This paper investigates the optimal choice of foreign aid when trade policies are decided in a non-cooperative fashion. Three alternative scenarios, depending on the timing of the actions, and on whether aid is tied, are analyzed. It is shown that, in the case where aid is decided before tari®s, untied aid can lead to the reduction of the recipient's optimal trade tax. This opens up the possibility that optimal aid is positive and that the world achieves a Pareto-e±cient equilibrium. When the donor can tie the aid to a reduction in the recipient's tari®, the optimal aid level is always positive, and the world can always achieve a Pareto-e±cient equilibrium.JEL Classi¯cation: F13, F35, O0.

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