Meiji University

　

Title

Understanding the Trade Finance Universe -

Development of Theoretical Frameworks and

Empirical Researches-

Author(s) ヌルメメット,依克山

Citation 政治経済学研究論集, 2: 159-180

URL http://hdl.handle.net/10291/19341

Rights

Issue Date 2018-02-28

Text version publisher

Type Departmental Bulletin Paper

DOI

　　　　　　　　　　　　　　　　　　　　　　　　　　　https://m-repo.lib.meiji.ac.jp/

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研究論集委員会 受付日 2017年 9 月22日 承認日 2017年10月30日

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政治経済学研究論集

第 2 号 2018. 2

Understanding the Trade Finance Universe:

Development of Theoretical Frameworks and Empirical Researches

貿易金融研究の発展についての考察

―理論面および実証面での研究と今後の課題―

博士後期課程 経済学専攻 2017年度入学

ヌルメメット　依克山

NUERMAIMAITI Yikeshan

【Abstract】

International trade is characterized by its' stunning drop during the times of crises. During the

2008–09 global ˆnancial crisis, world trade experienced a 5-time larger decrease in terms of growth

rate percent point than world GDP. While it is generally agreed that most of the drop in interna-

tional trade is due to the drop in demand (approximately 80), researchers believe that there are

other factors that could explain the remaining 20. Motivated by this discussion, trade ˆnance is

gaining bigger attention after the 2008–09 ˆnancial crisis. Due to its' longer distance and larger

risks associated with, ˆrms involved with international trade often utilize trade ˆnance as a

measure to mitigate the risks. Growing numbers of literature are focusing on trade ˆnance as the

ˆnancial aspect of international trade that might be able to shed some light on the supply side story.

In this paper, I go through the literature on trade ˆnance from both theoretical and empirical per-

spectives. Though the complete/comprehensive data sources are limited, trade ˆnance covers a

large portion of international trade. On the theory side, researches and frameworks to analyze trade

ˆnance as the choice of payment is growing but still in a very early stage. Although empirical ana-

lyses are more dominant in the ˆeld of trade ˆnance, the development is aŠected by the data limita-

tion and lack of grand theory. For the future studies, it is essential to develop more dynamic and

unifying models to establish more sophisticated frameworks from the theoretical perspective. And

for the empirical side, construction of more comprehensive dataset is of crucial importance.

【Key Words】 International Trade, Trade Finance, Trade Credit, Financial Condition, Financial

Constraint

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1 See Eaton, Kortum, Neiman and Romalis (2016).

2 It is still important to ˆnd the factors that aŠect the demand for trade ˆnance theoretically and test the model

with empirical data set.

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1. Introduction and Motivation ―Why Trade Finance?

International trade is gaining more attention than ever due to its' unique characteristic presented

during the latest global ˆnancial crisis. The international trade dropped severely during crisis time

especially in comparison to GDP. While world GDP growth rate dropped 5 points during the peak

of the 2008–09 crisis, world trade suŠered almost 20 points drop during the same period. This

huge stumble gave rise to a simple question that why the trade would decrease so dramatically com-

pared to GDP. As well as the researches to explain causes and consequences of the ˆnancial crisis,

a large amount of literature is dedicated to seek the reasons for the steep drop in international

trade. From the analyses that have been conducted so far, it is generally agreed that 80 of the

drop in international trade can be explained as the result of a drop in demand1. However, the

remaining 20 is still dragging attention of researchers and the ˆnancial perspective of interna-

tional trade is one of the focus points. The ˆnancial aspect of the trade is often referred as trade

ˆnance and is one of the growing areas in economic research in terms of numbers of researches.

The reason trade ˆnance is subjected to growing attention is that it is essential to international

trade considering the longer distance related to delivery and all the risks associated with trading

with counterparties located in diŠerent countries. Trade ˆnance provides methods of payment and

ˆnance to mitigate all the risks associated with international trade and especially for the latest

ˆnancial crisis, trade ˆnance is expected to be partially responsible for the remaining 20. Trade

ˆnance is considered to be a part of the supply side story during the ˆnancial crisis. As referred be-

fore, demand side story is generally agreed to account for most of the drop in international trade

during 2008–09 ˆnancial crisis and for the researches focusing on trade ˆnance (especially empiri-

cal studies), it is crucially important to dis-tangle the demand side factors so we can look at the

relatively pure eŠect of trade ˆnance over international trade (Figure 1)2.

In this paper, I go through the researches related to trade ˆnance from both theoretical and em-

pirical perspectives. Despite the growing number of researches on trade ˆnance, this is the very

ˆrst paper to overview the diŠerent aspects of researches related to trade ˆnance and addressing

issues that would lead to more comprehensive future researches. The rest of the paper is structured

as follows: in next section, I go through simple deˆnition and examples of trade ˆnance and provide

stylize facts established so far. In section 3, I provide an overview of theoretical frameworks to ana-

lyze trade ˆnance and section 4 is dedicated to reviewing empirical studies. Finally, I close the

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Figure 1. Trade ˆnance captured as a part of supply side of international trade

Source: Own illustration.

3 The opposite case that importers pay up front before the delivery is also considered as trade credit but less

common in business usage.

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paper with concluding remarks with some directions for future studies.

2. Stylized Facts ―What do we know about trade ˆnance, trade credit, and insur-

ance/guarantee.

Though sometimes trade credit and trade ˆnance are used interchangeably, trade credit can be

understood as a subset of trade ˆnance concept. Generally, trade credit is the consequence of

exporters shipping the goods to importers before the payment has been completed thus giving im-

porters the moratorium of paying the value of the goods3. From an accounting perspective, trade

credit received appears as account payables on the balance sheet of importers and as account

receivables on exporters' side. Inter-ˆrm trade credit refers to trade credit extended between ˆrms

and intra-ˆrm trade credit is the case of trade with ˆrms' own foreign subsidiaries. In the case of

intra-ˆrm trade credit, the risk of non-payment is perceived as zero considering the nature of the

transaction. However, in the case of inter-ˆrm trade credit, the exporters bear the overall risk of

non-payment for the transaction. Extending inter-ˆrm trade credit is the decision of exporters

based on various factors including exporters' own balance sheet, commercial relationship with

counterparties and the possibilities of discounting/factoring the receivables.

