Trade Credit Allows Sellers and Buyers to Manage Business Risk

(World Bank)

A new working paper by Leora Klapper, Luc Laeven and Raghuram Rajan shows how suppliers and buyers use trade credit as a competitive gesture and risk-management tool. The authors draw on data from nearly 30,000 supplier contracts for 56 large buyers and more than 24,000 suppliers in Europe and North America, all of varying size, investment grade and sector.

The evidence points to four important — and not mutually exclusive — ways trade credit helps to manage risk: as a method of financing, as a means of price discrimination, as a bond assuring buyers of product quality, and as a screening mechanism to gauge buyer default risk.

In particular, the largest and most creditworthy buyers receive contracts with the longest maturities (as measured by net days) from smaller, investment-grade suppliers. By contrast, early-payment discounts seem to be used as a risk management tool to limit the potential nonpayment risk of trade credit. Early payment discounts are generally offered to smaller, non-investment grade buyers. The results suggest that contract terms are jointly determined by supplier and buyer characteristics.

Download the World Bank Policy Research Working Paper 5328 here.

Protectionism During the Crisis Had Minimal Impact on the Global Trade Collapse

(World Bank)

Since the global financial crisis began, many countries have raised tariffs on selected products. But there hasn’t been a widespread increase in protectionism via tariff policies, according to a new working paper by Hiau Looi Kee, Cristina Neagu, and Alessandro Nicita. In fact, using new World Bank estimates that summarize trade policies in a wide range of countries from 2008 to 2009, the authors show that only a handful of countries, including Malawi, Russia, Argentina, Turkey, and China, raised tariffs on frequently-traded products. Some economies, such as the U.S. and the EU, have not used tariffs but instead mainly relied on anti-dumping duties. In the worst-case scenario, the rise in tariffs and anti-dumping duties may have driven down trade by about US$43 billion, or less than 2% of the global trade collapse between 2008 and 2009.

Download the World Bank Policy Research Working Paper 5274.