Abstract:

In this paper we quantify the scope of the distortion due to financial frictions in international trade; precisely for products and services that are Made in the World or produced through a process which is coordinated across geographies more commonly known as Global Value Chains (GVCs), Vertical Specialization (VS) or Intermediate Goods. Our motivation is twofold. From the real economy perspective, over 70% of global trade is in intermediate goods, services and in capital goods. The income created within GVCs has doubled over the last 15 years (OECD, World Trade Organization and World Bank 2014). Moreover, 60 million people all over the world work in 3 500 processing zones located in 130 mostly developing countries (International Labor Organization).From the financial perspective, globally a flow of some USD 6.58 trillion of bank-intermediated trade finance was provided during 2011, of which around USD 2.8 trillion was letters of credit (L/Cs). Trade finance directly supports about one-third of global trade, with L/Cs covering about one-sixth of total trade. The Asia-Pacific region accounts for more than half of the L/Cs related as well as overall trade finance exposures, while Europe accounts for one quarter, and North America, Latin America, Africa and the Middle East each for around 5-10%..