Modeling Trade in Services: Multiple Modes, Barriers to Trade, and Data Limitations

In 2015, international trade in services reached 13 percent of world GDP, according to the World Bank. Nonetheless, this trade is impeded by policy barriers that restrict foreign entry, the movement of people, competition, or regulatory transparency. It is challenging to quantify the impact of these barriers to international trade in services. There is very limited information on the value of these trade flows or the size of the barriers that impede them. In addition, the international provision of services occurs through multiple and inter-connected modes of delivery which can be complementary or competing. Finally, barriers to trade in services are complex and difficult to measure and compare across countries. Our research captures some of these complexities of international trade in services and overcomes some of the data challenges. We develop a model of trade in services that includes firm heterogeneity and multiple modes of delivery, including cross-border trade and foreign affiliate transactions. We then use the model to estimate how trade flows and prices would change if the European Union reduced barriers to non-EU providers of services by 50 percent. We find that this liberalization would increase the value of cross-border imports into the EU countries and foreign affiliate purchases in the EU countries by about 25 percent. However, it would only decrease the sales of domestic producers by 0.4 to 6.1 percent, and reduce overall prices of the services in the EU countries by 0.1 to 1.2 percent.