Trade Effects of the European Union's Service Directive: Contrastingex anteEstimates with Empirical Evidence

Abstract

AbstractOne of the top priorities to improve the European Union's growth performance is the creation of a single market for services. The directive on services adopted by the Parliament and the Council by the end of 2006 aims at removing barriers to the free movement of service providers on the internal market. Previous studies quantifiedex antesizable effects of implementing the directive in its original form. This paper is a first attempt to evaluateex postthe trade effects induced by a directive – which excludes the country‐of‐origin principle – by performing a difference‐in‐difference‐(in‐differences) estimator on a sample ofEU‐ and non‐EUcountries in the period 2004 to 10. We account for non‐tariff trade barriers and the endogeneity of regional trade agreements and find that the service directive adds to a reallocation of business services trade within theEU. Accounting for the trade effect of past deregulations, theEUdirective fosters a deeper integration of the new member states into the European service value‐added‐chain and promotes business service exports from third countries towards theEUsignificantly more than trade of country pairs in the control group. The reorientation of theEU‐15 towards the new members is in turn associated with less intense intra‐EU‐10 businesses, while business trade betweenEU‐15 members is not significantly affected.