Poultry in Motion: A Study of International Trade Finance Practices

This paper analyzes the financing terms that support international trade and sheds light on how these terms shape the impact of economic shocks on trade. Analysis of transaction-level data from a U.S.-based exporter of frozen and refrigerated food products, primarily poultry, reveals broad patterns about the use of alternative financing terms. These patterns help discipline a model in which the choice of trade finance terms is shaped by the risk that an importer defaults on an exporter and by the possibility that an exporter does not deliver goods as specified in the contract. The empirical results indicate that cash in advance and open account terms are much more commonly used than letter of credit and documentary collection terms. Transactions are more likely to occur on cash in advance or letter of credit terms when the importer is located in a country with weak contractual enforcement. As an importer develops a relationship with the exporter, transactions are less likely to occur on terms that require prepayment. During the recent crisis, the exporter was more likely to demand cash in advance terms when transacting with new customers, and customers that traded on cash in advance and letter of credit terms prior to the crisis decreased their purchases by 17.3% more than other customers. The model illustrates that these findings can be rationalized if (i) misbehavior on the part of the exporter is of little concern to importers, and (ii) local banks in importing countries are more effective than the exporter in pursuing financial claims against importers. ∗Harvard University and NBER; Harvard Business School and NBER. The authors are very grateful to numerous employees at the anonymous firm that provided the data and to Matthew Johnson and James Zeitler for excellent research assistance. We also thank Kyle Bagwell, Mihir Desai, Ricard Gil, James Hines, Kalina Manova, Sam Kortum (the editor), Mitchell Petersen, Tim Schmidt-Eisenlohr, Bill Simpson, Andrei Shleifer, Bob Staiger, Catherine Thomas, three anonymous referees, and seminar participants at the AEA meetings, Boston University, the Boston Federal Reserve, Columbia, Duke, Harvard, LSE, Manheim, MIT Sloan, the NBER CF Program Meetings, the NBER ITI Program Meetings, Nottingham, NYU Stern, Oxford, the University of British Columbia, Universidad de Alicante, Universitat de València, and the University of Missouri for helpful comments. Foley thanks the Division of Research of the Harvard Business School for financial support. Other work also uses the phrase “Poultry in Motion,” including the album by Hasil Adkins and the film “Chicken Run.”