Factors in International Trade in

Times of Crises

As a part of the supply side story

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4 Generally, premium is calculated based on risks of importers and their jurisdictions.

5 Namely Exim Bank of United States, ECGD of UK, Exim Bank of China and JBIC of Japan while the degree

of government funding might be diŠerent at each agency.

Figure 2. Payment Risk Diagram of International Trade

Source: Trade Finance Guide 2011, US Department of Commerce.

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The non-payment risk involved with trade credit can be mitigated by utilizing private export

credit insurance and public guarantee. Private credit insurer will reimburse the exporters in case

importers failed to pay for the goods purchased, in return by charging exporters a premium4. The

public guarantee works in the same way as private credit insurance to insure against the export

credit while the only diŠerence is it is backed by government funding5. The Berne Union is an

international non-proˆt organization that has more than 80 members of both private and public of

export credit agencies. According to Auboin and Engemann (2014), trade credit insured by the

members of The Berne Union covers 10 of international trade and average 20 of a country's

import is covered by trade credit insurance. More speciˆcally, Felbermayr and Yalcin (2011) have

reported that around 3 of German export is covered by public guarantee while the share varies

across time and Del Prete and Federico (2014) calculated that 20–25 of Italian trade is supported

by import/export loans and guarantees.

The idea of trade ˆnance includes all methods of payment and ˆnancial instruments that are

involved in the international trade transaction. Figure 2 shows some of the most commonly used

trade ˆnance in international trade and its' security level. Cash-in-advance means a payment made

before the delivery and open-account is the opposite case that payment is made after the goods

have reached the destination. In most cases, importers are not obligated to complete the payment

up to 90 days after the delivery has been completed. Open-account is the payment method that

generates the situation of trade credit extension as it is giving importers moratorium and `credit',

hence trade credit can be regarded as a subset or a part of the whole trade ˆnance concept. From

Least Secure

Documentary Collections

Cash-in-Advance

Cash-in-Advance

Letters of Credit

Open Account

Most Secure

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Figure 3. The Flow of Letter of Credit

Source: Own illustration, based on Trade Finance Guide 2011, US Department of Commerce.

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exporters' perspective, open-account is the least secure payment method as the exporters would

expose themselves to full risk of non-payment by importers. On the contrary, cash-in-advance

would be the most secure way since exporters would receive payment before delivery (or even

before production). However, the security is completely reversed for importers as cash-in-advance

provides no protection for non-delivery and under-the-standard quality of goods. Aside from credit

insurance and public guarantee, bank-intermediated trade ˆnance can also help to mitigate risks as-

sociated with the transaction. Letter-of-credit (LC) is the most commonly used bank-intermediated

trade ˆnance and Figure 3 explains how LC works in a simple case. As can be seen from the ˆgure,

the basic idea is to transfer the risks from exporters/importers to ˆnancial institutions against some

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6 Even though the deˆnition of trade ˆnance covers all payment methods and bank trade ˆnance, sometimes

trade ˆnance is referred purely as bank trade ˆnance and the 40 cover ratio is cited in many studies.

7 This report also provides country-speciˆc cover ratio with 7 countries of comprehensive data coverage and 6

countries of partial data coverage. Average of cover ratio on these 13 countries is 3134.

8 ICC is an international business organization with 6 million members in more than 100 countries that work to

promote international trade, responsible business conduct and approach to global regulation.

――

discount payment and fee cost.

Niepmann and Schmidt-Eisenlohr (2017 a) have explored LC and documentary-collection (DC)

transaction data from SWIFT organization. SWIFT is the single most important telecommunica-

tion system for bank transactions and it covers 90 of world's bank-to-bank LC/DC transactions.

The SWIFT data revealed that in case of US, LC and DC have covered 8.5 and 1.1 of export

respectively in 2011. Antras and Foley (2015) is another study on the usage of LC/DC in the US

from a diŠerent data source and it gives 5.5 coverage of LC and 10.7 coverage of DC on US

poultry export. The analysis in Ahn (2013) revealed the share of LC used in import was 3～4

over the 2008–09 period for Columbia and 20–25 for South Korea while Ahn (2014) conducted

another research on Chilean data and the cover ratio of LC was 10 in 2011. One more notable

ˆgure is by Demir and Javorick (2017) whose focus was on Turkey and they calculated LC cover

ratio of Turkish export as 15.

While the cover ratio of trade ˆnance varies among diŠerent countries, Asumundson et al.

(2011) have calculated cover ratio of overall international trade. With estimation based on national

data, academic studies and authors' own survey, they concluded that 38–45 of world trade is

covered by open account payment, 35–40 by bank trade ˆnance and the remaining 19–22 by

cash in advance in 20086. Report from BIS (2014) gave a similar result on bank trade ˆnance by

estimating 36–40 of international merchandise trade covered by bank trade ˆnance in 2011 while

it did stressed the possible bias on estimation as each available data source covers only part of the

market7. The report also points out regional heterogeneity on the usage of trade ˆnance. It ranges

from 2 in Mexico, 5–10 in North America, Latin America, Africa and the Middle East to more

than 40 in China and India. Niepmann and Schmidt-Eisenlohr (2017 a) have calculated overall

coverage ratio of LC on international trade as 13 in 2011 based on data from SWIFT. This num-

ber of LC coverage is similar in BIS (2014) with 11 coverage based on ICC trade register data.8

Even though LC is dominantly used, banks provide various forms of trade ˆnance and thus the

overall cover ratio of trade ˆnance is estimated to be higher than LC coverage.

