Rev International Economics - 2022 - Reverdy

Received: 9 March 2021 Revised: 17 August 2022 Accepted: 24 August 2022
DOI: 10.1111/roie.12635
ORIGINAL ARTICLE
Estimating the general equilibrium effects of

services trade liberalization
Camille Reverdy1,2
1
Centre d’économie de la Sorbonne
(CES), University of Paris 1 - Panthéon Abstract
Sorbonne, Paris, France The intangible nature of services and the lack of disag-
2
Graduate Institute of International and gregated trade data increase the difficulties involved in
Development Studies, Geneva,
assessing the impediments to cross-border trade in ser-
Switzerland
vices. In an attempt to reduce the information gap exist-
Correspondence ing in services trade, this article estimates the impact
Camille Reverdy, University of Paris 1 -
Panthéon Sorbonne, Paris, France.
of trade barriers along with the conditional and gen-
Email: camille.reverdy@univ-paris1.fr eral equilibrium responses to the partial liberalization
of services trade, using structural gravity. Using data
Funding information
H2020 Marie Skłodowska-Curie Actions, collected by the OECD, I find that the level of restric-
Grant/Award Number: 721916 tiveness applied by an importing country has a negative
and significant impact on trade; however, this impact
is heterogeneous across services sectors. By focusing on
eight services sectors, I find that the partial liberaliza-
tion of services trade will cause real income to increase
by, on average, 4.8%. The most restrictive countries are
the largest winners of the partial liberalization of ser-
vices trade, benefiting from the availability of less expen-
sive sources and an increase in their attractiveness as a
source.
KEYWORDS
services trade, STRI, structural gravity, trade barriers
J E L C L A S S I F I C AT I O N
F14, F17, L80
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits
use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or
adaptations are made.
© 2022 The Author. Review of International Economics published by John Wiley & Sons Ltd.
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494 REVERDY
1 I NT RO DU CT ION
Trade in services has become increasingly important for the world economy in recent decades,
outpacing the growth of trade in goods (World Bank, 2018). Despite trade in services accounting
for 13.3% of global GDP in 2018, disaggregated services data are still poor. While developed coun-
tries usually report their trade data by service sector and partner, developing countries mostly
report only the exports and imports of broad service sectors, without any detail either on the
source or the destination of the trade flow (Figure A1).
The diversity of services and their intangible nature explain the difficulties involved in identi-
fying and assessing the impediments to the cross-border supply of services (Francois et al., 2007;
Walsh, 2008). Contrary to trade in goods, the costs to trade in services cannot be directly observed;
for example, there is no import tariff. Barriers in services trade mostly take the form of prohi-
bitions, quotas, government regulations, price-based instruments, and discriminatory access to
distribution networks. These policy restrictions have been found to be significantly larger in the
service sector than in the good sector (Hufbauer et al., 2010). The gains from eliminating barriers
to services trade are thus expected to be considerable (Francois & Hoekman, 2010; Gervais & Brad-
ford Jensen, 2013). This article provides new evidence on the real consumption gains associated
with liberalization of trade in services.
This article first contributes to the literature measuring the barriers to services trade and
their impact on trade. Using a gravity specification, I find that distance is less important for
trade in services than for trade in goods; however, the border effect appears more important.
This could be explained by the nonstorable nature of certain services, implying that the pro-
duction and consumption of a service must often appear simultaneously. The effect of the other
trade cost determinants, namely sharing a common language, a border, a colonial link, a legal
origin or being part of a trade agreement, varies by sector. Second, the addition of domestic
trade allows me to identify the effect of restrictiveness in a correctly specified model, consistent
with the structural gravity model. Using the OECD Services Trade Restrictiveness Discrimina-
tory sub-Index (STRI), I find that the level of restrictiveness applied by an importing country
has a negative and significant impact on trade; however, its impact is heterogeneous across ser-
vices sectors. Trade in the maritime transport and financial services sector is the most affected
by discriminatory trade restrictions. The third contribution of this article is to estimate the con-
ditional and general equilibrium responses to the partial liberalization of services trade using
gravity. I implement the three-step analysis developed by Anderson et al. (2015) at the sec-
tor level to estimate the consumption gains from a reduction in trade frictions using direct
information provided by the OECD. First, baseline gravity is estimated along with the effect
of each trade cost determinant on trade for each sector. The multilateral resistance terms are
inferred from origin-sector and destination-sector fixed effects using a pseudo-Poisson maximum
likelihood (PPML) estimator. The second step corresponds to the estimation of the “condi-
tional gravity”, allowing for changes in the multilateral resistances in response to the trade cost
reduction. The third step estimates the “full endowment” gravity capturing changes in out-
put and expenditure in addition to changes in multilateral resistances following partial trade
liberalization. This model also delivers baseline, conditional and full endowment general equi-
librium (GE) indices. I find that the partial removal of restrictive policy measures applied
by the importing country in each sector will lead to welfare gains of 4.8%, on average. The
least restrictive countries will suffer the most from the fiercer competition induced by trade
liberalization.
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My findings contribute to the literature measuring the barriers to services trade and their
impact on trade. Ceglowski (2006) highlights the negative impact of distance on services trade
while Dettmer (2014) and Christen (2017) underline the importance of time zone differences for
business and commercial service trade. The impact of trade agreements has also been studied
(Guillin, 2013; Marchetti, 2011). Nordås (2018) finds that free trade agreements boost services
trade by 75% and single-market trade by an additional 45%.
Second, the development of databases compiling information on service regulations allows
researchers to rely on direct evidence from applied regulations to estimate the effect of policies’
restrictiveness on trade and ad valorem equivalents (AVEs). Based on the trade restrictiveness
index produced by the Australian Productivity Commission, Walsh (2008) calculates the tariff
equivalents of the barriers to services trade using a gravity framework and finds the highest tar-
iff equivalents for the developing countries. Fontagné and Mitaritonna (2013) compute AVEs for
regulations in three sectors applied by emerging countries and find a negative impact on the
price margins using data provided by Queen Mary University (Findlay & Warren, 2000). This
database gathers qualitative information on the restrictions applied by each country in different
sectors. Their results indicate the strong negative impact that the regulations can have, as more
than half of the AVEs are larger than 50%. The third source of trade restrictiveness in services is
developed by the World Bank. Jafari and Tarr (2014) estimate the AVEs for 11 sectors and 103
countries using this source. Van der Marel and Shepherd (2013) and Lu (2018) use a dyadic ver-
sion of the World Bank index, allowing for the possibility that the regulations applied by both
the exporter and the importer can affect trade flows. They find a negative impact on both bilat-
eral services trade and on exports. Gooris and Mitaritonna (2015) preserve the discrete nature
of the data and evaluate restrictiveness through four levels, from totally open to totally closed.
This method allows them to underline the nonlinear impact on services trade, as they find that
minor restrictions, in comparison to restriction-free environments, foster trade in certain sectors.
Borchert et al. (2020) use a joint World Bank-WTO STRI database to measure the evolution of
trade restrictions. They find higher income economies to be more open in general than emerg-
ing economies but they observe sector heterogeneity. The fourth source of trade restrictiveness is
produced by the OECD. Benz and Jaax (2020) relies on these STRIs to estimate their impact on
trade and calculate AVEs for 5 services sectors and 46 countries. Their results confirm the neg-
ative effect services trade barriers have, using cross-section and panel database. Using the same
source, Nordås and Rouzet (2017) find a negative and significant impact of STRI on both exports
and imports, illustrating the importance of having an open and procompetitive regulatory envi-
ronment to strengthen the international competitiveness of service exporters. Benz et al. (2020)
estimate the impact of STRI over the period 2014–2016 and observe a negative effect on trade with
a larger impact on exports.
A third strand of the literature focuses on estimating the gains from trade liberalization rely-
ing on computable general equilibrium (CGE) models (Brown et al., 1995a, 1995b, 1996; Brown
& Stern, 2001; Dee et al., 2003; Egger et al., 2012; Hertel, 2000; Nagarajan, 1999). Using the Michi-
gan Model of World Production and Trade, Dee and Hanslow (2002) analyze the effects of fully
and partially removing the barriers to services trade and find that a 33% reduction in the barriers
to services trade would produce benefits representing 1.23% of the world’s GDP in 2002. Francois
et al. (2003) use a modified version of the GTAP model and find that full liberalization of ser-
vices trade would produce benefits representing 0.14% of the world’s GDP in 2003 (World Bank).
However, these empirical papers build on indirect estimates of the barriers to services trade. The
former produces estimates of “tariff equivalents” for services trade based on sector-specific grav-
ity equations. Deviations from predicted imports are taken as an indication of barriers to trade,
496 REVERDY
yet, the reliance on trade equation residuals to estimate tariff equivalents can be affected by spec-
ification errors such as omitted variable bias or by poor data quality.1 The latter relies on gross
operating margins to measure trade costs. To overcome this data issue, Novy (2013) derives a
measure for bilateral trade costs that indirectly infers trade frictions from observable trade and
production data through gravity estimation. Despite capturing the full range of cost factors affect-
ing international trade in services, this method does not disentangle the different determinants
of trade barriers and their impact on trade.
From a methodological perspective, the article relates to studies relying on the addition of
domestic trade to estimate the impact of non-discriminatory policies (Beverelli et al., 2018; Heid
et al., 2021; Waugh, 2010). Anderson et al. (2018) estimate domestic trade costs for 12 services
sectors and 28 countries using a structural gravity with domestic trade flows. Yotov (2021) reviews
the literature using this method and highlight the numerous benefits that the addition of domestic
trade flows offers. In order to account for services sector heterogeneity, the article is linked to
studies incorporating the sectoral dimension such as Caliendo and Parro (2015) and Redding and
Weinstein (2019). Similar to Anderson and Yotov (2016), I use a nested CES utility function within
a Cobb–Douglas preference across sectors, to allow for sectoral linkages.
The remainder of the article is structured as follows. Section 2 introduces the theoretical
model used, while Section 3 presents the estimation of the general equilibrium effects. Section 4
describes the data sources. Section 5 presents the empirical strategy and stimulates the GE
answers to different liberalization scenarios. The final section concludes the article.
2 T H EO RET ICAL MODE L
To estimate the impact of a reduction in trade costs on trade flows, I use a structural gravity
model à la Anderson and Van Wincoop (2003), based on a standard Dixit and Stiglitz (1977),
Krugman (1979) model specified at the sector level. The model is specified at the sector level to
account for the heterogeneity and the non-substitutability nature of most of the services sectors.2
To allow for sectoral linkages on the demand, the CES utility, Equation (1), is later nested within
a Cobb–Douglas function, following Anderson and Yotov (2016).
2.1 CES monopolistic competition (Dixit–Stiglitz–Krugman) model
Let us consider a world that consists of N countries, where each economy produces a variety of
services (i.e., services are differentiated by place of origin (Armington, 1969)), which are traded
with the rest of the world. Consumer preferences, specifying how imports in a given sector are
allocated among supplying countries, are assumed to be homothetic, identical across countries
and approximated by a constant elasticity of substitution (CES) utility function for country j in
sector k:
(N ) 𝜎𝜎k−1
∑ 1−𝜎k
𝜎k
𝜎k −1
𝜎k
k
Ujk = 𝛽ik xijk (1)

