Trade Shocks and Credit Reallocation
68 Pages Posted: 25 Aug 2020
Date Written: July 28, 2020
This paper shows that there are endogenous financial constraints arising from trade liberalization. We find that banks with a high share of loans to firms exposed to competition from China experience an increase in non-performing loans and a reduction in their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China and firms expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade holds back the reallocation of factors of production between firms and sectors, which is crucial to the welfare implication of trade liberalization.
Keywords: trade liberalisation, China shock, bank credit, resource reallocation, gains from trade
JEL Classification: F10, F14, F65, G21
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