How Does Development Aid Impact Trade Performance and Margins? Evidence from China

We study the impact of China’s foreign aid on exports at the product level. To do this, we use a sample of 159 countries and a trade decomposition on 1366 HS4 products over the period 2000-2014. We employ a PPML methodology in a gravity framework. We find that the return on Chinese exports of every dollar spent on foreign aid is rather small, on average, at the HS4 product level, for the whole period. Moreover, we disentangle between difierent categories of international aid and find that the aid related to infrastructure, productive capacity, and other aid categories has positive effects on trade. Our results also indicate that the Chinese foreign aid enhances, at product level, the trade in new varieties but does not help the country to export more of the already traded products. In other words, at product level, the trade extensive margins are strengthened, while the intensive margins are not. We also find that, at geographical level, aid helps China exporting more towards the countries that are already its trade partners (the geographical trade intensive margins are boosted), but does not promote trade relations with new partners (no effect on the geographical trade extensive margins).