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Trade Finance during the Great Trade Collapse
Conclusions The main conclusion is that, contrary to some arguments heard early in the 2008–09 financial crisis, the crisis may have hit Sub-Saharan African countries harder through its effect on the region’s exports. Even though the direct effects of the crisis may be weaker due to the relative insulation and underdevelopment of the financial system in most Sub-Saharan African countries, the indirect effect through trade may be stronger. In the past, African exports have been hit harder by financial crises in the countries they export to. This is not only the result of the composition of African exports and the concentration on primary goods. The higher dependence of African exports on trade finance may explain African exporters’ particular fragility to financial crises in importer countries. One interpretation is that during a financial crisis, when uncertainty and risk are high and trust and liquidity are low, banks and firms in the importer country first cut exposure and credit to the particular countries they see as more risky. This response would, in particular, affect trade finance through LCs, by which the importer pays the exporting firm in advance. It is also likely that during financial crises, financial institutions “renationalize” their operations and reduce their exposure to foreign banks and firms. Exporters in countries with strong financial systems may be able to better resist such retrenchment of foreign banks. Clearly, for African firms that are more dependent on foreign finance, this option may not be feasible. At this stage, these interpretations of the results are only tentative, and more research must be done to better understand the origin of the particular fragility of African exports to financial crises in industrialized countries. Notes 1. For a more complete explanation of this methodology, see Martin, Mayer, and Thoenig (2008). 2. More information about Comtrade (the United Nations Commodity Trade Statistics Database) is available at http://comtrade.un.org/db. A more detailed description of the CEPII Trade, Production and Bilateral Protection Database (TradeProd) is available on the CEPII website at http://www.cepii .fr/anglaisgraph/bdd/TradeProd.htm. 3. Complete regression results can be found in Berman and Martin (2010).
References AfDB (African Development Bank). 2009. “The African Development Bank Group Response to the Economic Impact of the Financial Crisis.” Discussion paper, AfDB, Abidjan, Côte d’Ivoire. Amiti, M., and D. Weinstein. 2009. “Exports and Financial Shocks.” Discussion Paper 7590, Centre for Economic Policy Research, London. Anderson, J., and E. Van Wincoop. 2004. “Trade Costs.” Journal of Economic Literature 42 (3): 691–751.