i=1
Equation (1) features a constant elasticity of substitution between all varieties available in
sector k, denoted as 𝜎 k . xijk symbolizes exports from country i to country j of services sector k, and
REVERDY 497
𝛽 ik represents a positive distribution parameter reflecting a preference for the services provided
by this country. The representative consumer in country j maximizes his utility subject to the
following budget constraint:
∑
N
Ejk = pijk xijk (2)
i=1
Equation (2) ensures that the total expenditure in country j and sector k, Ejk , is equal to the
total spending on varieties from all countries at delivered price pijk , the price faced by the con-
sumer for the service sector k exported by country i. This differs from the producer’s supply price,
pik , due to trade costs. I consider that the costs of cross-border exports from country i to desti-
nation j in sector k, tijk , have an iceberg form. It is an ad valorem trade cost that increases the
marginal costs of supplying the destination country, where (tijk − 1) is the ad valorem equivalent
of trade costs.3
Solving the utility maximization problem and rearranging yields the following CES demand
function:
1−𝜎k 1−𝜎k 1−𝜎k 𝜎k −1

Xijk = Ejk 𝛽ik pik tijk Pjk (3)
[∑ ( )1−𝜎k ] 1−𝜎1 k
N
with the following CES price index: Pjk = 𝛽 p t
i=1 ik ik ijk .
On the supply side, an endowment of qik in country i is value at factory gate price pik . The
value of shipments at end user prices of country i and services k is equal to pik qik = Y ik . Imposing
the market clearing condition in value terms for all i to solve for the producer price obtains the
following:
∑
N
Yik = Xijk (4)
j=1
Equation (4) implies that, at delivered prices, the value of output in country i is equal to the
total expenditure on its variety among all countries in the world, including itself, i. From these
equilibrium conditions, I obtain an implicit solution for the producer price and the distribution
parameter:
[N ( )1−𝜎k ]−1
1−𝜎 Yik ∑ tijjk Ejk
𝛽ik pik k = (5)
Yk j=1 Pjk Yk
2.2 Calculating the effects of trade liberalization
The hypothetical services liberalization welfare effects require computing the general equilib-
rium solution of market clearing factory gate prices, further develop in Appendix A.3 and
Section 3.
The standard structural gravity equation provides a useful interpretation of the welfare effect
in addition to its use in inference of trade costs determinants including the effect of services trade
liberalization. Substituting the Equation (5) in the above demand Equation (3) yields the gravity
498 REVERDY
equation with two exact price indices:

( )1−𝜎k
tijk Yik
Xijk = Ejk (6)
Pjk Πik Yk
with
N ( )
1−𝜎
∑ tijk 1−𝜎k Ejk
Πik k = (7)
j=1
Pjk Yk
and
N ( )
1−𝜎
∑ tijk 1−𝜎k Yik
Pjk k = (8)
i=1
Πik Yk
Ejk represents the expenditure on service sector k at destination j from all origins. Y ik denotes
the sales of service sector k at delivered prices. Pjk measures the buyer’s incidence, calculated as
the weighted average of all bilateral-sectoral trade costs that fall on consumers in each region. The
seller’s incidence, Πik , is defined as the weighted average aggregate of all bilateral-sectoral trade
costs borne by the producers of service sector k in each country.
3 ESTIMATION OF THE G ENERAL EQUILIBRIUM

EFFECTS
This section starts by explaining the estimation of the structural gravity equation followed by the
estimation of the GE effects of a trade cost reduction.
3.1 Estimation of the structural gravity equation
As recommended by Feenstra (2015), cross-sectional Equation (6) is estimated with

importer-sector and exporter-sector fixed effects using a PPML estimator.4 Trade flows are
averaged over the period 2012–2014 to smooth any year-specific shock.
( )
Xijk = exp 𝛽k 𝜏ijk + eik + mjk + 𝜀ijk (9)
𝜏 ijk is a vector of trade cost variables and 𝛽 k is a vector of their coefficients:

