Service Trade Liberalization, Trade Elasticities and Welfare

This paper estimates the welfare effects of service trade liberalization at the country-sector level. We build a panel dataset combining information on service trade restriction index and bilateral service trade flows for 45 countries and estimate the service trade elasticity for cross-country heterogeneity at short horizons. Findings suggest that countries with smaller service trade share have greater the service trade cost elasticity, and the service trade elasticity ranges from 0.11 to 12.61. Then, we develop the CP mode to quantify the welfare effects from service trade liberalization. This study finds a significant positive relationship between service trade and welfare. During the 2014 –2018 period, service trade liberalization improved global welfare by 1.01%. The empirical results indicate that service trade liberalization mainly improves welfare through productivity effect and scale effect, with the former effect having a greater impact than the latter.