Working Paper: CEPR ID: DP17926
Authors: Federico Esposito; Fadi Hassan
Abstract: We analyze the role of trade credit and financial frictions in the propagation of international trade shocks along the supply chain. First, we show empirically that exposure to import competition from China increased the use of trade credit in the U.S. Then, we use a multi-country input-output trade model with borrowing constraints, trade credit, and endogenous employment to quantify the general equilibrium effects of such increase, characterizing the different channels at work. Borrowing constraints amplify the negative consequences of the China shock on employment, but introducing trade credit reduces these losses by 8%-27%, depending on the tightness of the constraints.
Keywords: Trade credit; Trade shocks; Financial frictions; Borrowing constraints; Employment
JEL Codes: E10; E44; F14; F15; F16; F62; G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Borrowing constraints (F34) | Employment losses in manufacturing (F66) |
| Trade credit (F19) | Mitigation of employment losses (J65) |
| Reduced revenues (H29) | Increased reliance on trade credit (F65) |
| Reduced revenues (H29) | Decreased collateral value (G33) |
| Decreased collateral value (G33) | Tightening of borrowing constraints (F65) |
| Exposure to import competition from China (F69) | Use of trade credit (F19) |