[ ( )
𝜏ijk = exp 𝛽1k STRIjk + 𝛽2k International tradeij + 𝛽3k ln Distanceij
+ 𝛽4k RTAij + 𝛽5k Contiguityij + 𝛽6k Common languageij + 𝛽7k Colonial linkij
]
+ 𝛽8k Legal originij (10)
Trade costs are estimated sector by sector to allow for heterogeneity of the effect depending
on the sector. Indeed, the effects of trade costs determinants are highly different across sectors
(Table 3). In addition, estimating the impact of trade costs separately for each sector, allows me to
only include the trade costs determinants that significantly impacts trade of each service sector,
that is: the variables with a non-significant effect will not be included in the conditional gravity
REVERDY 499
and thus in the welfare analysis. I first use the level of restrictiveness applied by country j in a given
sector k, STRI jk . An international trade dummy equals 1 when the flow between i and j in sector k
is international, capturing the border effect, and the bilateral distance between i and j. In the case
of services, distance captures transactional constraints, and informational frictions, rather than
transportation costs (Gooris & Mitaritonna, 2015). Several empirical studies have highlighted the
importance that trade agreements can have in facilitating trade in services (Beverelli et al., 2017;
Ing et al., 2019; Nordås, 2018). I thus control for the presence of a trade agreement covering trade
in goods or trade in services, as preferential services and goods-market provisions are often tied
together. Nordås (2018) identified an unexplained Nordic bias indicating that the full integration
of services markets may also rely on deeper institutional and cultural factors. I then add a measure
of common language, contiguity, colonial link, and legal origin to control for this possibility.
eik is an exporter sector fixed effect that accounts for the outward multilateral resis-
tances (OMR), Πik and output (Y ik ). mjk is an importer sector fixed effect that controls for
inward-multilateral resistances (IMR), Pjk and expenditures (Ejk ), and 𝜀ijk is the error term. The
addition of domestic trade along with the different STRI value associated with domestic flows,
allows me to add importer-sector fixed effects without the variable of interest, STRI, being per-
fectly collinear with those. The estimation relies on the differentiated effect of STRI on domestic
and international trade flows across sectors, accounting for exporter-sector and importer-sector
market characteristics.
To avoid perfect collinearity, I drop the constant and one importer fixed effect in each sec-
tor, implying that all other fixed effects are identified relative to m0k .5 In addition, solving the
system of Equations (7) and (8) requires normalizing one of the multilateral resistance terms to
obtain a unique solution.6 I choose to normalize the multilateral resistances that correspond to
the dropped importer fixed effects, P0k = 1. With the normalized multilateral resistances, the the-
oretical interpretation of importer-sector fixed effects, m0k , is E0k , but since one importer fixed
effect in each sector is dropped (m0k = 0), the theoretical interpretation of all other fixed effects is
relative to E0k .
Fally (2015) demonstrated that inferring multilateral resistances from origin and destination
fixed effects using a standard gravity regression along with more familiar unobservable bilateral
trade costs is consistent with the equilibrium constraints imposed by more structural approaches
(Equations 7 and 8), such as those of Anderson and Van Wincoop (2003) and Anderson and
Yotov (2010). Inward and outward multilateral resistance terms can be recovered from the fixed
effects as follows:
̂1−𝜎 Ejk ( )
Pjk k = exp −m ̂jk (11)
E0k
̂1−𝜎 ( )
Πik k =E0k Yik exp −̂ eik (12)
where m̂jk and ê ik are the estimated fixed effects from Equation (9) and E0k is the expenditure
value of the reference country in sector k, observable in the data along with Ejk and Yik.7
3.2 Estimating the general equilibrium effects of a trade cost

reduction
Based on the three-step estimation procedure developed by Anderson et al. (2015) specified at the
sector-country level, I estimate the general equilibrium effects of a reduction in trade costs.
500 REVERDY
The first step, the baseline scenario, consists of estimating the “baseline” gravity equation
(Equation 9), evaluating the impact of trade cost determinants on trade and constructing baseline
GE indices. I use the estimates of the fixed effects from Equation (9) along with data on output
and expenditures to construct inward and outward multilateral resistances (Equations 11–12).
The second step, the “conditional scenario”, delivers conditional gravity estimates and GE
indices, which allows for changes in IMRs and OMRs in response to changes in trade costs
but does not take output and expenditure changes into account; expenditure and output values
remain constant.
The following “conditional” gravity equation is estimated:
( )
Xijk = exp 𝛽k 𝜏ijk + eik + mjk + 𝜀ijk (13)
where 𝜏 ijk c are the “conditional” trade costs, for example, the reduced trade costs. The trade cost
coefficient (𝛽 bk ) is constrained to the estimated values from the baseline scenario. The new set of
fixed effects estimates (ec ik and mc jk ) and the original data on expenditures and output are used
to construct the “conditional” estimates of multilateral resistances.
The third step, “the full endowment” scenario, delivers the full endowment gravity estimates
and GE indices, which, in addition to changes in the multilateral resistances, capture changes in
( ) ( )
output and expenditure, given by Yikc = pcik ∕pik Yik and Ejk c
= pcik ∕pik Ejk in an economy where
trade imbalance ratios, 𝜙ik = Eik /Y ik are assumed to stay constant in the counterfactual scenario.8
The PPML estimator with the correct set of fixed effects ensures that the sum of the fitted
values of expenditure and income are equal to the sum of the observed values of expenditure and
income (Fally, 2015); thus, the changes in output and expenditures cannot be directly estimated.
Consequently, structural gravity is used to convert the changes in output and expenditure into
changes in trade flows:
( )c
1−𝜎k 1−𝜎 1−𝜎
𝜏ijk Yikc Ejk
c
Πik k Pjk k
X̃
ijk = ( )c Xijk (14)
1−𝜎 1−𝜎 1−𝜎
𝜏ijk k Yik Ejk Πik k Pjk k
The new values for output and expenditure are obtained by using market clearing conditions
(Equation 5) to convert the “conditional” GE effects on the multilateral resistances, obtained in
step 2 into “conditional” changes in factory-gate prices.9
The second step is then repeated with new trade values. Using these new values, the PPML
estimator will convert the initial response of factory-gate prices into changes in gravity fixed
effects, which can be used, along with the new values of output and expenditures, to obtain addi-
tional “full-endowment” responses in the multilateral resistances. Using the new set of producer
prices and new values of trade, outcome and expenditure, the third step is repeated. The oper-
ation is iterated until convergence is achieved.10 The percentage change in welfare in the “full
endowment” GE scenario can be calculated as the change in real GDP:
∑ Yikc ∕P̂
c
̂i =
W ik
(15)
k Yik ∕P̂
ik
Arkolakis et al. (2012) demonstrated that the welfare gains from trade liberalization obtained
from a wide class of trade models with alternative microfoundations can be expressed as a
REVERDY 501
combination
( ) of two sufficient statistics, including intranational trade as share of total expen-
X
ditures Eii and the trade elasticity of substitution (1 − 𝜎). This holds for this framework, a
i
multisector monopolistic competition model with restricted entry; that is, the labor supply is
assumed to be inelastic in each sector.
4 DATA
Bilateral and domestic trade data come from the World Input Output Database (WIOD). Trade
flows are averaged over the period 2012–2014 to smooth any year-specific shock. The STRI
database comes from the OECD. This dataset provides information on regulations affecting trade
in services in 22 sectors across all OECD member countries as well as Brazil, China, India, Indone-
sia, Malaysia, the Russian Federation, and South Africa, representing over 80% of global trade in
services. The policy measures are categorized as five policy areas: (1) restrictions on foreign own-
ership and other market entry conditions, (2) restrictions on the movement of people, (3) other
discriminatory measures and international standards, (4) barriers to competition and public own-
ership, and (5) regulatory transparency and administrative requirements. The aim of the analysis
is to estimate the impact of trade liberalization, of the removal of unnecessary trade barriers and
not of the policies that apply equally to both domestic and foreign suppliers, that might, among
others, ensure consumers’ safety. Thus, for the purpose of this analysis, I use the restrictiveness
sub-index focusing only on discriminatory measures for 2014. This index only includes measures
impacting differently international and domestic producers, such as discrimination against on
trademark protection of foreign firms in financial services sector or requirement of residency for
construction engineers in the construction sector. It does not include measures on regulatory
transparency and administrative requirements nor barriers to competition and public ownership
that apply equally to all producers. Even if non-discriminatory measures might represent barri-
ers to trade, they might have also been implemented for prudential or social objectives, that is:
producers in the distribution services sector, the pre-packaging of products is subject to manda-
tory nominal quantities. Thus, non-discriminatory measures are not accounted for, in the context
of this analysis. Composite indices measure the identified restrictions across five standard policy
categories, and their value ranges between 0 and 1. Complete openness to trade and investment
obtains a score of zero, while being completely closed to foreign services providers is associated
with a score of one.
However, discrepancies in terms of sectoral classification, countries and time span between
WIOD and the OECD STRI database constrain the matching between these two sources.11 The
sample is reduced to eight sectors—construction, professional services, telecommunications, air
transport, maritime transport, land transport, financial services, and logistics services.12 STRI
database is not available before 2014 and the WIOD data is available up to 2014, which hinders
the creation of a panel database over the period 2012–2014. Cross-sectional analysis presents
some limitations compared to a panel data analysis. First, the recent development of bilateral
trade database, such as the OECD-WTO services trade database would allow me to estimate
the impact of STRI on trade over the period 2014–2018 with exporter-time and importer-time
fixed effects. However, the non-availability of domestic trade flows does not allow me to control
for exporter-sector-time and importer-sector-time fixed effects, consistent with structural gravity
equation. Indeed, as explained by Yotov (2021), the introduction of domestic trade flows in the
dependent variable allows the estimation of non-discriminatory policies in a model in line with
502 REVERDY
theory with the correct set of fixed effects. The introduction of importer-sector and exporter-sector
fixed effects is consistent with the definition of inward and outward multilateral resistance terms,
which are at the heart of general equilibrium analysis of trade policy. Second, panel data structure
would also allow me to control for any country-pair trend, through the use of bilateral coun-
try fixed effect. To control for this possible bias, I add several bilateral trade cost determinants
along with the level of restrictiveness in each country-sector. The trade cost determinants used
in the regression, namely, bilateral and intranational distance, common language, colonial link
and contiguity, come from the CEPII GeoDist database, developed by Mayer and Zignago (2012).
I control for the presence of a trade agreement covering trade in goods or in services between
the two countries using the dynamic gravity dataset collected by Gurevich and Herman (2018).
Several empirical studies demonstrate that broad aspects of governance institutions are relevant
factors that shape the effects of policy measures reducing trade barriers (Beverelli et al., 2017; Ing
et al., 2019), I thus use a legal origin variable developed by Porta et al. (1999). Third, longitudi-
nal data would also allow me to observe services trade liberalization across countries and sectors.
However, across years, sectors and countries, the discriminatory STRI value does not vary a lot
(Figure A3).13
4.1 Descriptive statistics
The STRI database contains information on the policies affecting international trade in services.
As I use the sub-index focusing only on discriminatory measures, the restrictiveness index is equal
to 0 for domestic trade. This different value of the restrictiveness depending on the provenance
of the flow, allows me to estimate the effect of STRI, in a correctly specified gravity equation
with importer-sector fixed effects. The database covers (i) core measures that are common for all
sectors, such as the foreign equity share limit, and (ii) sector-specific measures that capture the
characteristics of each sector. For instance, in the professional services sector, the licensing system
and related procedures are captured in great detail.
The STRI scoring methodology uses binary scores. Individual policy measures are assigned a
score of 0 (not restrictive) or 1 (restrictive). The five policy areas are weighted according to their
relative importance. Experts have distributed 100 points among the five policy areas according
to their perception of the relative importance for each sector.14 Thus, the same policy area has a
different weight in different sectors, reflecting the relative importance of this policy category for
each sector.15
The median discriminatory STRI value is equal to 0.14 (Figure 1). The restrictiveness discrim-
inatory sub-index ranges from 0.01 to 0.62, with an average value of 0.16 (Table 1). The most
restrictive country of the sample is Russia in the “logistic services” sector, followed by India in
the “professional services” sector and China in the “construction” sector. The most open country
is Chile in the “air transport” sector.
The highest mean level of restriction is associated with the air transport sector with an aver-
age restrictive level of 0.24, while the financial services sector is associated with the lowest level
of restrictions, at 0.11 (Table 2). The main impediments to trade in the financial sector are related
to restrictions on foreign entry due to the capital-intensive nature of the sector. These restric-
tions take, among others, the form of foreign equity limits, discriminatory licensing criteria, and
restrictions on cross-border trade. Restrictions on air transport also prominently feature restric-
tions on foreign entry and barriers to competition (several countries maintain public ownership
in aviation, usually also restricting foreign ownership in these firms (OECD STRI Sector Brief)).
REVERDY 503
F I G U R E 1 Services trade restrictiveness discriminatory sub-index distribution for 2014 [Colour figure can
be viewed at wileyonlinelibrary.com]
T A B L E 1 Descriptive statistics
Obs Mean Std dev Min Max
STRI discriminatory measures 12,470 0.16 0.10 0.01 0.62

