Financial constraints and international trade patterns

Growing empirical literature shows that financial constraints reduce the chance of exporting, suggesting that financial constraints are an important determinant of international trade patterns. In this aspect, I develop a model of international trade based on new trade theory with financial constraints and non-homothetic preferences. With these two modified assumptions, the main findings are i) financial constraints act as trade barriers, ii) the largest amount of trade is between countries that have healthier financial systems in terms of access to loans and iii) financial constraints can cause one way or zero trade. As a result, this paper provides a single framework able to account for all possible patterns (two-way, one-way, and no trade) within the same industry. All these findings have important policy implications for countries suffering from relatively poor financial systems.

► I model financial constraints in the international trade framework. ► I examine the effects of financial constraints on international trade patterns. ► Financial constraints act as trade barriers. ► There exists a threshold trade barrier which determines the trade patterns. ► Financial constraints can cause one-way or zero trade within an industry.