Credit market frictions and trade liberalizations

Are credit frictions a barrier to gains from trade liberalization? We find that the answer to this depends on whether or not the debt limits are endogenous and respond to profit opportunities. If so, exporters expand and non-exporters shrink efficiently allowing for the same percentage gains from reform as with perfect credit markets. If debt limits do not respond, reallocation is reduced and gains are lower. We then use data from a trade liberalization to distinguish between the two models. We find that firm-level changes in export behavior, the growth of new exporters, and the capital distortions of firms that eventually exports are all consistent with a model of endogenous debt limits.