Trade (exports) 12,470 1234.2 22,320.7 0 1,647,87
Source: WIOD and OECD STRI dataset.
The negative relationship between the level of bilateral trade and the restrictiveness level
imposed by the importing country is displayed in Figure 2. The group of outliers located on the
lower-left part of the graph is composed of Mexico in the construction sector, partly explained by
the extremely low international trade flows of Mexico in the export of construction services.
5 TRADE U NDER PART IAL LIBERALIZATION
5.1 Gravity estimation
This section first provides the estimation of trade cost determinants in the context of services trade
and then offers GE estimates following a partial liberalization of services trade.
5.1.1 Gravity equation for services trade
Although trade in services differs from trade in goods in many aspects, part of the literature has
compared gravity estimates in trade in goods and in services (Kimura & Lee, 2006; Lejour & de
Palva, 2004; Tharakan et al., 2005; Walsh, 2008) and demonstrates that gravity model also fit ser-
vices trade. Consistent with structural gravity model, Anderson et al. (2018) have demonstrated
that the empirical gravity model works also well with services trade, using PPML estimator.
To account for each sector’s specificities the specification is estimated by sector, increasing the
precision of the model.
504 REVERDY
T A B L E 2 In-sample summary statistics
Sector Name Obs Mean Std Dev Min Max
Construction Discriminatory STRI 1369 0.12 0.07 0 0.28

