On the Hidden Links Between Financing Costs and International Trade Patterns

This paper investigates whether there is a link between financing costs and international trade patterns, and if so, whether this link is determined by the strength of trade and financial ties between trading partners. The potential importance of these considerations stems from the fact that approximately half of world trade is conducted on credit; a supplier gives to its foreign buyer a trade-financing loan financed by commercial banks on both sides of the transaction. For buyers, especially in developing countries, trade-financing loans from foreign suppliers are an essential source of external finance for international trade. We find that, first, with respect to price, the industry-level evidence indicates that financing costs determine international trade patterns, whereby for each industry the pass-through rates of exchange-rate changes into import prices are positively correlated with the industry's dependence on external-finance and trade-credit use. Second, with respect to volume, the country-level evidence suggests that between trading partners, the volume of trade-financing loans depends positively on the stronger trade and financial ties, including the higher value of total imports, the higher degree of product differentiation in imports, and the higher value of banking claims. Interestingly, investigation on trade-financing loans during periods of systematic banking crises suggests that the links between financing costs and international trade patterns also depend on characteristics of the loan arrangements (i.e. maturity), the size of the commercial banks (i.e. money-center, large, or small), and type of creditors (i.e. commercial bank or official)