The finance-trade nexus revisited: Is the global trade slowdown also a financial story?

- This paper explicitly takes into account non-linearities in the finance-trade nexus.
- We confirm a positive impact of financial development on trade openness.
- This effect however increasingly diminishes with the size of the financial sector.
- These non-linearities have played a key role in the recent slowdown of global trade.

This paper studies the role of non-linearities in the finance-trade nexus. While we confirm the positive impact of financial development on the level of trade openness, our findings reveal that the marginal effect decreases considerably with the size of the financial sector. The study contributes to two different strands of the economic literature: First, while widely examined in the finance-growth nexus literature, the discovered non-linearities have been neglected so far in studies on the link between finance and trade. Second, the diminishing marginal effect of finance appears to be an important factor in explaining the recent slowdown in global trade growth.