Testing the STRI: gravity regressions and trade costs analysis OECD Experts Meeting on the Services Trade Restrictiveness Index Paris, 2-3 July 2009

Approaches to quantifying barriers to trade in services Top Down Bottom Up Observation of empirical data Estimate discrepancies in prices or trade flows Empirical index number Relation to policies How much does each measure contribute to the index? STRI Weights How important is each measure? Expert judgement, equal weights, statistical or econometric methods Scores Assigning numbers to observed policies Observation of policies Which to include?

The “true” STRI The “true” STRI (Anderson and Neary approach): “should ideally be a single trade cost estimate that, when replacing all existing fixed and variable trade costs, will yield the same trade volume and the same number of trading partners as the existing trade regime” Neary (2009) Empirical index numbers: e.g., trade-weighted average tariff (goods) Novy measure of trade costs Theoretical index numbers: e.g., STRI index The hard part is their intersection

Does the STRI measure what it is supposed to measure? Gravity regressions of bilateral trade, bilateral FDI stocks and bilateral sales of foreign affiliates:

Robustness check – Poisson regressions

Robustness check – Cross-section (2005) Multilateral resistance is directly calculated following Straathof (2009).

STRI and trade costs Bilateral trade costs are calculated using the formula developed by Chen and Novy (2009): We assume that sigma is equal to 8. We can rank countries according to their trade-weighted average trade costs.

Regressions on trade costs

Concluding remarks Despite some issues in the way we can test the STRI in econometric analysis, preliminary results show that it seems to measure what it is supposed to measure: It acts as a trade cost in gravity regressions It is correlated with an estimation of bilateral trade costs While the STRI is negatively and significantly correlated with at least one measure of trade in each of the four pilot sectors… … it is in professional services and telecommunications that the index is the most robust in econometric analysis. Data and methodological issues in the estimation of a “top-down” STRI The advantage of the “bottom-up” STRI is that it is an exogenous variable that can be used in quantitative analysis.