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

World Trade Institute Berne Motivation 49 of the 55 PTAs notified to the WTO before 2000 were goods agreements49 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 servicesIn 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?Obvious question – How effective are these agreements in fostering services trade?

World Trade Institute Berne 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)?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?Is there an incremental trade effect from a services accord if a goods only agreement is already in place?

World Trade Institute Berne Why might we expect a positive trade effect? Barriers to services trade are often prohibitive and not revenue generating, so fewer costs of trade diversionBarriers 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 spilloversA 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)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 Gravity model more applicable to services trade?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); Helpmans (1987) econometric specification of the NTT similar to the gravity specification] Exploratory tool: The gravity model

World Trade Institute Berne However, empirical gravity literature is inconclusive on the… Trade effect e.g. insignificant in Grunfeld & Moxnes (2003); significant in othersTrade 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 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)Effect of common language e.g. insignificant in Kimura & Lee (2004); significant in Lennon (2006) & Walsh (2006)

World Trade Institute Berne So whats new about this paper? Empirical model is intuitively groundedEmpirical model is intuitively grounded Uses advanced estimation techniquesUses advanced estimation techniques Explores the impact of goods trade on services tradeExplores the impact of goods trade on services trade Delineates trade effect into that emanating from services and goods only agreementsDelineates trade effect into that emanating from services and goods only agreements Disaggregates PTA-trade relationship by economic status of partner countries and reciprocity of commitmentsDisaggregates PTA-trade relationship by economic status of partner countries and reciprocity of commitments Accounts for heterogeneity in trading partners in model estimationAccounts for heterogeneity in trading partners in model estimation Endogenizes the trade effect of PTAs in model estimationEndogenizes the trade effect of PTAs in model estimation

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

World Trade Institute Berne Model specification svsx ijt = α ij + β 1 gdp it + β 2 gdp jt + β 3 gdsx ijt + β 4 DPCGDP ijt + β 5 hk it + β 6 hk jt + β 7 teleden it + β 8 teleden jt + β 9 dist ij + β 10 ENG ij + β 11 rest i + β 12 rest j + β 13 PTA_SVS ijt + ε ijt -Lower cases variables are in log terms -Upper case variables are dummy variables -Economic data are in real value

World Trade Institute Berne Data OECD database on bilateral trade in servicesOECD database on bilateral trade in services 25 OECD exporters25 OECD exporters 53 OECD and non-OECD importers53 OECD and non-OECD importers 4327 observations4327 observations

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

World Trade Institute Berne Empirical results Services trade effect of 11.6%, ceteris paribus and on averageServices 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 averageA 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 literatureMuch lower GDP elasticities than in this literature Distance effect significant and less important for services trade than for goods tradeDistance effect significant and less important for services trade than for goods trade All explanatory variables have expected signs but not all estimates are statistically significantAll explanatory variables have expected signs but not all estimates are statistically significant

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

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World Trade Institute Berne Sequential and incremental impact of agreements Goods Only agreements do not report a statistically significant services trade effectGoods 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 enhancedHowever, 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 % for services agreements and % for goods only accords, ceteris paribus and on average]Thus, evidence for complementarities exists [this (services) trade effect ranges from % for services agreements and % for goods only accords, ceteris paribus and on average]

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World Trade Institute Berne Conclusion: What do these results tell us… Both goods trade and goods agreements have a positive impact on services tradeBoth 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 IRSServices 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 reciprocalTrade 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 sequentiallyMore prudent to negotiate goods and services agreements in tandem rather than sequentially