Working Paper: NBER ID: w31111
Authors: Stefano Federico; Fadi Hassan; Veronica Rappoport
Abstract: This paper identifies a credit-supply contraction that arises endogenously after trade liberalization. Banks with loan portfolios concentrated in sectors exposed to competition from China face an increase in non-performing loans after China’s entry into the World Trade Organization. As a result, they reduce the supply of credit to firms, irrespective of the firm’s sector of operation. This cut in credit translates into lower employment, investment, and output. Through this mechanism, the financial channel amplifies the shock to firms already hit by import competition from China and passes it on to firms in sectors expected to expand upon trade liberalization.
Keywords: Trade shocks; Credit reallocation; Non-performing loans; Bank exposure; China WTO
JEL Codes: F1; F60; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Trade shocks (F14) | Non-performing loans (NPLs) (G21) |
| Non-performing loans (NPLs) (G21) | Reduction in credit supply (E51) |
| Reduction in credit supply (E51) | Employment growth (J23) |
| Trade shocks (F14) | Reduction in credit supply (E51) |
| Trade shocks (F14) | Job losses in sectors affected by Chinese competition (F66) |
| Trade shocks (F14) | Job losses in services (L89) |