Poultry in Motion: A Study of International Trade Finance Practices
This paper analyzes the financing terms that support international trade and sheds light on how and why these arrangements affect trade. Using detailed transaction level data from a U.S. based exporter of frozen and refrigerated food products, primarily poultry, it begins by describing broad patterns about the use of alternative financing terms. These patterns help discipline a model in which the trade finance mode is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as specified in the contract. The empirical results indicate that transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement and in a country that is further from the exporter. Letters of credit, however, are rarely used by the exporter. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance terms prior to the crisis disproportionately reduced their purchases. These results can be rationalized by the model whenever (i) misbehavior on the part of the exporter is of little concern to importers, and (ii) local banks in importing countries are typically more effective than the exporter in pursuing financial claims against importers.
The authors are very grateful to numerous employees at the anonymous firm that provided the data and to Matthew Johnson for excellent research assistance. We also thank Kyle Bagwell, Mihir Desai, James Hines, Kalina Manova, Francisco Pérez-González, Mitchell Petersen, Catherine Thomas, Tim Schmidt-Eisenlohr, Andrei Shleifer, Bob Staiger, and seminar participants at the AEA meetings, Boston University, Columbia, Duke, Harvard, LSE, Manneim, the NBER CF Program Meetings, the NBER ITI Program Meetings, Nottingham, Oxford, and the University of Missouri for helpful comments. Foley thanks the Division of Research of the Harvard Business School for financial support. Other work also uses the phrase "Poultry in Motion," including the album by Hasil Adkins and the film "Chicken Run." The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Pol Antràs & C. Fritz Foley, 2015. "Poultry in Motion: A Study of International Trade Finance Practices," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 853 - 901. citation courtesy of