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Trade Shocks and Credit Reallocation

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  • Rappoport, Veronica
  • Federico, Stefano
  • Hassan, Fadi

Abstract

This paper shows that there are endogenous financial constraints arising from trade liberalization. Banks with a large share of loans on firms exposed to competition from China suffer an increase in non-performing loans and reduce their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China, and firm expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade retards the reallocation of factors of production between firms and sectors, crucial to the welfare implication of trade liberalization.

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  • Rappoport, Veronica & Federico, Stefano & Hassan, Fadi, 2020. "Trade Shocks and Credit Reallocation," CEPR Discussion Papers 14792, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14792
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    3. Lloyd, Simon & Reinhardt, Dennis & Sowerbutts , Rhiannon, 2023. "Financial services trade restrictions and lending from an international financial centre," Bank of England working papers 1022, Bank of England.
    4. Berthou Antoine, & Mayer Thierry, & Mésonnier Jean-Stéphane., 2021. "Good Connections: Bank Specialization and the Tariff Elasticity of Exports," Working papers 814, Banque de France.
    5. Federico Cingano & Fadi Hassan, 2020. "International financial flows and misallocation," CEP Discussion Papers dp1697, Centre for Economic Performance, LSE.
    6. Christian Keuschnigg & Michael Kogler, 2022. "Trade and credit reallocation: How banks help shape comparative advantage," Review of International Economics, Wiley Blackwell, vol. 30(1), pages 282-305, February.
    7. Hassan, Fadi & Esposito, Federico, 2023. "Import Competition, Trade Credit, and Financial Frictions in General Equilibrium," CEPR Discussion Papers 17926, C.E.P.R. Discussion Papers.
    8. Jin Cao & Valeriya Dinger & Ragnar E. Juelsrud & Karolis Liaudinskas, 2022. "Trade Conflicts and Credit Supply Spillovers: Evidence from the Nobel Peace Prize Trade Shock," CESifo Working Paper Series 10036, CESifo.
    9. Ricardo Correa & Julian di Giovanni & Linda S. Goldberg & Camelia Minoiu, 2023. "Trade Uncertainty and U.S. Bank Lending," International Finance Discussion Papers 1383, Board of Governors of the Federal Reserve System (U.S.).
    10. Cao, Jin & Dinger, Valeriya & Juelsrud, Ragnar E. & Liaudinskas, Karolis, 2022. "Trade conflicts and credit supply spillovers : Evidence from the Nobel Peace Prize trade shock," BOFIT Discussion Papers 8/2022, Bank of Finland, Institute for Economies in Transition.
    11. Izadi, Mohammad & Saadi, Vahid, 2023. "Banking Market Structure and Trade Shocks," Journal of Banking & Finance, Elsevier, vol. 153(C).

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    JEL classification:

    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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