Two observations should be noted at this point. First, while the analysis in this paper focuses on services trade, much of the methodology draws on similar research conducted on non-tariff barriers that exist in agricultural and manufacturing goods trade.
Second, the focus of this paper is on services that move across borders (the manner of this movement will depend on the nature of the service in question). The provision of services by affiliates of companies based in foreign countries is not considered. In other words, the role of foreign direct investment (FDI) as a conduit for trade in services is not addressed.
The paper begins by presenting an overview of the types of barriers to trade in services and the methods that can be used to estimate their impact on trade flows. Section three presents the gravity model approach used in this paper and reviews the existing literature on gravity model applications to services. In section four the standard gravity model is estimated for services trade and the results are discussed. The model is then extended in section five to incorporate measures of the barriers to trade in services and from this tariff equivalents of those trade restrictions are calculated. Section six concludes.
Barriers to Trade in Services: An Overview
What Barriers Exist?
The service sector encompasses a largely heterogeneous selection of activities. The operation of the financial or communications sectors is very different to that of health services or transport for example. With some exceptions, the majority of goods are considered to be tradable. Many services are by their nature non-tradable. This heterogeneity gives rise to a range of different types of barriers to services trade. As noted in the introduction, these barriers tend to be qualitative or non-tariff barriers (NTBs) such as legal or regulatory restrictions on the import of services. The types of restrictions imposed will vary between service sectors and modes of supply that are relevant in each.
The GATS classification identifies four modes of supply: (i) cross-border supply (the service product crosses the border); (ii) consumption abroad (the consumer crosses the border, e.g., visiting a bank in a foreign country); (iii) commercial presence (a firm establishes a branch abroad, this includes foreign direct investment); and (iv) the presence of natural persons (the supplier of the service moves temporarily to the country of the consumer). The importance of each of the modes of supply will vary from sector to sector. As will be discussed in later sections, not all modes will be relevant for the data employed in this paper. However, the overview of the types of barriers that exist in this section is not restricted to any particular mode of supply.
Hoekman and Braga (1997) summarise the major barriers to services trade under four headings. Quantity based restrictions impose quotas or other types of quantity limitations. These tend to be imposed on the providers of the services rather than the flows of services themselves. Examples include local content requirements or bilateral air space agreements. An extreme case of this type of restriction is simply to ban the import of services entirely.