New Study Shows International Trade Finance Drives Export Growth Through Learning within Trading Relationships

A new study in the Journal of International Economics finds that exporters actively manage default risk and uncertainty about market demand by shifting payment terms over time. In "International Trade Finance and Learning Dynamics," researchers Shengxing Zhang (Carnegie Mellon University), David Kohn (Central Bank of Chile, the Pontificia Universidad Católica de Chile), Emiliano Luttini (World Bank), and Michal Szkup (University of British Columbia) demonstrate that new exporters initially rely on cash-in-advance payments to guard against counterparty default while learning about foreign demand and buyer reliability. As business relationships mature, exporters gradually transition to providing trade credit through open account arrangements, which accelerates export volume growth.

The research team analyzed transaction-level Chilean customs data covering all export transactions by Chilean manufacturing exporters from 2005 to 2019. They observed that open account terms dominate overall trade value, yet initial reliance on cash-in-advance payments remains significantly higher among smaller, less experienced firms and when shipping to riskier foreign destinations. Over a five-year trading spell, exporters expand their usage of open account terms while increasing export volumes by roughly 26 percent. Moreover, businesses starting relationships with higher open account shares achieve faster export volume expansion than those relying primarily on advance payments.

"Our quantitative model shows that cash-in-advance arrangements lower export entry barriers by allowing new exporters to experiment in foreign markets without absorbing excessive default risk," said Shengxing Zhang, co-author and professor at CMU's Tepper School of Business. "As trading partners learn about product popularity and buyer trustworthiness, transitioning to trade credit unlocks substantial export growth."

To quantify macro-level impacts, the authors embedded these firm-level learning dynamics into a general equilibrium trade model. The framework evaluates how aggregate export flows react to macroeconomic shocks that affect foreign and domestic financing costs. The authors find that hikes in foreign financing costs force cash-in-advance exporters to exit or switch to riskier payment terms, causing immediate, sharp drops in aggregate exports followed by prolonged recoveries as firms rebuild trading relationships. Conversely, increases in domestic borrowing costs push exporters toward cash-in-advance terms. The resulting drop in exports is smaller than under a foreign financing shock, but it is immediate and permanent, because firms stop seeking out new, more trustworthy partners. The model also reveals a striking asymmetry: while a rise in foreign financing costs destroys trading relationships overnight, a fall produces only gradual gains, because trust takes years to build, and the effects depend on where firms sell. Foreign financing shocks hit exports to riskier destinations hardest, since those relationships depend on cash-in-advance terms, whereas domestic financing shocks weigh most on exports to safer destinations, where trade credit dominates.

The findings carry particular weight for Miami, the gateway for much of the hemisphere's trade and trade finance. Most firms exporting from Latin America are small and new to foreign markets — precisely the exporters the study finds most dependent on cash-in-advance terms and most exposed when financing costs rise abroad. As Carnegie Mellon prepares to open a campus in Miami built around real-world challenges, the research illustrates the kind of work the university aims to bring to the region.

"Exporters in Latin America are learning about their customers one shipment at a time, and interest-rate shocks in the U.S. can wipe out years of that learning overnight," Zhang said. "Those are exactly the questions Carnegie Mellon's presence in Miami can help answer alongside the businesses and policymakers who live them."

Summarized from Kohn, D., Luttini, E., Szkup, M., & Zhang, S. (2026). International trade finance and learning dynamics. Journal of International Economics, 162, Article 104286. https://doi.org/10.1016/j.jinteco.2026.104286