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Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach. Joseph Francois, Olga Pindyuk. Contents. Motivation Data description Modeling approach First results. Barriers to services trade.

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evolution of trade costs in services sectors gravity modeling approach

Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach

Joseph Francois, Olga Pindyuk

contents
Contents
  • Motivation
  • Data description
  • Modeling approach
  • First results
barriers to services trade
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
eu and services trade
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
data description
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.
modeling approach
Modeling approach
  • Assuming that import values depend on a mix of importer characteristics, exporter characteristics, and bilateral properties, we specify total trade as follows:
modeling approach1
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
modeling approach2
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.
modeling approach3
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.
modeling approach4
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.
modeling approach6
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
conclusions
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
further work
Further work
  • Find explanations of the data issues
  • Make a separate dummy for outliers (NOR, CHE, USA, HRV, RUS, JPN, CAN)?