Trade (USD Millions) 1369 1,322.67 12,576.72 0 229,482.7
Land transport Discriminatory STRI 1369 0.12 0.10 0 0.40
Trade (USD Millions) 1369 1387.94 15,311.99 0 415,847.1
Maritime transport Discriminatory STRI 961 0.14 0.10 0 0.39
Trade (USD Millions) 961 240.21 3116.15 0 85,672.98
Air transport Discriminatory STRI 1369 0.24 0.10 0 0.42
Trade (USD Millions) 1,369 237.48 2243.86 2.55e-07 56,191.2
Logistics services Discriminatory STRI 1369 0.12 0.10 0 0.62
Trade (USD Millions) 1,369 806.37 8041.34 0 166,898
Telecommunication Discriminatory STRI 1369 0.13 0.09 0 0.46
services
Trade (USD Millions) 1,369 984.63 12627.14 0.00 368,536.3
Financial services Discriminatory STRI 1369 0.11 0.082 0 0.32
Trade (USD Millions) 1369 2874.36 38,041.84 0 1,136,314
Professional Discriminatory STRI 1332 0.17 0.13 0 0.51
services
Trade (USD Millions) 1332 3,537.56 50,215.05 0 1,647,874
Source: WIOD and OECD STRI datasets.
To assess the impact of trade barriers and the GE effects of the partial removal of restrictive
trade measures applied by the importing country in each sector, the baseline gravity equation
(Equation 9) is specified as follows:
( ( )
Xijk = exp 𝛽1k STRIjk + 𝛽2k International tradeij + 𝛽3k ln Distanceij
+ 𝛽4k RTAij + 𝛽5k Contiguityij + 𝛽6k Common languageij + 𝛽7k Colonial linkij
)
+ 𝛽8k Legal originij + eik + mjk + 𝜀ijk (16)
Equation 16 is consistent with structural gravity due to the addition of exporter sector (eik ) and
importer sector (mjk ) fixed effects, which account for multilateral resistance terms, output and
expenditures, and to the use of the PPML estimator (Fally, 2015). The restrictiveness level is spec-
ified at the importer and sector level and does not vary across different exporters but vary between
domestic and international partners.16 The variability of the index at the country-pair-sector level
comes from the distinction between domestic and international trade.
Step 1.a, the estimation of “baseline” gravity (Equation 16), delivers the effects of the differ-
ent trade cost determinants on services trade for each sector. The coefficients associated with the
trade cost variables are available in Table 3. With all else being equal, the trade value of a country
with a restrictiveness level larger by 1 standard deviation, will be 0.33% lower in the construc-
tion sector, 0.1% lower in the land transport, 0.41% lower in the maritime transport, 0.04% lower
in the logistics services, 0.17% lower in the telecommunications sector, 0.48% lower in the finan-
cial sector, and 0.04% lower in the professional services sector.17 The restrictiveness level is not
REVERDY 505
F I G U R E 2 Correlation between trade (domestic and international) and discriminatory STRI across sectors
[Colour figure can be viewed at wileyonlinelibrary.com]
significant for the air transport sector. Market access via cross-border trade in aviation occurs
through the exchange of traffic rights largely on a bilateral basis (Grosso, 2015). The regulation of
international air transport services involves an elaborate structure of bilateral agreements. These
fix a set of rules to identify the airlines of the contracting parties with the rights to fly on each
route, determine the capacity that can be provided by each of those designated airlines and limit
the capacity that can be offered by airlines from third countries (Findlay, 2003). Thus, the STRI
covers mainly mode 3 in this sector and not cross-border which could explain the non-significant
impact of the index on trade in this sector.18 Distance is also associated with a negative and signif-
icant effect except for financial services sector, varying from −0.428 in the construction sector and
−0.915 for land transport, with several values in between −0.7 and −0.8, the estimates found for
trade in goods using PPML, suggesting that distance is less important for some services sectors.
These results are consistent with the coefficients found in the literature; Borchert et al. (2022)
found distance estimates for services trade between −0.36 and √ 1.22. The intranational distance
is used for domestic trade flows, it is calculated as dii = 0.67 area∕𝜋 . The coefficient associated
with the international trade dummy is also negative and significant for all sectors (varying from
−1.905 and −4.403) except for maritime transport sector, highlighting the importance of the bor-
der effect. Head and Mayer (2000) found a border effect for the EU for goods trade of 20, while
Helliwell (2000) estimated a border effect between Canada and the United States for services
between 30 and 43. One may expect distance to be less important for services being traded, as
they are not physically shipped; however, the nonstorable nature of services may still imply a dou-
ble coincidence in both time and space of the proximity between the provider and the consumer
(Christen, 2017; Kikuchi & Marjit, 2010).19 Sharing a common language positively impact trade
unless in the construction, land transport, and maritime transport. Being contiguous has a pos-
itive and significant effect in the construction, land transport, and professional services sectors.
Being part of a trade agreement covering trade in goods or services has a positive and significant
effect on trade in the telecommunication, construction, and logistics services sectors. Surprisingly,
sharing a trade agreement has a negative and significant effect in the air transport sector, similar
to Benz and Jaax (2020) who found that services provisions are often not included in older PTAs
and that the inclusion of a country pair fixed effects allows for a more causal interpretation of
PTAs coefficients. Sharing a colonial link has a positive and significant impact in the land and air
506
T A B L E 3 PPML Estimation of baseline gravity
(1) (2) (3) (4) (5) (6) (7) (8)

Land Maritime Air Logistics Financial Professional
Construction transport transport transport services Telecommunication services services
STRIjk −0.111*** −0.066*** −0.187*** 0.008 −0.018** −0.097*** −0.133*** −0.035***

(0.030) (0.018) (0.022) (0.018) (0.008) (0.018) (0.036) (0.012)
ln(Distanceij ) −0.583*** −0.915*** −0.693*** −0.865*** −0.801*** −0.690*** −0.095 −0.428***
(0.222) (0.116) (0.180) (0.090) (0.107) (0.137) (0.169) (0.090)
Common 0.188 −0.117 −0.171 0.415** 0.435* 0.948*** 1.612** 0.318*
Languageij
(0.293) (0.225) (0.319) (0.178) (0.233) (0.235) (0.658) (0.189)
PTAij 0.632** −0.066 −0.044 −0.312* 0.607*** 0.559*** 0.356 −0.020
(0.303) (0.169) (0.261) (0.186) (0.151) (0.180) (0.457) (0.150)
Contiguityij 0.767** 0.430** 0.095 −0.226 0.030 −0.143 −0.294 0.576**
(0.300) (0.169) (0.238) (0.194) (0.210) (0.285) (0.528) (0.237)
Colonial Linkij −0.882*** 0.403** −0.039 0.704*** −0.214 −0.510 −0.131 0.019
(0.330) (0.184) (0.284) (0.232) (0.223) (0.510) (0.430) (0.221)
Legal Originij 0.416* 0.206 0.265 −0.116 0.333** −0.061 0.033 −0.031
(0.240) (0.132) (0.171) (0.132) (0.163) (0.160) (0.315) (0.140)
International −4.403*** −2.904*** 0.029 −1.905*** −3.711*** −3.404*** −3.252*** −2.998***
Tradeij
(0.746) (0.308) (0.471) (0.634) (0.272) (0.576) (0.858) (0.332)
Observations 1,369 1,369 961 1,369 1,369 1,369 1,369 1,332
Importer FE Yes Yes Yes Yes Yes Yes Yes Yes
Exporter FE Yes Yes Yes Yes Yes Yes Yes Yes
Note: Standard errors in parentheses.

*p < .1, **p < .05, ***p < .01.
REVERDY
REVERDY 507
transport sectors. It significantly reduces trade in the construction sector. Finally, a common legal
origin between two countries positively impacts trade in the construction and logistics services
sectors.
5.2 Partial liberalization
In line with Gooris and Mitaritonna (2015), which found that minor restrictions, in comparison
to restriction-free environments, foster trade in certain service sectors, I estimate the impact of
partial liberalization. For this partial liberalization scenario, the STRI level is set to the value of
the least restrictive country in each sector (Table A3). This choice of scenario can be explained by
several reasons. First, the restrictions are not totally removed as some restrictions might be needed
for quality and/or safety reasons among others (it is important to impose some regulations on the
qualification in the professional services to ensure the safety of the customers). As these measures
will be accounted for in the non-discriminatory measures and as no country has a completely
open environment, it is safe to use the least restrictive country in each sector as a benchmark
value. Second, to account for sector-specific measures, a benchmark value is chosen by sector.
Real income would, on average, increase by 4.8% following a partial liberalization of services
trade. Less restrictive countries would be the countries gaining the least from partial liberalization
(Table 4). With liberalization, the available sources are becoming less expensive making compe-
tition fiercer, particularly for the least restrictive markets. As all countries are liberalizing at the
same time, one might expect both a positive impact on imports (due to its own liberalization) but
also a negative impact on exports (the rest of the world is also liberalizing). Smaller and among
the least restrictive countries, Latvia (which is used twice as the benchmark for liberalization),
would, on average, benefit the least from liberalization; it would lose its comparative advantage in
terms of restrictiveness, decreasing its real consumption following a partial removal of restrictive
trade policy. Other smaller countries, such as Lithuania, Slovakia, Slovenia, and Estonia, would
lose from partial trade liberalization, facing competition from bigger exporters. Changes in wel-
fare are calculating accounting for changes in multilateral resistance terms and in output and
expenditures. Figure A2a,b report changes in expenditures and OMR by sector to illustrate the
GE effects.
The magnitude of these results depends on the elasticities of substitution specified at the
sector level, ranging from 3.29 to 4.27.20 The elasticities of substitution are coming from Egger
et al. (2021). Using WIOD data, the authors first recover the importer-sector-time specific param-
eter, mr j,t , from the structural equation for trade flows. Second, they use the estimate m̂jt to struc-
̂s
turally estimate 𝛾 s = 𝜎 s𝜃−1 , and to recover 𝜎
̂s = 1−̂𝛾s𝜉 . A higher parameter means more competition
s
through a more elastic reaction of demand to higher prices on outcome.
5.2.1 Robustness of the baseline results
I first test the robustness of the results to the choice of the partial liberalization scenario. The
results hold with different partial liberalization scenarios, such as reducing the level of restriction
of each country-sector pair by 25% or 50%. Considering the welfare changes, the smaller and least
restrictive countries appear to be those benefiting the least from partial trade liberalization, as was
found for the previous scenarios. On average, welfare would increase by 3.2% when restrictions
are reduced by 25% and by 4.9% when restrictions are reduced by 50%.
508 REVERDY
T A B L E 4 Welfare change by country in percentage—Partial liberalization

