What
is Special about Trade in Services?
e-mail: daniel.mirza@nottingham.ac.uk
In
this article, we compare bilateral trade flows in goods to those in services
from a new OECD dataset[1]
and find that former flows are 4 to 5 times higher on average than the latter
within OECD countries. We also find that gravity type variables such as GDPs
and distance are not responsible for this difference as their effect on trade
in services is relatively similar to that of trade in manufactures. What is
then so special about services that make them more difficult to be traded than
goods, after accounting for gravity effects?
We argue in this article that trade in services have a very specific feature which would explain this puzzle. Mattoo (2000) have already mentioned that services are usually intangible, invisible and perishable, requiring simultaneous interaction of production and consumption. If it is the case, then we argue and show in this article that the delivered service uses not only inputs from the source country but also inputs from the host country when it crosses the border. Inputs are complement not substitutes. In Transport for example, route infrastructure or airports in the two countries are needed in order to supply internationally the service[2]. In order to set up a telecommunication, the two countries should be equipped with computers, reliable telephone cables, etc…
This specific feature for internationally traded services has some implications for policy. As inputs from both countries are used, all the modes of regulations from both countries could be affecting input prices, the resulted price of the traded services and hence bilateral trade. This is clearly not the case for trade in manufacturing where regulations in one country might increase the relative competitiveness of its partners. Using data on regulations from the OECD, we show that the host country’s regulations[3] have similar negative effects on bilateral exports in services than the source country’s regulations.
[1] We use an original
dataset on bilateral trade in services within the OECD from the OECD Statistics on International Trade in Services 1999-2000.
[2] As they use transport services, trade in manufacturers can be determined in return by factors from the host country, but the proportion of transport in the value of traded goods is relatively small, so that this indirect effect could be considered as negligible to the manufacturing industry.
[3] We use a set of regulations variables like tax wedge on labour, product market regulations, degree of corporatism, labour protection, etc…