The role of finance may have been magnified since borrowing may become harder during times of stress. Recent evidence suggests that the trade-finance nexus seems to be one explanation for the trade contractions during both the Japanese slump and the recent U.S. financial crisis. Amiti and Weinstein (2011) show that during the Japanese crisis of the late 1990s and early 2000s, the lack of financing accounted for nearly one-third of the plunge in exports. Similarly, using monthly U.S. import data, Chor and Manova (2012) find that countries with tighter credit availability during the crisis exported less to the United States. Moreover, exports to the United States contracted more in sectors that are more heavily dependent on external financing. International evidence is in line with the findings from the U.S. Paravisini, Rappoport, Schnabl, and Wolfenzon (2015) match Peruvian customs and firm-level bank credit data to accurately measure the exogenous credit shocks, and estimate that a 10% contraction in credit supply from poorly performing banks translates into a 2.3% fall in the export volumes.

There is limited understanding of the channels through which credit constraints may affect or be affected by export status. Several studies based on Melitz (2003) show that more productive firms export as they can afford the fixed costs of exporting. But less attention has been dedicated to the nature of the fixed costs. Indeed many studies assume perfect capital markets and rule out the existence of credit to finance either fixed or variable costs. Two noteworthy exceptions are Chaney (2016) and Manova (2013) that introduce firm-level liquidity into a trade model of heterogeneous firms and link country-specific financial development to export status. The logic underlying these models is that in the presence of binding credit constraints, a high-productivity firm may still be unable to finance export costs and operate internationally, but there may be low-productivity firms that are financially unconstrained and able to export. The relationship between productivity and access to credit may alter the sharp prediction of the standard heterogeneous firms model so that credit constraint may lower the (weighted) average productivity of the industry.

A fundamental difference in these models is whether credit is used to finance the fixed or variable costs of exporting. Chaney (2016) conjectures that firms use the cash flows from domestic sales to finance the fixed costs of entering foreign markets. More productive firms achieving higher profits are more likely to reinvest earnings. Once firms have enough liquidity to pay the fixed cost of exporting, they are able to finance the variable costs of expanding the scale of production with internal funds or even by external borrowing. In contrast, Manova (2013) proposes a different framework to analyze the role of credit constraints, assuming that credit affects exporting status because also the variable production costs need to be financed with external capital. In her model of heterogeneous firms, industries differ in their dependence on external finance and level of asset tangibility. By exploiting the variation in the degree of financial development across countries, she uncovers evidence that credit constraints are a significant determinant of international trade patterns. She shows that firms in financially-vulnerable sectors in financially-developed countries gain the most from the liberalization process. Once these firms become exporters, they start trading greater volumes and at the same time export a wider variety of products.

Alternative interpretations of the relationship among productivity, liquidity constraints, and 3