What is So Special about Trade in Services?

Abstract

This article argues that trade in services has a specific feature that does not apply to trade in goods. As the traded service is partly produced where it is consumed (i.e. in the importing country), we propose that it must use interactively inputs from both the exporting and importing countries. The modelling of the specificity of traded services is inspired from the O-ring production function presented in Kremer (1993). We then test our analytical framework using a new OECD dataset on bilateral trade in services. We find that policy and non-policy factors affecting the use of inputs in the exporting or importing country indeed have a similar impact on the same flow of traded service between those countries. This finding may contribute to explain why bilateral commerce in tradable-services is typically weaker than bilateral trade in goods.