Collateral Values and Global Production Networks

Firms are interconnected through global production networks. In this study, I investigate how changes in a firm’s collateral value affect its supply chain linkages with international trade partners. I use a plausibly exogenous shock to the real estate market in China, which reduced the value of firms’ real estate holdings, and find an 11.1% reduction in exports to trade partners in the US. Financially constrained firms affected by the shock respond by increasing product prices, potentially compromising long-term customer relationships. Connected U.S. customers reallocate their imports to alternative suppliers, thereby inducing a shift to the global production network structure. My findings highlight the role of collateral value fluctuations, interacting with financial frictions, in trade partnership adjustment.