Sunday, January 23, 2011

Costs of international trade in services

Fig: World aggregate trade costs indices for goods and services, 1995-2007 (1995=100).

Trade costs in construction services have increased markedly over the last decade, by nearly 20%. Construction is also the most insulated sector, with ad valorem equivalent trade costs of around 200%. Trade costs in transport services have remained approximately constant over the last decade. By contrast, trade costs in financial and computer services have fallen by more than 10%. This finding is perfectly consistent with the rise of outsourcing in those sectors over roughly the same time period: as trade costs fall, probably due to improved information and communications technologies, it becomes feasible for firms to have more of these kinds of tasks performed overseas. Sectors such as transport and construction, on the other hand, are largely immune to such developments because of the need for physical proximity between producer and consumer.

More here. Miroudot, Sauvage and Shepherd (2010) find that trade costs in services are much higher than in goods, perhaps a multiple of two or even three times. This makes a strong case for more liberalization in services trade. However, Hoekman and Matto argue that explicitly recognizing that services liberalization cannot – and should not be – divorced from services regulation will do much to help harness the potential that trade agreements have to expand services trade and investment.