A structural quantitative analysis of services trade de-liberalization

Abstract

We propose a quantifiable multi-country-multi-sector model of trade in goods and services where markets are not fully penetrated by firms and trade is impeded by standard iceberg costs as well as market-entry costs. Using transaction-type information of German services traders, we inform the model about key behavioral parameters governing the activity of services producers. We calibrate market-entry costs by sector and market, and decompose these into observable and unobservable components. We then study the effects of de-liberalizing services trade. Overall costs on seller-to-customer-market transactions in services are reduced substantially by preferential market access for services through trade agreements. If all countries abandoned existing preferential market access to services, this would reduce their real consumption by up to 6.7% with a similar decline in real wages and dividends (depending on the country). For most economies, depending on their input-output structure, de-liberalizing preferential services-market access has adverse spillover effects on manufacturing.