generally accepted government auditing standards.
section_title: U.S. Government Trade Capacity Building Database
paragraphs: The U.S. government has conducted an annual survey of U.S. agencies’  trade capacity building assistance efforts since 2001. The survey collects  funding data for an entire agency or U.S. Agency for International  Development (USAID) mission in the given fiscal year.
U.S. agency officials complete the survey by providing financial  information on funds obligated for various projects and activities in a given  year. Actual expenditures of funds for these activities may not occur until a  year or two after the survey. For example, the fiscal year 2002 database  accounts for obligations in fiscal year 2002. However, activities may not  occur and thus may not be expended until fiscal year 2003, or 2004, or even  later.
To answer the survey, an agency official typically goes through all of the  agency’s projects for a given fiscal year and reviews the survey guidance,  including the trade capacity building categories (see table 1 for complete  list of categories), to determine which projects are related to trade capacity  building. The officials then assign a percentage amount of the total funded  project to a trade capacity building category. An “other” category is  provided for activities that do not fit the given trade capacity building  categories in the survey. In addition, activities in the database are often not  discrete projects but parts of larger programs. For instance, the  USAID/Egypt mission has a $200 million Commodity Import Program, but  only $50 million of the project is counted as trade capacity building and  included in the database.
The database, created by a USAID contractor from the surveys, is available  online at http://qesdb.cdie.org/tcb/index.html. It provides information by  type of activity, by recipient country, and by U.S. government agency.  Agencies are grouped in three ways: those that fund, those that implement,  and those that both fund and implement trade capacity building activities.  The database provides financial information for the period of fiscal years  1999–2004.
According to the survey administrator, the technical team reviewed  completed survey forms, checking for accuracy and consistency in the  reporting and allocation of funding to various trade capacity building  categories. In addition, the survey administrator told us that, whenever a  report was ambiguous or incomplete, the technical team worked with the  reporting U.S. government agency, department, or field mission to amend  the data.
section_title: Total U.S. Funding for Trade Capacity Building, by Region and Country, Fiscal Years 2001–2004
section_title: The Linkages between Trade and Development
paragraphs: Assistance to developing countries for trade capacity building is based on  the premise that international trade can positively benefit a country’s  overall growth and development. Economists postulate that these potential  benefits come as trade increases competition and specialization, provides  greater access to technology for domestic producers, expands export  markets and earnings, and fosters new foreign investment and institutional  reforms. However, economists have also argued that international trade  can create significant challenges for developing countries, such as greater  instability due to volatile export markets, increased reliance on  international debt to finance trade deficits, and exacerbated income  inequality and unemployment. Following the rapid growth of certain East  Asian countries, and more recently China, the role of international trade in  fostering growth and development has become more widely accepted.  Some empirical studies have confirmed a positive relationship between  trade liberalization and growth; however, others question the robustness of  these results and stress that greater openness does not uniformly lead to  development.
subsections: section_title: International Trade May Benefit Growth and Development through a Variety of Channels
paragraphs: Economic theory predicts a variety of ways in which international trade  can positively affect a country’s growth and development. First, greater  openness to imports from other countries increases competition in the  country’s domestic market. This can lead to greater efficiency as less  competitive producers are driven out of the market. In addition, resources  will shift to more competitive producers and industries enabling them to  expand. Second, these expanding domestic producers may now be able to  export their products to a worldwide market, rather than sell them only in  the local economy. With a larger market, some producers also may benefit  from economies of scale in production; that is, they are able to reduce their  costs per unit of output by producing on a larger scale. Third, overall  productivity in the economy can increase due to greater competition and  specialization. Competition increases the number of efficient producers  and reduces the number of less efficient producers. Fourth, imports also  may provide access to machinery and equipment that the domestic  economy does not produce but are needed so domestic firms can expand.  These imports may embody technology and innovations that the domestic  economy lacks but which help improve labor productivity and benefit  industries that use them.
Increased openness to trade may also create incentives for foreign direct  investment and institutional reforms, both of which may facilitate growth.  For example, a more liberal trading regime that reduces costs on both  imported manufacturing inputs and exported final products may create  incentives for foreign producers to invest in new production in the  domestic market since the cost of foreign-produced components used  domestically is lower and producers can export more competitively.  Lower tariffs mean the domestic industry can import components used in  their final products more cheaply, while lower export taxes enable the final  products to be sold at a lower price internationally. Increased foreign  investment expands developing countries’ stock of capital, technology, and  managerial expertise, which may expand production directly through new  subsidiaries and have positive spillover effects on other companies and  industries in the economy. Trade liberalization also may positively affect  institutional development and reform. For example, some economists  argue that greater competition from imports may encourage institutional  reforms and reduce corruption by reducing the monopoly power of  domestic interests that benefited from the protected market. At the same  time, export industries that are expanding to take advantage of  opportunities in the world market have an incentive to lobby for further  reforms that increase the competitiveness of the domestic economy.
