Time to ship during financial crises. No October. Nicolas Berman, José de Sousa, Philippe Martin, Thierry Mayer - PDF

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C E N T R E D É T U D E S P R O S P E C T I V E S E T D I N F O R M A T I O N S I N T E R N A T I O N A L E S No October D O C U M E N T D E T R A V A I L Nicolas Berman, José de Sousa, Philippe

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C E N T R E D É T U D E S P R O S P E C T I V E S E T D I N F O R M A T I O N S I N T E R N A T I O N A L E S No October D O C U M E N T D E T R A V A I L Nicolas Berman, José de Sousa, Philippe Martin, Thierry Mayer TABLE OF CONTENTS Non-technical summary Abstract Résumé non technique Résumé court Introduction Model Time-to-ship and the effect of crises on trade: country-level evidence Empirical methodology Data Results Firm-level evidence Conclusion References Appendix A. Descriptive statistics B. Aggregate robustness C. Sectoral evidence List of working papers released by CEPII TIME TO SHIP DURING FINANCIAL CRISES Nicolas Berman, José de Sousa, Philippe Martin, Thierry Mayer NON-TECHNICAL SUMMARY The dramatic trade collapse during the global financial crisis of has generated a lot of interest. That imports fall when a country suffers a financial crisis and a recession is not surprising. What grabbed the attention of economists and policy makers was the magnitude of the collapse and the fact that it was much larger than the fall in world GDP and demand. This pointed to the potential role of financial frictions and trade finance. A fact linking the financial crisis and international trade went largely unnoticed: the fall in trade caused by financial crises is magnified by the time-to-ship goods between the origin and the destination country. We document this during the recent as well as past financial crises. The amplification effect of time-to-ship is very robust. It is observed on a large panel of countries over the period , and at the firm-level over the period This stylized fact strongly suggests that financial crises affect trade not only through demand but also through financial frictions that are specific to international trade. It takes time to ship goods internationally. For instance, a shipment takes 1 day from Rotterdam to Copenhagen and more than 28 days to go from Rotterdam to Hong-Kong. This is without taking into account the time to load and unload the boat, and to deal with customs and other administrative procedures. During a financial crisis time-to-ship takes a new dimension: as time passes, during which goods are stuck on cargo, the probability that a financial incident takes place in the destination country rises. The negative impact on trade of the increased probability of default is thus amplified by the time it takes to ship the good. Crucially, time to ship does not simply represent an extra cost, it increases the elasticity of export volume to the expected cost of default. This is the core of the magnification effect that time to ship produces. The reason is that exporters react to this increased probability of default by raising their export price and reducing their export volumes and values, the more so the longer the time of shipping. This can be thought as a pricing to market strategy that depends on financial conditions in the destination country. Hence, on the intensive margin, the value of imports by existing importers falls with a financial crisis and this is more so the longer the time to trade with the exporter country. In such a framework, the probability to exit and cease exporting is higher in a country that experiences a financial crisis and that this effect is again amplified by time-to-ship. Before exploring these firm-level predictions on firm-level data, we assess the effect of a banking crisis in a country on the aggregate bilateral imports of this country, and how this effect varies with the time it takes to ship goods from each partner country. Using aggregate data from 1950 to 2009, we find that this magnification effect is robust to different specifications, samples and inclusion of additional controls, including distance. Using a gravity-type estimation, and controlling in particular for the change in GDP, we find that a financial crisis in the importer country reduces its imports by 5%. The amplification effect of time-to-ship is 3 large: a one standard deviation increase of time-to-ship from the mean magnifies the effect of a banking crisis from -5 to -12%. We then explore our firm-level predictions on firm-destination specific export data obtained from the French customs over the period 1995 to The firm-level data, in addition to the aggregate data, is consistent with predictions of the model and the role of time-to-ship. We find that French exporters indeed raise their price and decrease their export volumes when the destination country is hit by a crisis. The reduction in volume and value is larger when time-to-ship is longer. Similarly, the probability that an exporter exits a given destination increases