Discussion Paper Details

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Title: Don't Throw in the Towel, Throw in Trade Credit!

Author(s): Banu Demir and Beata Javorcik

Publication Date: September 2014

Keyword(s): competition, export financing, Multi-Fibre Arrangement, trade credit and Turkey

Programme Area(s): International Trade and Regional Economics

Abstract: The literature has documented how firms adjust to increased competitive pressures arising from globalization. This paper demonstrates a new margin of adjustment, namely, provision of trade credit. A simple model predicts that an increase in competitive pressures will lead exporters to provide trade credit and lower prices and that the price adjustment will be attenuated by trade credit provision. These predictions are tested in the context of an exogenous shock, the end of the Multi-Fiber Arrangement (MFA), a quota system governing trade in textiles and clothing until the end-2004. The analysis focuses on Turkey which was not subject to quotas in the EU and thus faced an increase in competition after the quotas on China had been removed. The results suggest that in the post-MFA period Turkish exports of products with binding MFA quotas prior to the shock saw an increase in the provision of trade credit and a drop in prices relative to the other products. There is also evidence that provision of trade credit generated a dampening effect on the price response to the increase in competition.

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Bibliographic Reference

Demir, B and Javorcik, B. 2014. 'Don't Throw in the Towel, Throw in Trade Credit!'. London, Centre for Economic Policy Research.