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International trade and letters of credit: A double-edged sword in times of crises

Author

Listed:
  • Demir, Banu
  • CROZET, Matthieu
  • Javorcik, Beata

Abstract

This study argues that the ability to mitigate risks associated with international trade is particularly important at times of heightened uncertainty, such as the economic crisis caused by the Covid-19 pandemic. Risk mitigation can be achieved through letters of credit (LCs), trade finance instruments providing guarantees to trading partners. As their use varies across products, exports of some products are more resilient than others during times of increased uncertainty. This situation reverses in times of financial crises when distressed banks may limit the supply of LCs. Our analysis using data on US and EU-15 exports during the Covid crisis and the Global Financial Crisis provides empirical support for these hypotheses.

Suggested Citation

  • Demir, Banu & CROZET, Matthieu & Javorcik, Beata, 2021. "International trade and letters of credit: A double-edged sword in times of crises," CEPR Discussion Papers 16630, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16630
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    2. Alen Mulabdic & Yoto Yotov, 2025. "Geopolitical Risks and Trade," Working Papers 202532, Center for Global Policy Analysis, LeBow College of Business, Drexel University.
    3. Kemal Türkcan & Yushi Yoshida & Taiyo Yoshimi, 2025. "Exporter’s Productivity and the Cash-In-Advance Payment: Transaction-Level Analysis of Turkish Textile and Clothing Exports," Open Economies Review, Springer, vol. 36(1), pages 221-242, February.
    4. Cristina Constantinescu & Ana Margarida Fernandes & Arti Grover & Stavros Poupakis & Santiago Reyes, 2022. "Globally Engaged Firms in the Covid-19 Crisis," CESifo Working Paper Series 9711, CESifo.
    5. Lea Borchert & Ralph De Haas & Karolin Kirschenmann & Alison Schultz, 2023. "Broken Relationships: De-Risking by Correspondent Banks and International Trade," CRC TR 224 Discussion Paper Series crctr224_2023_478, University of Bonn and University of Mannheim, Germany.
    6. Ricardo Correa & Julian di Giovanni & Linda S. Goldberg & Camelia Minoiu, 2023. "Trade Uncertainty and U.S. Bank Lending," NBER Working Papers 31860, National Bureau of Economic Research, Inc.
    7. Marc Auboin & Eddy Bekkers & Dario De Quarti, 2023. "A Novel Framework to Evaluate Changes in Access to and Costs of Trade Finance," CESifo Working Paper Series 10445, CESifo.
    8. Falavigna, G. & Ippoliti, R. & Ramello, G.B., 2025. "Financial constraints, institutional quality and import trade flows: An empirical investigation on Italian manufacturing SMEs," International Business Review, Elsevier, vol. 34(4).
    9. Claudia Gabriela Baicu, 2024. "Banks And International Trade Finance: Green Practices In Letters Of Credit," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences;Institute for World Economy of the Romanian Academy, vol. 12(2), pages 45-51, December.
    10. Luis Alberto Geraldo-Campos & Juan J. Soria & Tamara Pando-Ezcurra, 2022. "Machine Learning for Credit Risk in the Reactive Peru Program: A Comparison of the Lasso and Ridge Regression Models," Economies, MDPI, vol. 10(8), pages 1-21, July.
    11. Auboin, Marc & Bekkers, Eddy & De Quarti, Dario, 2023. "A novel framework to evaluate changes in access to and costs of trade finance," WTO Staff Working Papers ERSD-2023-01, World Trade Organization (WTO), Economic Research and Statistics Division.
    12. Agarwal, Natasha & Chan, Jackie M.L. & Lodefalk, Magnus & Tang, Aili & Tano, Sofia & Wang, Zheng, 2023. "Mitigating information frictions in trade: Evidence from export credit guarantees," Journal of International Economics, Elsevier, vol. 145(C).
    13. Cristina Constantinescu & Arti Grover & Gaurav Nayyar, 2026. "Digitalization, Remote Work and Firm Resilience: Evidence From the COVID‐19 Shock," The World Economy, Wiley Blackwell, vol. 49(1), pages 52-72, January.
    14. Antonis Kotidis & Margaux MacDonald & Dimitris Malliaropulos, 2024. "Guaranteeing Trade in a Severe Crisis: Cash Collateral Over Bank Guarantees," Open Economies Review, Springer, vol. 35(2), pages 261-282, April.

    More about this item

    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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