The Impact of the Financial Crisis on Exports

In view of the higher risk and working-capital needs of exporting, firms rely more on banks for their exports than for their domestic sales. As a consequence, finan­cial crises are likely to affect exports more negatively than domestic sales.

One of the most striking features of the financial crisis of 2008 was the col­lapse in international trade. The decline in world exports was much greater than the decline in world GDP Between the first quarter of 2008 and the first quarter of 2009, the real value of GDP fell 4.6 percent while exports plunged 17 percent, which amounts to a decline of $761 billion in nominal terms.

Exports are more sensitive to financial shocks due to the higher default risk and higher working-capital requirements associated with international trade. The need to insure against credit default risk arises because exporters rarely have the capacity or willingness to evaluate default risk and usually turn to banks to provide payment insurance and guarantees. In addition, exporters need more working-capital financing than firms engaged in domestic transactions because of the longer time lags associated with international trade, especially when firms ship by sea. The fact that exporters depend so heavily on financial institutions for working capital and risk insurance suggests that if a credit crunch causes banks to limit trade finance, exports are likely to be affected more than domestic sales. Djankov, Freund, and Pham (2006) found in a sample of 180 countries that the median amount of time it takes from the moment the goods are ready to ship from the factory until the goods are loaded on a ship is twenty-one days. Much of this time is spent dealing with the paperwork and procedures associated with getting goods ready to ship overseas. Similarly, the median amount of time it takes from the moment a typical good arrives in a port until the good arrives in the purchaser’s warehouse is twenty-three days. If we couple this finding with Hummels’s (2001) estimate that the typical good imported into the United States by sea spends twenty days on a vessel, we can see that it is not uncommon for goods to spend approximately two months in transit. Even in OECD countries, which have the most streamlined procedures, it takes eleven days for a good to reach a port or arrive from a port.

These data suggest that firms engaged in international trade are likely to be more reliant than domestic firms on working-capital financing to cover the costs of goods that have been produced but not yet delivered. More than 90 percent of trade transactions involve some form of credit, insurance, or guarantee issued by a bank or other financial institution. Given that banks are the principal suppliers of trade finance, the supply of such financing is likely to be closely tied to the health of the banks. In particular, as the health of banks deteriorates, these financial institutions find it increasingly difficult to raise funds either through interbank bor­rowing or through the issuance of new bonds or equity.

As these sources of liquidity diminish, unhealthy institutions cut back on their lending. These cutbacks are likely to have a particularly large impact on trade finance because the short maturities of trade finance and its need for constant re­newal make it particularly sensitive to a bank’s ability to extend new credit. More­over, since exports are much more dependent on finance than domestic sales for the reasons already outlined, exports are likely to be harder hit by financial shocks. In the 2008 crisis, the standard measure of the risk premium charged to banks (the difference between interbank offer rates charged to banks and the overnight indexed swap rate [OIS]) jumped sharply, reflecting higher bank bor­rowing costs. Eighty-eight banks in forty-four countries revealed that the average spreads on letters of credit, export credit insurance, and short- to medium-term trade-related lending rose by 70, 107, and 99 basis points, respectively, in the second quarter of 2009 relative to the fourth quarter of 2007.

The decline in trade finance transactions was caused by a tightening of credit availability at their own institution. The deteriorations in the financial health (or out­right bankruptcy) of major players in the trade finance world, including Lehman, AIG, CIT Group, Citigroup, Bank of America, and Wells Fargo, may have made it difficult for these banks to raise money to finance their export clients’ trade credit default risk. The simultaneous collapse in the commercial paper market may have left exporters with few options other than cutting exports if their trade finance providers ran into trouble.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.