Credit Conditions and International Trade during the Global Financial Crisis

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Adverse credit conditions were an important channel through which the global economic and financial crisis of 2008-9 affected trade volumes.

In Off the Cliff and Back? Credit Conditions and International Trade During the Global Financial Crisis (NBER Working Paper No. 16174), co-authors Davin Chor and Kalina Manova provide new evidence that adverse credit conditions were an important channel through which the global economic and financial crisis of 2008-9 affected trade volumes. Using data on U.S. trade with the world before and during the crisis, they find that countries with tighter credit markets exported less to the United States during the peak of the crisis.

Because exports incur higher financial risks than domestic activities, it has been estimated that over 90 percent of world trade depends on some form of trade finance or insurance. To acquire that financing, firms need to guarantee lenders that export revenues will be high (and thus that demand in the export destination market is high). A fall in U.S. demand makes it harder for foreign firms to obtain trade financing at home, thereby reducing the quantities they export. As a result, the plummeting U.S. demand during the financial crisis likely magnified the detrimental trade effects of tight credit in foreign markets.

Moreover, the tighter credit conditions in the United States during the crisis period reduced export activity for firms outside the United States that relied on some form of financing in the U.S. destination market. This had more severe consequences in exporting countries with tighter initial credit conditions, because such firms could not fall back on domestic credit markets to compensate for the tighter credit conditions in the United States.

These effects were especially pronounced in sectors that require extensive external financing, have few tangible assets to use as collateral and offer to secure a loan, or have limited access to trade credit. Exports of financially dependent industries thus were more sensitive to the cost of external capital than exports of less dependent industries, and this sensitivity rose during the financial crisis. Therefore, the uneven impact of the crisis across countries and sectors can be attributed to the multiplicative effects of tighter credit at home, tighter credit and depressed demand in the export market, and sectors' varying degree of financial dependence. The authors explore the extent to which strong pre-crisis financial institutions mitigated the subsequent impact of the crisis on export activity. They confirm that economies with higher initial levels of financial development and stronger initial financial institutions exhibited greater resilience to the crisis.

The authors also study the potential effects of policy intervention. If credit conditions had remained as tight as they were in September 2008 for one year -- through August 2009 -- they estimate that U.S. imports would have fallen by an additional 2.5 percent. Imports in sectors of the U.S. economy that are highly dependent on external financing would have fallen over 13 percent more than in other sectors. On the other hand, had credit conditions been eased to the levels of August 2009 at the beginning of the crisis, U.S. imports would have been 5.5 percent higher than they were.

-- Claire Brunel