Does Bilateral Free Trade Agreement Actually Increase Trade in Services?

Abstract

Free trade is a topic of heated debate: domestic consumers and producers in the export sector advocate freer access to foreign markets and a greater variety of goods and services, whereas domestic workers and producers in the import sector oppose the influx of cheaper foreign products and services. Governments signing Free Trade Agreements (FTAs) often argue in favor of the economic benefits from free trade and affirm that gains can be redistributed to compensate for the losses. Then, it is critical to confirm that FTAs actually increase trade volume.

This paper addresses the question of whether a bilateral FTA necessarily increases trade volume in services for the trading countries. Although the relationship seems obvious, it is not. The statistical significance of the impact of FTAs on trade volume has been widely debated and studied in the trade literature with a focus on the goods rather than the service sector. The hypothesis of this paper is that bilateral FTAs are positively correlated with subsequent exports in services. Contrary to this hypothesis, the study found a statistically insignificant association, by the conventional standard, between forming FTAs and higher exports in services for the trading partners. Nonetheless, the relationship is insignificant at the margin by a more liberal standard and its potential economic significance should not be overlooked. The findings of this paper imply that FTAs might not be an appropriate measure if the goal of the policy is to increase exports in services.