How Trade Effect of Foreign Aid Evolves : Evidence from the United States

Unlike the average trade effect estimation of foreign aid discussed in previous studies, this paper explores the trade effect evolution of foreign aid and provides some explanations for it by employing a two-step methodology: a varying-coefficient panel data gravity model and controlling for the impact of aid competition. We utilize the data of the United States as a donor from 1962 to 2018 to show the evolving trade effect of foreign aid. Several endogeneity and robust tests provide support for the evolving trade effect of aid. The second step provides evidence that donors’ scale of aid, and the (export) industry structure all impact the trade effect of aid. The scale of aid and the (export) industry structure play a moderator role in their impact of aid share to recipients and the scale of aid on the trade effect, respectively. The study also estimates the threshold values of moderating variables