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WIOD conference, 27.05.2010 Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach Joseph Francois, Olga Pindyuk.

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Presentation on theme: "WIOD conference, 27.05.2010 Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach Joseph Francois, Olga Pindyuk."— Presentation transcript:

1 WIOD conference, 27.05.2010 Evolution of Trade Costs in Services Sectors: Gravity Modeling Approach Joseph Francois, Olga Pindyuk

2 2 Contents Motivation Data description Modeling approach First results

3 3 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

4 4 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

5 5 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.

6 6 Data description BOPSector name 200Total services 205Transport 236Travel 245Post and telecommunications 247Telecommunications 249Construction 253Insurance 260Financial intermediation 268Other business services 287Personal, cultural, recreational services

7 7 Sectoral structure of NMS services trade 2003 2007

8 8 Geographical structure of NMS exports USD bn

9 9 Geographical structure of NMS exports 20032004 DEU18.6NOR7.0 GBR8.7CHE6.3 AUT7.4RUS5.9 ITA6.0HRV4.4 RUS5.9USA4.3 USA5.8JPN3.9 HRV4.8CAN3.9 FRA4.1ISR3.4 NLD3.5AUS3.3 CZE2.3TUR3.2 Other32.9Other54.5

10 10 Data examples - total services imports YearReporterPartnerValue, USD mlnSource 2003CZECHE249.9 UN 2004CZECHE1930.6 UN 2003CZENOR35.0 OECD 2004CZENOR4770.0 OECD 2003CZERUS369.1 OECD 2004CZERUS4441.0 OECD 2003HUNCAN56.6 UN 2004HUNCAN3734.9 OECD 2003HUNJPN84.8 OECD 2004HUNJPN4038.5 OECD 2003 SVKCHE140.0 OECD 2004 SVKCHE1401.2 OECD 2003 SVKNOR35.1 UN 2004 SVKNOR1502.9 UN Mirror

11 11 Modeling approach Assuming that import values depend on a mix of importer characteristics, exporter characteristics, and bilateral properties, we specify total trade as follows:

12 12 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-wiseExporterImporter Time varying Time invariant

13 13 Modeling approach We take an average of Mijt across time for country pairs. This yields μ i j. We then take the difference of M ijt from this average. This yields ψ1 ijt.

14 14 Modeling approach Next we take an exporter average: the average of ψ1 ijt across importers for each exporter in each period. This yields μ it. We then take the difference of ψ1 ijt from this average. This yields ψ2 ijt.

15 15 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 ψ2 ijt across exporters for each importer in each period. This yields μ jt. We then take the difference of ψ2 ijt from this average. This yields ψ3 ijt.

16 16 Modeling approach

17 17 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

18 18 1999-2003 BOPS200205236245247249253260268287 old_old0.21%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_new10.52%4.45%0.58% new_old0.67%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%

19 19 2004-2007 BOPS200205236245247249253260268287 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%

20 20 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

21 21 Further work Find explanations of the data issues Make a separate dummy for outliers (NOR, CHE, USA, HRV, RUS, JPN, CAN)?

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