Financial Frictions and the Fragility of Global Trade: A Review of Trade Finance, Credit Constraints, and Policy Responses

Abstract

International trade depends on finance at every stage of the transaction cycle, yet the financial dimension of trade has historically received far less attention than tariffs, transport costs, or comparative advantage. This article reviews the theoretical and empirical literature on the relationship between finance and trade, with a particular focus on how credit constraints and the availability of trade finance shape export participation, transaction structure, and the resilience of trade flows during crises. Drawing on a narrative synthesis of peer-reviewed research, working papers from international financial institutions, and industry surveys, the review documents three central findings. First, financial development and firm-level access to credit are significant determinants of who exports, what they export, and to whom. Second, the collapse of trade during the 2008–2009 global financial crisis was driven primarily by demand and compositional effects, but trade finance frictions played a measurable and heterogeneous amplifying role, particularly for smaller firms and for transactions intermediated by bank instruments. Third, a persistent global trade finance gap, concentrated among small and medium-sized enterprises in emerging and developing economies, remains a structural barrier to inclusive trade. The article concludes by discussing the dollar-based invoicing system, the digitalization of trade documents, and the policy architecture of export credit agencies and multilateral guarantee programs, and identifies directions for future research.