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Using panel data from Chinese listed firms, Marc Auboin discusses the link between export earnings and trade finance. A 1% increase in trade finance loans is associated with a 0.067-0.083% rise in export earnings, depending on the model.

The opinions expressed in this paper are those of the authors. They do not represent the positions or opinions of the WTO or its Members and are without prejudice to Members' rights and obligations under the WTO

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Here are five key points from the video:

1. **Historical Convideo of Trade Finance**: Before the global financial crisis of the early 2000s, trade finance was largely overlooked in economic literature despite its crucial role in supporting the exponential growth of international trade, which saw an increase from $66 billion post-World War II to $23 trillion in goods and $8 trillion in services by the year prior to the video's publication.

2. **Lack of Data and Perception Issues**: There has been a significant shortage of reliable statistics on trade finance, leading to a lack of awareness about its importance. The Bank for International Settlements estimated that bank-intermediated trade finance flows accounted for around 60% of international trade, illustrating the need for better data on this financial segment.

3. **Impact of the Global Financial Crisis**: The 2008 financial crisis shifted attention to trade finance due to its susceptibility to interbank conditions and risk perception, which revealed how trade finance could be an amplifying factor during economic downturns, potentially leading to supply shortages, especially in emerging markets.

4. **Research Findings on Trade Finance in China**: A study co-authored by the speaker found that trade finance significantly boosts export earnings in China, particularly for smaller firms that rely on it more heavily due to limited access to domestic capital markets. A 10% increase in trade finance was associated with a proportional increase in exports.

5. **Current Challenges and Opportunities**: The video discusses ongoing issues of limited trade finance access, particularly for smaller and developing nations, exacerbated by international financial institutions reducing exposure to these markets post-crisis. Multilateral development banks are attempting to address these issues through trade finance facilitation programs, which aim to enhance the capacity for trade finance in less developed regions.

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Here are some key quotes extracted from the video about trade finance:

1. **Historical Convideo of Trade Finance**:
- “Until the global financial crisis took place in the early two thousands, the topic of trade finance... was relatively unheard of in the economic literature since the end of the second World War.”

2. **Growth of International Trade**:
- “The trade finance industry has quietly supported the boom in international trade, which has grown in value by 347 times, up to last year, when it reached a $23 trillion in goods and $8 trillion in services.”

3. **Statistical Gaps in Trade Finance**:
- “Part of the silence over the topic was linked to a very basic fact that there is a global shortage of statistics on trade finance. This is one of the world's largest trade statistical gaps.”

4. **Impact of the Financial Crisis**:
- “The perception has changed since the global financial crisis, when the economist community has started to wonder why global trade had collapsed so rapidly, relative to global output.”

5. **Trade Finance Sensitivity**:
- “Trade finance was quite sensitive to interbank conditions, risk perception, and contagion from other more risky parts of the financial industry.”

6. **Supplier and Importer Interests**:
- “In trade, exporters and importers have the opposite interest... This time gap constitutes the main reason for this very large market.”

7. **Importance of Trade Finance for Exports**:
- “We find that a 1% increase in trade finance available is associated with an increase in export earnings of these firms.”

8. **Elasticity of Trade Finance**:
- “The trade finance to trade elasticity is comparable to what we find in other countries... a 10% increase in trade finance is associated with an increase in trade of one.”

9. **Barriers to International Trade**:
- “Limited availability of trade finance can be a significant barrier to international trade.”

10. **Unmet Demand in Developing Countries**:
- “There was a significant unmet demand in developing countries... not only of trade integration, but also, in general, of trade expansion as well.”

11. **Diverse Funding for Trade Finance**:
- “Multilateral development banks have been trying to bridge the gap, by running trade finance facilitation programs that have expanded since the global financial crisis.”

12. **Future of Trade Finance**:
- “If we are looking towards diversification of supply chains... we have to think about trade finance.”

These quotes encapsulate the central themes of the video, highlighting the significance of trade finance, changes in perceptions since the financial crisis, and the challenges faced by smaller markets and firms.

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Okay.

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It is the 9th of October.

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We've just gone past two 30, in London.

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We're working on trade, finance and exports.

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We talking about the Chinese context.

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Uh, mark, thanks for talking to faculty. Okay.

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Mark, what's the context of this work?

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Well, until the, global financial crisis,

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took place, in the early two thousands, the topic

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of trade finance, IE the financing

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of international trade was relatively unheard of in the,

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economic literature since the end of the,

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second World War.

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Um, actually, the trade finance industry has quietly,

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supported the boomer in international trade, which,

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which has grown in value by 347 times, up to last year,

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when it, reached, $23 trillion in goods

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and $8 trillion in, in services.

