Trade Shocks and Credit Reallocation
Stefano Federico, Fadi Hassan, Veronica Rappoport
American Economic Review · 2025 · Volume 115 · Issue 4
Abstract
This paper identifies a credit-supply contraction that arises endogenously after trade liberalization. Banks with loan portfolios concentrated in sectors exposed to competition from China face an increase in nonperforming loans after China's entry into the World Trade Organization. As a result, they reduce the supply of credit to firms, irrespective of the firm's sector of operation. This cut in credit translates into lower employment, investment, and output. Through this mechanism, the financial channel amplifies the shock to firms already hit by import competition from China and passes it on to firms in sectors expected to expand upon trade liberalization.
Keywords
Firm Behavior: Empirical Analysis, Empirical Studies of Trade, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Capital Budgeting, Fixed Investment and Inventory Studies, Capacity, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure, Value of Firms, Goodwill, Firm Performance: Size, Diversification, and Scope, Socialist Institutions and Their Transitions: International Trade, Finance, Investment, Relations, and Aid
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