Market Access Uncertainty and Trade in Services

We develop an analytical/empirical framework bridging the decision under uncertainty and recent gravity-based empirical trade literature. We examine the impact of policy uncertainty on services trade, focusing on binding overhang, the gap between market access commitments and actual applied policy). The government’s ability to change policies within this gap yields uncertainty for firms regarding market access. Our findings reveal average Most Favored Nation (MFN) services trade costs ranging from 12.38% for low or medium-income countries to 14.08% for high-income countries, comparable to other regulatory trade barriers. We embed our estimates in a general equilibrium model to quantify the effects of removing market-access uncertainty in services. Results show substantive economic effects on trade and overall economic performance. Globally, we estimate a 0.72% increase in real GDP and a 12.65% increase in services trade volumes from removal of binding overhang. This fits into the range of estimates for deep multilateral and preferential trade liberalization for goods.