Trade Finance and Exports: Firm-level Evidence from China

Key Question Being Explored in This Insight:

View the page of: Marc Auboin

Institution: World Trade Organization

Explore more insights in:

Economics Financial Economics Global and Regional Policy Authorities International Trade Social Sciences

Media Literacy Toolkit

Faculti's Media Literacy Toolkit helps viewers critically engage with academic insights by analyzing the research context, identifying perspectives, and encouraging thoughtful evaluation.

Critical Questions to Consider ▼

What assumptions does the research make?
Are there alternative perspectives not explored?
What are the limitations of the research method?

Bias and Perspective Awareness ▼

This research comes from World Trade Organization . Reflect on how the institution's academic focus and research partnerships may shape the questions being explored.

Further Reading ▼

Read the Study

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

Image courtesy of interviewee. October 10, 2024

Log-in or Sign-up to Faculti
Currently viewing this subject insight as a guest. You have insight(s) remaining for this month. Login to view 8000+ figures on the platform.

Generating Workspace...

Export as PDF

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

Language:

Export as PDF

Export as PDF
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.

Export as PDF
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.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

1
00:00:38.695 --> 00:00:38.985
Okay.

2
00:00:38.985 --> 00:00:40.025
It is the 9th of October.

3
00:00:40.025 --> 00:00:42.105
We've just gone past two 30, in London.

4
00:00:42.155 --> 00:00:43.745
We're working on trade, finance and exports.

5
00:00:43.745 --> 00:00:44.945
We talking about the Chinese context.

6
00:00:45.285 --> 00:00:46.945
Uh, mark, thanks for talking to faculty. Okay.

7
00:00:46.945 --> 00:00:48.625
Mark, what's the context of this work?

8
00:00:49.055 --> 00:00:51.945
Well, until the, global financial crisis,

9
00:00:52.135 --> 00:00:55.745
took place, in the early two thousands, the topic

10
00:00:55.745 --> 00:00:57.665
of trade finance, IE the financing

11
00:00:57.665 --> 00:01:01.225
of international trade was relatively unheard of in the,

12
00:01:01.585 --> 00:01:04.425
economic literature since the end of the,

13
00:01:04.485 --> 00:01:05.545
second World War.

14
00:01:05.645 --> 00:01:09.305
Um, actually, the trade finance industry has quietly,

15
00:01:09.485 --> 00:01:13.345
supported the boomer in international trade, which,

16
00:01:13.345 --> 00:01:18.305
which has grown in value by 347 times, up to last year,

17
00:01:18.765 --> 00:01:22.945
when it, reached, $23 trillion in goods

18
00:01:22.965 --> 00:01:25.065
and $8 trillion in, in services.

19
00:01:25.445 --> 00:01:28.065
And that would not have been possible without the parallel

20
00:01:28.065 --> 00:01:30.065
expansion of that trade finance industry.

21
00:01:30.605 --> 00:01:33.505
And part of the silence, over the topic was linked to,

22
00:01:34.085 --> 00:01:37.625
a very basic fact that there is a, a global shortage of,

23
00:01:37.625 --> 00:01:39.545
statistics on trade finance.

24
00:01:39.735 --> 00:01:42.145
This is one of the world's largest trade,

25
00:01:42.485 --> 00:01:43.585
statistical gap.

26
00:01:43.925 --> 00:01:46.905
Uh, the bank of international settlement, made in 2014

27
00:01:46.965 --> 00:01:50.105
and estimate of, bank intermediate,

28
00:01:50.105 --> 00:01:54.105
trade finance flows, to be around $8 trillion,

29
00:01:54.165 --> 00:01:56.985
in a year where international trade was $16 trillion.

30
00:01:57.045 --> 00:02:00.185
And if you add non-bank, intermediate trade finance,

31
00:02:00.725 --> 00:02:02.865
you would reach, another $2 trillion.

32
00:02:02.885 --> 00:02:05.865
So that would be a total of 10 out of 16 trillion in trade.

33
00:02:06.205 --> 00:02:07.865
That's a 60% coverage.

34
00:02:08.495 --> 00:02:11.625
Part of the silence was also linked to the fact that we,

35
00:02:11.725 --> 00:02:13.705
we didn't hear much about this, segment

36
00:02:13.805 --> 00:02:16.865
of the financial industry, which was quiet and safe.

