www.wiiw.ac.at motivation 2 Barriers to services trade - PowerPoint PPT Presentation

WIOD conference, Groningen, 24-26.04.2012 Recent EU Enlargement: The Evolution of Services Trade Costs between EU Members Joseph Francois, Olga Pindyuk www.wiiw.ac.at

motivation 2 Barriers to services trade  Cross-border services trade accounts for >20% of global trade - Even more if trade through foreign affiliates is added  Regulation driven both by efficiency and equity concerns - Affecting establishment or ongoing operations - Non-discriminatory or discriminatory - Affecting price of services or costs of service providers  Bilateral heterogeneity of regulation in each pair of countries matters

motivation 3 EU and services trade  EU members have quite heterogeneous services regulation (Kox and Lejour, 2007)  Still the most advanced services trade liberalization among existing RTAs (Francois, Hoekman, 2010)  Thus we should expect to see positive effect of the EU membership on services trade of new members

motivation 4 Openness in the EU to services

motivation 5 Openness in the EU to services 6 is maximum value of an index, indicating the highest level of regulation

motivation 6 Services exports to the EU, index, 1999=100

data description 7 Geographic structure of EU10 services exports, USD mln

data description 8 Sectoral structure of EU10 services exports, %

literature review 9 Ways to measure services trade barriers  “Indirect” modeling (price-cost margins by sector across countries or gravity regressions) - Not possible to attribute price-cost margins or differences in trade volumes to specific trade policies - Data limitations  „Direct“ methodology using regulatory indicators of APC, World Bank, OECD (Dee, 2005; Dihel and Shepherd, 2007; Berden, Bergstrand, et al 2009) - Assumption of sample average responsiveness of countries‘ performance to policy settings - Often lack of in-sample variation; insufficient differentiation of services regulation

modeling approach 10 Gravity-based representation of trade  Assuming that import values depend on a mix of importer characteristics, exporter characteristics, and bilateral properties, we specify total trade as follows:

modeling approach 11 Estimation approach  We group effects as follows: Pair-wise Exporter Importer Time varying Time invariant  We only are interested in the first cell. We can isolate this by differencing over means (pairs, exporter/time, importer/time).  Difference-in-difference approach (Egger and Pfaffermayr, 2004; Frazer and Biesebroeck, 2007; Hornok, 2009)

modeling approach 12 Estimating approach  We estimate a polynomial pair-wise time trend for trade with the EU relative to the general baseline (similar to Francois and Woerz, 2009)  This captures changes that are not explained by general exporter/ importer time varying effects, or time-constant effects, but represent pair-wise trends, which might be attributed to regulatory changes in the single market

modeling approach 13 Estimating procedure  Regional regressors: - 6 regional pair-wise dummies ( old-old, new-new, old-new, new-old, third-old, third-new) are interacted with time trend, and third degree polynomials are constructed  2 stage selection model estimation procedure : - Heckman selection to account for zero flows – gives inverse Mills ratios (pdf/cdf) to use as an additional regressor in the second stage - Services imports (logs) and regressors are demeaned with respect to time, exporter and importer to isolate time varying pair-wise effects - Clustered errors to deal with remaining heterogeneity. - Separate regressions for 2 periods: 1999-2002 and 2003-2007 - Chi-squared tests for full polynomial expressions  Regressions for each services sector

data 14 description Data description  Dataset based on the Eurostat, OECD, UN, and IMF data  Bilateral services trade flows for 244 reporting countries and 244 partners (plus World)  About 20 sectors  In total (1995-2009) we have more than 2 mln observations, 18% of observations are missing values, and 35% of observations are zero flows.  Mode 1+2 (cross border trade)

results 15 Change in bilateral trade relative to global baseline, %, 1999 to 2002 205 268 200 Transpor 236 245 249 253 260 262 Other BOPS Total t Travel Communications Construction Insurance Financial Computer business A. old_old -2.37% -0.49% -0.49% 5.34% -0.37% -0.42% -0.43% -3.66% -0.21% B. old_new 2.35% -1.21% 7.16% 11.01% -4.51% 43.22% -10.52% 18.29% 1.24% C. new_new -9.92% 7.47% 25.11% 31.26% -58.62% -14.85% 1121.18% 43.45% D. new_old 3.79% -1.90% 4.22% -3.75% 6.35% 5.05% 0.63% 1.97% -1.11% E. third_old -0.07% 0.97% 0.65% 0.98% -0.46% -0.20% -0.37% -0.66% -1.80% F. third_new 1.59% 0.58% -9.23% -8.29% 31.57% -15.67% -46.80% -8.79% -3.01% Observations 8417 5594 4849 2577 2127 2210 1944 2031 4382

results 16 Change in bilateral trade relative to global baseline, %, 2003 to 2007 205 268 200 Transpor 236 245 249 253 260 262 Other Total t Travel Communications Construction Insurance Financial Computer business BOPS A. old_old -3.39% 2.12% -6.18% -2.63% -9.85% 3.08% -3.29% -11.75% -7.16% B. old_new -8.95% 10.08% 2.56% 3.59% 89.65% 18.53% 2.76% 2.17% 129.91% C. new_new 20.32% -14.36% 1.63% 7.45% -19.55% -5.47% -4.97% -76.31% -53.81% D. new_old 5.83% -0.67% 13.31% 5.07% 16.33% -13.50% -1.48% 8.30% 17.64% E. third_old -0.48% -0.61% -0.01% 0.68% 1.38% 1.75% 1.26% -0.12% -0.17% F. third_new 0.42% -0.41% -0.57% -1.88% -7.90% -35.76% -24.33% -7.48% 0.18% Observations 24566 12208 11261 7294 5264 5758 6333 6560 11197

results 17 Main trends in services trade 1999-2002  Accession countries seem to have started liberalizing access to their services markets prior to 2003 - Relatively faster growth in exports from old to new in communications, construction, other business services and, most prominently, financial services  Exports in the opposite direction ( new->old ) did not pick up much above the global trendline  Likely trade diversion in exports of third and new to new

results 18 Main trends in services trade 2003-2007  Exports from old to new grew faster than the global baseline for most of the sectors - now as well for travel and computer services - dramatic growth in exports of financial services  Exports from new to old also grew faster than the global baseline for most of the sectors, apart from insurance and finance  Trade diversion continues: - third-new in most sectors - new-new in computer and other business services  No strong impact on third country access to the old EU members’ market

future work 19 Estimating trade cost equivalents consistent with cumulative trade volume changes  Objective: translate trade volume effects into price/cost effects. These represent a mixture of possible effects: - Simple RTA dummies would miss third county benefits of non- discriminatory changes linked to accession of new Members.  Method: small computational model (general equilibrium) to identify set of trade cost reductions consistent with estimated volume changes. - 3 regions (EU15, EU12, rest of world) - 12 sectors (8 services, 4 others: agrofish, mining, food, manufactures, transport, communication, construction, finance, insurance, business services, consumer services, other services)

future work 20 Basic computational approach  Model: - Data (including intermediate linkages and two-way trade flows) are benchmarked to 2003 - CES production structures, final demand, and trade (consistent with sector level gravity equation) - Iceberg trade costs linked to bilateral import demand  Selected services trade flows are made exogenous, in a “closure swap” with trade costs  Trade flow changes are imposed on the model (for 8 estimated service sectors, for EU12  EU15, EU15  EU12, ROW  EU12, ROW  EU15), yielding trade cost reductions