section_title: Greater Dependence on Trade May Also Create Significant Challenges for Developing Countries
paragraphs: Economists have also pointed to a variety of significant challenges that  international trade raises for developing countries. For example, many  developing countries have significant exports of primary products, such as  agriculture and raw materials.   Dependence on these types of exports,  particularly for countries that generate their export earnings from a few  products (such as coffee, cocoa, or bananas), creates large economic  fluctuations since primary product prices tend to be relatively unstable. In  addition, many developing country exporters also have faced deterioration  in their terms of trade, as the prices of their export products fell relative to  the prices they paid for their imports. This can create a situation in which  trade barrier reductions in the domestic market increase demand for  imports and displace domestic production, but export sectors do not  expand to capture these resources because prices in world markets are  declining. Consequently, the gap between export earnings and import  payments may lead developing countries to maintain current account  deficits. This means that more foreign currency for imports is paid for  imports than received from selling exports. To acquire foreign currency to  cover this deficit, countries need an inflow of foreign financial assistance,  either through private investment or public assistance (such as loans and  aid). Persistent current account deficits were partly responsible for the  accumulation of debt among developing countries in the 1980s and 1990s.
Some economists point out that, although trade may benefit a country’s  growth and overall wealth, distributional problems such as wage inequality,  unemployment, and poverty may accompany this growth and be contrary  to a country’s development goals. For example, trade liberalization may  worsen a country’s income distribution and reduce the wages of low-skilled  workers if it encourages (as a result of increased foreign competition) the  adoption of technologies that favor more skilled workers. In addition, the  economic changes induced by greater competition may affect workers,  industries, and communities disproportionately.
section_title: Greater Acceptance of Important Role for International Trade in Development
paragraphs: The potentially positive role of international trade on economic growth and  development is not a new concept. Eighteenth-century economists such as  Adam Smith and David Ricardo argued for the benefits of international  trade for economic growth. In the twentieth century, the rise of trade  barriers among the major trading nations and the resulting decline of  international trade has been cited as one of the reasons for the depth and duration of the worldwide recession in the 1930s. Following World War II,  the reduction of trade barriers among trade partners was seen as an  important component of the world economic system. The General  Agreement on Tariffs and Trade was inaugurated in 1947 and then followed  by successive rounds of negotiations, which resulted in the formation of  the World Trade Organization in 1995. Similarly, the United Nations  Conference on Trade and Development was formed in 1964 because of a  general understanding that trade and development were interrelated.
Despite these developments, economists and developing countries from  the 1950s through the 1970s held divergent views about the best policies for  growth and development. These views involved engaging the world market  versus sheltering certain industries from competition until they were better  able to compete. Ultimately, the divergent experiences of developing  countries over this period led to a broader acceptance of the role of  openness to international trade in fostering economic growth and  development. Many countries, such as Argentina, El Salvador, Ghana, and  Nigeria, pursued an inwardly focused development strategy known as  import substitution. This strategy focused on restrictive trade policies that  sought to protect certain domestic industries in order to foster a diverse  industrial base. On the other hand, certain East Asian economies,  including Hong Kong, Korea, Singapore, and Taiwan, pursued a more  outwardly focused development strategy known as export promotion,  which sought to encourage industrial development by tapping into larger  export markets rather than relying on protected domestic markets.  Although the debate between these two broad approaches has swung back  and forth, export promotion, and trade liberalization in general, was more  broadly accepted by the 1980s as the dominant development strategy. This  was due in large part to the rapid growth of the East Asian economies, as  well as China more recently, and the relatively stagnant growth of many  countries that pursued more restrictive policies. Openness to trade, sound  fiscal and monetary policy, security of property rights, and privatization  were key policy prescriptions in what became known as the “Washington  Consensus.” This consensus generally characterized the advice of the  World Bank and International Monetary Fund (both based in Washington,  D.C.) to developing countries.
