The Impact of Policy Restrictions on Services Trade

Standard techniques used to estimate gravity equations, the workhorse empirical model in international trade, rely on bilateral variation to identify the effect of trade barriers on bilateral trade flows. This prevents the estimation of any exporter- or importer-specific trade barriers. To address this shortcoming, I develop a method that estimates the effects of country-level variables on trade between countries in the presence of firm heterogeneity and country selection into trade, a natural extension of existing empirical models of international trade. The method relies on the theoretical structure of a model of international trade to generate empirical measures of multilateral resistance and fixed production costs for each country. I implement the method in services data, where measures of services trade policy currently available provide information on the average level of regulations restricting entry into an importing country. I find that policy barriers are statistically significant and quantitatively important in predicting services trade flows. Further, consistent with the theoretical model, I find that increases in measured importer and exporter fixed costs reduce bilateral trade