International trade friction and the cost of debt: Evidence from China

In this paper we investigate whether international trade friction affects the cost of debt. When a firm is confronted with international trade friction, both operational and information risks significantly increase, as does the default risk perceived by debtholders. We find that the cost of debt increases by approximately 4.95% for a firm that is directly affected by international trade friction. Cross-sectional analysis shows that international trade friction has a stronger effect on the cost of debt for non-state-owned companies, companies operating in industries without policy support, and companies that rely heavily on export transactions. We also find that firms that export to the US have experienced an increase in the cost of debt since the start of the US-China trade war. Our study extends the literature on the economic consequences of international trade friction and cost of debt determinants and contributes to the debate on trade protectionism.