Cutting red tape for trade in services

Trade in services is often hampered by domestic administrative barriers, even when countries are members of the same regional trade agreement. We exploit a large reform in the European Union (the EU Service Directive) aimed at reducing such administrative hurdles in cross-border service provision to estimate its effects on service trade. We employ a triple-difference strategy and a Poisson pseudo-maximum-likelihood panel approach to estimate gravity equations with multiple fixed effects. On average, the reform increased intra-EU trade in targeted services between a lower bound of 29% and an upper bound of 67%, translating into an overall welfare increase between 0.39% and 1.32% for the member states. This effect of the reform on service trade is corroborated by several robustness and sensitivity checks. Besides the cross-border trade creation effect, we show that there is trade diversion at the cost of domestic flows. Furthermore, a disaggregated analysis reveals significant differences between countries and service sectors.