New implications of aid for trade: The impacts of ODA on donor-recipient trade relationship

Abstract This paper, using the OECD DAC's ODA (Official Development Assistance) database and UN Comtrade's trade data, empirically demonstrates that donor countries can utilize development aid as an instrument to build stable trade relationships and expand trade with recipient countries by strategically directing aid to targeted recipients. The empirical results indicate that a bilateral donor-recipient pair is more likely to establish a stable trade relationship and experience greater growth in bilateral trade flows than in the absence of such aid. The effects of aid on trade stability persist across various settings: whether the trade type is export or import, whether the traded goods are final or intermediate, and whether the aid is provided as loans or grants. The impacts of aid on fostering bilateral trade growth are also significant. Particularly, concessional loans are far more effective than grants in promoting donor-recipient trade growth, especially in stimulating the recipient's imports from the donor. These findings suggest that donor countries can leverage development aid as a strategic measure to mitigate the risk of global supply chain disruptions and secure overseas export markets during external trade shocks, such as the global financial crisis and the COVID-19 pandemic.