Journal Article

The Effect of Binding Commitments on Services Trade

Lysenko, Dmitry, Ciuriak, Dan, Dadkhah, Ali

2020

Overview

It has long been established in theory that uncertainty impacts on firm behaviour. However, the empirical basis for quantifying the uncertainty-reducing effects of trade agreements has not been firmly established. In this paper, we develop estimates of the effect of reducing uncertainty regarding regulation of foreign services markets by making commitments that are bound under a trade agreement. Specifically, we identify the effect on services trade of services trade restrictions, as measured by the OECD's Services Trade Restrictiveness Index (STRI), and the separate effect of ‘water’ in binding commitments, as assessed by the difference between countries’ commitments under the General Agreement on Trade in Services (GATS) or free trade agreements (FTAs) and applied levels of market access, as captured by STRI scores. Using a gravity model, we find that services trade responds positively but inelastically to reductions in services trade barriers, as measured by the STRI and, in our preferred regression, the response to actual restrictions is more than twice – specifically 2.4 times – as strong as the response to comparable reductions in uncertainty, as measured by water. Moving from GATS commitments to FTA commitments leads to a 4.7% increase in services trade because of the reduction in uncertainty.

• Publisher: Cambridge University Press
• Subject: Costs / Free Trade Agreement (ASEAN) / GATS / General Agreement on Trade in Services (1994 April 15) / Impact analysis / Market entry / Organisation for Economic Co-operation and Development / Political risk / Service industries / Small & medium sized enterprises-SME / Tariffs / Trade agreements / Trade regulation / Trade restrictions / Uncertainty / Water