As the summary, trade ˆnance is the idea that includes various payment methods as well as bank-

intermediated ˆnancing for international trade. Trade credit can be regarded as the result of certain

payment method employed by importers/exporters as a part of trade ˆnance. As the exporters who

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9 The shocks considered in the counterfactual calibration are trade cost shocks, productivity shocks, invest-

ment e‹ciency shocks, aggregate demand shocks, labor supply shocks and service deˆcit shocks.

――

are extending trade credit is exposed to the risk of non-payment by importers, they generally pur-

chase private credit insurance or public guarantee to mitigate the risk and these credit insurances

and public guarantees are covering approximately 10 of overall international trade. Open-account

as the most commonly used payment method covers 38–45 of total global merchandise trade and

LC, the most frequently used bank trade ˆnance has 13–15 coverage internationally. Adding all

other forms of bank trade ˆnance, 35–40 of world trade is covered by bank-intermediated trade

ˆnance though there is country/regional heterogeneity and estimation might be biased due to par-

tial data coverage. Under the broadest deˆnition of trade ˆnance, Auboin (2009) concluded that

80–90 of international trade involves some form trade ˆnance as the measure of risk mitigation.

3. Theoretical models ―To better understand the motivation for trade ˆnance

The theoretical frameworks of trade ˆnance and trade credit is motivated by questions such as

why exporters would decide to utilize trade ˆnance and what are the factors that aŠect this deci-

sion. The general answer to these questions is to mitigate the risks associated with international

trade compared to domestic sales and the studies referred below are dedicated to explaining this

rationale with theoretical models.

Before diving into the theoretical world of trade ˆnance, it is worth mentioning Eaton, Kortum,

Neiman and Romalis (2016). This research is not directly related to trade ˆnance but often cited as

the starting point and motivation for analysis on the ˆnancial aspect of international trade. In this

paper, they developed a micro-founded general equilibrium model by embedding a multi-sector

model of international trade into a multi-country real business cycle model. The ˆnal purpose of the

analysis is to answer the question that what was responsible for the steep dive of international trade

during the 2008–09 ˆnancial crisis. By calibrating the model using data from 21 countries and

regions together with diŠerent shock measures, they have concluded that the decline in e‹ciency

of investment in durable manufacturing capital stock drove most of the collapse in trade (80 in

terms of magnitude) while there were a few exceptions such as Japan and China9.

3.1 Trade ˆnance ―The payment choice theory

Schmidt-Eisenlohr (2013) is one of the ˆrst papers to develop a framework of payment choice of

international trade. He has considered a one-shot game situation between exporter and importer to

formulize the optimal payment choice of each party by deˆning risk as the probability of deviation

from initial contract. The two key factors that the model indicated as important in payment choice

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10 Previously referred Niepmann and Schmidt-Eisenlohr (2017 b) is heavily based on this research as its' theo-

retical backbone.

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are the ˆnancial and legal condition (ˆnancial development level measured as the cost of bank trade

ˆnance and law enforcement level) at both origin and destination countries. This paper also pro-

vides econometric results to partially support this ˆnding by presenting that ˆnancial development

indicator having a signiˆcant power in explaining bilateral exports of sample countries10. Glady and

Potin (2011) developed a two-country two-ˆrm partial equilibrium model with discreet time to ana-

lyze payment choice of international trade. In addition to contract enforcement, another key feature

they have included was asymmetric information in form of private ˆrm health information. As the

result, they have documented that default risk of diŠerent countries/ˆrms (law enforcement level

and private information of ˆrms' health) are the biggest determinant of payment choice and devel-

opment of banking system would help to eliminate the risk. This result echoes ˆndings from

Schmidt-Eisenlohr (2013) and it is followed by the empirical part that provides supporting results

to the model's prediction by utilizing SWIFT transaction data.

In the spirit of Schmidt-Eisenlohr (2013), Antras and Foley (2015) have developed a framework

by addressing choice of trade ˆnance as the consequence of ˆrm's default probability and e‹ciency

of contract enforcement. The diŠerence from Schmidt-Eisenlohr (2013) is that they have included

relationship building process as an increasing function of time. The model predicted that cash-in-

advance payment is preferred in weak contract enforcing environment. While relationship helps to

boost the use of open-account, it decreases in times of crisis due to higher risk involved with inter-

national trade. The predictions from the framework are also supported by econometric evidence in

ˆnal part of their paper by using poultry export data of a US ˆrm that includes trade ˆnance infor-

mation. Hoefele, Schmidt-Eisenlohr and Yu (2016) have extended the model in Schmidt-Eisenlohr

(2013) by introducing product complexity as the factor that aŠects the degree of law enforcement.

The rationale behind including this feature is that generally, it would be di‹cult for ˆrms with the

complex product to appeal to the court in case of breach of contract. They have deˆned the proba-

bility of law enforcement as a function of product complexity that treats development in legal condi-

tion as a higher law enforcement probability for complex products. The model suggests that

product complexity magniˆes the eŠect of contract enforcement over the payment choice and this

is supported by the empirical evidence from estimating the eŠect of the triple-interacted variable of

law enforcement-import intensity-complexity on the choice of payment methods.

Ahn (2014) is unique in its way of including bank's optimizing problem while considering expor-

ter's and importer's optimizations as well. The basic model is developed by solving exporter's,

importer's and bank's optimization problems in each case of open-account, cash-in-advance and

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11 The econometric part is conducted by utilizing trade ˆnance data from Chile and Columbia. However, the

predicted tendency disappears for Asian countries mostly due to the speciˆc policies that require use of

letter-of-credit.

