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International trade, risk and the role of banks

Listed author(s):
  • Niepmann, Friederike
  • Schmidt-Eisenlohr, Tim

International trade exposes exporters and importers to substantial risks. To mitigate these risks, firms can buy special trade finance products from banks. Based on unique data with global coverage, this paper explores under which conditions and to what extent firms use these products. 15% or $2.5 trillion of world exports are settled with letters of credit and documentary collections. Letters of credit are employed the most for exports to countries with intermediate contract enforcement, and they are used for riskier destinations than documentary collections. The 2007/2008 financial crisis affected firms' payment choices, pushing them to use more letters of credit. These patterns follow naturally from a model of payment contracts in international trade.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022199617300338
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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 107 (2017)
Issue (Month): C ()
Pages: 111-126

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Handle: RePEc:eee:inecon:v:107:y:2017:i:c:p:111-126
DOI: 10.1016/j.jinteco.2017.03.007
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. de Sousa, José & Mayer, Thierry & Zignago, Soledad, 2012. "Market access in global and regional trade," Regional Science and Urban Economics, Elsevier, vol. 42(6), pages 1037-1052.
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  8. Andreas Hoefele & Tim Schmidt-Eisenlohr & Zhihong Yu, 2016. "Payment choice in international trade: Theory and evidence from cross-country firm-level data," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 296-319, February.
  9. Thomas William Dorsey & Mika Saito & Armine Khachatryan & Irena Asmundson & Ioana Niculcea, 2011. "Trade and Trade Finance in the 2008-09 Financial Crisis," IMF Working Papers 11/16, International Monetary Fund.
  10. Daniel Paravisini & Veronica Rappoport & Philipp Schnabl & Daniel Wolfenzon, 2015. "Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data," Review of Economic Studies, Oxford University Press, vol. 82(1), pages 333-359.
  11. Galina Hale & Christopher Candelaria & Julian Caballero & Sergey Borisov, 2013. "Bank Linkages and International Trade," Research Department Publications IDB-WP-445, Inter-American Development Bank, Research Department.
  12. Song, E. Young, 2014. "Trade Finance and Trade Collapse during the Global Financial Crisis: Evidence from the Republic of Korea," East Asian Economic Review, Korea Institute for International Economic Policy, vol. 18(4), pages 395-423, December.
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