when the destination incurs a financial crisis, the more so when time-to-ship is longer. Both in firm level and aggregate regressions, when we include both time-to-ship and geographic distance variables, only the effect of time-to-ship remains significant. This suggests that the mechanism that we uncover is indeed due to the role of time as a financial friction. ABSTRACT We show that the negative impact of financial crises on trade is magnified for destinations with longer time-to-ship. A simple model where exporters react to an increase in the probability of default of importers by increasing their export price and decreasing their export volumes to destinations in crisis is consistent with this empirical finding. For longer shipping time, those effects are indeed magnified as the probability of default increases as time passes. Some exporters also decide to stop exporting to the crisis destination, the more so the longer time-to-ship. Using aggregate data from 1950 to 2009, we find that this magnification effect is robust to alternative specifications, samples and inclusion of additional controls, including distance. The firm level predictions are also broadly consistent with French exporter data from 1995 to JEL Classification: F10, G01, G32. Keywords: Time-to-ship, Financial crises, international trade 4 TEMPS DE TRAJET, COMMERCE INTERNATIONAL ET CRISES FINANCIÈRES Nicolas Berman, José de Sousa, Philippe Martin, Thierry Mayer RÉSUME NON TECHNIQUE L effondrement spectaculaire des échanges au cours de la crise financière mondiale de a suscité beaucoup d intérêt. Que les importations diminuent lorsqu un pays est touché par une crise financière et une récession n est pas très surprenant. Ce qui a attiré l attention des économistes et des décideurs a été l ampleur de l effondrement du commerce, beaucoup plus important que la chute du PIB mondial. Ce fait a suggéré un rôle potentiellement important des frictions financières et du crédit commercial dans les variations cycliques du commerce international. Un fait caractérisant les relations entre la crise financière et le commerce international est passé largement inaperçu jusqu à présent : la baisse des échanges causée par les crises financières est amplifiée par le temps de trajet entre l origine et la destination de la transaction. Nous mettons à jour ce fait lors de la crise récente ainsi que lors de crises financières passées. L effet d amplification du temps de trajet est très robuste, notre recherche permet de l observer sur un large panel de pays au cours de la période , et au niveau des firmes françaises au cours de la période Ceci suggère que les crises financières affectent les échanges non seulement au travers de leur impact sur la demande, mais aussi par des frictions financières spécifiques au commerce international. Il faut du temps pour expédier des marchandises. Par exemple, faire parvenir une cargaison de Rotterdam à Copenhague prend 1 jour contre plus de 28 jours pour aller de Rotterdam à Hong-Kong (sans prendre en compte le temps de chargement et de déchargement du bateau, le passage en douane et autres procédures administratives). Lors d une crise financière, le temps de trajet prend une nouvelle dimension : pendant le temps qui s écoule tant que les marchandises sont sur le cargo, la probabilité qu un incident financier puisse avoir lieu dans le pays de destination augmente. L impact négatif sur le commerce de la probabilité de défaut du payeur (accrue en temps de crise) est ainsi amplifié par le temps qu il faut pour expédier le bien. Fondamentalement, le temps de trajet ne représente pas seulement un coût supplémentaire, il augmente l élasticité du volume des exportations au coût anticipé du défaut de paiement. C est le cœur de l effet d amplification du temps de trajet. La raison en est que les exportateurs réagissent à cette augmentation de la probabilité de défaut en augmentant leurs prix à l exportation et en réduisant leurs volumes d exportation, d autant plus que le trajet est long. Cela peut être considéré comme une stratégie de pricing to market en fonction des conditions financières du pays de destination. Dans ce cadre, la probabilité pour une firme de mettre fin à ses exportations vers un pays qui connaît une crise financière également plus élevé, et cet effet est encore amplifié par le temps de trajet. Avant d explorer ces prédictions sur des données d entreprises françaises, nous évaluons l effet d une crise bancaire sur les importations bilatérales d un pays, et comment cet effet varie avec le temps qu il faut pour expédier des marchandises de chaque pays exportateur. En utilisant des données agrégées de 1950 à 2009, 5 nous constatons que l effet d amplification est robuste à différentes spécifications et échantillons, ainsi qu à l inclusion de variables de contrôles supplémentaires, y compris la distance bilatérale. En utilisant une estimation de type gravitationnel, qui permet de prendre en compte les variations du PIB des pays partenaires, on constate que la crise financière dans le pays