Credit constraints and spillover effects of financial market liberalization: Case of Colombia

Abstract

We identify an effect of deep trade agreements that is previously not studied in the literature. The 2012 US-Colombia Trade Promotion Agreement caused Colombia to liberalize its financial markets, providing greater access to foreign financial services. We show that this financial market liberalization effectively reduced credit constraints faced by Colombian firms. We merge balance sheet data with export transaction data, allowing us to analyze changes in export decisions of more than 7000 firms over the span of 10 years. As a result of the reforms, in sectors that rely more on external financing, exports have increased to the rest of the world. That is, the trade-diversion effects of the agreement were reduced due to improved access to external financing by foreign capital. Thus, we demonstrate a new channel for potential welfare gains from trade agreements.