Working Paper: NBER ID: w17091
Authors: Pol Antràs; C. Fritz Foley
Abstract: This paper analyzes the financing terms that support international trade and sheds light on how and why these arrangements affect trade. Using detailed transaction level data from a U.S. based exporter of frozen and refrigerated food products, primarily poultry, it begins by describing broad patterns about the use of alternative financing terms. These patterns help discipline a model in which the trade finance mode is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as specified in the contract. The empirical results indicate that transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement and in a country that is further from the exporter. Letters of credit, however, are rarely used by the exporter. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance terms prior to the crisis disproportionately reduced their purchases. These results can be rationalized by the model whenever (i) misbehavior on the part of the exporter is of little concern to importers, and (ii) local banks in importing countries are typically more effective than the exporter in pursuing financial claims against importers.
Keywords: international trade; finance; contractual enforcement; trade finance
JEL Codes: F1; G0; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Weak contractual enforcement (D86) | Cash in advance or letter of credit terms (F34) |
| Distance (R12) | Cash in advance or letter of credit terms (F34) |
| Repeated interactions (C73) | Less likely to use cash in advance terms (E41) |
| Economic crisis (G01) | Demand for cash in advance terms with new customers (E41) |
| Cash in advance terms (E41) | Reduced purchases by customers (D12) |
| Weak institutional environments (O17) | Higher price per pound for post shipment terms (L87) |
| Institutional quality (I24) | Financing terms (G32) |
| Financing terms (G32) | Trade flows (F10) |