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And that would not have been possible without the parallel

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expansion of that trade finance industry.

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And part of the silence, over the topic was linked to,

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a very basic fact that there is a, a global shortage of,

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statistics on trade finance.

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This is one of the world's largest trade,

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statistical gap.

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Uh, the bank of international settlement, made in 2014

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and estimate of, bank intermediate,

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trade finance flows, to be around $8 trillion,

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in a year where international trade was $16 trillion.

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And if you add non-bank, intermediate trade finance,

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you would reach, another $2 trillion.

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So that would be a total of 10 out of 16 trillion in trade.

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That's a 60% coverage.

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Part of the silence was also linked to the fact that we,

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we didn't hear much about this, segment

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of the financial industry, which was quiet and safe.

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Um, according to statistics of the International Chamber

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of Commerce,

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the default rate on trade finances less than 1%,

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be it on loans or letters of credit,

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and 60% of, that loss would be recovered

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through the sale of the merchandise,

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which is a very strong collateral in trade finance.

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So the implicit belief at the end was

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that trade finance was largely driven by trade flows.

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That is, it was demand driven and not the other way around.

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Uh, the perception has changed since the global financial

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crisis, when the economists,

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the economist community has started

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to wonder why global trade had collapsed so rapidly,

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relative to global output.

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There were several culprits,

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and one of the channels, looked at was, the stoppage

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of trade finance, which caught the attention of economists.

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And, so far the literature about trade, why trade,

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traders trade, how much do they do, was largely,

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related to, physical factors like on the macroeconomic

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side, aggregate demand

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or on the microeconomic side, labor capital,

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productivity, trade cost, geography, you name it.

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Um, but rarely to finance.

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And with the financial crisis, the, economist community,

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realized that as mostly short term, 90 days financing,

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trade finance was quite sensitive to interbank,

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conditions, risk perception

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and contagion from other more risky parts

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of the financial industry.

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And therefore, in crisis, counterparty risk, tends

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to get conflated with country risk leading

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to supply shortages, particularly in emerging markets.

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And for all these reasons, the supply of that trade finance

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that is normally safe,

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could overshoot the fall in demand for traded goods,

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and can be an accelerator in its own right

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of the falling trade.

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Brilliant. Really brilliant actually.

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And you, you're doing it great in terms of

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how you reference your notes in anu.

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Okay. So how is trade finance important to trade?

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Well, actually, the, the simple fact of trade is that,

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international trade fi trade is not paid cash.

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Um, exporters

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and importers have, the opposite interest explorer want

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to be paid at the latest upon shipment

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because they want, don't want to undertake, the,

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the payment risk of actually sending the

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merchandise and not being paid.

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The importers have exactly the opposite, interest.

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They do not want to pay

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until they actually see the merchandise, the quantity

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and the quality according to contract.

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So one does not want to take the payment risk,

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the other one doesn't want to take the transactional risk

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of actually,

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paying the merchandise and not receiving it.

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And that time gap, which is, around an 80 to 90 days,

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it takes 82 days from a car for a cargo to go from,

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Singapore to Europe.

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Um, that the time gap constitutes, the main reason

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for this, very large, market.

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And it goes beyond, imagine an exporter that needs to,

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pay for its input to be able to produce

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for supply chains.

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Um, it needs the, so-called pre-ex export finance to pay

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for this and put and produce the goods,

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that also creates a market for trade finance.

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Fantastic. Okay.

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So what is your paper say and maybe speak to the co-authors?

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Yes. In this paper I coauthored with, behi with,

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Jeff Li and Wong Yu,

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and which does not commit the World Trade Organization.

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We examine the association between trade, finance

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and exports in China.

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At the firm level, we find that a 1%

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increase in trade finance available to firms is associated

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with an increase by not as much,

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but an increase in, export earnings of these firms.

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Uh, depending on the model we use.

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Uh, the main data source that we use is, is a new source

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of data, that is, from the Chinese, stock market

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and accounting, research database.

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That is a data set for listed firms in China.

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And we use it for the years, 2013 to 20, 21.

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Uh, first data set provides information about the bank loans

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received by firms, with a description

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of the intended use of the loan.

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And that has a category of trade,

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international trade finance.

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There is a second data set

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that contains the annual statements of firms.

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That includes, all kinds of statements, of course,

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but the, particularly the trade receivables in the forms

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of notes that are typically used in international trade,

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like promissory notes

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or builds of exchange, which are all the old instruments,

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and that we cross with the, exports of these firms

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to be sure that it is related to movement of goods.

