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Institute for International Integration Studies IIIS Discussion Paper - page 12 / 41





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many FTAs do not explicitly cover trade in services, their presence may indirectly facilitate the process.

Lejour and de Paiva Verheijden (2004) also compare gravity model estimates for trade in goods and services, examining intra-regional trade in Canada and the EU using the OECD services trade statistics used in the above studies and data from the official Canadian statistical agency. Unlike Kimura and Lee (2004), distance is found to be less important for services compared to goods.

Lennon (2006) contrasts trade in goods and services, focusing in the case of the services on the commercial services sector of the OECD database. Distance and adjacency are found to be less significant for trade in services than goods, common language is found to be more important for services trade.

The opposing nature of the results regarding the importance of distance in services trade is reflected elsewhere in the literature. Portes and Rey (2005) examine international equity flows with a gravity model and find distance to be negative and significant, which they note is counter-intuitive given the weightlessness of the commodity. They argue that distance proxies informational frictions that restrict international equity flows. Park (2002) also finds distance to be negative and statistically significant across all service sectors examined. Tharakan et al. (2005) find distance to be insignificant in a gravity model analysis comparing Indian software exports to overall goods trade flows.

In addition to the standard gravity model features, Lejour and de Paiva Verheijden (2004) also incorporate the OECD’s product market regulation (PMR) indicator (described in section 2.2) as a measure of the non-tariff barriers to trade, which they find has a significant negative impact on trade in services. The use of this measure is further explored in Kox and Lejour (2005), building on the approach of Nicoletti et al. (2003) who estimate a gravity equation using relative levels of PMR in the importing country compared to its trading partners, which they find has a negative impact on trade in services. As well as the standard gravity model regressors in estimating trade between two countries, Kox and Lejour (2005) include the level of PMR in both countries and a variable measuring the level of heterogeneity between the PMR of the two countries. They argue that it is the differences between regulations across countries that are an important determinant of trade flows.

Their model employs the OECD services trade statistics and is estimated using OLS, several fixed effects models and a SUR model. Due to the limits of the PMR data, the model is only estimated for trading pairs of EU15 member countries. They find significant impacts on trade from the level of PMR and the level of heterogeneity. Distance between countries negatively effects trade whilst GDP and similar language increase the level of trade.

The literature analysing the determinants of services trade using gravity-based approaches shows a lack of consensus on many of the key findings. The aim of this paper is to improve upon these results. In the next section, the gravity model is applied to services trade and a variety of estimation techniques are tested to find the most appropriate. The standard gravity equation is augmented with new variables to further develop the model. In the following section, a measure of the level of barriers to trade is included in the model to assess their role in services trade and to estimate a set of non-tariff equivalents.


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