Country Obs Mean Std Dev Min Max
Australia 8 11.46 13.99 −6.95 28.90
Austria 7 5.74 10.36 −6.75 21.96
Belgium 8 8.12 10.45 −7.38 24.18
Brazil 8 13.04 13.13 −6.93 28.80
Canada 8 12.91 13.92 −6.79 31.22
China 8 16.15 15.26 −6.57 33.43
Czech Republic 7 0.10 14.81 −23.55 20.44
Denmark 8 0.36 14.90 −23.41 22.37
Estonia 8 −7.33 18.90 −46.43 18.54
Finland 8 7.39 12.03 −6.89 24.31
France 8 9.28 11.63 −4.38 28.20
Germany 8 12.45 10.16 −4.64 28.11
Greece 8 −1.06 17.96 −31.72 23.59
Hungary 7 −0.65 15.58 −26.85 19.72
India 8 9.93 15.15 −6.90 28.95
Indonesia 8 10.63 12.22 −7.01 26.29
Ireland 8 −2.08 15.89 −23.56 24.23
Italy 8 14.02 11.70 −4.87 25.82
Japan 8 10.23 11.51 −7.32 24.94
Latvia 8 −15.01 24.61 −57.11 14.70
Lithuania 8 −13.74 22.77 −62.92 13.72
Luxembourg 7 −5.24 17.60 −31.70 18.12
Mexico 8 8.18 12.46 −7.06 25.85
Netherlands 8 1.01 13.44 −15.02 23.29
Norway 8 7.51 11.37 −5.83 25.31
Poland 8 3.31 14.61 −21.51 24.45
Portugal 8 −4.38 20.36 −33.24 22.02
Russia 7 18.42 18.74 −5.49 42.56
Slovakia 7 −7.00 22.71 −55.69 12.58
Slovenia 8 −7.39 18.07 −44.77 17.52
South Korea 8 −1.57 21.90 −46.57 24.84
Spain 8 7.70 11.90 −6.13 25.84
Sweden 8 11.40 12.90 −6.63 30.18
Switzerland 7 6.76 10.19 −6.78 25.76
Turkey 8 8.20 15.85 −15.86 26.52
United Kingdom 8 12.01 11.86 −6.32 25.93
United States 8 17.72 15.78 −5.87 36.01
REVERDY 509
The estimates of the elasticity of substitution for the services sector are highly heterogeneous
in the literature. To test whether the results depend on the set of elasticities, I rerun the esti-
mations using different sets of elasticities. First, using data on sales in services and goods of
German firms in 28 EU countries, 15 other major countries and the rest of the world, Blank
et al. (2018) estimated the elasticities of substitution for 5 broad sectors. 𝜎 k is measured as the
sum of firms’ sales belonging to sector k over all destination markets, divided by the sum of
corresponding operating profits. Table A5 summarizes the elasticities.21 The results found for
this different set of elasticities still hold. Smaller and less restrictive countries would benefit the
least, whereas Germany and France, among others, would benefit from their privileged localiza-
tion, the availability of less expensive sources and the increase of their attractiveness as a source
(Table A6).
Second, based on micro data from Finland and the United Kingdom, Rouzet et al. (2017) esti-
mated the elasticity of substitution for 15 services sectors, which were estimated as the median
ratio of turnover to operating profits among all firms active in a given sector. These elasticities
are summarized in Table A7. The order of countries in terms of welfare gains also holds with
this set of elasticities. Smaller and less restrictive countries would benefit the least due to fiercer
competition (Table A8).
However, despite the fact that the order of countries in terms of welfare gains is robust to
the choice of elasticities of substitution, the magnitude of the effects varies across the different
sources. One explanation for this heterogeneity in the magnitude of the results is the different
value in the elasticities. For example, the elasticity of substitution for the financial services sec-
tor in the baseline regression is associated with a value of 4.18, while to a value of 3.27 in one
robustness check and to a value of 1.9 in the second robustness check exercise. A second possi-
ble explanation is the different services sector classification used for the estimation of elasticity
of substitution (the value of elasticity of substitution is only available for 5 broad sectors in one
robustness check). Third, one should also keep in mind that the STRI might not include some of
the important regulatory barriers affecting services trade (Gupta et al., 2020).
6 CO N C LU S I O N
This article overcomes the intangible nature of trade costs in services trade and estimates the
effects of the liberalization of services trade at the country-sector level. Based on standard struc-
tural gravity, I estimate the general equilibrium effect of services trade liberalization using a
three-step analysis model. The addition of domestic trade allows me to identify the effect of
STRI in a correctly specified model consistent with the structural gravity model due to the
exporter-sector and importer-sector fixed effects imperfectly accounting for multilateral resis-
tance terms. I find that the level of restrictiveness applied by the importing country negatively
impacts trade; however, this impact differs across sectors. These restrictions impact trade the most
in the maritime transport and financial services sectors.
Using the STRI developed by the OECD, I found that the partial removal of the policy mea-
sures applied by the importing country would lead to an increase in welfare of 4.8% on average,
when accounting for changes in multilateral resistance terms and general equilibrium effects via
changes in output and expenditure. The largest winners of services trade liberalization are the
most restrictive countries that would benefit from the availability of less expensive sources and an
increase in their attractiveness as a source. The least restrictive countries would indeed lose their
comparative advantage and face increased competition, decreasing their exports and welfare.
510 REVERDY
These results are robust to the use of different conditional scenarios and different elasticities of
substitution.
To the best of my knowledge, this is the first empirical paper estimating the general equilib-
rium effect of a reduction in barriers to services trade at the sector level using gravity. Beverelli
et al. (2017) found that decreasing services trade restrictiveness has a positive indirect impact on
manufacturing sectors that use services as intermediate inputs in production. The welfare gains
from service liberalization could thus be higher if trade in goods were included in the model. I
leave to further research to explore this mechanism in a “global” model including trade in both
goods and services and discussing changes at the global economy level.
ACKNOWLEDGMENTS
I am indebted to Yoto Yotov, and three anonymous referees for insightful comments and sug-
gestions. The author is grateful to Peter Egger, Gabriel Felbermayr, Lionel Fontagné, Alessandro
Nicita, Gianluca Orefice and participants to GSIE & ifw Kiel seminars, Deep FTA workshop,
TIISA & FIW conferences for useful comments and suggestions.
FUNDING INFORMATION
This project has received funding from the European Union’s Horizon 2020 research and inno-
vation programme under the Marie Sklodowska-Curie agreement No. 721916.
DATA AVAILABILITY STATEMENT

