Ebook Exports and Financial Shocks
One of the most striking features of the financial crisis of 2008 was the collapse in international trade. Figure 1 plots the ratio of world trade to GDP for a sample of the larges economies in the world. As one can see from this plot, the decline in world exports was much greater than the decline in world GDP. While GDP fell 10 percent between the first quarter of 2008 and the first quarter of 2009, exports plunged 28 percent, which amounts to a 761 billion dollar decline.
Interestingly, the decline was much larger than what would have been predicted by standard gravity and macro models of trade that base export changes on changes in supply, demand, and relative prices (c.f. Chinn (2009), Campbell et al (2009), and Levchenko et al. (2009), and OECD (2009)).
The puzzling drop has prompted a number of observers to postulate that trade finance may be partially responsible for the decline (c.f. Auboin (2009), Dorsey (2009) and OECD (2009). This view is largely based on anecdotal evidence from bank surveys that indicate that finance conditions tightened during this period. However, as Dorsey (2009) has noted, it is difficult to separate cause and effect. Moreover, the standard proxies for trade finance used in the literature e.g. trade credit or short-term credit are extremely noisy measures of trade finance, making conclusions based on these variables hard to interpret.
Our study overcomes these difficulties by using unique matched firm-bank data to examine the link between finance and exports during the Japanese financial crises of the 1990s. This is the first paper to match exporters with the institutions that provide them with trade finance and establish a causal link between the health of these banks and export growth. Importantly, we also demonstrate that domestic sales are not affected by the health of banks providing trade finance. This establishes that financial shocks affect exports differently than domestic sales. Moreover, the point estimates suggest that the partial effect of bank crises on exports accounts for about one third of the dramatic drop in exports observed in the Japanese financial crisis of 1997-8.
Proponents of a trade finance channel between banks and exporters note that exports are more sensitive to financial shocks due to the higher default risk and working capital requirements associated with international trade. In particular, exporters rarely have the capacity or willingness to evaluate counter-party default risk and usually turn to banks to provide payment insurance and guarantees. Moreover, the longer time-lags associated with international trade require greater export working-capital financing than those with domestic transactions.
As a result, virtually every exporter works with a bank or other financial institution to obtain credit or export guarantees. For example, Marc Auboin (2007), using data from the Joint BIS-IMF-OECD-World Bank Statistics on External Debt for 2004, estimates that 90 percent of trade transactions involve some form of credit, insurance or guarantee issued by a bank or other financial institution. We will henceforth refer to this nexus of financial arrangements as “trade finance” i.e. the use of financial intermediaries to manage an exporter’s payment risk and terms. The fact that exporters depend so heavily on financial institutions for working capital and risk insurance suggests that if a credit crunch causes banks to limit trade finance, exports are likely to be differentially affected.
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