Import competition, trade credit and financial frictions in general equilibrium

Federico Esposito and Fadi Hassan

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We analyze the role of trade credit and financial frictions in the propagation of international trade shocks along the supply chain. First, we show empirically that exposure to import competition from China increased the use of trade credit in the U.S. Then, we use a multi-country input-output trade model with borrowing constraints, trade credit, and endogenous employment to quantify the general equilibrium effects of such increase, characterizing the different channels at work. Borrowing constraints amplify the negative consequences of the China shock on employment, but introducing trade credit reduces these losses by 8%-27%, depending on the tightness of the constraints.

Keywords: trade credit; trade shocks; financial frictions; borrowing constraints; employment (search for similar items in EconPapers)
JEL-codes: E10 E44 F14 F15 F16 G20 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2023-02-09
New Economics Papers: this item is included in nep-cna, nep-dge, nep-ifn and nep-int
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121378

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