The Coherence of Trade Flows and Trade Policies with Aid and Investment Flows

This paper provides a theoretical and empirical overview of the relationships among trade, aid and FDI, both in terms of policy interactions and interactions among resource flows. Aid flows from one country to another can have positive or negative effects on trade flows between those countries. These effects, in turn, may act at two different levels. There are macro-level links between aid and trade: aid enhances saving, permitting more imports, or aid raises the real exchange rate, depressing exports. There are also micro-level mechanisms: tied aid may increase exports if it is spent on enhancing trade capacity, but other forms of tied aid merely lead to allocative inefficiency. Aid flows can affect trade policy in the developing country that...