Trade Costs and Productivity in Services Sectors

For goods sectors, there is extensive empirical evidence that lower trade costs are associated with higher productivity at the firm- and sector-levels (e.g., Pavcnik, 2002). Lower trade costs lead to contraction and exit by smaller, less-productive firms, and the transfer of resources to larger, more productive ones (Melitz, 2003). The overall result is a gain in measured sectoral productivity. Nearly two-thirds of all economic activity in the G-20—and over three-quarters in France, the USA, and the UK—is made up of services. Breinlich and Criscuolo (2011) show that many of the stylized facts regarding services firms are similar to those for goods manufacturers. For example, production is highly concentrated in a small number of firms, and exporters tend to be larger and more productive than other firms. VanDerMarel (2011) shows that regulation in services sectors has an important influence on the productivity of services firms: as for tariffs in goods markets, more restrictive regulation is associated with lower productivity. However, the present paper is the first one to present evidence on the links between services productivity and trade costs, using a comprehensive measure that captures all regulatory and other burdens on international service providers. The paper proceeds as follows. The next section discusses our data and methodology for measuring trade costs. Section 3 presents regression results linking trade costs and productivity in services sectors. Section 4 concludes.