Don’t throw in the towel, throw in trade credit!

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.

Trading with the Enemy: The Impact of Conflict on Trade in Non-Conflict Areas

“…Predicted contract usage is calculated based on the types of products traded by a firm (weighted by the amount of trade). For each HS4 product code, we use data from Demir et al (2017) and Demir and Javorcik (2018) on contract types used in trade between Ukraine, Russia, and Turkey from 2004 to 2011. Inference across regression models is conducted using a similarly unrelated regressions framework with standard errors clustered at the county level.…”

“…Table 10 presents the results of estimating the baseline specification (1) for subsets of firms depending on their predicted use of different types of contracts. To disentangle the risks levied on exporters and 70 These data, kindly shared with us by Banu Demir, were previously used in Demir, Michalski, and Ors (2017) and Demir and Javorcik (2018). The implicit assumptions here are that (i) Russian and Ukrainian firms use similar types of contracts for similar products when they trade with each other as they do when they trade with Turkey, and (ii) there have been no substantial changes between the 2004-2011 and 2013-2016 periods in terms of typical use of different types of contracts.…”

Trade finance matters: evidence from the COVID-19 crisis

“… Demir and Javorcik (2018) highlight another factor that matters for the choice of financing terms in international trade. They use detailed firm-level customs data disaggregated by financing terms to show that an increase in the level of market competition leads exporters to provide more trade credit to their buyers (i.e.…”

Estimating the direct impact of bank liquidity shocks on the real economy: Evidence from letter‐of‐credit import transactions in Colombia

“…Ahn () reports that letters‐of‐credit transactions account for around 20% and 10% of international trade in South Korea and Chile, respectively. Demir and Javorcik () document that around 15% of international transactions in Turkey is undertaken by letters of credit. Colombian data, the main data introduced in the next section in more detail, show that letters of credit were responsible for around 4% of total imports in 2008 and 2009.…”

“… A thorough discussion on the choice of payment methods is provided in Ahn (), Antràs and Foley (), Demir and Javorcik (), Eck, Engemann, and Schnitzer (), Hoefele, Schmidt‐Eisenlohr, and Yu (), Niepmann and Schmidt‐Eisenlohr (), Olsen (), and Schmidt‐Eisenlohr (). …”