Publication

This paper identifies the determinants of service trade and foreign affiliate sales in a gravity model, using recently collected bilateral data for the OECD countries and their trading partners, as well as new indicators for barriers to service imports and foreign affiliate sales. The authors emphasize the strong links between service FDI and trade, since a large proportion of trade is facilitated through foreign affiliate sales. The study identifies a strong home market effect in service trade and rich countries do not tend to import more, which may indicate that rich countries have a competitive advantage in service trade. The authors conclude that free trade agreements do not contribute to increased service trade. A full liberalization of international trade in services in the model lifts exports by as much as between 30 and 50 percent for some countries.