The WIOD data can be downloaded freely from the website (http://wiod.org/database/wiots16).
The STRI database can be downloaded from the OECD website (https://qdd.oecd.org/subject.
aspx?Subject=063bee63-475f-427c-8b50-c19bffa7392d). The other trade costs determinants come
from the CEPII GeoDist database (http://www.cepii.fr/CEPII/fr/bdd_modele/presentation.asp?
id=6). The information on the trade agreement comes from the dynamic gravity dataset (https://
www.usitc.gov/data/gravity/dgd.htm). Replication files can be accessed here: https://u.pcloud.
link/publink/show?code=kZql1fXZOO1EWbvAS445ig6ehhOWebR8tAQV.
ORCID
Camille Reverdy https://orcid.org/0000-0003-4421-1822
ENDNOTES
1 From a consistent and efficient estimator, one should expect white-noise residuals, which do not have any
systematic variation (Egger, 2002).
2 The specification of the utility function at the sector level allows substitution across varieties of a given sector k
and not across services sector as sectors are hard to substitute, that is, construction services cannot be substituted
with financial services.
3 The proportionality property is assumed to hold for services trade costs, measuring transactional constraints.
4
This estimator accounts for the presence of heteroscedasticity and zero trade flows in the data (Santos Silva &
Tenreyro, 2006).
5 Perfect collinearity can also be avoided by dropping one exporter and one importer fixed effect in each sector.
6 The system of Equations (7) and (8) solves for {Π ,P } only up to a scalar.
ik jk
7
Throughout the analysis, the chosen reference country is Germany.
8 With constant shares of trade imbalances, the change in output and expenditure are identical for each country.
Thus, real GDP changes correspond to changes in real expenditures.

{ }
9 The vector of prices pc
ik
is normalized by P0k = 1.
10 Convergence is achieved when the mean and the standard deviation of the difference in each of the factory-gate
prices between two subsequent iterations is smaller than 0.001.
REVERDY 511
11 The countries available in the dataset are listed in Table A2.

12
The STRI for the land transport sector is the average value of rail freight transport and road freight transport.
13 The mean discriminatory STRI value is 0.18 across the 5 years, with a standard deviation of 0.09.
14
Each member country nominated an expert, and in addition, several international organizations covering the
sector in question were invited.
15 See Grosso (2015) for more information on the scoring and weighting methodology.
16 The policy measures on which the index is based apply equally to all partner countries.
17 Calculated as (exp(𝛽
1k *sd) − 1)*100
18 The definition of the four modes of supply defined by the General Agreement on Trade in Services (GATS) is
presented in Table A1.

19
The nonstorable nature of certain services such as telecommunication services implies that the production and
consumption of a service must often appear simultaneously.
20 The value of the elasticities of substitution by sector are available in Table A4
21
For the financial services sector, I use the elasticity of the “other services” sector.
22 N is the number of countries while K is the number of sector.
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How to cite this article: Reverdy, C. (2023). Estimating the general equilibrium effects
of services trade liberalization. Review of International Economics, 31(2), 493–521. https://
doi.org/10.1111/roie.12635
REVERDY
F I G U R E A1 Countries reporting bilateral services trade data. Source: ITC Trade Map, 2018 [Colour figure
can be viewed at wileyonlinelibrary.com]
A.1 Additional figures
APPENDIX A
514
515
Distribution of STRI index across years [Colour figure can be viewed at wileyonlinelibrary.com]
F I G U R E A2 General equilibrium effects at the sector level. (a) Change in expenditure across sectors
(b) Change in OMR term across sectors [Colour figure can be viewed at wileyonlinelibrary.com]
(a)
(b)
F I G U R E A3
REVERDY
516 REVERDY
A.2 Additional tables

T A B L E A1 Mode of supply
Mode Definition Example
Mode 1: Cross-border Services supplied from the territory of A user in country A receives
trade one member into the territory of any services from abroad
other member through its
telecommunications or
postal infrastructure. Such
supplies may include
consultancy or market
research reports,
tele-medical advice,
distance training, or
architectural drawings.
Mode 2: Consumption Services supplied in the territory of one Nationals of A have moved
abroad member to the service consumer of abroad as tourists, students,
any other member services supplied or patients to consume the
by a service supplier of one member, respective services.
through commercial presence, in the
territory of any other member
Mode 3: Commercial The service is provided within
presence A by a locally established
affiliate, subsidiary, or
representative office of a
foreign owned and
controlled company (bank,
hotel group, construction
company, etc.).
Mode 4: Presence of Services supplied by a service supplier A foreign national provides a
natural persons of one member, through the presence service within A as an
of natural persons of a member in the independent supplier (e.g.,
territory of any other member consultant, health worker)
or employee of a service
supplier (e.g., consultancy
firm, hospital, construction
company).
Source: GATS definition.
T A B L E A2 Countries available in the dataset
Australia Austria Belgium Brazil Canada China Czech Republic

Denmark Estonia Finland France Germany Greece Hungary
India Indonesia Ireland Italy Japan Latvia Lithuania
Luxembourg Mexico Netherlands Norway Poland Portugal Russia
Slovakia Slovenia South Korea Spain Sweden Switzerland Turkey
United Kingdom United States
REVERDY 517
T A B L E A3 STRI value used for partial liberalization
Sector Country STRI value
Construction Japan 0.07

Land transport Czech Republic 0.05
Maritime transport Latvia 0.09
Air transport Australia 0.17
Logistics services Czech Republic 0.04
Financial services Czech Republic 0.04
Telecommunication Germany 0.07
Professional services Latvia 0.09
T A B L E A4 Elasticities of substitution by sector
Sector Elasticity of substitution (𝝈 k )
Construction 3.34
Land transport 4.14
Maritime transport 3.98
Air transport 3.29
Logistics services 4.18
Telecommunication services 4.27
Financial services 4.18
Professional services 4.02
Source: Egger et al. (2021).
A.3 Calculating the effects of partial trade liberalization

Rewriting Equation (5), we obtain:
Yik
(𝛽ik pik Πik )1−𝜎k = (A1)
Yk
where
N ( )
1−𝜎k
∑ tijk 1−𝜎k Ejk
Πik = .
j=1
Pjk Yk
To compute the market clearing factory gate prices, it is convenient to solve the market clear-
ance system in world share form. The world supply shares in the endowment economy are given
by:
Yik pik qik

= ∑N (A2)
Yk pik qik
i=1
518 REVERDY
For the sectoral demand-side derivation, services from different sectors are combined by a
Cobb–Douglas utility function that reflects preference across different services sectors. As a result,
for each country, the expenditure in each class of goods, Ejk , is obtained as a constant share of this
country’s total expenditure Ej . The world demand shares are:
∑K
Ejk 𝜑j i=k pjk qjk
=∑ ∑ (A3)
Yik j 𝜑j k pjk qjk
K represents the number of sectors. As previously mentioned, the demand share on

Equation (A3) uses the assumption of identical Cobb–Douglas technology to set country j’s share
of world spending on services of sector k as the ratio of j’s spending on all services, canceling the
common parameter 𝛼 k in the numerator and denominator. 𝜙j is the ratio of total expenditure to
income for services in country j. There are N times K prices that change from their initial value
equal to 1 when the trade costs change.22 They can be solved from the market clearing equations,
using Equation (A2):
( ) ∑
pik qik ∑ 𝛽ik pik tijk 1−𝜎k k 𝜑j pjk qjk
∑ = ∑ (A4)
i pik qik j
Pjk j,k 𝜑j pjk qjk
1−𝜎 ∑ ( )1−𝜎k
where Pjk k = i 𝛽ik pik tijk .
Solving Equation (A1) for pik :
( )1 (1−𝜎k )
Yk 𝜎k
𝜎k
pik = (𝛽ik Πik ) (A5)
qik
qik is the supply shifter, 𝛽 ik is the demand shifter while Πik is the sellers’ incidence. In general
equilibrium, the seller’s incidence is a function of the producer’s price, pik , through the seller’s
share Y ik /Y k .
A.4 Robustness checks

A.4.1. Using different sets of elasticities
Construction services 5.997

Transport 5.164
ICT services 3.915
Other business services 4.512
Other services 3.273
Source: Blank et al. (2018).

