Trade capacity building (TCB) can be broadly defined as development assistance aimed at helping countries build the physical, human, and institutional capacity to participate in global trade. It includes assistance to negotiate, implement, and benefit from trade agreements, such as agreements within the World Trade Organization (WTO), and regional and bilateral free trade agreements. Many experts consider TCB to be vital for developing countries to benefit from trade liberalization and to participate actively in the global economy. In turn, trade liberalization and participation in the global economy are considered important factors in promoting economic growth and poverty reduction. This report examines key issues in TCB, provides an overview of U.S. and international TCB programs, and explores Congressional involvement in TCB. TCB is provided by bilateral donors such as the United States, the European Commission, individual European countries, and Japan, Korea, and Canada. Multilateral institutions such as the World Bank, the Inter-American Development Bank (IDB), the World Trade Organization (WTO), and the United Nations also provide TCB. Direct recipients of TCB include government ministries, customs officials, business owners, local non-governmental organizations (NGOs), and farmers. TCB can take the form of workshops, on-the-job training, data collection, feasibility studies, infrastructure upgrades, and efficiency improvements in procedures. Ideally, developing countries incorporate TCB needs in their national development plans, and TCB programs are planned in partnership between recipient and donor countries. The U.S. government provides TCB assistance to developing countries worldwide on a bilateral basis, and through contributions to multilateral organizations and established global TCB trust funds. The U.S. Agency for International Development (USAID) has historically provided the bulk of U.S. TCB assistance, but other agencies such as the U.S. Department of Agriculture (USDA), U.S. Department of Commerce, and U.S. Trade and Development Agency (USTDA) also provide such assistance. The Millennium Challenge Corporation (MCC) first provided TCB assistance in FY2005, and in FY2006 and FY2007 its TCB funding obligations surpassed those of USAID. U.S. TCB is not currently a discrete line item with its own budget; it is funded through several different initiatives within USAID and other agencies. In FY2007, U.S. government agencies reported obligating nearly $1.4 billion to TCB, of which over $1 billion was obligated by the MCC and USAID. According to the Organization for Economic Cooperation and Development (OECD), the United States allocated about 25% of its total official development assistance (ODA) to TCB between 2002 and 2005. Interest in TCB has grown in the donor community, both in the United States and abroad. As developing countries become more involved in trade negotiations, trade capacity becomes a higher priority issue for them and for donors. Developing countries from every region have entered free trade agreement (FTA) negotiations with the United States or the European Union. They have also been heavily engaged in the Doha round of WTO negotiations. In order to conclude the Doha round and other trade negotiations, developing country needs may require consideration, and that may include additional resources for TCB. Congress has several policy interests in TCB. First, TCB may be included in some potential free trade agreements (FTAs). The United States has concluded FTA negotiations with some developing countries, and Congress may be asked to consider implementing legislation for these potential FTAs. Congress also appropriates funds for TCB through USAID and other budgets. Congress may play a role in oversight of TCB programs, to ensure effectiveness and adherence to U.S. interests. TCB is also considered a compliment to U.S. trade preference programs such as the African Growth and Opportunity Act (AGOA), which Congress oversees. Finally, TCB is provided to developing countries through their participation in the WTO, and has been a topic of discussion in the Doha Development Agenda (DDA) round of negotiations. Congress may consider implementing legislation for a WTO agreement, and TCB could be important in that discussion. There is no set definition of TCB in trade and development public policy discourse. A narrow definition of TCB might include only assistance directly related to trade agreements, such as assistance to negotiate and implement such agreements. However, TCB is usually defined more broadly to include all types of development assistance that directly affect a country's capacity to participate in trade. This broader definition of TCB is assumed for the purpose of this report (see the box on page 3 for elaboration on the various areas of TCB assistance). The assistance contained within the broad definition of TCB includes addressing the regulatory environment for business, trade, and investment, supply-side constraints such as low productive and entrepreneurial capacity, and inadequate physical infrastructure such as transport and storage facilities. The goals of TCB include overcoming adjustment costs from liberalized trade; offsetting high implementation costs of trade agreements; offsetting preference erosion from multilateral liberalization; offsetting lost tariff revenue; improving negotiating capacity; and addressing supply-side constraints that make it difficult for developing