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letter-of-credit. Aside from the aspect that the demand for trade ˆnance comes from the probability

of counterparties' default and each countries' contract enforceability, the bank's optimization

helped to more explicitly determine the preferred payment method under diŠerent parameter

values. The model is also extended by including the reduced form of ˆrm default probability as the

function of relationship intensity that succeeded to explain the payment preference of trading

partners with the long-term trading relationship. Econometric part follows the model to test the

hypothesis that trading partners with long-standing relationship tend to use open-account payment

as the model predicted and validity of the prediction is conˆrmed11. Olsen (2016) has extended the

idea of trading relationship by introducing repeated interaction of ˆrms by developing a micro-

founded model based on representative agent's utility maximizing problem on consumer side where

the producers (importers) of a variety of goods need to match with suppliers (exporters) in order

to obtain intermediate goods to produce ˆnal goods. The main feature of the framework is to treat

the interaction of each producer and supplier as a repeated game and the deviation from the

contract will result in punishment that works as an alternative to overcome weak o‹cial law enfor-

cement. By including banks and endogenizing ˆrm entry, the model stressed that transmission of

information would be crucial to address asymmetric information in the market to assure the

e‹ciency of punishment scheme thus supplementing o‹cial contract enforcement of each jurisdic-

tion.

While the number of theoretical literature related to trade ˆnance is still small, most of them

share a few points in common. First, law and contract enforceability are addressed to be crucial in

every framework. Intuitively, the possibility and the degree that the contract will be honored is one

of the central interests of exporting/importing ˆrms. Asymmetric information is another aspect of

international trade that justiˆes the usage of bank trade ˆnance even over a relatively higher fee as

the ˆnancial institutions might have better information on the creditworthiness of counterparties.

Finally, the relationship between trading partners is also referred as fundamental in relation to

asymmetric information as the longer the relationship lasts the more information each party would

be able to gain about each other that helps to eliminate the asymmetry.

3.2 Trade credit ―The recent development in relation to trade ˆnance

Researches focusing on trade credit has a longer history than those of trade ˆnance. As the focus

of this paper is on trade ˆnance, the trade credit researches referred here are the most recent ones

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12 Within the model, the ˆnancial development is capture by loan size, default probability and collateral at-

tached to the loan as better ˆnancial development provides capital from multiple sources (thus decrease the

size of each loan), strong contract enforcement to avoid or minimize the eŠect of default and the sophisticat-

ed contract with solid collateral to back up the loan.

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and those that have close connection to the study of trade ˆnance. Theoretical researches of trade

credit are categorized into two groups based on its' motivations. The ˆrst group tries to explain

what is the optimal source of credit and the second group focuses on how credit constraint would

aŠect export performance of ˆrms.

Eck, Engemann and Schnitzer (2012) analyzed the role of trade credit separately from import-

ers'/exporters' perspective by considering situations involved with pure bank credit, pure inter-

ˆrm credit and combination of these two. For exporting side, the model predicts that higher produc-

tivity is required for exporters and inter-ˆrm credit (cash-in-advance) boosts export more than pure

banking credit. For importing side, on the other hand, the model could only indicate ambiguous

ranking for productivity and credit preference. The econometric part follows to test the prediction

of the model and the statistical results from a German survey data supported the hypothesis from

the model. The trade credit side extension of Schmidt-Eisenlohr (2013) and Antras and Foley

(2015) was developed by Demir and Javorick (2017). They focused on the end of Multi-Fiber

Agreement (MFA) in 2004 that gave rise to international competitive pressure on Turkish textile

industry. As the analogy of payment choice model of Schmidt-Eisenlohr (2013) and Antras and

Foley (2015), their framework on cash-in-advance and letter-of-credit each predicted that Turkish

textile exporters are more willing to extend trade credit to importers and oŠer favorable price in

order to stay competitive in the textile exporting market after the end of MFA. Empirical analysis

was also conducted to estimate the signiˆcance of MFA elimination on trade credit extension and

the change in the unit price of export. The results suggested that the end of MFA had a positive

eŠect on these two factors.

Manova (2013) has developed a multi-sector multi-country partial equilibrium framework to cap-

ture and explain exports of ˆrms that are under credit-constraint. She included investor to act as

the source of constraint as they extend funding to exporters at the beginning of each period and

require payment at the end of it. While the most part of the research is dedicated to explaining

upfront sunk cost and export market entry, she also argued that ˆnancial development helps to

increase the level of export, especially for ˆnancially vulnerable sectors12. The analysis ends with

several empirical results supporting the predictions of the model that indicator of ˆnancial develop-

ment had statistically signiˆcant eŠect on the export of sectors with higher ˆnancial vulnerability

and external ˆnance dependency. Feenstra, Li and Yu (forthcoming) addressed the question why

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13 The three reasons are production-sales time lag, greater (than domestic sales) risk associated with export

and additional ˆxed cost for entering export market.

――

exporting ˆrms face more credit constraint than ˆrms focus on domestic sales from banks' perspec-

tive. By setting up a model that takes ˆrms' productivity as a private information, they have argued

that this asymmetric information only leads to less-than-needed loan extend from banks. Three rea-

sons why export is diŠerent from domestic sales are also included in the model and the time lag be-

tween production and ˆnal sales in export process is predicted to be the primary reason for banks to

extend less loan and require more interest payment13. By exploring data from China, interest pay-

ment as the indicator of credit constraint was found to be economically and statistically relevant in

the empirical part.

The points emphasized in the trade credit frameworks referred so far are that the trade credit

does help to boost international trade while ˆrms fall into credit constraint as a natural consequence

of asymmetric information. In fact, the overall theoretical literature of trade ˆnance and trade

credit stress the asymmetric information as one of the fundamental factors. As the theoretical trade

ˆnance literature is still in its' very early stage, there are a number of directions that it could be ex-

tended for further studies. While the ˆnancial vulnerability is taken account into some researches,

explicit role of ˆrm and industry characteristics are still yet to be included in the theoretical work.

Most of the models referred so far are static, thus dynamic extension of those models might shed

light on new factors related to payment choice decision. Intra-ˆrm/arm's length trades that some

data suggest to account for a large portion of international transaction has not been referred in any

framework, so extensions including intra-ˆrm trade could signiˆcantly sophisticate the models and

predictions.

