Chinese Aid for Trade: What makes it so special?

26 May 2015

China has become a major player in providing Aid for Trade (AfT). However, Beijing's trade-related South-South cooperation is a mix of strengths and weaknesses. What makes China’s approach distinctive, and what are the avenues for collaboration with the OECD?

Trade and investment are two central means by which China engages economically with developing countries. The country has become a significant provider of foreign assistance through South-South cooperation in Asia, Latin America, and especially in Africa. In many Least Developed Countries (LDCs), China is now the major source of aid, trade and investment. However, the various instruments stated to be part of the Chinese foreign assistance programme do not all qualify for reporting as Official Development Assistance (ODA) as defined by the Organisation for Economic Co-operation and Development (OECD).

Engaging with China in a manner that contributes to international efforts to improve development effectiveness and achieve the Millennium Development Goals (MDG) has been a preoccupation for the members of the OECD Development Assistance Committee (DAC). China’s acceptance of the principles, commitments, and actions enshrined in the Busan Partnership for Effective Development Co-operation as the reference for South-South cooperation, albeit on a voluntary basis, is therefore a welcomed move. This global partnership launched in December 2011 provides the basis for promoting stronger engagement between China and DAC members in delivering both increased and improved development co-operation, including Aid for Trade (AfT). In fact, the new white paper on China’s foreign aid issued in 2014 shows that a significant proportion of Chinese aid activities involves building, directly or indirectly, recipient countries’ trade capacities.

The path of Chinese aid for trade 

China estimates its foreign aid over 2010-2012 at around US$14.4 billion according to the 2014 white paper. Around half of that aid was directed towards economic development sectors. In general, China’s development strategy is more integrated with trade and investment. In fact, in comparison with the practices in DAC members which are subject to certain aid disciplines, the distinction between aid, trade, and investment is often blurred. China’s aid is often delivered as part of a larger package of investments and trade deals, blended with much larger non-concessional loans and export credits. Nonetheless, a significant proportion of China’s aid activities – especially in transport, power, and telecommunications – appears to fall within the scope of AfT.

Trade-related assistance has long been an integral part of China’s aid programme, and has increased significantly since the 2005 Hong Kong WTO Ministerial Conference – see “China and Aid for Trade” (MOFCOM, 2013). While no official figures of Chinese AfT exist, the OECD estimates that China, on average, disbursed US$743 million as AfT between 2006 and 2011. At the Fourth WTO Global Review of Aid for Trade in 2013, China stressed its commitment toward increasing investments overseas over the next five years which would create opportunities for other developing countries and LDCs in terms of poverty reduction and employment.

According to a survey conducted by the OECD and the WTO, China’s trade-related assistance comprises three elements: 1) Duty-free and quota-free market access to products from LDCs; 2) large-scale infrastructure projects (e.g. roads, ports, and factories) to address supply-side constraints; and 3) capacity development training programmes and sharing of Chinese knowledge and experience in economic and trade development.

Concessional loans are mainly used to finance projects that may qualify as AfT– although the primary purpose of these loans is to provide capital to Chinese exports. Concessional loans are the growing source of Chinese aid. According to the 2014 white paper, China provided almost US$ 7.3 billion in concessional loans just between 2010 and 2012, accounting for 56 percent of total foreign aid.

Complete projects (i.e. completed mainly by Chinese engineers and labour and delivered as finished products to the recipient country) are another major form of China’s aid, financed with either grants or interest-free loans. By the end of 2009, China had completed more than 2’000 complete projects in various sectors, such as transport, power supply, telecommunications, agriculture and industry. Between 2010 and 2012, China completed an additional 580 of such projects in 80 countries. Though China does not appear to have a specific regional approach to its South-South cooperation, more than half of its foreign aid was directed to Africa, underscoring Beijing’s interest in deepening economic and trade ties with the continent. China’s direct investment in Africa is fast growing, from US$1.44 billion in 2009 to US$2.52 billion in 2012 (PRC, 2013). At the Fifth Forum on China-Africa Cooperation (FOCAC) Ministerial Conference in Beijing in 2012, China offered US$ 20 billion in preferential loans to African countries mainly for infrastructure construction, doubling the amount it offered at the FOCAC in 2009. This pledge was boosted by another US$10 billion this year. In 2012, China also established the trans-national and trans-regional infrastructure construction cooperation partnership with African countries that will help to bring more investment from Chinese companies to the continent.

Harmonising Chinese Aid for Trade

AfT is about enabling developing countries to use trade more effectively to promote growth and poverty reduction. It has become an integral part of the broader aid effectiveness agenda. Strong country ownership, coordination, alignment, and harmonisation are particularly important for AfT effectiveness.

