Intangible trade: Understanding the relationship between trade barriers and mode of supply in services sectors

In recent years, increased availability of services trade data and measures of non‐tariff barriers has enabled more detailed analysis of trade patterns, including the relationship between different modes of service delivery across international borders. This paper uses a detailed, sector‐level structural gravity model to shed light on the question of whether services trade via foreign affiliate sales (also known as mode 3 trade) is a complement or substitute for cross‐border services trade (modes 1, 2, and 4) in 13 services sectors. In 9 of the 13 sectors considered, there is a negative and significant relationship between trade policies that limit foreign affiliate sales and cross‐border trade, indicating a complementary relationship between the two types of trade flows. This suggests that when services firms export, they rely on multiple modes of supply to deliver their products, considering factors such as the degree of service tradability over the internet, levels of customer interaction, and complexity of particular tasks.