4. Empirical Studies ―Relationship between ˆnancial factors and international trade

The number of empirical studies is dominant within the ˆeld of trade ˆnance in comparison with

theoretical researches. Empirical studies of trade ˆnance can be categorized into 3 groups as per

motivation and data usage. The ˆrst group is the researches with direct trade ˆnance data, especial-

ly for bank trade ˆnance. As referred previously, data on trade ˆnance is scarce. So far there is no

global comprehensive data coverage of trade ˆnance and the number of countries with complete

trade ˆnance data is very limited. Thus, despite the result from these studies seem to be the most

precise ones, these results still need careful interpretation. The second group is the researches with

indirect proxy data of trade credit, insurance, and guarantee. However, using trade credit and

insurance data only covers a part of the trade ˆnance universe similar to the ˆrst group. The third

category is the ones focusing on ˆnancial constraints. Instead of using direct data or proxies, ˆnan-

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14 Foreign ˆnance is deˆned as the share of deposit held by non-residents on total deposit.

――

cial status of importers/exporters, ˆnancial institutions as well as overall economy are the central

interests of these analyses. By exploring data of ˆnancially constrained ˆrms and institutions, these

researches try to relate ˆnancial conditions to trade based on the hypothesis that the adverse eŠect

of deteriorating ˆnancial condition could transmit through the channel of trade ˆnance.

4.1 Trade ˆnance ―The Direct data

Niepmann and Schmidt-Eisenlohr (2017 a) studied trade ˆnance data from a regulatory country

exposure report that large banks in US and US a‹liates of foreign banks are obligated to ˆle. By

utilizing this regulatory reporting data, they have constructed a bank shock measure independent

from country-time eŠect. They estimated the eŠect of this bank shock measure on US export and

found a positive relationship between them with the magnitude of a one-standard-deviation of a

negative shock to a country's trade ˆnance supply reduces US's export to that country by 1.5

points. Italian Central Credit Register has a comprehensive registered data of import/export loans

and guarantees extended by Italian banks to ˆrms. Del Prete and Federico (2014) have conducted

analysis on this rich database to establish a relationship between the possible factors that aŠect

banks' loan extension and the ˆrm export. The uniqueness of this analysis is that the individual ˆrm

is matched with their main bank and the result of estimation argued that banks' exposure to foreign

ˆnance negatively aŠected ˆrm export, especially the impact is signiˆed in the case that banks are

under worse-than-average ˆnancial condition14.

Ahn (2013) explored one of the most extensive custom/tax data coverage from Columbia that

records payment methods of all its' import transactions. Similar to Del Prete and Federico (2014),

the interest of this research is looking at the factors that aŠect the supply of trade ˆnance (especial-

ly LC) and to bring evidence of a relationship between these factors and import itself. The result of

empirical estimation presented banks' liquidity as the biggest positive factor to both trade ˆnance

extension and import while credit limit intuitively had a negative impact on these points. Niepmann

and Schmidt-Eisenlohr (2017 b) is another research with most direct trade ˆnance data from

SWIFT organization which gives the most accurate ˆgures related to LC and DC. What was unique

about their research was the point that they focused on the determinants of demand for LC and DC

from importers/exporters point of view. The results from their estimation suggested that degree of

law enforcement has a signiˆcant impact and a non-linear relationship with demand for LC/DC.

The rationale behind this result is that LC/DC works as a safety measure for importers/exporters

to mitigate the risks related to trade, especially in the regions with weaker law enforcement that

――

15 Agreement on Subsidies and Countervailing Measures, World Trade Organization.

https://www.wto.org/english/docs_e/legal_e/24-scm.pdf

――

provides only limited protection over the right of foreign companies.

In general, the studies with direct trade ˆnance data are motivated in three ways. First is to

directly estimate how the supply of trade ˆnance aŠects trade itself. Second is to establish a causal

relationship between the supply/demand of trade ˆnance and the factors that aŠect it. And third is

to see how those factors would ultimately aŠect import and export. The estimation results so far all

have provided evidence to support the importance of trade ˆnance. Trade ˆnance does aŠect inter-

national trade while the supply of trade ˆnance is largely related to ˆnancial condition and demand

for trade ˆnance is related to the risk that importers/exporters are facing.

4.2 Trade credit, insurance, and guarantee ―Aggregate and cross-section proxies

As referred in earlier section, trade credit can be understood as a part of the whole trade ˆnance

concept. On the contrary to the limitation of direct trade ˆnance data, trade credit data has relative-

ly comprehensive coverage and the data sources are easier to access. Another data set related to

trade credit is insurance and guarantee upon trade credit that provides measures for risk mitiga-

tion. While trade credit and insurance/guarantee also cover only a part of trade ˆnance universe,

these are perceived to be some of the best proxies for analytical purpose. Aside from the data itself,

there is one thing worth noting related to public guarantee. Though a number of countries provide

public guarantee over the default risk faced by their exporters, under WTO norm it is qualiˆed to

be export subsidies. However, the WTO Agreement on Subsidies and Countervailing Measures ex-

empt public guarantee schemes as long as su‹ciently large members of GATT are part of ``interna-

tional undertaking on o‹cial export credit''15. The public guarantee is, in principle, outlawed by WTO

norm but is exempt based on the rationale that private ˆnancial market cannot e‹ciently provide

adequate product and instrument to cover all credit/default risk related to export.

Petersen and Rajan (1997) is one of the ˆrst researches to empirically support the classic theo-

retical ˆndings of trade credit. By testing the simple hypothesis that who oŠers trade credit and

who receives trade credit, the result from estimation based on US national survey data indicated

that ˆrm size (in terms of asset size) and age of ˆrm (a proxy for creditworthyness) are the two

most important factors when extending trade credit. Moving to receiving credit, the empirical

result suggested that credit quality measured by the book value of the asset (that could serve as

collateral) and net proˆt are key determinants for ˆrms being able to receive more trade credit.

Korinek, Le Cocguic and Sourding (2010) have analyzed one of the richest data sources available

for trade credit insurance from the Berne Union that provides its' members' direct lending or insur-

――

16 The standard gravity variables are distance, population, GDP, currency union, language, regional trade

agreement, border sharing, isolated island and former colonizer.

