Chinese Import Competition and the Provisions for External Debt Financing in the US

How does international competition originating from low-wage countries affect domestic financing capacity of firms in high-wage countries? In this article, we use China’s entry into the World Trade Organization (WTO) as a quasi-natural experiment to investigate the effects of trade-induced competition originating from China on the price and design of bank-loan contracts for firms in US manufacturing industries. We find that the elevated level of Chinese import competition in the US, following China’s WTO entry, is associated with a reduction in the overall cost of bank financing for import-competing US manufacturing firms, evidenced by lower spread, higher amount, longer maturity, and less restrictive non-price contract terms such as collateral and covenants. We show that such reduction in the external financing premiums of import-competing firms is the result of trade-induced productivity gains within firms and a reallocation of financing between firms towards more capital-intensive and technologically advanced firms. These results suggest that engaging in international business activities with a low-wage country via trade openness is likely to ease the provisions of external debt financing for firms in high-wage countries