Financing a Fragmenting World: Bank-Intermediated Trade Finance Supply, Geopolitical Alignment, and Export Performance in Emerging Market and Developing Economies, 2012–2025

Abstract

Roughly four-fifths of merchandise trade depends on some form of credit, guarantee, or insurance, yet the supply of bank-intermediated trade finance is highly concentrated, geographically specialised, and increasingly exposed to geopolitical risk. This study asks whether the availability of bank-intermediated trade finance causally shapes the export performance of emerging market and developing economies (EMDEs), and whether that relationship is being reorganised along lines of geopolitical alignment. Drawing on the theory of payment-contract choice under imperfect contract enforcement (Schmidt-Eisenlohr, 2013) and on heterogeneous-firm models with credit constraints (Manova, 2013; Melitz, 2003), the paper develops a structural gravity framework in which trade finance supply enters as a bilateral, time-varying cost-and-risk shifter. The empirical design combines country-pair trade flows with measures of letter-of-credit and correspondent banking capacity, and identifies supply-side variation using a shift-share instrument constructed from pre-period bank–corridor exposures interacted with idiosyncratic shocks to individual global trade finance banks, following the logic of Khwaja and Mian (2008) and Paravisini et al. (2015). Geopolitical alignment is measured using United Nations General Assembly ideal-point distance (Bailey et al., 2017). Estimation proceeds via Poisson pseudo-maximum likelihood with three-way high-dimensional fixed effects (Correia et al., 2020; Santos Silva & Tenreyro, 2006). The paper sets out the analysis protocol, hypotheses, identification strategy, robustness architecture, and result-reporting templates, and specifies falsifiable priors drawn from the existing literature. It contributes a bridge between the trade finance literature, which has largely treated bank supply shocks as apolitical, and the geoeconomic fragmentation literature, which has largely ignored the financial plumbing through which fragmentation is transmitted.