Import competition, credit reallocation, and small business lending

Abstract

Using import competition from China as a funding shock, we find that banks curtail small business loans in non-exposed counties, while preserving their core markets with branch presence. The results are robust to alternative measures of bank exposure to import competition, alternative classifications of exposed counties, placebo tests, reverse causality, and others. Bank capital mitigates the propagation of trade shocks to non-exposed counties, and banks increase small business lending in non-exposed counties with less social capital. We also document the effects of import competition on local establishments and private sector wages of non-exposed counties via the bank lending channel.