Off the cliff and back? Credit conditions and international trade during the global financial crisis

Kalina Manova, Davin Chor

15 February 2010



The global financial crisis has decimated international trade. What started out as a credit crisis in the US financial sector quickly spilled over into a broader contraction in industrial production and trade for many countries. In all, world trade is expected to have fallen by up to 9% in 2009 (WTO 2009).

These recent events have shone the spotlight on the importance of trade-related credit instruments as a critical facilitator of international trade. As much as 90% of world trade is said to depend on some form of trade financing (Auboin 2009). The evaporation of credit during the crisis led to a large shortfall in the availability of such financing in the second half of 2008, as well as sharp increases in the interest rates required to secure trade-related letters of credit (IMF-BAFT 2009, Chauffour and Farole 2009, Malouche 2009). These difficulties in accessing trade finance and insurance drew the attention (and alarm) of policymakers, prompting an urgent response at the G20 Summit in April 2009 to bolster the supply of trade finance by $250 billion.

New evidence on the credit-trade link

In recent research (Chor and Manova 2009), we investigated this link between credit conditions and export performance more formally, using data that tracks the evolution of trade volumes during the crisis months. We found that adverse credit conditions were an important channel through which the crisis affected trade flows, adding to the mounting evidence on the negative effects of credit crises in general on exports (Iacovone and Zavacka 2009, Amiti and Weinstein 2009a,b).

Furthermore, credit conditions had an uneven impact across different industries, with the effect on trade flows being especially pronounced in more financially vulnerable sectors following the height of the credit crunch. This is consistent with what others have found in the experience of French firms during this crisis (Fontagné and Gaulier 2009).

The effects that we estimate are large, suggesting that the aggressive monetary policies implemented in many countries to ease credit conditions helped to avert an even more precipitous dip in international trade.

While other research has also delved into the causes of the recent trade collapse (Freund 2009, Levchenko et al. 2009, Eaton et al. 2009), ours is unique in its focus on the role of credit conditions.

Credit conditions and exports to the US during the Crisis

We examined monthly US trade data reported by the US Census Bureau. As Figure 1 shows, US trade was in fact growing modestly until mid-2008, but this was followed by a very sudden and severe contraction. This decline was especially sharp between October and November 2008, coming on the heels of several events that marked the height of the global credit crunch, namely the collapse of Lehman Brothers and the bailout of AIG in September 2008.

Figure 1. Off the cliff and back? US trade flows during the financial crisis

Between October and November 2008, US imports contracted 21.3%, while its exports fell 14.3%. Although the decline was a very broad-based one, there were interesting differences across industries, as shown in Table 1. The worst-hit industry was by far petroleum and coal products manufacturing, where imports fell more than 50%, largely because oil prices also fell during this time. On the other hand, food manufacturing and furniture manufacturing saw the most moderate declines, although these still dropped more than 5%.

Table 1. The month-on-month fall in US manufacturing imports (Oct-Nov 2008)

Our study requires a measure of credit conditions across countries. A direct measure such as the rates charged on export credit lines would be ideal, but such data are not easily available for many countries. We instead use the interbank lending rate, namely the interest rates that commercial banks charge each other for short-term loans – a well-known example is the London Interbank Offer Rate (LIBOR). These rates are seen as an indicator of the overall cost of credit in the economy, from which many other lending rates often take their cue.

Figure 2 confirms that interbank rates (here, the one-month rate) spiked in September 2008 in many economies, as banks became extremely averse to lending and the supply of financing tightened. There are nevertheless key differences in the severity and timing of the credit crunch. In countries such as Germany and Bulgaria, the interbank rate was on an upward trend until an abrupt reversal in November 2008. In contrast, these rates were declining from a much earlier date in Canada and Singapore, reflecting earlier interventions made by central bankers there to cope with the impending downturn.

Figure 2. Interbank lending rates during the crisis

To the extent that credit conditions affected export performance, we should expect export volumes to be lower where interbank rates were higher. This is indeed what we find in our regression analysis. Countries with higher interbank rates and thus tighter credit availability exported less to the US.

Our second finding relates to the unequal impact across industries. Industries often differ (for largely technological reasons, it is argued) in the extent of their vulnerability to financial conditions in the broader economy.

  • First, production and exporting in some industries are associated with larger upfront costs that cannot be funded internally, leaving such industries more dependent on external sources of finance (Rajan and Zingales 1998).
  • Second, industries which employ fewer tangible assets such as plant, property and equipment face more difficulties gaining access to outside capital because they lack collateral that can be pledged (Braun 2003, Claessens and Laeven 2003).
  • Finally, trade credit between buyers and suppliers often provides an alternative to formal loans; sectors where access to such trade credit is limited thus have to rely more on external financing (Fisman and Love 2003). These researchers have devised ways to measure the financial vulnerability of industries along each of these dimensions, and we use these measures in our study.

We find that the effects of tighter credit conditions were more pronounced in those industries that require extensive external financing, have few collateralisable assets, or can access limited trade credit. In other words, exports of financially vulnerable industries were more sensitive to the cost of external capital than exports of less vulnerable industries, and this sensitivity rose following the height of the crisis, which we date to September 2008 and after.

Our results suggest that the impact of credit conditions was sizeable. The decline in trade volumes would have been about twice as large in percentage terms had interbank rates instead remained at the high levels of September 2008 throughout the rest of our sample period. Moreover, financially vulnerable sectors would have been affected more. For example, exports to the US would have been about 9% lower in the most external finance-dependent sector (chemicals) relative to the least dependent sector (leather). Naturally, such out-of-sample extensions cannot be viewed as definitive policy analysis, but they nevertheless suggest that world trade would have taken a significantly larger hit in the absence of policy interventions to ease the credit crunch.


Our findings confirm the importance of credit conditions in influencing trade patterns during the crisis. The observation that the credit crunch hit financially vulnerable sectors especially hard also points to the need for more targeted remedial measures to boost trade financing in such industries. Broad monetary policy moves that affect all industries uniformly might be too blunt an instrument for this purpose.

Our focus on credit conditions should not be seen as being to the exclusion of other economic forces. In fact, the loss of consumer confidence and contraction in aggregate demand may well have been responsible for a larger share of the decline in trade (Mora and Powers 2009). More research is needed to provide a fuller accounting of the relative importance of credit and demand conditions in explaining the trade collapse (see Eaton et al. 2009). Similarly, we cannot identify whether the decline in trade flows was merely an extension of the broader decline in industrial production, or whether trade was uniquely hit harder than domestic output (see Amiti and Weinstein 2009a). The answer will have to await the availability of more detailed data on monthly production or sales.


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Amiti, Mary and David Weinstein (2009b), "Exports and financial shocks: New evidence from Japan",, 23 December.

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Topics:  Global crisis International trade

Tags:  international trade, global crisis, trade credit

Assistant Professor of Economics at Stanford University

Associate Professor at the Department of Economics, National University of Singapore