How much do agreements matter for services trade ?

1. How much do agreements matter for services trade? Anirudh Shingal Senior Research Fellow, WTI anirudh.shingal@wti.org WTO Public Forum 2010, Geneva September 15-17, 2010 The National Centres of Competence in Research (CCR) are a research instrument of the Swiss National Science Foundation (SNSF)

2. Motivation • 49 of the 55 PTAs notified to the WTO before 2000 were goods agreements • In the last decade,150 PTAs have been notified of which nearly half cover trade in services • Obvious question – How effective are these agreements in fostering services trade? World Trade Institute Berne

3. Sub-text • What is the (services) trade effect of a PTA delineated by type (goods v services) and form (North-North v North-South, symmetric v asymmetric)? • Is there an incremental trade effect from a services accord if a “goods only” agreement is already in place? World Trade Institute Berne

4. Why might we expect a positive trade effect? • Barriers to services trade are often prohibitive and not revenue generating, so fewer costs of trade diversion • A la trade in goods, benefits from possibilities for increased competition, exploitation of economies of scale and inducement of knowledge spillovers • However, “the sequence of liberalization matters more in services trade than in the case of goods trade” because location-specific sunk costs of production are important, so even temporary privileged access for an inferior supplier can translate into a long-term market advantage (Mattoo & Fink, pp 3) World Trade Institute Berne

5. Exploratory tool: The gravity model • Gravity model more applicable to services trade? - physical proximity (think Mode 4) - role of distance (Mode 1 v Mode 4) - services differentiated by quality and location may give rise to monopolistic competition [driving force behind IIT (think N-N trade); Helpman’s (1987) econometric specification of the NTT similar to the gravity specification] World Trade Institute Berne

6. However, empirical gravity literature is inconclusive on the… • Trade effect e.g. insignificant in Grunfeld & Moxnes (2003); significant in others • Effect of distance e.g. more important for services trade in Kimura & Lee (2004); less important in Lejour & Verheijden (2004) & Lennon (2006); and insignificant in Walsh (2006) • Effect of common language e.g. insignificant in Kimura & Lee (2004); significant in Lennon (2006) & Walsh (2006) World Trade Institute Berne

7. So what’s new about this paper? • Empirical model is intuitively grounded • Uses advanced estimation techniques • Explores the impact of goods trade on services trade • Delineates trade effect into that emanating from services and “goods only” agreements • Disaggregates PTA-trade relationship by economic status of partner countries and reciprocity of commitments • Accounts for heterogeneity in trading partners in model estimation • Endogenizes the trade effect of PTAs in model estimation World Trade Institute Berne

8. Sector, mode of delivery and determinants of trade World Trade Institute Berne

9. Model specification svsxijt = αij + β1gdpit + β2gdpjt + β3gdsxijt + β4DPCGDPijt + β5hkit + β6hkjt + β7teledenit + β8teledenjt + β9distij + β10ENGij + β11resti + β12restj + β13PTA_SVSijt + εijt • Lower cases variables are in log terms • Upper case variables are dummy variables • Economic data are in real value World Trade Institute Berne

10. Data • OECD database on bilateral trade in services • 25 OECD exporters • 53 OECD and non-OECD importers • 4327 observations • 1999-2003 World Trade Institute Berne

11. Number of observations on the PTAs • Services (22.3% obs.) • Goods (27.8% obs.) • “Goods Only” (5.5% obs.) • NN_PTA_SVS (20% obs.) • NS_PTA_SVS (2% obs.) • AsymNS_PTA_SVS (1% obs.) • SymNS_PTA_SVS (1% obs.) World Trade Institute Berne

12. Empirical results • Services trade effect of 11.6%, ceteris paribus and on average • A 10% increase in bilateral goods exports would raise bilateral services exports by 1.7%, ceteris paribus and on average • Much lower GDP elasticities than in this literature • Distance effect significant and less important for services trade than for goods trade • All explanatory variables have expected signs but not all estimates are statistically significant World Trade Institute Berne

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14. Disaggregating the services trade effect • Only North-North agreements report both a positive and statistically significant trade effect; other results lack statistical significance • In aggregate, North-South services accords have the largest positive trade effect • Within North-South agreements, asymmetric accords have a larger and always positive trade effect World Trade Institute Berne

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16. Sequential and incremental impact of agreements • “Goods Only” agreements do not report a statistically significant services trade effect • However, when paired with services agreements, the services trade effect of each set of agreements is enhanced • Thus, evidence for complementarities exists [this (services) trade effect ranges from 12.1-13.4% for services agreements and 2.3-2.4% for “goods only” accords, ceteris paribus and on average] World Trade Institute Berne

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18. Conclusion: What do these results tell us… • Both goods trade and goods agreements have a positive impact on services trade • Services trade between countries may be driven as much by differences in factor endowments as by IRS • Trade alliances between the North and the South can be less than perfectly reciprocal • More prudent to negotiate goods and services agreements in tandem rather than sequentially World Trade Institute Berne