The impact of trade policy uncertainty on short-term financing

Abstract

This study proposes a novel channel through which trade liberalization may increase firms’ trade credit ratios by reducing trade policy uncertainties (TPU). Using China’s World Trade Organization (WTO) accession in 2001 as a quasi-natural experiment, we find that a reduction in TPU significantly encourages firms to provide trade credit: firms in industries with a larger reduction in uncertainty hold more account receivables after China joined the WTO. Furthermore, the response of firms to TPU reduction varies according to ownership status, exporting status, and financial constraints.