# **_I. Introduction_**

This paper brings together two strands of research to examine the specific question of whether foreign aid directed toward the trade facilitation agenda has increased trade of developing countries. The two strands of research are first, the relationship between trade facilitation and trade flows, and the second is the relationship between aid flows and trade flows. We wish to marry these two lines of research because of the increasingly important constellation of issues surrounding trade, aid, and development policies, as well as the increased attention to aid effectiveness and aid-for-trade in trade negotiations and other multilateral forums. The main strength of our approach is that we use detailed data on types of aid flows, which allows us to examine the relationship between aid-and-trade according to different classifications of the type of aid extended and received.

The linkages between trade facilitation, trade, and development are relatively simple in theory. Development is enhanced through income growth, which comes from the expansion of trade, investment, and production opportunities. Trade facilitation initiatives, with the aim of lowering trade transactions costs, can enhance trade competitiveness, and expand trade flows, while at the same time playing an important role in supporting a positive business climate.

In practice, implementing trade facilitation initiatives involves the domestic reform agenda, private sector priorities, and national development strategies. Trade facilitation reform requires self-assessment, technical assistance, and capacity building. In other words, trade facilitation reforms are difficult to do and cost money.

Hence, with greater attention to the potential gains to trade facilitation reforms has come greater attention to how to enable and finance those reforms. The trade facilitation agenda is part of the Doha Development Round of the World Trade Organization. Other multilateral institutions and other groups have established task forces and research programs to understand better the impact of trade facilitation reform on development, how lower trade costs affect trade, and, importantly for this research paper, what role aid and technical assistance have in supporting development and poverty reduction goals.<sup>5</sup> Empirical research on trade facilitation has largely focused on the question: What is trade facilitation and how does it work to enhance trade? A number of studies provide strong evidence that improvements in trade-facilitation— for example improvement in port and information infrastructure, more rapid customs clearance time, or regulatory reform to remove duplicative technical requirements on imports have a positive impact on trade

> 5 One example of a public private dialogue on trade facilitation reform is the Global Partnership for Transport and Trade which brings together international agencies in trade facilitation, such as the United Nations Conference on Trade and Development (UNCTAD), World Bank, and World Customs Unions (for more information: <u>http://www.gfptt.org). The World Bank has had an on-going research project on the</u> relationships between trade facilitation and trade performance, http://econ.worldbank.org/projects/trade_costs

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