17 Notable factors with positive eŠect were GDP, population, currency union, common language and factors

with negative eŠect were distance, product of the areas of the countries.

――

ance data covering more than 80 credit agencies. The empirical result has revealed that while the

impact of trade credit insurance to trade is limited in normal time, it tripled during the time of

200809 crisis and that could explain just under one-third of a drop in international trade. What out-

stands in their result is the point that they also considered the cost of trade credit insurance as a

speciˆc factor that might have explanatory power to trade ‰ow. They have included US high yield

spread on 10-year government bond as a general measure of cost for ˆnancial products and from es-

timation result, the spread had a negative eŠect on merchandise trade. This could be explained as

the result of higher demand for risk covering measure under riskier environment during the crisis

time. Another analysis conducted based on the same data source is by Auboin and Engemann

(2014). They took a two-step approach to ˆrst establish a relationship between ˆnancial condition

and availability of trade credit, then in next step to estimate the relationship between trade credit

availability and trade ‰ow. The measure of ˆnancial condition is proxied by the share of short-term

claims paid of insured export which represents the severity of risk environment. The result of the

ˆrst step indicated that the risky environment had a negative impact on short-term insured trade

credit granted for export while general liquidity measure had a positive eŠect on it. The result of

the second step of the estimation suggested that the eŠects of credit insurance and real GDP on

trade were intuitively positive as predicted. Van der Veer (2013) studied another aggregated data

set on trade credit insurance provided by one of the three biggest private credit insurance agencies

in the world. He has exploited a gravity type of estimation including standard gravity variables as

well as privately insured exports16. The estimation results presented expected positive/negative

eŠects for those standard gravity variables and signiˆcant positive eŠect of private insurance on the

exports17. However, as the data set itself only covers OECD nations, the estimation result could be

highly biased.

Aside from those aggregated international data sources, Bastos and Pindado (2013) have con-

structed a multi-country panel data over 147 ˆrms of Argentina, Brazil, and Turkey. The main pur-

pose of this research is in line with Niepmann and Schmidt-Eisenlohr (2017 b) that is to discover

what aŠects demand for trade ˆnance and trade credit. The number of days to pay account payable

is used to represent the demand for trade credit and a probability variable is constructed by includ-

ing credit quality measures to capture the probability of ˆrms get into insolvency. Intuitively, the

higher probability of getting into insolvency might raise the demand for more trade credit and this

――

18 10 countries include Argentina, Brazil, Indonesia, Malaysia, Philippines, Russia, South Korea, Thailand,

Turkey and Mexico.

19 The quick ratio is the indicator that measures a company's ability to meet its short-term obligations. Techni-

cally it is the ratio of cash, cash equivalents, marketable securities and accounts receivable (excluding inven-

tories) over current liability.

20 Foreign dependency is deˆned as share of foreign funding of each bank.

――

rationale is supported by the result of estimation. Ronci (2004) is one of the panel data studies spe-

ciˆcally focusing on past ˆnancial crises. Based on data from 10 countries over 10 year-period, he

proxied trade ˆnance with short-term credit in USD (does not include intra-ˆrm trades and trades

related to FDI)18. By estimating for export and import separately, the change in short-term credit

had more signiˆcant positive eŠect on export than on import before and after crises and the eŠects

are signiˆcantly magniˆed during the crises times.

Among the studies focused on single country data, Lohler, Britton and Yates (2000) looked into

the data of quoted UK companies. In addition to the well-used relevant variables such as GDP, base

rate, interest rate spread and monetary condition, they have included sales and the quick ratio, two

of the most intuitive variables that might aŠect ˆrm's extension of trade credit19. The estimation

result is however interpreted in a unique way. As the data only contains quoted companies, they are

regarded to have direct access to capital market. At the lower point of GDP cycle, these quoted

ˆrms that have direct access to capital market have actually extended trade credit (on a net basis)

to other ˆrms. Thus, they claim that this result can be interpreted as the access of capital market

plays an important role when extending trade credit to trading partners which support the impor-

tance of the ˆnancial aspect of the trade. From the elasticity point of view, Pravisni, Rappoport,

Schnabl and Wolfenzon (2014) utilized Peruvian data to estimate the elasticity of trade to credit.

The estimation is divided into two steps each focusing on intensive margin and extensive margin

with ˆrms' credit data in relation to their main banks. As a part of the supply side story of credit

extension, they have created a variable of banks' foreign dependency as a supply shock measure20.

The result of the analysis indicated that shock on credit extension only aŠects intensive margin but

not extensive and the point estimation predicts 10 reduction of credit would result in 1.9 de-

crease of export. Flbermayr and Ylacin (2011) have conducted a straightforward estimation that

aims to see how the public guarantee in Germany aŠects its' export. After controlling for unob-

served factors such as country and industry characteristics, they have documented a positive eŠect

of public guarantee on German export especially for the sectors with higher external ˆnance depen-

dency.

The studies utilizing trade credit data source echoes the ˆndings from research with direct trade

ˆnance data. Trade ‰ow is impacted by trade credit and ˆnancial aspect of the trade while these

――――

two factors are strongly aŠected by risk environment and ˆnancial condition of both ˆnancial insti-

tutions and exporting/importing ˆrms. The magnitude of impacts (both positive and negative) is

relatively small compared to the demand-side story but still cannot be ignored as the studies repeat-

edly pointed out that the eŠects (especially negative ones) are magniˆcently intensiˆed during the

crises times.

4.3 Constraint, performance and development ―The impact of ˆnancial condition

This part of the section goes through the most indirect but yet prominent part of researches relat-

ed to the ˆnancial aspect of international trade. As an alternative of using direct trade ˆnance data

or proxies such as trade credit and insurance/guarantee, a large number of studies were conducted

by focusing implicitly on the ˆnancial constraints faced by banks as well as exporting/importing

ˆrms, general ˆnancial condition of economies and the impact of overall ˆnancial development.