REVERDY 519
T A B L E A6 Welfare change by country in percentage %—Elasticities Table A5

Australia 8 11.95 16.18 −3.78 42.65
Austria 7 7.54 12.46 −3.22 26.19
Belgium 8 8.51 11.34 −3.53 27.50
Brazil 8 13.21 15.55 −3.31 42.49
Canada 8 13.45 16.99 −3.24 46.25
China 8 15.02 15.25 −3.13 41.30
Czech Republic 7 3.60 14.08 −13.73 23.20
Denmark 8 3.33 14.81 −17.38 25.42
Estonia 8 −3.16 14.39 −29.06 21.02
Finland 8 8.67 13.03 −3.29 28.42
France 8 10.72 14.89 −2.08 36.09
Germany 8 12.63 13.12 −2.20 33.92
Greece 8 2.60 17.44 −23.90 27.88
Hungary 7 3.10 14.30 −15.80 22.67
India 8 11.56 16.99 −3.85 42.71
Indonesia 8 11.33 14.77 −3.34 38.62
Ireland 8 1.59 15.72 −17.49 27.55
Italy 8 13.37 13.12 −2.31 35.46
Japan 8 10.81 13.72 −3.50 34.93
Latvia 8 −9.67 19.90 −45.44 16.63
Lithuania 8 −8.50 17.08 −42.05 15.51
Luxembourg 7 −0.48 15.76 −18.91 21.52
Mexico 8 9.46 15.28 −3.37 37.94
Netherlands 8 4.19 13.71 −7.76 26.48
Norway 8 8.95 13.69 −2.77 31.75
Poland 8 6.19 14.61 −12.47 28.69
Portugal 8 0.37 18.61 −23.69 28.54
Russia 7 16.96 17.50 −2.61 41.62
Slovakia 7 −2.46 16.99 −36.08 18.03
Slovenia 8 −3.09 14.20 −27.86 19.86
South Korea 8 2.13 20.47 −36.15 28.26
Spain 8 9.47 14.49 −2.92 34.86
Sweden 8 11.44 13.39 −3.16 31.27
Switzerland 7 7.67 11.23 −3.23 29.32
Turkey 8 9.41 15.70 −7.77 32.82
United Kingdom 8 11.67 12.60 −3.01 30.03
United States 8 16.61 16.73 −2.79 47.51
520 REVERDY
Construction 2.7
Land transport 3.1
Maritime transport 2.8
Air transport 1.9
Logistics services 3.5
Telecommunication services 2.7
Financial services 1.9
Professional services 2.175
Source: Rouzet et al. (2017).
T A B L E A8 Welfare change by country in %—Elasticities Table A7

Australia 8 37.85 52.41 −9.44 145.24
Austria 7 18.94 32.22 −9.17 79.97
Belgium 8 23.26 28.95 −10.01 71.55
Brazil 8 39.60 49.52 −9.41 144.58
Canada 8 40.53 54.82 −9.23 161.19
China 8 48.08 52.99 −8.93 139.44
Czech Republic 7 6.02 38.50 −49.50 68.20
Denmark 8 7.01 36.55 −35.70 73.71
Estonia 8 −10.00 35.12 −79.57 38.71
Finland 8 20.83 34.72 −9.74 88.10
France 8 28.31 41.86 −5.98 117.78
Germany 8 34.38 36.36 −6.33 109.12
Greece 8 5.82 43.46 −46.83 86.11
Hungary 7 4.80 39.44 −54.87 67.56
India 8 30.45 53.14 −16.62 145.53
Indonesia 8 32.14 44.28 −9.51 128.14
Ireland 8 2.27 38.81 −36.94 69.60
Italy 8 39.58 40.55 −6.64 115.23
Japan 8 30.44 39.65 −9.94 113.10
Latvia 8 −21.29 40.58 −77.68 30.19
Lithuania 8 −19.23 37.13 −91.99 28.05
Luxembourg 7 −2.95 41.67 −62.09 63.59
(Continues)
REVERDY 521
T A B L E A8 Continued
Mexico 8 27.76 45.56 −9.59 125.30
Netherlands 8 8.32 36.10 −31.17 76.15
Norway 8 22.20 37.34 −7.94 100.67
Poland 8 13.39 40.88 −46.00 89.10
Portugal 8 0.74 48.51 −64.24 88.52
Russia 7 54.31 57.54 −7.47 140.80
Slovakia 7 −6.02 42.21 −87.39 52.00
Slovenia 8 −9.06 35.25 −77.92 36.42
South Korea 8 6.78 46.34 −64.58 86.98
Spain 8 23.49 41.58 −11.21 112.82
Sweden 8 30.93 36.15 −9.01 98.82
Switzerland 7 18.56 23.72 −9.21 55.40
Turkey 8 24.68 42.83 −21.15 104.80
United Kingdom 8 32.79 34.89 −8.59 94.11
United States 8 53.51 58.76 −7.99 166.89

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Received: 9 March 2021 Revised: 17 August 2022 Accepted: 24 August 2022

Estimating the general equilibrium effects of

Rev Int Econ. 2023;31:493–521. wileyonlinelibrary.com/journal/roie 493

2 T H EO RET ICAL MODE L

2.1 CES monopolistic competition (Dixit–Stiglitz–Krugman) model

Ujk = 𝛽ik xijk (1)

1−𝜎k 1−𝜎k 1−𝜎k 𝜎k −1

2.2 Calculating the effects of trade liberalization

equation with two exact price indices:

3 ESTIMATION OF THE G ENERAL EQUILIBRIUM

3.1 Estimation of the structural gravity equation

As recommended by Feenstra (2015), cross-sectional Equation (6) is estimated with

𝜏 ijk is a vector of trade cost variables and 𝛽 k is a vector of their coefficients:

3.2 Estimating the general equilibrium effects of a trade cost

4.1 Descriptive statistics

Obs Mean Std dev Min Max

STRI discriminatory measures 12,470 0.16 0.10 0.01 0.62

Source: WIOD and OECD STRI dataset.

5 TRADE U NDER PART IAL LIBERALIZATION

5.1 Gravity estimation

5.1.1 Gravity equation for services trade

T A B L E 2 In-sample summary statistics

Sector Name Obs Mean Std Dev Min Max

Construction Discriminatory STRI 1369 0.12 0.07 0 0.28

Source: WIOD and OECD STRI datasets.

T A B L E 3 PPML Estimation of baseline gravity

(1) (2) (3) (4) (5) (6) (7) (8)

STRIjk −0.111*** −0.066*** −0.187*** 0.008 −0.018** −0.097*** −0.133*** −0.035***

Note: Standard errors in parentheses.

5.2 Partial liberalization

through a more elastic reaction of demand to higher prices on outcome.

5.2.1 Robustness of the baseline results

T A B L E 4 Welfare change by country in percentage—Partial liberalization

DATA AVAILABILITY STATEMENT

Thus, real GDP changes correspond to changes in real expenditures.

11 The countries available in the dataset are listed in Table A2.

presented in Table A1.

A.2 Additional tables

Mode Definition Example

Source: GATS definition.

T A B L E A2 Countries available in the dataset

Australia Austria Belgium Brazil Canada China Czech Republic

T A B L E A3 STRI value used for partial liberalization

Sector Country STRI value

Construction Japan 0.07

T A B L E A4 Elasticities of substitution by sector

Sector Elasticity of substitution (𝝈 k )

Source: Egger et al. (2021).

A.3 Calculating the effects of partial trade liberalization

Yik pik qik

K represents the number of sectors. As previously mentioned, the demand share on

A.4 Robustness checks

Sector Elasticity of substitution (𝝈 k )

Construction services 5.997

Source: Blank et al. (2018).

T A B L E A6 Welfare change by country in percentage %—Elasticities Table A5

T A B L E A7 Elasticities of substitution by sector

Sector Elasticity of substitution (𝝈 k )

T A B L E A8 Welfare change by country in %—Elasticities Table A7

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STRIjk −0.111* −0.066* −0.187* 0.008 −0.018 −0.097* −0.133* −0.035***