What effect does trade finance have on international trade? This column uses new data to stress the importance of trade finance for international trade both in crisis and in non-crisis periods. The major policy lesson is that there must be high levels of market incentives for supplying trade credit, particularly during a period of ‘deleveraging’ of the financial system. That said, trade credit statistics could be vastly improved if we wish to continue comparing global trade finance transactions against global trade.

Was the great trade collapse due to the evaporation of credit? This column examines how the interbank lending rate across countries affected US trade during the crisis months to confirm the role of credit conditions in influencing trade patterns. It suggests the decline in trade volumes would have been about twice as large had interbank rates remained at the high levels of September 2008.

The giant and global drop in trade was concurrent with an equally colossal and global credit crunch. Did the financial market turmoil directly disrupt trade by reducing the availability of trade financing? This chapter marshals the best available evidence on the importance of trade-credit financing as a cause of the crisis. Surveys of participants indicate that trade-credit problems were the number two cause of the trade collapse (after demand). Europe and North America experienced bigger problems early in the crisis, but by mid-2009, the problem was mainly felt in Eastern Europe and Africa. The scant direct evidence, however, suggests that the drop in trade credit was shallower than the drop in trade. Policy responses to shore up trade credit were early and massive; these may have dampened credit problems.