importateur réduit ses importations de 5%. L effet d amplification du temps de trajet est important : une augmentation d un écart-type par rapport au temps de trajet moyen amplifie l effet de la crise bancaire qui passe de -5% à -12%. Nous explorons ensuite nos prévisions au niveau des entreprises en utilisant les données individuelles d exportation des firmes françaises au cours de la période allant de 1995 à Les résultats sur données individuelles, comme ceux sur données agrégées, sont compatibles avec les prédictions du modèle et le rôle du temps de trajet. Nous constatons que les exportateurs français augmentent leurs prix et réduisent leurs volumes d exportation lorsque le pays de destination est frappé par une crise. La réduction des exportations est d autant plus prononcée que le temps de trajet est long. De même, la probabilité qu un exportateur ne serve plus une destination donnée augmente lorsque la destination connaît une crise financière, encore une fois avec un effet d amplification du temps passé sur le bateau. Tant au niveau des données fines que des régressions agrégées, si l on inclut à la fois le temps de trajet et la distance géographique, seul l effet du temps de trajet demeure significatif. Ceci suggère que le mécanisme que nous découvrons est bien dû au rôle du temps en tant que friction financière. RÉSUMÉ COURT Cet article montre que l impact négatif de la crise financière sur le commerce est amplifié par le temps de trajet. Un modèle simple dans lequel les exportateurs réagissent à une augmentation de la probabilité de défaut de paiement des importateurs en augmentant leur prix à l exportation et en diminuant leurs volumes d exportation vers les destinations en crise formalise cette constatation empirique. Lorsque le temps de transport est plus grand, les effets de la crise sont plus importants car la probabilité de défaut augmente avec le temps de trajet. Certains exportateurs décident également d arrêter d exporter vers la destination en crise, et ce d autant plus que le temps de trajet est long. En utilisant des données agrégées de 1950 à 2009, nous constatons que l effet d amplification est robuste à différentes spécifications et échantillons, ainsi qu à l inclusion de variables de contrôles supplémentaires, y compris la distance bilatérale. Les prédictions au niveau de la firme sont globalement validées par les données d exportation des entreprises françaises de 1995 à Classification JEL : F10, G01, G32. Mots clés : Temps de trajet, Crises financières, Commerce international 6 TIME TO SHIP DURING FINANCIAL CRISES 1 Nicolas Berman, José de Sousa, Philippe Martin, Thierry Mayer 1. INTRODUCTION This paper documents a robust stylized fact: the fall in trade caused by financial crises is magnified by the time-to-ship goods between the origin and the destination country. The paper is motivated by the collapse of world trade that occurred during the financial crisis of and the debates on why it was much larger than the fall in world GDP and demand. But we go further by analyzing the effect of financial crises on trade using historical data. The amplification effect of time-to-ship is very robust. It is observed at the bilateral level on a large panel of countries over the period and at the firm-level over the period We argue that this stylized fact of financial crises strongly suggests that they affect trade not only because they impact demand but also through financial frictions which are specific to international trade. International trade differs from intranational trade in several dimensions. One on which we focus in this paper and which we can interpret as a financial friction is time-to-ship 2. It takes time to transport goods internationally and we focus on how this financial friction is exacerbated during a financial crisis. For instance, a shipment takes more than 28 days to go from Rotterdam to Hong-Kong but a bit more than 1 day from Rotterdam to Copenhagen. This is without taking into account the time to load and unload the boat and the time taken by customs and other administrative procedures. Djankov, Freund, and Pham (2006) found in a sample of 180 countries that the median amount of time it takes from the moment the goods are ready to ship from the factory until the goods are loaded on a ship is 21 days. In normal circumstances, time to load, ship... implies a transport cost which depends on distance, the value and the weight of the good transported. Of course even in normal times, there is an opportunity cost to 1 We thank the International Growth Centre (LSE and Oxford University) for financial help. We thank Francesco Giavazzi, Nicolas Schmitt, Helene Rey and Cedric Tille as well as participants at the 2012 NBER ISOM conference in Oslo, CREI, UAB, ITAM and at Colegio de Mexico for helpful comments. We are grateful to Jules Hugot and Jules-Daniel Wurlod for excellent research assistance. We are most thankful to James Feyrer who generously shared with us his dataset on time-to-ship. Philippe Martin thanks CREI at Pompeu Fabra for its hospitality. Graduate Institute of International and Development Studies, Geneva, and CEPR. University of Paris Sud and CES, University of Paris 1 Pantheon-Sorbonne. Sciences-Po and CEPR. Sciences-Po, CEPII and CEPR. 2 We are not the first to analyze the implications of this characteristic of international trade (see for example Amiti and Weinstein (2011) and Feyrer (2011) for the most recent contributions). 