37
00:02:17.445 --> 00:02:19.985
Um, according to statistics of the International Chamber

38
00:02:19.985 --> 00:02:21.225
of Commerce,

39
00:02:21.485 --> 00:02:24.545
the default rate on trade finances less than 1%,

40
00:02:24.765 --> 00:02:27.385
be it on loans or letters of credit,

41
00:02:27.925 --> 00:02:31.025
and 60% of, that loss would be recovered

42
00:02:31.025 --> 00:02:33.065
through the sale of the merchandise,

43
00:02:33.065 --> 00:02:35.185
which is a very strong collateral in trade finance.

44
00:02:35.845 --> 00:02:37.785
So the implicit belief at the end was

45
00:02:37.785 --> 00:02:41.265
that trade finance was largely driven by trade flows.

46
00:02:41.495 --> 00:02:45.025
That is, it was demand driven and not the other way around.

47
00:02:46.105 --> 00:02:48.845
Uh, the perception has changed since the global financial

48
00:02:48.845 --> 00:02:50.885
crisis, when the economists,

49
00:02:51.025 --> 00:02:52.965
the economist community has started

50
00:02:53.025 --> 00:02:56.125
to wonder why global trade had collapsed so rapidly,

51
00:02:56.705 --> 00:02:58.205
relative to global output.

52
00:02:58.205 --> 00:02:59.685
There were several culprits,

53
00:02:59.945 --> 00:03:03.605
and one of the channels, looked at was, the stoppage

54
00:03:03.605 --> 00:03:06.445
of trade finance, which caught the attention of economists.

55
00:03:06.985 --> 00:03:11.485
And, so far the literature about trade, why trade,

56
00:03:11.485 --> 00:03:15.165
traders trade, how much do they do, was largely,

57
00:03:15.165 --> 00:03:18.805
related to, physical factors like on the macroeconomic

58
00:03:18.835 --> 00:03:20.205
side, aggregate demand

59
00:03:20.205 --> 00:03:24.045
or on the microeconomic side, labor capital,

60
00:03:24.045 --> 00:03:26.565
productivity, trade cost, geography, you name it.

61
00:03:26.985 --> 00:03:28.645
Um, but rarely to finance.

62
00:03:29.425 --> 00:03:33.125
And with the financial crisis, the, economist community,

63
00:03:33.305 --> 00:03:37.645
realized that as mostly short term, 90 days financing,

64
00:03:38.215 --> 00:03:41.685
trade finance was quite sensitive to interbank,

65
00:03:41.685 --> 00:03:43.805
conditions, risk perception

66
00:03:43.945 --> 00:03:47.405
and contagion from other more risky parts

67
00:03:47.405 --> 00:03:48.645
of the financial industry.

68
00:03:48.945 --> 00:03:53.245
And therefore, in crisis, counterparty risk, tends

69
00:03:53.245 --> 00:03:56.325
to get conflated with country risk leading

70
00:03:56.345 --> 00:03:59.085
to supply shortages, particularly in emerging markets.

71
00:03:59.785 --> 00:04:03.845
And for all these reasons, the supply of that trade finance

72
00:04:03.875 --> 00:04:05.805
that is normally safe,

73
00:04:06.055 --> 00:04:10.125
could overshoot the fall in demand for traded goods,

74
00:04:10.125 --> 00:04:12.805
and can be an accelerator in its own right

75
00:04:13.465 --> 00:04:14.485
of the falling trade.

76
00:04:15.085 --> 00:04:16.285
Brilliant. Really brilliant actually.

77
00:04:16.305 --> 00:04:17.725
And you, you're doing it great in terms of

78
00:04:17.725 --> 00:04:19.045
how you reference your notes in anu.

79
00:04:19.075 --> 00:04:21.285
Okay. So how is trade finance important to trade?

80
00:04:21.915 --> 00:04:24.845
Well, actually, the, the simple fact of trade is that,

81
00:04:24.845 --> 00:04:27.485
international trade fi trade is not paid cash.

82
00:04:27.945 --> 00:04:28.965
Um, exporters

83
00:04:28.965 --> 00:04:32.725
and importers have, the opposite interest explorer want

84
00:04:32.725 --> 00:04:35.125
to be paid at the latest upon shipment

85
00:04:35.125 --> 00:04:37.965
because they want, don't want to undertake, the,

86
00:04:38.305 --> 00:04:40.325
the payment risk of actually sending the

87
00:04:40.325 --> 00:04:41.565
merchandise and not being paid.

