New research reveals that international trade in services faces significant border barriers. The study by James Anderson, Ingo Borchert, Aaditya Mattoo and Yoto Yotov, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016, finds that although these barriers have generally fallen over time, there are pronounced differences across services sectors and countries.
Border barriers have fallen most in sectors with lower initial barriers – transport, travel and communications, for example, which are the ones most strongly affected by advances in communications and technology. In contrast, while sectors such as finance, insurance and audiovisual services may also have seen a positive technological impact, they are also hampered by serious regulatory impediments.
Across countries, border barriers decline with economic size. The largest estimates are for small countries like Slovakia, Estonia, Lithuania, Latvia and Slovenia, and the smallest are for Britain, Germany, Australia and Canada. The authors comment:
''We find that characteristics such as geography and country size partly determine the size of barriers. At the same time, institutions such as the rule of law and private sector, as well as the quality of digital infrastructure, matter significantly. Some of these areas could be reformed by new policies – for the smallest economies, these could offer a way of mitigating the forces that keep their border barriers stagnant.''
Novel estimates reveal that international trade in services faces significant border barriers. These barriers have generally fallen over time but with pronounced differences across services sectors and countries. Trade barriers have declined less for small economies and for sectors where initial borders were high. The result is a divergent pattern across countries and sectors. Factors such domestic institutions, geography, country size and digital infrastructure affect the magnitude of border barriers to services trade.
Given the economic importance and increasing significance of services trade, surprisingly little is known about trade costs and border barriers in services. Using a gravity model of trade that includes intra-national trade flows, which are crucial for estimating border effects, this study estimates a set of services border barriers at an unprecedented level of detail. Evidence for 12 service sectors and 28 OECD countries over the period 2000-07 shows that border barriers in services trade are large, significant and vary widely across countries and sectors.
Across countries, border barriers decline with economic size. The largest estimates are for small countries like Slovakia, Estonia, Lithuania, Latvia and Slovenia, and the smallest are for Britain, Germany, Australia and Canada. The inverse relationship between economic size and trade costs in services trade is consistent with, and complements, findings in the goods trade literature that less developed countries face higher aggregate trade costs.
Across services sectors, trade in financial, insurance, and research and development services sectors appear to exhibit the highest border barriers, which is consistent with the widespread perception that these services tend to be produced and consumed domestically.
It is interesting to see that the business services sector exhibits relatively low barriers to cross-border trade, reflecting the influence that ''business process outsourcing'' and related developments have had to lower revealed border effects. Borders matter least for transport, travel and communications services.
Even over the limited period of time covered in this study, border barriers in services trade have fallen, consistent with increasing globalisation of services, though the decline varies considerably across sectors and across countries.
Overall border barriers have fallen in all sectors but more so in sectors with lower initial barriers, that is, sectors such as transport, travel and communications, which are precisely the ones that have been most strongly affected by advances in communications and technology. In contrast, while sectors such as finance, insurance and audiovisual services may likewise have seen a positive technological impact, they are also hampered by serious regulatory impediments.
Looking at the evolution over time of country-level border effects unveils a novel pattern. Barriers have remained stable for the smallest economies that faced the highest border effects from the outset, whereas border barriers have fallen for most mid-sized economies. Thus globalisation effects (in this sense) are convergent within a set of larger economies and divergent between the smallest countries and the rest.
The researchers investigate the driving forces behind the large border estimates and find that exogenous characteristics such as geography and country size partly determine the size of barriers. At the same time, institutional features such as the rule of law and private sector development policies as well as the quality of digital infrastructure matter significantly.
For example, advanced digital infrastructure and sound legal institutions both facilitate border-crossing services trade and thus are associated with lower border barriers. As some of these areas are potentially amenable to policy reform, the findings point towards areas for effective policy intervention. For the smallest economies, such reforms could offer a way of mitigating the divergent forces that underpin the apparent stagnation of their border barriers.
Shedding Some Light on Dark Matter: Trade Costs in Services – James E. Anderson, Ingo Borchert, Aaditya Mattoo, Yoto Yotov
NBER Working Paper No. 21546
Figure 1: Country size and border effects in services trade
Figure 2: Sectoral border effects in services trade
Figure 3: Globalisation and services trade