countries to compete in world markets. A risk of defining TCB too broadly is that almost any assistance activity can be loosely defined as TCB. There are many areas of assistance that focus on domestic policy and capacity issues in a developing country, for example, business regulatory regimes, but also have direct consequences for trade. However, there are other areas of assistance, such as providing training to local microenterprises that are not likely to engage in international trade, where the linkage to trade is often not clear. In some cases, two similar projects in different countries can be similarly described on paper, but may be implemented with different objectives in mind. One project may be strongly trade-related, while another may not qualify strongly as TCB. This poses a problem when examining the aggregate TCB data. It is useful to know the total amounts of TCB assistance provided to different countries for summary purposes, but this data should be viewed as an inexact estimate of TCB, rather than as a definitive tool for measuring TCB assistance. Trade capacity building has some synonyms. It is also referred to as aid for trade or trade-related technical assistance (TRTA), especially within the context of the WTO. Some distinctions can be made between these terms, but since there is no agreement on them they are treated as interchangeable within this report. Most developing countries lack the physical, institutional, or human capacity to participate effectively in world trade. Physical capacity includes infrastructure essential to trade such as ports, roads, and storage facilities. Institutional capacity refers to the business and trade policy environment, in addition to the strength of the financial sector. Institutional capacity relates to the existence of effective administrative and regulatory regimes, including property rights and formal business registration procedures. Human capacity refers to the technical competence of individuals such as government officials, entrepreneurs, and producers to contribute to international trade. The box on the following page breaks down further the different categories of TCB. Trade capacity building is based on the premise that trade liberalization leads to economic growth for both developed and developing countries, but developing countries do not have the capacity to achieve trade-led economic growth without assistance. On a more basic level, TCB assumes that donors can have an impact on trade capacity in developing countries. TCB is often cited as an important complement to market access, which is believed to be necessary but insufficient for developing countries to increase participation in trade. Other reasons given for TCB are to offset preference erosion and the adjustment costs of trade liberalization. Increased market access through preferential treatment, trade agreements, and other programs may not be sufficient to increase developing countries' participation in international trade. Beginning with the Generalized System of Preferences (GSP) in the 1970s, the United States and other developed countries have provided increased market access to products from developing countries through trade preference programs. Trade preference programs provide duty-free and/or quota-free access to certain products from certain developing countries, with stated limitations such as rules of origin. Despite the GSP and other trade preference programs such as the African Growth and Opportunity Act (AGOA), most developing countries have not substantially increased their trade globally or with the United States. Perhaps more importantly, many developing countries have not diversified their exports out of primary commodities. Low income developing countries have faired the worst: between 1990 and 2003, low income developing countries only increased their share of the global market for non-oil trade by one half a percentage point and least developed countries (LDC) have only maintained their market share. During the same time period, middle income countries increased their market share by about 14 percentage points. A few exceptions have occurred in countries that have attracted investments in textile and apparel manufacturing. Some critics blame the lack of trade growth on the preference programs themselves, arguing that the rules of origin are too stringent or that the programs exclude products in which developing countries have a competitive advantage. Also, the temporary nature of preference programs may add greater uncertainty to an already risky business environment, discouraging both foreign and domestic investment. Other experts believe that trade capacity is a more important factor than any of the above. It is broadly accepted that many developing countries have not benefitted from market access opportunities because of inadequate knowledge of these opportunities, non-competitive production capacity, lack of the necessary exporting infrastructure, inability to meet prevailing standards in high value export markets, and being crowded out of some markets by domestic support and export subsidies of developed countries. This view is not new: a 1980 Congressional Budget Office (CBO) report found that "actual exports depend on the ability of the economy to produce competitively, and preferences of the sort granted by GSP may not be sufficient to compensate for the differences in competitiveness among countries, or between U.S. producers and those in developing countries."