Trade Reform in Services: Structural Change and Production Networks

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We study the effects of services trade reforms in a multi‐country multi‐sector quantitative trade model with input–output linkages. Services matter both as final consumption and as production inputs: cheaper traded services lower household prices directly and reduce the costs of downstream producers also indirectly. We find that (i) welfare gains from a multilateral services trade‐cost reduction are large; (ii) gains depend strongly on the structure of final demand and production networks, especially the intensity with which producers use services as intermediate inputs; and (iii) both Emerging Market and Developing Economies (EMDEs) and Advanced Economies (AEs) gain when EMDEs reduce services barriers toward AE levels and the largest gains among AEs accrue to services‐intensive economies with strong EMDE linkages. These results suggest that the potential gains from liberalizing services trade are large and likely to rise for economies that develop more services‐intensive production networks, thereby calling for renewed ambition in services trade reforms.