Services Policies and Manufacturing Exports

Abstract

This paper uses a structural gravity model to show the effects of services policies on manufacturing exports. Whereas the previous literature has focused on indirect effects of policies—flowing through productivity effects in domestic services markets—we look at direct effects, namely the ability of domestic manufacturers to access services inputs on world markets at competitive prices. Our results show that discriminatory barriers to services trade have a significant negative effect on manufacturing exports. We use theory-consistent counterfactual simulations to show that the trade and real output effects of a 10% reduction in services trade restrictiveness are in fact much larger than those of a 10% reduction in tariffs. On a policy level, our results suggest that an additional argument for liberalizing services markets is that it in fact aids manufacturing sector development, due to the intimate links between the two.