Good Connections: Bank Specialization and the Tariff Elasticity of Exports

Abstract

In this paper, we show that exporters react more strongly to a cut in tariffs by a distant country
when their banks have already been specializing in funding exports to this country. To make our
case, we build upon a theoretical model where an informational advantage provided by the
exporter's bank results in a lower distribution cost in the destination country. We test the
implications of this model for French exporters using the 2011 free trade agreement between the
European Union and South-Korea as a quasi-natural experiment. We measure a bank's
specialization in Korea using granular information on bank-firm credit lines and firm-level exports
in the years preceding the agreement. We assess how customers of different banks react to this trade
liberalization episode using detailed information on the bilateral tariff cuts and disaggregated data
on French export flows at the firm-product level. We find robust evidence that the specialized
lenders help exporters to respond more strongly to changes in tariffs. The effect is strong for all
firms along the extensive margin, but only for less productive exporters along the intensive margin.