88
00:04:41.785 --> 00:04:44.805
The importers have exactly the opposite, interest.

89
00:04:44.995 --> 00:04:46.405
They do not want to pay

90
00:04:46.455 --> 00:04:48.965
until they actually see the merchandise, the quantity

91
00:04:49.025 --> 00:04:51.325
and the quality according to contract.

92
00:04:51.665 --> 00:04:53.805
So one does not want to take the payment risk,

93
00:04:53.825 --> 00:04:56.365
the other one doesn't want to take the transactional risk

94
00:04:56.625 --> 00:04:57.845
of actually,

95
00:04:57.845 --> 00:04:59.725
paying the merchandise and not receiving it.

96
00:05:00.185 --> 00:05:04.165
And that time gap, which is, around an 80 to 90 days,

97
00:05:04.545 --> 00:05:08.205
it takes 82 days from a car for a cargo to go from,

98
00:05:08.505 --> 00:05:09.925
Singapore to Europe.

99
00:05:10.545 --> 00:05:14.325
Um, that the time gap constitutes, the main reason

100
00:05:14.385 --> 00:05:17.645
for this, very large, market.

101
00:05:18.185 --> 00:05:21.765
And it goes beyond, imagine an exporter that needs to,

102
00:05:21.985 --> 00:05:24.765
pay for its input to be able to produce

103
00:05:24.765 --> 00:05:25.805
for supply chains.

104
00:05:26.265 --> 00:05:30.565
Um, it needs the, so-called pre-ex export finance to pay

105
00:05:30.565 --> 00:05:33.085
for this and put and produce the goods,

106
00:05:33.155 --> 00:05:35.205
that also creates a market for trade finance.

107
00:05:36.795 --> 00:05:37.845
Fantastic. Okay.

108
00:05:37.845 --> 00:05:40.805
So what is your paper say and maybe speak to the co-authors?

109
00:05:41.625 --> 00:05:44.725
Yes. In this paper I coauthored with, behi with,

110
00:05:44.795 --> 00:05:47.365
Jeff Li and Wong Yu,

111
00:05:47.425 --> 00:05:49.605
and which does not commit the World Trade Organization.

112
00:05:49.745 --> 00:05:52.285
We examine the association between trade, finance

113
00:05:52.385 --> 00:05:53.485
and exports in China.

114
00:05:53.985 --> 00:05:56.725
At the firm level, we find that a 1%

115
00:05:57.245 --> 00:06:00.685
increase in trade finance available to firms is associated

116
00:06:00.715 --> 00:06:02.365
with an increase by not as much,

117
00:06:02.705 --> 00:06:05.885
but an increase in, export earnings of these firms.

118
00:06:06.345 --> 00:06:08.005
Uh, depending on the model we use.

119
00:06:08.465 --> 00:06:11.325
Uh, the main data source that we use is, is a new source

120
00:06:11.325 --> 00:06:15.085
of data, that is, from the Chinese, stock market

121
00:06:15.305 --> 00:06:17.325
and accounting, research database.

122
00:06:17.715 --> 00:06:20.605
That is a data set for listed firms in China.

123
00:06:21.025 --> 00:06:24.965
And we use it for the years, 2013 to 20, 21.

124
00:06:25.385 --> 00:06:28.245
Uh, first data set provides information about the bank loans

125
00:06:28.605 --> 00:06:30.765
received by firms, with a description

126
00:06:30.765 --> 00:06:32.565
of the intended use of the loan.

127
00:06:32.905 --> 00:06:34.965
And that has a category of trade,

128
00:06:34.965 --> 00:06:36.285
international trade finance.

129
00:06:36.855 --> 00:06:38.405
There is a second data set

130
00:06:38.555 --> 00:06:41.085
that contains the annual statements of firms.

131
00:06:41.715 --> 00:06:44.205
That includes, all kinds of statements, of course,

132
00:06:44.225 --> 00:06:47.485
but the, particularly the trade receivables in the forms

133
00:06:47.545 --> 00:06:50.725
of notes that are typically used in international trade,

134
00:06:51.035 --> 00:06:52.525
like promissory notes

135
00:06:52.625 --> 00:06:55.965
or builds of exchange, which are all the old instruments,

136
00:06:56.185 --> 00:07:00.005
and that we cross with the, exports of these firms

137
00:07:00.145 --> 00:07:02.845
to be sure that it is related to movement of goods.

