Does Aid for Trade Reduce Trade Costs? Panel Data Evidence from Inverse Gravity

Although the Aid for Trade (AfT) initiative was officially launched ten years ago, empirical evidence on its effectiveness in reducing trade costs is still scarce. This paper uses new trade cost estimates inferred from the gravity model to examine how different types of AfT are linked with trade costs. The analysis includes panel data on bilateral trade costs for 182 countries over the period 2002-2013. Overall, I find that AfT is significantly associated with reducing trade costs across all countries, as well as in certain sub-samples based on income group or region. The effects further vary by specific AfT categories, with AfT Policies & Regulations and particularly AfT Facilitation, indicating the largest potential return on AfT disbursed, especially in Least Developed Countries.