Poultry in Motion: A Study of International Trade Finance Practices

Pol Antràs and C. Fritz Foley
Authors registered in the RePEc Author Service: Pol Antras

No 8422, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper analyzes the financing terms that support international trade and sheds light on how and why these arrangements affect trade. Using detailed transaction level data from a U.S. based exporter of frozen and refrigerated food products, primarily poultry, it begins by describing broad patterns about the use of alternative financing terms. These patterns help discipline a model in which the trade finance mode is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as specified in the contract. The empirical results indicate that transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement and in a country that is further from the exporter. Letters of credit, however, are rarely used by the exporter. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance terms prior to the crisis disproportionately reduced their purchases. These results can be rationalized by the model whenever (i) misbehavior on the part of the exporter is of little concern to importers, and (ii) local banks in importing countries are typically more effective than the exporter in pursuing financial claims against importers.

Keywords: Contract enforcement; Poultry; Trade finance; Working capital (search for similar items in EconPapers)
JEL-codes: F1 F3 G32 K12 (search for similar items in EconPapers)
Date: 2011-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Working Paper: Poultry in Motion: A Study of International Trade Finance Practices (2011)
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