138
00:07:03.225 --> 00:07:05.965
So when we aggregate those trade loans on the one hand

139
00:07:06.265 --> 00:07:09.405
and on the trade receivables, on the other hand, we find

140
00:07:09.405 --> 00:07:14.325
that the trade finance to trade elasticity is comparable

141
00:07:14.325 --> 00:07:17.045
to what we find in other countries that have,

142
00:07:17.175 --> 00:07:19.765
undertaken relatively similar studies.

143
00:07:19.875 --> 00:07:24.005
That is, a elasticity of zero point 15

144
00:07:24.105 --> 00:07:28.805
or 0.2, which means that a 10% increase in trade finance

145
00:07:29.965 --> 00:07:31.645
generates, an increase

146
00:07:31.645 --> 00:07:34.565
or is associated with an increase of trade to one

147
00:07:34.565 --> 00:07:35.805
and a half to 2%.

148
00:07:36.505 --> 00:07:38.965
And we also find that the elasticities

149
00:07:39.065 --> 00:07:42.045
of export earning is higher for the smaller firms

150
00:07:42.475 --> 00:07:45.365
that have more limited financing options on the domestic

151
00:07:45.635 --> 00:07:46.645
capital markets.

152
00:07:47.225 --> 00:07:48.645
In other words, smaller

153
00:07:48.745 --> 00:07:52.285
and more financially constrained firms are more dependent on

154
00:07:52.285 --> 00:07:54.765
trade finance for their trade than larger firms.

155
00:07:55.545 --> 00:07:56.645
In our paper, we show

156
00:07:56.645 --> 00:07:59.165
that trade finance has been an important fuel

157
00:07:59.225 --> 00:08:00.365
for exporters in China.

158
00:08:00.815 --> 00:08:03.685
China has become a very large trading nation supported

159
00:08:03.685 --> 00:08:05.245
by a very large financial sector.

160
00:08:05.915 --> 00:08:07.925
That does not mean that,

161
00:08:07.935 --> 00:08:12.005
there is no si significant unmet demand, in the country,

162
00:08:12.585 --> 00:08:16.565
as our data mainly, relates to a listed firm

163
00:08:16.565 --> 00:08:18.325
that are the largest firms in the country.

164
00:08:18.585 --> 00:08:21.325
And that is probably the best of served by the market

165
00:08:21.865 --> 00:08:26.485
and are not entirely, representative of the full ity of,

166
00:08:26.485 --> 00:08:27.725
of all traders in China.

167
00:08:29.125 --> 00:08:31.485
Brilliant. So far. So, so why is this interesting?

168
00:08:31.485 --> 00:08:33.205
It's a bit of a silly question 'cause it's fascinating,

169
00:08:33.205 --> 00:08:34.765
but what is the rest of the literature say?

170
00:08:35.395 --> 00:08:37.605
Well, this positive association

171
00:08:37.605 --> 00:08:39.325
between the availability of trade finance

172
00:08:39.385 --> 00:08:41.765
and the amount of international trade is something

173
00:08:41.765 --> 00:08:44.645
that other authors have found in,

174
00:08:44.705 --> 00:08:46.285
in different studies in developed

175
00:08:46.285 --> 00:08:48.885
and developing countries at various levels of development.

176
00:08:49.465 --> 00:08:52.845
Uh, Nova have, for example, shown

177
00:08:52.845 --> 00:08:55.205
that greater supply of trade finance is also associated

178
00:08:55.315 --> 00:08:56.845
with larger trade flows

179
00:08:56.845 --> 00:09:00.045
or greater resilience of trade in times of crisis.

180
00:09:00.435 --> 00:09:03.805
Inversely, limited availability of it,

181
00:09:03.985 --> 00:09:06.765
can be a significant barrier to international trade.

182
00:09:07.225 --> 00:09:10.405
And access of firms to this type of finance can be limited

183
00:09:10.585 --> 00:09:13.085
by a number of factors such as the intensity

184
00:09:13.825 --> 00:09:16.325
of their internal external financial constraint

185
00:09:16.545 --> 00:09:19.005
or even the quality of the banks that are serving them.

