DP16630 International trade and letters of credit: A double-edged sword in times of crises

Author(s): Matthieu Crozet, Banu Demir, Beata Javorcik
Publication Date: October 2021
Keyword(s): COVID-19, Global Financial Crisis, international trade, letter of credit, risk, Trade Finance
JEL(s): F14, F23, G01
Programme Areas: International Trade and Regional Economics, International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16630

This study argues that the ability to mitigate risks associated with international trade is particularly important at times of heightened uncertainty, such as the economic crisis caused by the Covid-19 pandemic. Risk mitigation can be achieved through letters of credit (LCs), trade finance instruments providing guarantees to trading partners. As their use varies across products, exports of some products are more resilient than others during times of increased uncertainty. This situation reverses in times of financial crises when distressed banks may limit the supply of LCs. Our analysis using data on US and EU-15 exports during the Covid crisis and the Global Financial Crisis provides empirical support for these hypotheses.