Poultry in Motion: A Study of International Trade Finance Practices

Abstract

This paper analyzes the …nancing terms that support international trade and sheds light on how these terms shape the impact of economic shocks on trade. Analysis of transaction-level data from a U.S.-based exporter of frozen and refrigerated food products, primarily poultry, reveals broad patterns about the use of alternative …nancing terms. These patterns help discipline a model in which the choice of trade …nance terms is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as speci…ed in the contract. The empirical results indicate that cash in advance and open account terms are much more commonly used than letter of credit and documentary collection terms. Transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance and letter of credit terms prior to the crisis decreased their purchases by 17.3% more than other customers. The model illustrates that these …ndings can be rationalized if (i) misbehavior on the part of the exporter is of little concern to importers, and (ii) local banks in importing countries are more e¤ective than the exporter in pursuing …nancial claims against importers.Harvard University and NBER; Harvard Business School and NBER. The authors are very grateful to numerous employees at the anonymous …rm that provided the data and to Matthew Johnson and James Zeitler for excellent research assistance. We also thank

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