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Institute for International Integration Studies IIIS Discussion Paper - page 20 / 41

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i j t i j 1 i t 2 j t 3 i t 4 j t 5 i j 6 i j 7 8 i j 9 i 1 0 j t i j t l n M = + l n G D P p c + l n G D P p c + l n P o p + l n P o p + l n D i s t a n c e + A d j a c e n c y + L a n g u a g e + E U + l n E c o F r e e + l n E c o F r e e + + i j α β β β β β β β β β β θ ε

(5)

Overall, the results from the application of the standard gravity model approach to services are similar to those found in studies of trade in physical goods and are quite robust.24 The explanatory variables that are consistently the most influential are the GDP per capita of the importer and exporter and the presence of a common language. Unlike trade in goods, adjacency, distance between countries and EU membership are not found to significantly influence the level of services trade.

5. Estimating Tariff Equivalents

5.1 Non-Tariff Barriers in the Gravity Equation

A key objective of this paper is to estimate tariff equivalents of the barriers to services trade using the gravity framework. This is accomplished by adding a new variable

( β 9 l n N T B T o t a l j ) t h a t m e a s u r e s t h e t o t a l l e v e l o f n o n - t a r i f f b a r r i e r s ( N T B s ) o f t h importing country j to the gravity equation. This variable is primarily based on a trade restrictiveness index (TRI - an augmented frequency index) produced by the Australian Productivity Commission (as with other variables, full details of the data source are provided in the appendix). A higher level of protection in the importer should reduce the level of services trade between countries. The model estimated for total services imports becomes (6). e

i j t i j 1 i t 2 j t 3 i t 4 j t 5 i j 6 i j 7 i j 8 i j 9 j t l n M = + l n G D P p c + l n G D P p c + l n P o p + l n P o p + l n D i s t a n c e + A d j a c e n c y + L a n g u a g e + E U + l n N T B T o t a l + + i j t α β β β β β β β β β θ ε

(6)

The results are shown in V of table 3. The new variable is statistically significant at the 15 per cent level and the coefficient has the expected sign. GDP per capita of the importer and common language remain positive determinants of imports of total services, however GDP per capita of the exporter is no longer statistically significant.

For travel services, the same variable measuring the total levels of NTBs in the exporting country (the destination of the traveller) is added to (3) to give (7). The results are shown in table 4, in the final panel. In this case, the NTB variable is not found to be statistically significant.

24 For example, alternating the combinations of GDP per capita, GDP and population used in the gravity equation does not significantly alter the estimated coefficients. Nor does the adoption of varying measures of language or the replacement of the EU dummy with dummies for EU and NAFTA.

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