Abstract:

We investigate the role of trade credit and financial frictions in propagating inter-
national trade shocks along supply chains. Using U.S. data, we show that exposure
to Chinese import competition resulted in a significant increase in trade credit and a
broader shift toward short-term financing. To quantify the economic effects of these
adjustments, we develop a multi-country input-output trade model with borrowing
constraints, trade credit, and endogenous employment. We find that borrowing con-
straints lead to negative effects of the China shock on employment and real wages.
While trade credit mitigates these losses by half, it does not fully offset the effects of
financial frictions.