The Paradox of 'Preferences': Regional Trade Agreements and Trade Costs in Services

We analyse the relationship between regional trade integration and trade costs in services. The analysis relies on theory-consistent bilateral trade costs for 55 countries for 1999-2009 and an analysis of services commitments in 66 regional trade agreements to which these countries are parties. Despite the recent proliferation of services regional trade agreements (RTAs), we find that trade costs are only slightly lower due to these agreements. In addition, we find that the trade cost reductions that do take place tend to happen before the agreement is signed. This is consistent with countries using RTAs as a way of locking in' reforms. Finally, we find that the preferential margin of services RTAs is thin: members and non-members both see slightly lower trade costs when an RTA is signed. However, the difference between the member and non-member trade cost effects is 28 per cent for services and 40 per cent for goods, indicating a slimmer margin of preference in the former case. We discuss the possible explanations for these findings in terms of the nature of services RTAs and their relationship with regulatory reform. Based on these results, we argue that regionalism in the case of services seems relatively non-discriminatory and does not lead to substantial trade preferences.