Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach

1. Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach Joseph Francois, Olga Pindyuk

2. Contents • Motivation • Data description • Modeling approach • First results

3. Barriers to services trade • Many services trade barriers primarily affect fixed costs of service providers and are sunk market-entry costs • Bilateral heterogeneity of regulation in each pair of countries matters • Even when services regulations are not discriminatory and were designed to meet legitimate economic or social objectives, they may they still hamper trade as regulatory requirements in a given export market are additional to the ones a service provider faces at home and other export markets

4. EU and services trade • EU members have quite heterogeneous services regulation • Still the most advanced services trade liberalization among existing RTAs • Thus we should expect to see positive effect of the EU membership on services trade of new members

5. Data description • Dataset based on the Eurostat, OECD, UN, and IMF data • Bilateral services trade flows for 244 reporting countries and 244 partners. • In total (1995-2007) we have 1,393,805 observations, 11% of observations are missing values, and 35% of observations are zero flows.

6. Data description

7. Sectoral structure of NMS services trade 2003 2007

8. Geographical structure of NMS exportsUSD bn

9. Geographical structure of NMS exports

10. Data examples - total services imports

11. Modeling approach • Assuming that import values depend on a mix of importer characteristics, exporter characteristics, and bilateral properties, we specify total trade as follows:

12. Modeling approach • We group effects as follows: Table 1. Classification of effects • We only are interested in the first cell. We can control for everything else with exporter dummies, importer dummies, and pair-wise time invariant dummies

13. Modeling approach • We take an average of Mijt across time for country pairs. This yields μi j . We then take the difference of Mijt from this average. This yields ψ1ijt.

14. Modeling approach • Next we take an exporter average: the average of ψ1ijtacross importers for each exporter in each period. This yields μit. We then take the difference of ψ1ijt from this average. This yields ψ2ijt.

15. Modeling approach • We have now eliminated both time-invariant pair-wise effects, and time-varying exporter effects. Next we take an importer average: the average of ψ2ijt across exporters for each importer in each period. This yields μjt. We then take the difference of ψ2ijt from this average. This yields ψ3ijt.

16. Modeling approach

17. Modeling approach • 2 stage estimation procedure: • Heckman selection to account for zero flows • “Difference-in difference-in difference” regression (demeaned log of imports value as a dependent variable; pair-wise dummies old-old, new-new, old-new, new-old, third-old, third-new on the RHS) • Separate regressions for 2 periods: 1999-2003 and 2004-2007 • Based on coefficients of the pair-wise dummies we calculate percentage changes in bilateral trade relative to global baseline • These changes cannot be explained by “gravity fundamentals”, but are attributed to trade costs

18. 1999-2003

19. 2004-2007

20. Conclusions • NMS have been re-orienting their services trade after the EU accession: from trading relatively more with each other to trading relatively more with old member states • Costs of trade with the old member states have decreased • Old member states started to trade relatively less with each other after the EU enlargement • Costs of trade between the old member states did not decrease as much as costs of trade between old-new • Trade diversion between NMS and third countries continues after the accession, but to smaller extent

21. Further work • Find explanations of the data issues • Make a separate dummy for outliers (NOR, CHE, USA, HRV, RUS, JPN, CAN)?