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American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Trade Shocks and Credit Reallocation

  • Stefano Federico
  • Fadi Hassan
  • Veronica Rappoport
American Economic Review
vol. 115, no. 4, April 2025
(pp. 1142–69)
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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.

Citation

Federico, Stefano, Fadi Hassan, and Veronica Rappoport. 2025. "Trade Shocks and Credit Reallocation." American Economic Review 115 (4): 1142–69. DOI: 10.1257/aer.20200704

Additional Materials

JEL Classification

  • D22 Firm Behavior: Empirical Analysis
  • F14 Empirical Studies of Trade
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • L25 Firm Performance: Size, Diversification, and Scope
  • P33 Socialist Institutions and Their Transitions: International Trade, Finance, Investment, Relations, and Aid