As a result, since the 1980s, a variety of countries have liberalized their  trade regimes by reducing trade barriers through unilateral, bilateral,  regional, and multilateral trade negotiations. The range of policies that  affect the trade openness of particular countries makes it difficult to  measure levels of openness over time and across countries. However, a  wide variety of evidence shows that developing countries have liberalized  their trade regimes extensively over the past two decades. For example,  average tariffs of developing countries have fallen from around 36 percent  in the early 1980s to around 16 percent currently, based on World Bank and  International Monetary Fund statistics. However, the trend to greater  openness varied among regions and countries, with Latin America tending  to move the most rapidly and comprehensively, while South Asian  countries made little progress until the 1990s. For Ghana and Egypt— countries we visited in our work—average tariffs were similar in the early  1980s at 43 percent and 47 percent, respectively. However, Ghana reduced  its average tariff much more rapidly than Egypt, so that currently Ghana’s  average tariff is about half that of Egypt (16 percent compared to 30  percent).
section_title: Some Empirical Studies Confirm a Positive Relationship between Trade and Growth, but Critics Raise Caution
paragraphs: A large economics literature exists on the relationship between trade and  growth. Many studies have attempted to empirically measure (and confirm)  the relationship between a country’s level of openness to trade and per  capita income, or the relationship between changes in trade flows and  changes in gross domestic product (growth). For example, regularly cited  research by economists David Dollar, Aart Kraay, Jeffrey Sachs, Andrew  Warner, Dan Ben-David, and Sebastian Edwards generally finds an  important relationship between changes in trade flows or liberalization and growth rates across countries. The studies construct measures of  openness to trade and econometrically estimate the relationship to growth,  controlling for causality (e.g., growth may also spur increased trade) and  other factors that affect growth. Similarly, research over the past 15 years  by economists Robert Hall, Charles Jones, Andrew Rose, Jeffrey Frankel,  and others have found that large differences across countries in the level or  the growth rate of real GDP per capita may be systematically related to the  level (or degree) of openness of those countries. However, these studies  have also found that institutional quality, such as the effectiveness of  government, is also an important factor affecting growth and difficult to  separate from the effects of openness.
Although there is a general acceptance that trade can play an important  role in economic development, some economists have criticized the  methodologies used to study the relationship between openness and  growth. For example, Francisco Rodriguez and Dani Rodrik argue that  methodological problems in this literature leave the results open to diverse  interpretations. They find little convincing evidence that changes in trade  policy (i.e., reductions in government-imposed trade barriers) are  significantly associated with economic growth. One challenge that affects  the robustness of studies trying to estimate the impact of trade  liberalization on economic growth is constructing reliable and reasonable  measures of “openness.” The few measures that are relatively widely  available, such as tariff rates, do not fully capture the wide range of policies  that governments may put into place to affect trade. Data are not readily  available on barriers other than tariffs (e.g., nontariff barriers such as  quotas) for many developing countries. Furthermore, for those countries  for which some data are available, generally only information on whether  or not nontariff barriers are in force is available, rather than precise  information on their relative restrictiveness or actual effect on trade.
In addition, less is known about the relationship between trade capacity  building and other factors affecting economic growth and development  (such as institutions and human capital). Although increased trade appears  to be potentially beneficial to growth and development, countries that have  liberalized over time have had mixed experiences. As mentioned above,  institutional factors also appear important, as do geographical factors  (proximity to trade partners), in the extent to which countries benefit from  greater connectedness to the world economy. Countries in sub-Saharan  Africa have remained relatively less developed and marginalized compared  to developing countries elsewhere, despite undergoing some degree of  trade liberalization. Trade liberalization alone does not appear to be a  sufficient criterion for development but is one of several important factors.  Also, the speed at which the global economy evolves may initially benefit a  developing country but later pose difficulties as labor tries to adjust to new  conditions. For example, the removal of textile and apparel trade  restrictions on January 1, 2005, by developed economies such as the United  States and European Union will allow China and other large clothing  producers to compete against other developing countries for their market  share previously protected by the quotas. Some economies may have  difficulties adjusting to rapid changes in their export markets after having  built up significant industries under the quota system.
section_title: Comments from the U.S. Agency for International Development
paragraphs: The following are GAO’s comments on the U.S. Agency for International  Development’s letter dated January 18, 2005.
subsections: section_title: GAO Comments
paragraphs: 1. We have made changes in the report language to recognize that, while  many U.S. trade capacity building efforts are existing activities, some  trade capacity building activities are new. 2. To ensure accountability, it is GAO policy to address recommendations  to agency officials, rather than to the agency as a whole. However, we  have added the term “cost-effective” to the recommendation as  suggested in the letter.
section_title: Comments from the Office of the U.S. Trade Representative
section_title: Comments from the Department of the Treasury
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Nina Pfeiffer, Rhonda Horried,  Ann Baker, and Tim Wedding made key contributions to this report.   Martin De Alteriis, Lynn Cothern, Etana Finkler, Curtis L. Groves, and   Ernie Jackson also provided assistance.