WIOD conference, 27.05.2010

www.wiiw.ac.at

Evolution of Trade Costs in Services

Sectors: Gravity Modeling Approach

Joseph Francois, Olga Pindyuk

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Contents

Motivation Data description Modeling approach First results

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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

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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

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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.

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Data description

BOP Sector name

200 Total services

205 Transport

236 Travel

245 Post and telecommunications

247 Telecommunications

249 Construction

253 Insurance

260 Financial intermediation

268 Other business services

287 Personal, cultural, recreational services

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Sectoral structure of NMS services trade2003

2007

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Geographical structure of NMS exportsUSD bn

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Geographical structure of NMS exports

2003 2004

DEU 18.6 NOR 7.0

GBR 8.7 CHE 6.3

AUT 7.4 RUS 5.9

ITA 6.0 HRV 4.4

RUS 5.9 USA 4.3

USA 5.8 JPN 3.9

HRV 4.8 CAN 3.9

FRA 4.1 ISR 3.4

NLD 3.5 AUS 3.3

CZE 2.3 TUR 3.2

Other 32.9 Other 54.5

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Data examples - total services importsYear Reporter Partner Value, USD mln Source

2003 CZE CHE 249.9 UN

2004 CZE CHE 1930.6 UN

2003 CZE NOR 35.0 OECD

2004 CZE NOR 4770.0 OECD

2003 CZE RUS 369.1 OECD

2004 CZE RUS 4441.0 OECD

2003 HUN CAN 56.6 UN

2004 HUN CAN 3734.9 OECD

2003 HUN JPN 84.8 OECD

2004 HUN JPN 4038.5 OECD

2003 SVK CHE 140.0 OECD

2004 SVK CHE 1401.2 OECD

2003 SVK NOR 35.1 UN

2004 SVK NOR 1502.9 UN Mirror

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Modeling approach

Assuming that import values depend on a mix of

importer characteristics, exporter characteristics, and

bilateral properties, we specify total trade as follows:

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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

Pair-wise Exporter Importer

Time varying

Time invariant

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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.

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Modeling approach

Next we take an exporter average: the average of ψ1ijt

across importers for each exporter in each period. This

yields μit. We then take the difference of ψ1ijt from this

average. This yields ψ2ijt.

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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.

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Modeling approach

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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

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1999-2003

BOPS 200 205 236 245 247 249 253 260 268 287

old_old 0.21% 0.05% 0.48% -1.67% 5.83% 0.96% -2.93% -5.43% -0.13% -1.30%

old_new -1.28% -0.80% 2.98% 3.89% 15.78% 2.84% -5.02% 29.80% 2.90% 9.17%

new_new 10.52% 4.45% 0.58%

new_old 0.67% 0.47% 2.12% 0.45% -11.60% -1.27% 4.95% 10.05% 0.24% 5.96%

third_old -0.09% 0.17% -0.40% 0.53% 0.19% -0.40% -0.04% 0.26% -0.15% -0.27%

third_new -1.79% -0.49% -1.76% -0.62% -6.12% 15.21% 1.65% -14.29% 0.57% 1.10%

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2004-2007

BOPS 200 205 236 245 247 249 253 260 268 287

old_old -5.14% -1.53% -7.54% -1.17% -4.81% 1.18% 0.66% -0.70% -7.61% -3.87%

old_new 5.33% 2.61% 7.95% 5.71% 2.49% 9.71% 23.27% 22.48% 1.54% 13.73%

new_new -8.14% -3.15% -10.13%

new_old 6.69% 2.10% 11.93% 1.51% 3.84% -0.90% -1.04% 1.57% 7.24% 14.42%

third_old 0.03% -0.09% -0.60% 0.14% 0.40% 0.01% -0.12% 0.09% 0.46% 0.28%

third_new 0.01% -0.22% -0.14% -0.54% 0.07% -1.13% -4.27% -2.92% -0.24% -1.14%

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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

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Further work

Find explanations of the data issues Make a separate dummy for outliers (NOR, CHE,

USA, HRV, RUS, JPN, CAN)?