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Reshaping Global Trade: The Immediate and Long-Run Effects of Bank Failures

Journal: Quarterly Journal of Economics

Date: 20221101

Author: Xu, Chenzi

Abstract:
I show that a disruption to the financial sector can reshape the patterns of global trade for decades. I study the first modern global banking crisis originating in London in 1866 and collect archival loan records that link multinational banks headquartered there to their lending abroad. Countries exposed to bank failures in London immediately exported significantly less and did not recover their lost growth relative to unexposed places. Their market shares within each destination also remained significantly lower for four decades. Decomposing the persistent market-share losses shows that they primarily stem from lack of extensive-margin growth, as the financing shock caused importers to source more from new trade partnerships. Exporters producing more substitutable goods, those with little access to alternative forms of credit, and those trading with more distant partners experienced more persistent losses, consistent with the existence of sunk costs and the importance of finance for intermediating trade.

Link: Google Scholar

Key Findings

Immediate Impact on Exports

Countries exposed to bank failures in London immediately exported 8.5% less and did not recover their lost growth relative to unexposed places

Long-Term Market Share Loss

Exposed exporters lost approximately 18% market share within destinations that persisted for four decades after the crisis

Extensive Margin Effects

Market share losses primarily stemmed from lack of extensive-margin growth, as importers formed new trade relationships with unexposed countries

Impact of Bank Failures on Export Activity

  • Ports with average exposure (7%) had 4.6% lower exports in the post-crisis year
  • Similar effects found at both country and port level
  • Results robust when controlling for country-level shocks

Market Share Evolution Over Time

  • Significant market share losses began immediately after the 1866 crisis
  • No recovery of market share for approximately 40 years
  • Effects persisted until early 1900s

Trade Relationship Changes

  • Number of trading partners declined for exposed countries
  • 30.3% lower probability of establishing new trade relationships
  • No significant effect on existing relationship exits

Contribution and Implications

  • First causal evidence that temporary financial shocks can permanently reshape global trade patterns
  • Demonstrates importance of maintaining stable financial systems during periods of global economic integration
  • Highlights role of bank-intermediated trade finance in determining long-run trade relationships

Data Sources

  • Export Impact Chart: Based on Table IV regression results showing immediate effects on shipping
  • Market Share Evolution: Constructed from Figure III Panel B showing persistent effects over time
  • Trade Relationship Changes: Derived from Table V extensive margin effects analysis