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So when we aggregate those trade loans on the one hand

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and on the trade receivables, on the other hand, we find

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that the trade finance to trade elasticity is comparable

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to what we find in other countries that have,

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undertaken relatively similar studies.

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That is, a elasticity of zero point 15

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or 0.2, which means that a 10% increase in trade finance

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generates, an increase

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or is associated with an increase of trade to one

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and a half to 2%.

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And we also find that the elasticities

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of export earning is higher for the smaller firms

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that have more limited financing options on the domestic

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capital markets.

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In other words, smaller

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and more financially constrained firms are more dependent on

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trade finance for their trade than larger firms.

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In our paper, we show

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that trade finance has been an important fuel

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for exporters in China.

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China has become a very large trading nation supported

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by a very large financial sector.

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That does not mean that,

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there is no si significant unmet demand, in the country,

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as our data mainly, relates to a listed firm

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that are the largest firms in the country.

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And that is probably the best of served by the market

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and are not entirely, representative of the full ity of,

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of all traders in China.

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Brilliant. So far. So, so why is this interesting?

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It's a bit of a silly question 'cause it's fascinating,

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but what is the rest of the literature say?

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Well, this positive association

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between the availability of trade finance

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and the amount of international trade is something

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that other authors have found in,

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in different studies in developed

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and developing countries at various levels of development.

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Uh, Nova have, for example, shown

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that greater supply of trade finance is also associated

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with larger trade flows

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or greater resilience of trade in times of crisis.

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Inversely, limited availability of it,

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can be a significant barrier to international trade.

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And access of firms to this type of finance can be limited

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by a number of factors such as the intensity

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of their internal external financial constraint

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or even the quality of the banks that are serving them.

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Um, of course, and here, iTero Degene firm matters the,

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the share of merchandise trade supported

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by trade finances empirically associated according to Niman,

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Niman and Schmidt and Eisen, to financial development,

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levels and to, to the quality of the rule of law and,

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and trade and supply chain finances relevant

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for value chains integration.

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So all of this says that trade finance matters not only,

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on the demand side, but also on the supply side.

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Let's get to the policy implications. Uh, yeah.

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And what, what's your contributions to ship?

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Um, you know, after,

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a significant G 20 financial package, in support

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of the trade finance market

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during the global financial crisis, policy makers

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and international organization have started

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to exercise greater scrutiny at these markets

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and develop, the, the realize

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that there was a significant unmet demand

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in developing countries.

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And that was an issue not only of trade integration,

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but also, in general, of,

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of trade expansion as well.

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Uh, so through various studies, for example, the,

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world Bank's International Financial Corporation, the IFC

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and the World Trade Organization together have established

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that trade finance availability was limited at much lower

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level of development.

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Um, because the ability of the core local financial system

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to support their expanding trade was limited.

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Um, in West Africa, in the Ong region, for example, only 20%

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of trade is supported by some trade finance, relative

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to the 60% at the global level that I mentioned earlier.

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So in Russian markets,

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limited available trade finance goes to, if not only to,

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to well established firms.

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And that creates actually a, a question about,

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export diversity verification if only,

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only always the same firm actually benefit, SMEs,

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face a very high rejection rate.

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And, RJ enrolled equilibrium, models show

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that raising the trade finance coverage of trade from 20%

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to only 40%,

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not the 60% internationally would increase trade

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to these countries from eight to 10%.

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So, you could think that imports

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of trade finance from other part of the world,

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capital market would balance market out.

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But this is not the case

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because since the financial crisis, what

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we have also discovered is that international,

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private financial institutions have reduced exposures

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to smaller markets, a phenomenon called de-risking,

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and which is well known in, in world economics.

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And, and they also often confuse the,

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counterparty risk, which is very small, as we said,

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the 1% loss default, to the country risk,

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which can be high in developing countries.

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So, for that reason,

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multilateral development banks have been trying

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to bridge the gap,

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by running trade finance facilitation program

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that have expanded since the global financial crisis

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link linking local

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and international banks in daily transactions, trying

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to bridge that, gap between the perception of risk

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and the actual level of risk.

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And they are actually dedicating,

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supporting 50 billion in,

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in trade finance per year in critical, trade in, in low

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to middle income countries.

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Brilliant. So then coming back to your paper,

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what does that say about your paper?

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Well, by no mean, our paper is perfect

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and, when data is, is more available, it would be useful

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to extend it to the universe of firms in China.

