The Availability and Cost of Short-Term Trade Finance and its Impact on Trade

The systemic nature of the recent financial crisis precipitated a general and synchronized drop ofactivity in the interbank market, contaminating most banks in almost all regions. The ensuing economiccrisis was characterised by a drop in production coupled with a much larger drop in trade flows. Theremay be a number of reasons for the particularly sharp drop in trade. This paper examines one potentialreason for the drop in trade between mid-2008 and the first quarter of 2009 – changes in the cost andavailability of trade finance to potential exporters and importers. Results from an econometric modeldeveloped to examine this question show that short-term trade finance availability has had an effect ontrade flows during the crisis period, but that its impact has been smaller than that of falling demand. It alsoshows that the availability and cost of trade finance seem to have had a limited impact on trade outsidecrisis periods. During the crisis period, the cost of financing negatively impacted trade overall due to anincrease in spreads. This indicates that financing was probably prohibitively expensive for some traders,thereby severely constraining their ability to trade. This paper however highlights one of the majordifficulties regarding policymaking in the area of trade finance – that there is little reliable quantitativeinformation.