The Impact of Services Trade Restrictiveness on Trade Flows

• Published date: 01 June 2017
• Author: Dorothée Rouzet,Hildegunn K. Nordås
• Date: 01 June 2017
• DOI: http://doi.org/10.1111/twec.12424

The Impact of Services Trade

Restrictiveness on Trade Flows

Hildegunn K. Norda

˚s and Doroth

ee Rouzet

OECD, Paris, France

1. INTRODUCTION

SERVICES account for about 75 per cent of GDP, 80 per cent of employment and two-

thirds of FDI inflows in OECD countries.

1

Competitive services sectors are an engine of

job creation and an enabling condition for manufacturing growth. Yet, while the impact of

tariffs and non-tariff measures on manufacturing trade has been extensively studied, little is

known about the costs of barriers to trade in services. Impediments to the entry and operations

of foreign services providers are likely to hinder competition and hold back efficienc y gains

in the targeted sectors, but also to raise costs for downstream sectors using services as key

inputs. As a third of the value added in goods exports is now services value added, access to

cost-effective world-class services is needed to maintain and improve the competitiveness of

firms throughout the economy.

Until recently, the main hurdle to such analysis has been a dearth of data on service s trade

restrictions. Most regulations impeding the free flow of trade and investment in services are

of a ‘behind the border’ nature. For instance, discriminatory licensing conditions applying to

foreign investors, the recognition of qualifications earned abroad or unnecessary red tape are

prominent hindrances to services trade, but their identification often requires a comprehensive

understanding of each country’s laws. The nature of trade restrictions in services therefore

makes them more difficult to record in a consistent and comparable manner across countries

than when dealing with tariffs and other costs imposed on goods imports at the border. Quan-

tifying their impact is an even more challenging task, which cannot be undertaken without

reliable and consistent data on the relevant laws and regulations.

2

To fill this data gap, the OECD released the Services Trade Restrictiveness Index (STRI)

in 2014 followed by an update in February 2016. It provides a comprehensive regulatory data-

base on measures affecting trade in 22 services sectors and 42 countries.

3

For each sector, the

STRI database covers five policy areas: restrictions on foreign entry, restrictions to the move-

ment of people, other discriminatory measures, barriers to competition and regulatory trans-

parency. The information was collected by looking into each country’s laws and regulations

The authors would like to thank Peter Egger, Mauro Pisu, Alexander Ragoussis and an anonymous

referee for useful comments and suggestions. The paper extends and updates research reported in OECD

Trade Policy Paper 178 (Nord



as and Rouzet, 2015).

1

Sources: World Development Indicators (World Bank), ILOSTAT (International Labour Organization)

and OECD FDI statistics.

2

A few previous attempts have been made at creating internationally comparable indices on services

trade restrictions, but with limited country and sector coverage, and/or based on less reliable survey

methods or on GATS commitments rather than current legal texts. A recent World Bank project offers

services trade restrictiveness indices for a large number of countries in some of the sectors covered by

the OECD STRI. See Borchert et al. (2012).

3

The country and sector coverage of the STRI database is listed in Tables A1 and A2.

©2016 John Wiley & Sons Ltd 1155

The World Economy (2017)

doi: 10.1111/twec.12424

The World Economy

currently in force and identifying the relevant restrictions. It was then verified and peer-

reviewed by government officials of OECD countries.

4

The qualitative information has been

converted into quantitative indices by sector, ranging from zero to one (where 0 is the

absence of any restriction, and 1 is a completely closed sector).

5

These new high-quality data

open the way for cross-country empirical analysis of the economic costs of impediments to

trade in services.

Several previous studies, rather than starting from observed trade restrictions to assess their

impact, have proceeded to infer the magnitude of trade costs from observed patterns of trade in

services compared to a free trade benchmark (e.g. Fontagn

e et al., 2011; Gervais and Jensen,

2013; Guillin, 2013; Miroudot et al., 2013; Anderson et al., 2014). Th is indirect approach

reveals that trade costs in services are large and overall significantly higher than in goods. How-

ever, by design, such methods cannot distinguish between natural barriers –such as cultural and

geographical differences –and policy-induced barriers, or relate the estimated costs to speci fic

restrictions and actionable policies. Other papers have used indices limited to a few measures

and a few sectors and try to estimate their effects through general equilibrium modelling (e.g.

Dee et al., 2003) or econometric analysis (e.g. Walsh, 2006; Fontagn

e and Mitaritonna, 2013).

We draw on a gravity model to assess more directly the impact of regulatory barriers to

trade in services as measured by the sector-level STRI indices. Although the gravity equa-

tion was developed for goods trade, a small body of literature has applied it to services and

has found it to provide a good fit to trade in services (Kimura and Lee, 2006; Head et al.,

2009). A few studies have assessed the impact of domestic regulation and regulatory hetero-

geneity on services trade in a gravity framework using the OECD Product Market Regulation

index (Kox and Lejour, 2005, 2006; Kox and Nord



as, 2007; Schwellnus, 2007) and the World

Bank’s services trade restrictions database (van der Marel and Shepherd, 2013). Using the

OECD STRI enables us to improve on existing estimates by considering a more accurate and

comprehensive measure of restrictions to trade in a wider range of services sectors.

Our first results highlight the large potential costs of regulations that restrict trade and

investment in services. In a majority of services sectors, a higher STRI index is associated

with lower imports, indicating that the costs for foreign suppliers of entering and serving the

host market are raised by trade-restrictive regulations as expected. Interestingly, we uncover

an even stronger relationship between a higher STRI score and lower exports in legal

services, telecommunications, commercial banking, insurance, maritime transport and courier

services. This second finding emphasises the importance of having an open and pro-competi-

tive regulatory regime to strengthen the international competitiveness of service exporters.

Regulatory cooperation aiming at regulatory coherence has become a prominent part of

recent trade agreements, including the Trans-Pacific Partnership (TPP). We propose a method-

ology for measuring the impact of such provisions. Based on the detailed information on

specific policy measures in the STRI database, we construct a bilateral inde x of regulatory

differences by sector. It is noteworthy that countries with similar levels of trade liberalisation

can have fairly high indices of regulatory differences, including within the highly integrated

market of the European Union. Our empirical results provide evidence that regulatory hetero-

geneity deters trade in services, the more so the lower the STRI indices.

4

Also Russia has verified its database, and South Africa and Brazil have reviewed and commented on

their data.

5

For more information on the scoring methodology, see Geloso Grosso et al. (2015).

©2016 John Wiley & Sons Ltd

1156 H. K. NORD

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AS AND D. ROUZET