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But we need more of these studies

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of these country studies at different level of development

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to understand how at firm level

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or at country level, firms,

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at the different stage of their development evolve from cash

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business essentially, or, or credit card business

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to more sophisticated ways

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of handing their financials in the complex, world

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of supply chain.

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For example, supply chain finance is a new

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development of trade finance.

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Half of world trade is supply chain trade today.

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And if we are looking towards di diversification

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of supply chains and, and expansion into new countries

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and new horizons, well we have to think about trade finance.

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And so this is why, I mean, we have

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to understand better these markets, how firms behave,

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how are there constraints?

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How can they accept

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that finance reason why this relatively silent topic

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that has, risen out of globalization at the intersection

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between global capital flows

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and global trade flows, is important.

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And we need to continue clarifying the issues and, and,

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and do research on it.

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Brilliant. Mark, that's all the time we have for you.

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00:13:54.385 --> 00:13:56.285
So that is superb. That is superb. Lemme.

Resurgence of Trade Finance Awareness Post-Crisis

00:00:00 - Until the, global financial crisis, took place, in the early two thousands, the topic of trade finance, IE the financing of international trade was relatively unheard of in the, economic literature since the end of the, second World War. actually, the trade finance industry has quietly, supported the boomer in an international trade, which, which has grown in value by 347 times, up to last year, when it, reached a $23 trillion in goods and $8 trillion in, in services.

00:00:38 - expansion of that trade finance industry. And part of the silence, over the topic was linked to, a very basic fact that there is a, a global shortage of, statistics on trade finance. This is one of the world's largest trade, statistical gap. the Bank of International settlement, made in 2014 an estimate of, bank intermediate, trade finance flows, to be around $8 trillion, in a year where international trade was $16 trillion.

00:01:10 - you would reach, another $2 trillion. So that would be a total of 10 out of 16 trillion in trade. That's a 60% coverage. Part of the silence was also linked to the fact that we, we didn't hear much about this, segment of the financial industry, which was quiet and safe. according to statistics of the International Chamber of Commerce, the default rate on trade finances less than 1%, be it on loans or letters of credit,

Shifting Perceptions of Trade Finance Post-Crisis

00:01:41 - through the sale of the merchandise, which is a very strong collateral in trade finance. So the implicit belief at the end was that trade finance was largely driven by trade flows. That is, it was demand driven and not the other way around. The perception has changed since the global financial crisis, when the economists, the economist community, has started to wonder why global trade had collapsed so rapidly, relative to global output. There were several culprits,

00:02:12 - of trade finance, which caught the attention of economists. And, so far the literature about trade, why trade, traders trade, how much do they do, was largely related to, physical factors like on the macroeconomic side, aggregate demand on the microeconomic side, labor capital, productivity, trade cost, geography, you name it. but rarely to finance. And with the financial crisis, the, economist community,

00:02:47 - trade finance was quite sensitive to interbank, conditions, risk perception, and contagion from other more risky parts of the financial industry. And therefore, in crisis, counterparty risk, tends to get conflated with country risk leading to supply shortages, particularly in emerging markets. And for all these reasons, the supply of that trade finance

Balancing Risks in Trade Finance: Exporters vs. Importers

00:03:14 - could overshoot the fall in demand for traded goods, and can be an accelerator in its own right of the fall. In trade, exporters and importers have, the opposite interest exporter want to be paid at the latest upon shipment because they want, don't want to undertake, the, the payment risk of actually sending the merchandise and not being paid. The importers have exactly the opposite, interest. They do not want to pay until they actually see the merchandise, the quantity,

00:03:47 - So one does not want to take the payment risk, the other one doesn't want to take the transactional risk of actually, paying the merchandise and not receiving it. And that time gap, which is, around an 80 to 90 days, it takes 82 days from a car for a cargo to go from, Singapore to Europe. that the time gap constitutes, the main reason for this, very large, market. And it goes beyond, imagine an exporter that needs to,

00:04:20 - for supply chains. it needs the, so-called pre-ex export finance to pay for this input and produce the goods, that also creates a market for trade finance. This paper I coauthored with, be with, Jeff Li and, Wong Yu, and which does not commit the World Trade Organization. We examined the association between trade, finance and exports in China. At the firm level, we find that a 1% increase in trade finance available

Exploring Trade Finance Data and Its Impact on Export Earnings

00:04:51 - but an increase in, export earnings of these firms. depending on the model we use. the main data source that we use is, is a new source of data, that is, from the Chinese, stock market and accounting, research data database. That is a data set for listed firms in China, and we use it for the years, 2013 to 20, 21. first data set provides information about the bank loans received by firms, with a description

00:05:21 - And that has a category of trade, international trade finance. There is a second data set that contains the annual statements of firms. That includes, all kinds of statements, of course, but the, particularly the trade receivables in the forms of notes that are typically used in international trade, like promissory notes or builds of exchange, which are all the old instruments, and that we cross with the, exports of these firms to be sure that it is related to movement of goods.

