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International Trade and Finance Interactions

Paper Session

Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Foothill H
Hosted By: Central Bank Research Association
  • Chair: Galina B. Hale, University of Califronia-Santa Cruz

Trade Protection, Stock Market Returns and Welfare

Mary Amiti
,
Federal Reserve Bank of New York
Matthieu Gomez
,
Columbia University
Sang Hoon Kong
,
Columbia University
David Weinstein
,
Columbia University

Abstract

Tariff announcements made during the U.S.-China trade war had broad effects on financial variables. Announcements systematically decreased stock prices and raised nominal and real bond prices. We use a specific factors model to show that the welfare impact of the tariffs can be identified from the policy-induced movement in the present value of firm cash flows: a variable that can be estimated from financial data. Using this framework, we find that the U.S.-China trade war lowered U.S. welfare by three percent. We show that these cash flow movements can be further decomposed into market expectations about how tariffs affect current and future prices and productivity. Seen through the lens of our model, the market reactions to tariff announcements can be explained by expectations that tariffs lead to large, negative future price
and TFP shocks that play an important role in dynamic, but not static, models.

EXIM's Exit: The Real Effects of Trade Financing by Export Credit Agencies

Chenzi Xu
,
University of California-Berkeley
Adrein Matray
,
Harvard University

Abstract

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 a 1% reduction in EXIM trade financing reduces exports in an industry by approximately 5%. The impact on firms' total revenues implies that the export shock has positive pass-through to domestic sales, and firms contract investment and employment. These negative effects for the average firm are amplified by increased capital misallocation across firms as those with higher ex-ante marginal revenue product of capital contract more. We model the effect of EXIM trade financing as lowering two types of input cost wedges: an exporting firm's financing friction, and an importer market friction. We show that both frictions are empirically relevant, indicating that even in well-developed financial markets, the supply of trade financing is plausibly constrained. These results provide a framework for the conditions under which Export Credit Agencies can boost exports and firm growth, and can act as a tool of industrial policy without necessarily leading to a misallocation of resources.

Trade Credit and Relationships

Felipe Benguria
,
University of Kentucky
Tim Schmidt- Eisenlohr
,
Federal Reserve Board
Alvaro Garcia-Marin
,
Universidad de los Andes

Abstract

Exploiting transaction-level international trade data, this paper documents new facts about trade credit. Trade credit use increases with firm-to-firm relationship length, an effect that varies with countries’ rule of law, and is stronger for trade in more complex products and trade between unrelated parties. A model featuring diversion risk, learning, and a financing cost advantage of trade credit can rationalize these patterns. Initially, payment risk is a key factor limiting trade credit use. Through learning, this risk declines and firms switch to trade credit. Long-term trade relationships give rise to a financial benefit: saving financing costs through trade credit.

On the Origins of the Multinational Premium

Jose L. Fillat
,
Federal Reserve Bank of Boston
Stefania Garetto
,
Boston University, CEPR and NBER

Abstract

This paper studies the relationship between management, firm expansion, and firm risk exposure. We document two empirical regularities. First, firms run by managers with previous experience in multinational expansion are more likely to become multinationals (MNEs). Second, current and future MNEs command a higher risk premium than firms that sell always and only in their domestic market. To provide a mechanism that connects these facts, we develop a dynamic model in which managerial ability shapes the relationship between firm characteristics, selection into FDI, and risk premia. The model lends itself to a quantitative analysis that exploits its mechanisms to suggest that distortions to the market for managerial talent may have unwanted effects on multinational activity and financial market outcomes.
JEL Classifications
  • F3 - International Finance
  • F1 - Trade