As referred previously, some studies have taken ˆnancial conditions into account to explain the

impact of the ˆnancial (risk) environment over trade. Chor and Manova (2012) have followed this

approach intensively by implying the general risk measure as one of the explanatory power to ex-

port. They have focused on industries that rely highly on external ˆnance by constructing variables

following Rajan and Zingale (1998) and utilized inter-bank oŠer rate to estimate the eŠect of gener-

al ˆnancial condition. The result indicated that inter-bank oŠer rate had a bigger impact on the in-

dustries that are relying heavily on external ˆnance especially in the time of latest ˆnancial crisis.

Amiti and Weistein (2011) have taken another approach by looking at the health of ˆnancial insti-

tutions in Japan and estimated how it aŠected export performance of manufacturing ˆrms. The

construction of variables was based on the concept of the market to book value and the approach of

matching each ˆrm with its' main bank is supported by the relatively steady relationship of

Japanese banks and ˆrms. The result was intuitive that deterioration of banks' health and perfor-

mance negatively aŠected manufacturing ˆrms' export with one ˆscal year lag, supporting the

hypothesis that ˆnancial aspect does matter for international trade. Coulibaly, Sapriza and Zlate

(2011) have documented estimation based on ˆnancial vulnerability and ˆnancial resources of

ˆrms in emerging Asian countries. The estimation on 7,200 non-ˆnancial ˆrms from 6 emerging

economies has provided intuitive results in two points. First, better pre-crisis ˆnancial condition

helped ˆrms to minimize the drop in sales during the 2008 crisis. Secondly, ˆrms relied more on

trade credit as an alternative resource to external ˆnance during the crisis. And ˆnally, as the com-

bination of above two points, more ˆnancially vulnerable ˆrms experienced more drop of sales as

well as limitation on access to trade credit during the crisis period.

Love, Lorenzo and Sarria-Allende (2007) is one of the studies using trade credit data but more

――――

importantly, they have included ˆnancial soundness measure to assess the impact of ˆnancial con-

straint to the extension of trade credit. By focusing on Mexican peso devaluation on 1994 and Asian

currency crisis on 1997, they have concluded that ˆrms with higher short-term debt, ˆnancially con-

straint, in other words, have reduced the extension of trade credit relatively more during the crisis

period. From a regional perspective, sub-Saharan nations were focused in Berman and Martin

(2012). As referred previously, there is large regional heterogeneity in the usage of trade ˆnance

and sub-Saharan nations utilize less trade ˆnance than any other region in the world which consid-

ered to be the outcome of a less-sophisticated ˆnancial system. Berman and Martin (2012) has con-

cluded that sub-Saharan nations are in fact more vulnerable to banking crises as the fall in export

was larger than countries in other regions and the negative eŠect lasts longer while their estimation

result suggested trade ˆnance played an important role in the disruption. Bricongne, Fontagne,

Gaulier, Taglioni and Vicard (2012) has taken advantage of a unique French dataset of payment

incident to capture ˆnancial constraint that ˆrms are facing. French ˆrms are required to ˆle a

regulatory report when they have failed to pay credit and it is recorded as a payment incident. The

payment incident works as the signal on the credibility of ˆrms that would adversely aŠect the pos-

sibility of obtaining new loan including trade ˆnance. The estimation results suggested that while

the overall impact of this payment incident indicator had limited impact on export, the adverse

eŠect is signiˆcantly magniˆed in sectors with higher dependency on external ˆnance.

A unique perspective presented by Jarreau and Poncet (2010) is that looking at Chinese private

ˆrms as ˆnancially constrained to enter the export market. As the state-owned banks dominate the

ˆnancial market in China, a huge distortion is caused as the result of irrational credit allocation.

The hypothesis is as the credit allocation is not completely market driven (strongly skewed to

state-owned ˆrms), ˆrm types might work as a constraint and negatively aŠect trade through credit

channel. The estimation result supported the hypothesis that foreign ˆrms and joint-ventures are

performing better in trade market possibly due to their ability to access more credit outside while

the private ˆrms have only limited resources (and the limitation has been eliminated partially due

to ˆnancial sector liberalization over past decades). Manova (2008) have extended a similar idea

but in a broader scope of the equity market liberalization. By estimating the data of equity market

liberalization, she has concluded that past equity market liberalizations have boosted export in sec-

tors with higher external ˆnance dependency. The possible explanation is that the liberalizations

have stimulated in‰ow of foreign capital that had a supplementary eŠect on existing domestic

‰ows. Aside from the ˆnancial factors, Ahn, Amiti and Weistein (2011) have argued on a more

fundamental factor that makes trade ˆnance essential to international trade, the distance. Usually,

goods shipped by sea take longer than those of air and land thus is exposed to more risks. They

――――

observed a sour in trade price after the outbreak of 2008–09 crisis and hypothesized the increase in

trade price could be the result of undersupply of trade ˆnance. By following this logic, they have

implicitly estimated the eŠect of seaborne trade over the trade price and found a statistically sig-

niˆcant relationship that supports their hypothesis.

As the summary, there are three points that all of these studies share in common as the conclu-

sion. First, these researches all stress the importance of trade ˆnance with clear supportive evi-

dence. Although the magnitude is lower compared to the demand and it diŠers among countries

and regions, it still has a strong and signiˆcant explanatory power over trade ‰ow. Secondly, the

impact of trade ˆnance is signiˆcantly magniˆed during the crisis period. In fact, some of the stud-

ies were not able to present signiˆcant result to support the importance of trade ˆnance during the

``normal'' times. However, all studies agreed and did ˆnd a statistically meaningful relationship be-

tween trade ˆnance and trade ‰ow during the times of crises. Intuitively, this is the re‰ection of the

high-risk environment at the peak of crisis and considering trade ˆnance is developed to mitigate

the risk associated with international trade, by nature trade ˆnance is much preferred in crises

periods. The third point is the ˆnancial soundness and reliance on external ˆnance. All the evidence

suggested that ˆnancial condition is one of the main determinants of trade ˆnance supply as well as

demand and external ˆnance reliance as a key industry characteristic when considering trade

ˆnance demand.

