Comparison of trade costs in the services and manufacturing sector

Services are the largest sector in the global economy and their importance is expected to continue to grow. Services currently represent more than two thirds of World Gross Domestic Product and half of total employment in industrialized countries (WTO, 2010). World exports of commercial services amounted to US$ 3,350 billion in 2009 (WTO, 2010), after growing on average at around 7.9% per year in value terms since 1980. Trade in commercial services grew faster than trade in goods (6.6% on average) during this period.

Objective: Because of the huge effect of trade costs on shaping international trade, a better understanding of international economy necessitates the careful measurement of trade costs. However, despite the growing importance of international trade in services, very little is known about the incidence of trade costs in the services sector and how they are different from the manufacturing sector trade costs. This paper presents a systematic and a detailed comparison of the trade costs in the two sectors. The paper estimates the trade costs in the services and the manufacturing sector using a gravity-like equation for 50 countries for the year 2005 and shows if the trade costs in the manufacturing and the services sector are related. The paper highlights the differences in the effects of various components on the trade costs in the two sectors. It also shows how the country specific import barriers in the services sector trade are different from the country specific manufacturing import barriers.

Data: The study uses United Nations Service Trade Statistics Database as the primary source of data on services bilateral trade flows. The services production data is provided from OECD STAN database and UN-System of National Accounts. The bilateral manufacturing trade data comes from the COMTRADE database of the UN. Manufacturing output data comes from the United Nation’s Industrial Statistics (UNIDO) database. Data on gravity variables (Distance, common border, common language, currency union, regional trade agreements) come from the gravity database compiled by CEPII.

Expected Results: Gravity model is expected to work smoothly for both manufacturing and services trade. Trade costs in services are expected to be much higher than the manufacturing sector trade costs. In case of services, trade costs mainly arise from the distance between the trading partners and also legal and regulatory environment (destination import barriers).