186
00:09:19.465 --> 00:09:24.165
Um, of course, and here, iTero Degene firm matters the,

187
00:09:24.185 --> 00:09:26.045
the share of merchandise trade supported

188
00:09:26.045 --> 00:09:29.365
by trade finances empirically associated according to Niman,

189
00:09:29.575 --> 00:09:33.645
Niman and Schmidt and Eisen, to financial development,

190
00:09:33.745 --> 00:09:37.405
levels and to, to the quality of the rule of law and,

191
00:09:37.585 --> 00:09:40.165
and trade and supply chain finances relevant

192
00:09:40.165 --> 00:09:41.885
for value chains integration.

193
00:09:42.465 --> 00:09:46.765
So all of this says that trade finance matters not only,

194
00:09:47.305 --> 00:09:50.005
on the demand side, but also on the supply side.

195
00:09:51.235 --> 00:09:54.145
Let's get to the policy implications. Uh, yeah.

196
00:09:54.145 --> 00:09:56.345
And what, what's your contributions to ship?

197
00:09:57.205 --> 00:09:58.665
Um, you know, after,

198
00:09:58.945 --> 00:10:02.065
a significant G 20 financial package, in support

199
00:10:02.065 --> 00:10:03.145
of the trade finance market

200
00:10:03.145 --> 00:10:05.945
during the global financial crisis, policy makers

201
00:10:05.945 --> 00:10:08.265
and international organization have started

202
00:10:08.325 --> 00:10:11.225
to exercise greater scrutiny at these markets

203
00:10:11.325 --> 00:10:13.505
and develop, the, the realize

204
00:10:13.505 --> 00:10:15.625
that there was a significant unmet demand

205
00:10:15.925 --> 00:10:17.145
in developing countries.

206
00:10:17.525 --> 00:10:20.305
And that was an issue not only of trade integration,

207
00:10:20.325 --> 00:10:22.745
but also, in general, of,

208
00:10:22.765 --> 00:10:24.145
of trade expansion as well.

209
00:10:24.605 --> 00:10:27.265
Uh, so through various studies, for example, the,

210
00:10:27.275 --> 00:10:30.345
world Bank's International Financial Corporation, the IFC

211
00:10:30.345 --> 00:10:33.345
and the World Trade Organization together have established

212
00:10:33.345 --> 00:10:36.865
that trade finance availability was limited at much lower

213
00:10:36.865 --> 00:10:37.905
level of development.

214
00:10:38.365 --> 00:10:41.385
Um, because the ability of the core local financial system

215
00:10:41.445 --> 00:10:43.705
to support their expanding trade was limited.

216
00:10:44.405 --> 00:10:48.665
Um, in West Africa, in the Ong region, for example, only 20%

217
00:10:48.965 --> 00:10:52.345
of trade is supported by some trade finance, relative

218
00:10:52.345 --> 00:10:55.665
to the 60% at the global level that I mentioned earlier.

219
00:10:56.165 --> 00:10:58.145
So in Russian markets,

220
00:10:58.145 --> 00:11:02.065
limited available trade finance goes to, if not only to,

221
00:11:02.245 --> 00:11:03.905
to well established firms.

222
00:11:04.205 --> 00:11:06.705
And that creates actually a, a question about,

223
00:11:06.725 --> 00:11:09.505
export diversity verification if only,

224
00:11:09.655 --> 00:11:14.105
only always the same firm actually benefit, SMEs,

225
00:11:14.105 --> 00:11:15.745
face a very high rejection rate.

226
00:11:16.125 --> 00:11:19.265
And, RJ enrolled equilibrium, models show

227
00:11:19.265 --> 00:11:23.745
that raising the trade finance coverage of trade from 20%

228
00:11:23.805 --> 00:11:24.985
to only 40%,

229
00:11:25.005 --> 00:11:27.705
not the 60% internationally would increase trade

230
00:11:27.805 --> 00:11:30.345
to these countries from eight to 10%.

231
00:11:31.085 --> 00:11:34.345
So, you could think that imports

232
00:11:34.345 --> 00:11:36.545
of trade finance from other part of the world,

233
00:11:36.545 --> 00:11:38.745
capital market would balance market out.

234
00:11:38.745 --> 00:11:39.745
But this is not the case

235
00:11:39.745 --> 00:11:42.785
because since the financial crisis, what

236
00:11:43.205 --> 00:11:45.945
we have also discovered is that international,

237
00:11:45.945 --> 00:11:48.865
private financial institutions have reduced exposures

238
00:11:48.925 --> 00:11:52.065
to smaller markets, a phenomenon called de-risking,

239
00:11:52.085 --> 00:11:55.005
and which is well known in, in world economics.

