Trade in Services: Does Gravity Hold? A Gravity Model Approach to Estimating Barriers to Services Trade

This paper assesses the determinants of trade in services using a gravity model, with particular attention given to the role of barriers to services trade. Initially, the application of the gravity equation to services trade is examined. A variety of econometric estimators are tested and the Hausman-Taylor model is found to be the best estimator. The gravity model fits services trade flows in a similar manner to trade in goods. Wealth of countries and a common language are the most important determinants of services trade, distance is generally found to be insignificant. A variable measuring barriers to services trade is introduced into the gravity equation. Although the variable is only found to be weakly significant, a quantified set of tariff equivalents of those barriers is estimated. * This paper has benefited from comments from Alan Matthews, Anne-Célia Disdier, Francesco Aiello and Maria Pina Cipollina. Any remaining errors are my own. I am grateful for the financial support of the Institute for International Integration Studies, Trinity College and the Irish Research Council for the Humanities and Social Sciences. ** Address for correspondence: Business School, Dublin City University, Dublin 9, Ireland. Tel: +353-17005589. Email: [email protected].