00:05:55 - and all the trade receivables, on the other hand, we find that the trade finance to trade elasticity is comparable to what we find in other countries that have, undertaken relatively similar studies. That is a elasticity of zero point 15 or 0.2, which means that a 10% increase in trade finance generates, an increase or is associated with an increase of trade to one

Impact of Trade Finance on Small Exporters in China

00:06:24 - And we also find that the elasticities of export earning is higher for the smaller firms that have more limited financing options on the domestic capital markets. In other words, smaller and more financially constrained firms are more dependent on trade finance for their trade than larger firms. In our paper, we show that trade finance has been an important fuel for exporters in China. China has become a very large trading nations supported by a very large financial sector.

00:06:55 - there is no si significant unmet demand, in the country, as our data mainly, relates to a listed firm that are the largest firms in the country, and that are probably the best served by the market and are not entirely, representative of the full ity of, of all traders in China. This positive association between the availability of trade finance and the amount of international trade is something that other authors have found in,

00:07:25 - and developing countries at various levels of development. ANOVA have, for example, shown that greater supply of trade finance is also associated with larger trade flows or greater resilience of trade in times of crisis. Inversely, limited availability of it, can be a significant barrier to international trade. And access of firms to this type of finance can be limited by a number of factors such as the intensity of their internal external financial constraint

Trade Finance: Critical Insights and Global Disparities

00:07:58 - of course, and here it ity of firm matters, the, the share of merchandise trade supported by trade finances empirically associated according to Niman, Niman and Schmidt and Eisen, to financial development, levels and to, to the quality of the rule of law and, and trade and supply chain finances relevant for value chains integration. So all of this says that trade finance matters not only,

00:08:29 - After, a significant G 20 financial package, in support of the trade finance market during the global financial crisis, policy makers and international organization have started to exercise greater scrutiny at these markets and develop, the, the realized that there was a significant unmet demand in developing countries. And that was an issue not only of trade integration, but also, in general, of, of trade expansion as well. so through various studies, for example, the,

00:09:01 - and the World Trade Organization together have established that trade finance availability was limited at much lower level of development. because the ability of the coal local financial system to support their expanding trade was limited. in West Africa or in the Ong region, for example, only 20% of trade is supported by some trade finance, relative to the 60% at the global level that I mentioned earlier. So in Russian markets,

Challenges and Solutions in Trade Finance Accessibility for SMEs

00:09:34 - to well-established firms. And that creates actually a, a question about, export diversity verification if only, only always the same firm actually benefit. SMEs, face a very high rejection rate. And, r general enrolled equilibrium, models show that raising the trade finance coverage of trade from 20% to only 40%, not the 60% internationally would increase trade to these countries from eight to 10%.

00:10:05 - of trade finance from other part of the world, capital market would balance market out. But this is not the case because since the financial crisis, what, we have also discovered is that international, private financial institutions have reduced exposures to smaller markets, a phenomenon called de-risking, and which is well known in, in world economics. And, and they also often confuse the, counterparty risk, which is very small, as we said, the 1% loss default, to the country risk,

00:10:37 - So, for that reason, multilateral development banks have been trying to bridge the gap, by running trade finance facilitation program that have expanded since the global financial crisis link linking local and international banks in daily transactions, trying to bridge that, gap between the perception of risk and the actual level of risk. And they are actually dedicating supporting 50 billion in, in trade finance per year in critical, trade in, in low

Enhancing Understanding of Trade Finance and Supply Chain Dynamics

00:11:07 - By no mean, our paper is perfect, and, when data is, is more available, it would be useful to extend it to the universe of firms in China. But we need more of these studies of these country studies at different level of development to understand how at firm level or at country level firms at the different stage of their development evolve from cash business essentially, or, or credit card business to more sophisticated ways of handing their financials in the complex, world of supply chain. For example, supply chain finance is a

00:11:38 - Half of world trade is supply chain trade today. And if we are looking towards di diversification of supply chains and, and expansion into new countries and new horizons, well, we have to think about trade finance. And so this is why, I mean, we Have to, to understand better these markets, how firms behave, how are there constraints? How can they accept that finance reason why this relatively silent topic that has, risen out of globalization at the intersection between global capital flows

00:12:14 - And we need to continue clarifying the issues and, and, and do research on it.

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