7 time which can be measured broadly by the cost of capital. However, during a financial crisis time-to-ship takes a new dimension: as time passes during which goods are stuck on cargo the probability that a financial incident takes place in the destination country rises. We model this incident as the possibility that during a financial crisis the importer defaults on her payment obligation. We present a simple partial equilibrium model in which heterogeneous exporters sell to distant importers. We show that in such a framework the negative impact on trade of the increased probability of default that comes with a financial crisis is amplified by the time it takes to ship the good. Crucially, time to ship does not in this case simply represent an extra cost, like transport costs do, it increases the elasticity of export volume to the expected cost of default. This is the core of the magnification effect that time to ship produces. The reason is that exporters react to this increased probability of default by raising their export price and reducing their export volumes and values, the more so the longer the time of shipping. This can be thought as a pricing to market strategy that depends on financial conditions in the destination country. Hence, on the intensive margin, the value of imports by existing importers falls with a financial crisis and this is more so the longer the time to trade with the exporter country. We also show that in such a framework, the probability to exit and cease exporting is higher in a country that experiences a financial crisis and that this effect is again amplified by time-to-ship. We test these firm-level predictions on firm-destination specific export data obtained from the French customs over the period The firm-level data, in addition to the aggregate data, is consistent with predictions of the model and the role of time-to-ship. We find that French exporters indeed raise their price and decrease their export volumes when the destination country is hit by a crisis. The reduction in volume and value is larger when time-to-ship is longer. Similarly, the probability that an exporter exits a given destination increases when the destination incurs a financial crisis, the more so when time-to-ship is longer. Using aggregate data from 1950 to 2009, we find that this magnification effect is robust to alternative specifications, samples and inclusion of additional controls, including distance. Both in firm level and aggregate regressions, when we include both the time-to-ship variable and distance, only the effect of time-to-ship remains significant. This suggests that the mechanism that we uncover is indeed due to the role of time as a financial friction. There is a now large and still growing literature on the analysis of the trade collapse during the recent financial crisis. Some papers have analyzed the characteristics of countries and sectors that were most hit by the financial crisis. This is the case of Chor and Manova (2012) who analyze the effect that credit conditions had on international trade during the recent global crisis by examining the evolution of monthly US imports over the November 2006 to October 2009 period, and compare trade patterns before and during the crisis. They identify the impact of credit conditions by exploiting the variation in the cost of external capital across countries and over time, as well as the variation in financial vulnerability across sectors. They find that during the crisis period, countries with tighter credit availability exported less to the US, relative to other countries. Another related paper on the effect of credit constraints on export performance at the 8 firm level is Amiti and Weinstein (2011) who show that Japanese banks transmitted financial shocks to exporters during the systemic crisis in Japan in the 1990s. Ahn, Amiti, and Weinstein (2011) review evidence that financial factors may have resulted in a greater decline in exports than were predicted in models without financial frictions. They show that export prices rose relative to domestic manufacturing prices across a large number of countries. This is consistent with a result we find in a very different data set which is that export prices rise when the destination country experiences a financial crisis. They also find that import and export prices of goods shipped by sea, which are likely to be affected most by trade finance contractions, rose disproportionately more than those shipped by air or land. Our paper is complementary to theirs in pushing the argument that what we document in t
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