Evolving Patterns of Payment Methods in Turkish Foreign Trade

Serving the global marketplace brings many risks to the firms that they may not have on the domestic side. Apart from financing, trade finance mechanisms assist exporters and importers to mitigate or reduce their risks associated with doing business internationally. The present paper sheds lights on the structure and evaluation of payment methods in international trade as well as their changing composition due to 2008-2009 global financial crisis using a unique bilateral trade finance data from Turkey with 206 countries over the period 2002-2012 at the 2-digit level of ISIC Revision 3. Three key results emerge. First, Turkey’s exports are mainly financed via open account method while the majority of its imports were executed via cash-in advance method. Second, the shares of inter-firm trade finance (open account and cash-in advance) in Turkey’s foreign trade dramatically increased over the period 2002-2012, while the shares of the intermediate trade finance (cash against documents and letter of credit) decreased substantially. Finally, the evidence show that both exporters and importers started to use cash-in advance method, the safest method of payment, more intensively than other methods shortly after the global recession in 2008. Overall, the patterns presented in this paper highlight the fact that Turkish traders are not able to set payment terms that are highly favorable to themselves and bear all risks associated with international trade transactions.