International Trade and Letters of Credit: A Double-edged Sword in Times of Crises
30 Pages Posted: 15 Jul 2021
Date Written: July 12, 2021
This study argues that the ability to mitigate risks associated with international trade is particularly important at times of heightened uncertainty, such as the economic crisis caused by the Covid-19 pandemic. Risk mitigation can be achieved through letters of credit (LCs), trade finance instruments providing guarantees to trading partners. As their use varies across products, exports of some products are more resilient than others during times of increased uncertainty. This situation reverses in times of financial crises when distressed banks may limit the supply of LCs. Our analysis using data on US and EU-15 exports during the Covid crisis and the Global Financial Crisis provides empirical support for these hypotheses.
Keywords: International trade, Trade finance, Letter of credit, Risk, Global Financial Crisis, Covid-19
JEL Classification: G01, F14, F23
Suggested Citation: Suggested Citation