Bilateral trade agreements and trade finance: evidence from Turkey

Abstract

PurposeThis study investigates the impact of trade integration on payment choice in international transactions using data from Turkey, an emerging economy that signed many trade agreements in the last two decades.Design/methodology/approachThe authors use industry-level trade finance data from Turkey, which reports payment methods in exports at two-digit ISIC level for 180 export destinations. The authors performed linear as well as maximum likelihood techniques to test our hypothesis.FindingsThe authors show that the removal of trade barriers by bilateral free trade agreements leads to more exporter-financed transactions. This implies that lowering trade barriers contributes to reducing risk, which leads to more trade finance by exporters.Originality/valueTrade finance is the lifeblood of global trade. Although the previous literature have analyzed the institutional and financial factors affecting exporters' decision to extend trade credit, the effect of economic integration has been overlooked. In this regard, this study represents the first attempt to analyze the impact of trade integration on trade finance.