240
00:11:55.465 --> 00:11:58.365
And, and they also often confuse the,

241
00:11:58.365 --> 00:12:01.005
counterparty risk, which is very small, as we said,

242
00:12:01.005 --> 00:12:04.045
the 1% loss default, to the country risk,

243
00:12:04.045 --> 00:12:06.005
which can be high in developing countries.

244
00:12:06.345 --> 00:12:07.365
So, for that reason,

245
00:12:07.365 --> 00:12:09.365
multilateral development banks have been trying

246
00:12:09.365 --> 00:12:11.085
to bridge the gap,

247
00:12:11.145 --> 00:12:13.445
by running trade finance facilitation program

248
00:12:13.555 --> 00:12:16.085
that have expanded since the global financial crisis

249
00:12:16.715 --> 00:12:17.885
link linking local

250
00:12:17.985 --> 00:12:21.565
and international banks in daily transactions, trying

251
00:12:21.565 --> 00:12:24.645
to bridge that, gap between the perception of risk

252
00:12:24.645 --> 00:12:25.685
and the actual level of risk.

253
00:12:25.985 --> 00:12:27.765
And they are actually dedicating,

254
00:12:27.765 --> 00:12:30.045
supporting 50 billion in,

255
00:12:30.145 --> 00:12:34.125
in trade finance per year in critical, trade in, in low

256
00:12:34.125 --> 00:12:35.285
to middle income countries.

257
00:12:35.725 --> 00:12:37.645
Brilliant. So then coming back to your paper,

258
00:12:37.645 --> 00:12:38.685
what does that say about your paper?

259
00:12:39.435 --> 00:12:41.325
Well, by no mean, our paper is perfect

260
00:12:41.585 --> 00:12:44.565
and, when data is, is more available, it would be useful

261
00:12:44.565 --> 00:12:47.245
to extend it to the universe of firms in China.

262
00:12:47.425 --> 00:12:49.085
But we need more of these studies

263
00:12:49.145 --> 00:12:51.685
of these country studies at different level of development

264
00:12:52.025 --> 00:12:54.125
to understand how at firm level

265
00:12:54.225 --> 00:12:58.605
or at country level, firms,

266
00:12:59.105 --> 00:13:01.765
at the different stage of their development evolve from cash

267
00:13:02.045 --> 00:13:04.245
business essentially, or, or credit card business

268
00:13:04.545 --> 00:13:06.245
to more sophisticated ways

269
00:13:06.265 --> 00:13:09.645
of handing their financials in the complex, world

270
00:13:09.645 --> 00:13:10.645
of supply chain.

271
00:13:10.705 --> 00:13:12.885
For example, supply chain finance is a new

272
00:13:12.885 --> 00:13:14.005
development of trade finance.

273
00:13:14.675 --> 00:13:17.965
Half of world trade is supply chain trade today.

274
00:13:18.265 --> 00:13:20.645
And if we are looking towards di diversification

275
00:13:20.645 --> 00:13:24.125
of supply chains and, and expansion into new countries

276
00:13:24.125 --> 00:13:26.965
and new horizons, well we have to think about trade finance.

277
00:13:27.385 --> 00:13:29.125
And so this is why, I mean, we have

278
00:13:29.125 --> 00:13:32.085
to understand better these markets, how firms behave,

279
00:13:32.185 --> 00:13:33.565
how are there constraints?

280
00:13:33.865 --> 00:13:35.205
How can they accept

281
00:13:35.205 --> 00:13:38.605
that finance reason why this relatively silent topic

282
00:13:38.915 --> 00:13:42.365
that has, risen out of globalization at the intersection

283
00:13:42.365 --> 00:13:44.405
between global capital flows

284
00:13:44.445 --> 00:13:46.885
and global trade flows, is important.

285
00:13:46.945 --> 00:13:50.205
And we need to continue clarifying the issues and, and,

286
00:13:50.345 --> 00:13:51.685
and do research on it.

287
00:13:52.605 --> 00:13:54.365
Brilliant. Mark, that's all the time we have for you.

288
00:13:54.385 --> 00:13:56.285
So that is superb. That is superb. Lemme.

Quick Answers

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.

Faculti AI can make mistakes

Research

Policy

Analysis

Data

Originals

Explainers

Podcasts