# Measuring the Cost of International Trade in Services

```WIOD Conference, 26-28 May 2010, Vienna
Measuring the Cost of International
S&eacute;bastien Miroudot (OECD), Jehan Sauvage (OECD)
and Ben Shepherd (Developing Trade Consultants Ltd.)
Why focusing on trade costs in services?
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Services represent two-thirds of economic activity but
trade in services is less than 5% of GDP (as opposed to
20% for goods).
Services are less “non-tradable” than in the past.
Definition of trade costs: the full range of costs a firm
confronts when it decides to sell its services overseas.
Quantification of barriers to trade in services:
top-down versus bottom-up approach
Observation of empirical
data
Index (STRI)
Estimate discrepancies in prices or
Weights
How important is each measure?
Empirical index number
Scores
Assigning numbers to observed policies
Relation to policies
How much does each measure
contribute to the index?
Observation of policies
Which to include?
A theory-consistent measure of trade costs
(Novy, 2009)
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Based on the standard Anderson and Van Wincoop (2003)
gravity model.
Trade costs are calculated as the geometric average of
bilateral trade costs for exports from country i to
country j and from country j to country i, expressed
relative to domestic trade costs in each country.
The equation below presents this measure in ad valorem
equivalent terms:
1
2
 tij .t ji 
 xii .x jj 



 ij  
1  

 x .x 
t
.
t
ii
jj


 ij ji 
1
2 ( 1)
 xii .x jj 

1  
 x .x 
 ij ji 
1
2
1
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We construct Novy (2009) measures of trade costs in
services for up to 61 countries and 12 services industries.
We also compile data for 17 goods sectors as a point of
comparison.
In all calculations, the elasticity of substitution sigma is set
equal to 8 (equivalent to gamma = 7, a reasonable
assumption for firm-level heterogeneity).
Data sources:
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Intranational trade flows (domestic output minus exports): EU
Klems, OECD Stan and OECD I/O tables, complemented with
national data.
Bilateral trade flows: OECD ITCS (goods) and TISP (services)
database.
Comparison of trade costs in goods and services
USA vis-&agrave;-vis major partners (2000, per cent ad valorem equivalent)
World aggregate trade costs indices, 1995-2007
(1995=100)
China trade costs indices, 1995-2005 (1995=100)
Trade costs indices for selected services industries
Trade costs within and outside services RTAs
Services industries
Trade costs and RTAs: regression results
Concluding remarks
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Strong evidence that trade costs in services are much higher
than in goods: two or three times higher.
Trade costs in services have remained stable over the last
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China’s experience and results for RTAs suggest that trade policies