Good connections : Bank specialization and the tariff elasticity of exports

Abstract

Banks support exporters in foreign markets by providing them with credit, trade finance instruments or information about business opportunities. Repeated interactions with clients allow them to develop an expertise in specific markets – a geographical specialization. We develop a theoretical model where the specialization of banks translates into lower export costs for their clients through both the cost of credit and an information channel. The model predicts that the geographical specialization of banks tends to amplify the response of firm-level exports to a trade liberalization episode. We test this prediction on detailed French export data, using the 2011 free trade agreement between the European Union and Korea as a quasi-natural experiment. We find that the tariff elasticity of exports is larger in absolute terms for exporters which are connected to banks with a specialization in Korea. The sector specialization of the banks also matters, but to a lesser extent.