From importer/exporter perspective, the ˆnancial condition of their own and counter-party

would aŠect their demand for trade ˆnance. With better ˆnancial condition, ˆrms would be able to

buŠer or absorb the outcomes of risks to a certain degree on their own. Counter-party risk would

also be perceived to be lower for ˆrms with sound ˆnancial condition and the transaction would be

conducted with less security/risk covering measures. Similar logic applies to ˆnancial institutions

as well. The health of the ˆnancial institutions is crucial on the supply side of trade ˆnance and

risks taken by banks are based on the condition of importing/exporting ˆrms. In case of crisis, the

ˆnancial condition of both ˆrms and banks would be deteriorated and under the unhealthy condi-

tion, banks would lower its' supply of trade ˆnance while the demand for trade ˆnance would be

higher than usual. This is the deadlock situation that occurred exactly during the 2008–09 ˆnancial

crisis which led to a historical collapse of international trade.

4.4 The counter evidence ―The skeptic views over importance of trade ˆnance

Despite a large amount of evidence supporting the importance of trade ˆnance, there are also a

few skeptic views on it. Behrens, Corcos and Mion (2013) demonstrated an analysis by utilizing

micro-level data of Belgium as a typical small open economy. By including various characteristics of

――

21 Some of the characteristics include ˆrm size, value added per worker, export over turnover, share of ˆnancial

debt, foreign/multinational ˆrm dummy, OECD/EU dummy, industry characteristics dummy and GDP

growth rate.

22 There are a lot of attempt in each research to eliminate the bias coming from data availability via diŠerent

empirical strategies. However, it is still di‹cult to conclude the bias have been completely removed.

――

the ˆrm, country, and product, they have concluded that the fall in trade ‰ow is mostly due to the

fall in demand for durable goods and the single most important factors that aŠect the fall in demand

is GDP growth21. Though the external ˆnance dependency did have statistically signiˆcant impact

on trade ‰ow in the estimation result, they have treated it as a secondary weak evidence.

Levchenko, Lewis and Tesar (2010) did not ˆnd any impact of trade credit on the reduction of

international trade ‰ow. They have included accounts payable over the cost of goods and account

receivable over sales as the measures of trade credit extended and received as well as trade-share-

weighted inter-bank rate following Chor and Manova (2012). The estimation result did not support

the hypothesis that these ˆnancial factors had explanatory power over the change in trade ‰ow

during the 2008–09 crisis. Levchenko, Lewis and Tesar (2011) have followed the same approach

but with more intensive focus on the ˆnancial aspect of the trade. By exploiting the same method-

ology as Levchenko, Lewis and Tesar (2010), they have included external ˆnance dependency,

asset tangibility and a dummy for transportation methods in addition to other variables utilized in

Levchenko, Lewis and Tesar (2010). While the result remained same for most of the variables (in-

signiˆcant), transportation method (especially seaborne) had signiˆcant negative impact on the

change of trade ‰ow that echoes ˆnding from Ahn, Amiti and Weistein (2011).

The general consensus from empirical studies is that trade ˆnance is important in regard to inter-

national trade. From the academic research perspective, however, there are two critical problems

that need to be addressed. First, as it has been mentioned repeatedly, limited data availability of

trade ˆnance remains as the biggest challenge to all researches related to trade ˆnance. Especially

for empirical studies, data availability is crucial for comprehensive and precise estimation. Some of

the researches utilizing single country trade ˆnance data can be considered to be comprehensive as

the data set is complete within the country. As the estimation results might not have universal ex-

planatory power but still can be perceived as the best analyses of the available data sets. But in case

of multi-country cross-section estimations, one can argue the results might be coming from country-

speciˆc and industry-speciˆc characteristics. As the data availability problem might bias the esti-

mation results either upward or downward, so far the empirical researches can only be treated as

partial and possibly biased evidence in supporting the importance of trade ˆnance22. As it would re-

quire tremendous time and eŠort to construct comprehensive data sets, it is important to highlight

the importance of trade ˆnance with more evidence so to give the incentive to initiate the data con-

――――

struction movement.

Another issue with the empirical researches is the lack of grand theory. So far there is no well-

established theoretical model for trade ˆnance. Mostly due to the development of gravity type esti-

mation, there exist an unwritten code for trade-related estimation to include factors such as GDP,

population, distance, exchange rate etc. Though the empirical strategies vary among all the empiri-

cal estimations, the general idea for most of them is to include the variable of trade ˆnance in addi-

tion to all or some of the general gravity type estimation variables. There is no uniˆed methodology

for constructing the estimation equation for trade ˆnance and the explanatory variables are includ-

ed with some justiˆcations but still arbitrarily. As the development on the empirical side is provid-

ing more evidence from the data, it is imperative to sophisticate the analytical frameworks to give

theoretical rationale to those ˆndings. This would in return provide more room for theory-founded

estimation putting both theory and empirical side of trade ˆnance study into a virtuous circle.

5. Conclusion

In this paper, I provide an overview of theoretical and empirical researches of trade ˆnance as

being the very ˆrst paper to review the development of studies on trade ˆnance. While trade

ˆnance covers a signiˆcant portion of international trade and the econometric evidence support the

importance of trade ˆnance, there is no comprehensive data set to estimate the exact coverage and

this is also limiting the scope of empirical analysis. From a theoretical perspective, the frameworks

developed so far are still in their elementary phase and requires more sophistication. The volume of

research related to trade ˆnance is dominated by empirical studies which re‰ects the recent trend

of researches in economics that start by presenting econometric facts then build theoretical frame-

works to give a rational explanation. However, this does not change the interdependence of theory

and empirics and it never neglects the importance of either aspect. For future studies, dynamic ex-

tension of models would be of great importance in establishing more comprehensive analytical

frameworks. This would also greatly beneˆt the empirical side by providing grand theory. Con-

structing a comprehensive data source in order to address the data limitation problem would pave a

solid ground for further empirical studies together with the development of theoretical frameworks.

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