DP14792 Trade Shocks and Credit Reallocation

Author(s): Stefano Federico, Fadi Hassan, Veronica Rappoport
Publication Date: May 2020
JEL(s): F61, F62, G21
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14792

This paper shows that there are endogenous financial constraints arising from trade liberalization. Banks with a large share of loans on firms exposed to competition from China suffer an increase in non-performing loans and reduce their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China, and firm expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade retards the reallocation of factors of production between firms and sectors, crucial to the welfare implication of trade liberalization.