In practice this means that developing countries, on the one hand, need to integrate trade objectives into their development strategies and take the lead in their implementation. External partners, on the other hand, are expected to align their assistance with these strategies and priorities and use local systems to the largest extent possible. Furthermore, all AfT activities should be delivered in a harmonised and transparent manner. In particular, harmonisation is a key component of the aid effectiveness agenda, because it ensures that external partners coordinate their efforts to avoid duplication of support, which normally tends to result in lower marginal productivity of aid resources. Finally, managing and being accountable for results should ensure effective delivery of AfT.

Co-financing is often used as a way to promote harmonisation of multiple external interventions to overcome a common development obstacle. The regional and sub-regional transport corridor projects (e.g. the Greater Mekong Sub-region corridor projects in Southeast Asia) are good examples, which typically involve multiple players specialising in different aspects but working together toward a larger whole. A number of countries, including China, also channel AfT contributions through multilateral programmes (the Enhanced Integrated Framework) or multi-donor trust funds (WTO Global Trust Fund) as part of their efforts toward greater harmonisation.

China has mostly provided foreign assistance through bilateral channels and has tended to stay away from mechanisms or instruments set up in many recipient countries to coordinate and harmonise aid activities. Nevertheless, recent years have witnessed an increasing readiness by China to engage with others on issues related to foreign aid and global development challenges. China underlines in the new white paper that it stands ready to “work with the international community to share opportunities, meet challenges, strive to realise the world’s dream of lasting peace and common prosperity, and make greater contribution to the development of mankind.”

China has become more active in recent years in the international dialogue on aid effectiveness and a Chinese delegation attended the Third High Level Forum on Aid Effectiveness held in Accra, Ghana in 2008. China’s perspectives were taken up in the Accra Agenda for Action, which recognised South-South cooperation as a valuable complement to North-South cooperation. In 2011, China participated in the Fourth High Level Forum on Aid Effectiveness held in Busan and adopted the outcome document. With an enhanced ability to participate in globally shared efforts, China increasingly works with other development partners, particularly with multilateral organizations. The new white paper highlights China’s exchanges with Australia, Switzerland, the United Kingdom and the OECD.

For example, China co-financed jointly with Thailand and the Asian Development Bank the construction of the Laotian section of the Kunming-Bangkok Expressway under the framework of the Greater Mekong Sub-region programme. China is also an active contributor to the Aid for Trade initiative, establishing in 2011 the China Programme at the WTO for supporting the LDCs in their accession to the multilateral trade organisation. China has so far contributed US$1.2 million to the programme. More recently, China has set up a US$2-billion investment fund, called the Africa Growing Together Fund, inside the African Development Bank to co-finance infrastructure and industrial development projects in Africa.

Nevertheless, some commentators conclude that the primary rationale for Chinese aid is the advancement of strategic economic interests. For example, in Cambodia (a major political ally), China’s assistance is mostly directed to economic infrastructure projects, i.e. transportation, power, and telecommunications. A study by Sok Siphana and Associates (2011) reports that, although it does not participate in coordination meetings, China does adhere to the basic tenets of the Paris Declaration, namely ownership, accountability, harmonisation, and alignment. Moreover, the country applies few conditions for aid compared with DAC members operating in Cambodia but all of China’s funded projects have been implemented through a parallel implementation unit that is not integrated into the national system.

Finding common ground

A report by the China-DAC Study Group on development partnerships concludes that comparative advantages and complementarities of development partners should constitute a coherent overall effort and requires ongoing dialogue, rather than detailed coordination, at the international level. Indeed, the DAC’s current relationship with China is rooted in the realisation that ‘common interests’ rather than ‘common values’ are what they share in promoting global development. China and many DAC members also signed the G20 Development Principles agreed at the Seoul Summit in November 2010, which commit all actors to coordinate their different but complementary development efforts.

Indeed, China acknowledged in the 2011 white paper that the quality of its foreign aid programme needs to improve and the government considers factors such as country ownership with mutual respect, time-bound delivery with tangible results, and recipients’ satisfaction as fundamental for effective aid. Therefore, ownership, capacity development, and mutual learning are among those shared concepts that provide a basis for complementary efforts by China, DAC members, and other development partners.

Conclusion

One characteristic of the AfT initiative is its emphasis on South-South trade-related cooperation. The Busan outcome document, which also recognizes the importance of AfT as an engine of sustainable development, now provides the common framework to strengthen the alliance between the providers of South-South cooperation and the DAC in delivering increased and improved AfT. This global partnership can be used as a platform for active knowledge-sharing, including lessons from the success of South-South trade-related cooperation.

Author: Masato Hayashikawa, Advisor, Inclusive Growth and Knowledge Sharing Alliance Unit, Office of the Secretary-General, OECD.

The views expressed herein are those of the author and do not reflect the views of the OECD or its member countries.

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