Session 3: Trade and Finance

We study the effectiveness of government aid to exporters by exploring an exogenous shock that affected the ability of the Export-Import Bank of the United States (EXIM) to provide aid to U.S. exporters through loan guarantees to importers. We focus on Boeing, the largest individual recipient of aid. We find that Boeing sales declined only modestly – despite Boeing’s significant reliance on EXIM for export credit. Moreover, we find that this decline is driven by financially constrained airlines or by airlines operating in countries with underdeveloped financial systems. We show that airlines in developed countries were easily able to substitute EXIM guaranteed loans for private credit and thus could still purchase Boeing aircraft despite the EXIM shock. Our results are consistent with the view that government-sponsored export credit is mostly relevant for importers in countries with underdeveloped financial systems, which represent a relatively small share of total EXIM aid.

We study the role of export credit agencies—the predominant tool of industrial policy—on firm behavior by using the effective shutdown of the Export-Import Bank of the United States (EXIM) from 2015-2019 as a natural experiment. We show that firms that previously relied on EXIM support saw a 18% drop in global sales after the agency closed down, driven by a reduction in exports. Firms affected by the shutdown were unable to make up for the loss of trade financing, especially if they were financially constrained, and consequently laid off employees and curtailed investment. These negative effects were more pronounced for firms with higher export opportunities and higher ex-ante marginal revenue products of capital. Lower exports at the firm level aggregate up to lower total exports for industries most reliant on EXIM support. These findings suggest that government policies aimed at providing trade financing can boost exports and firm growth even in countries with well-developed financial markets without necessarily leading to a misallocation of resources.

We study the role of exchange rates in industrial policy. We construct an open-economy macroeconomic framework with production externalities and show that the desirability of these policies critically depends on the dynamic patterns of externalities. When they are stronger in earlier stages of development, economies that are converging to the technological frontier can improve welfare by intervening in foreign exchange markets, keeping the exchange rate undervalued, and speeding the transition; economies that are not converging to the technological frontier are better off not using the exchange rate as an industrial policy tool. Capital-flow mobility and labor market dynamism play a central role in the effectiveness of these policies. We also discuss the role of capital controls as an industrial policy tool and use our framework to interpret historical experiences.

This paper develops a methodology to assess the expected impact of trade-policy announcements on aggregate welfare using financial market reactions. We use an infinite-horizon specific factors model of production to map the present discounted value of firm cash flows into aggregate welfare. We show that the policy-induced movement in the present value of firm cash flows—a variable that can be estimated from financial data—encapsulates the welfare impact of the tariffs. After applying our framework to the data, we find that the U.S.-China trade war lowered U.S. welfare by three percent.

This paper uses U.S. credit register data and the 2018–2019 Trade War to study the effects of uncertainty on domestic credit supply. Exploiting differences in banks’ ex-ante exposure to trade uncertainty, we find that increased uncertainty is associated with a broad lending contraction across their customer firms. This result is consistent with banks responding to uncertainty with wait-and-see behaviors, where more exposed banks curtail risky exposures, reduce loan maturities, and adjust loan supply along both intensive and extensive margins. The lending contraction is larger for more capital-constrained banks and has significant real effects, especially for bank-dependent firms.

We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find that the treatment affects the dynamics of export and import quantities and prices at the firm level, with differential effects for exports to destination countries that use the US dollar as their currency. We instrument exchange rate expectations with the variation induced by the treatment and estimate a positive elasticity of a future expected depreciation in import expenditures.

We study the relationship between financial frictions and trade dynamics by exploiting the reallocation of global supply chains induced by the 2018--2019 trade tensions between the U.S. and China. We match two administrative datasets---shipment-level import data with the U.S. credit register---to obtain comprehensive information on importer-supplier relations at the firm level and credit relationships at the bank-firm level. We document firm-level evidence of supply chain reallocation by U.S. importers in response to the 2018--2019 tariffs. Firms importing tariff-hit products from China increased credit demand: they increased credit line utilization, took out new loans, and obtained more credit at higher rates. Furthermore, firms with multiple banking relationships or borrowing from specialized banks received credit on relatively advantageous terms and were better able to find new suppliers and increase their import shares outside China. Our results highlight the importance of banking relationships for firms facing search costs related to trade disruptions and for supply chain resilience.

This paper shows that, in a world dominated by vehicle currencies, firms engaging in international operations retain currency risk and hedge it real and financially. We employ a unique dataset covering the universe of trade credit, international trade, foreign currency debt, and FX derivatives contracts with firms’ census data in Chile (2005-2018). We document that operational hedging is quantitatively limited, as different maturity, frequency, and amount of FX operations make it difficult to net these exposures. The granular firms complement real hedging using FX financial instruments, which improve their cash flow management and promote their trade and growth.

I develop a theory of joint production to quantify aggregate economies of scope. In US manufacturing data, increased export demand in one industry raises a firm’s sales in its other industries that share knowledge inputs like R&D and software. I estimate that knowledge inputs contribute to economies of scope through their scalability and partial non-rivalry within the firm. On average a 10 percent increase in output in one industry lowers prices in other industries by 0.4 percent. Such economies of scope manifest disproportionately among knowledge proximate industries and imply large spillover impacts of recent US-China trade policy on producer prices.

We characterize how firms structure supply chains under climate risk. Using new data on the universe of firm-to-firm transactions from an Indian state, we show that f irms diversify sourcing locations, and suppliers exposed to climate risk charge lower prices. Our event-study analysis finds that firms with suppliers in flood-affected districts experience a decline in inputs lasting two months, followed by a return to original suppliers. We develop a general equilibrium model of firm input sourcing under climate risk. Firms diversify identical inputs from suppliers across space, trading off the probability of a climate shock against higher input costs. We quantify the model using data on 271 Indian districts, showing real wages vary across space and are correlated with geography and productivity. Wages are inversely correlated with sourcing risk, giving rise to a cost minimization-resilience tradeoff. Supply chain diversification unambiguously reduces real wage volatility, but ambiguously affects their levels, as diversification may come with higher input costs. While diversification helps mitigate climate risk, it exacerbates the distributional effects of climate change by reducing wages in regions prone to more frequent shocks.

This paper studies the drivers of global shipping dynamics and their aggregate implications. We document novel evidence on the dynamics of global shipping supply, demand, and costs. Motivated by this evidence, we set up a dynamic model of international trade with a global shipping market where shipping firms and importers endogenously determine shipping supply and costs. We find the model successfully accounts for the dynamics of global shipping observed in the aftermath of COVID-19 as well as at business cycle frequencies. We find that accounting for global shipping is critical for the dynamics of aggregate economic activity.