Capital Controls and International Trade: An Industry Financial Vulnerability Perspective

Kevin Lai (Federal Reserve Bank of New York), Tao Wang (Swarthmore College) and David Xu (PIIE)

Working Paper
19-20
December 2019
Photo Credit: 
REUTERS/Claro Cortes

Capital controls—or measures that governments take to restrict the amount of money that flows into and out of countries—pose significant challenges for firms that rely heavily on foreign financing to conduct business. This paper empirically evaluates effects of capital controls on trade across industries with varying levels of dependence on foreign capital. Mobilizing data on 99 countries from 1995 to 2014 across 27 industries, the authors find that industries more reliant on foreign capital tend to export much less in response to tightening of capital controls by exporting countries. Exports decline uniformly across all industries in response to tightening of capital controls by importing countries. The negative effects of capital controls on trade are less pronounced in countries with more advanced financial systems.

Data Disclosure: 

The online appendix and data underlying this analysis are available here [3GB]. Proprietary data are not included.