measured by the distance between trading partners, are moot in a Mode 3 context insofar as establishment-based trade reduces distance to zero in substituting for cross-border transactions. Information and transaction trade costs include hurdles that firms confront in establishing trade relations. These include costs incurred in searching for trading partners and local suppliers, acquiring information about tastes, regulations and technical requirements, and enforcing contracts in a foreign country. Such costs are found to increase with cultural and linguistic distance. Furthermore, transaction costs - those associated to compliance with regulatory requirements and procedures - are high for cross-border trade in services because of heterogeneous institutional frameworks and the need for cross-border financial transactions involving currency conversions.

The next two categories of trade costs for Modes 1, 2 and 4 include government institutions and regulations. Governance quality measures the quality of regulation and the rule of law in trading partners. They capture perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development and perceptions of the extent to which economic agents have confidence in - and abide by - societal norms and rules, in particular the quality of contract enforcement, property rights, police, courts, as well as the likelihood of crime and violence. WTO estimates suggest that the quality of governance accounts for one-tenth of overall trade costs in services. This is likely an underestimate given the regulatory intensity of services trade and indicative of difficulties in assigning empirical measurements to highly qualitative metrics of state conduct. Meanwhile, trade policy barriers and regulatory convergence are seen to account for 21 percent of overall trade costs. This category, which measures policies that make access to domestic markets relatively more onerous for foreign firms, looks at cross-country differences in regulatory quality and trade barriers specific to service sectors. The last category of trade costs – that relating to infrastructure and border costs, captures the cost of delivering services under Modes 1, 2 and 4 from suppliers to customers. Such costs remain significant, accounting for a fifth (20 percent) of trade costs in services.

Figure 9 offers a sectoral breakdown of trade costs, once more solely for services trade under Modes 1, 2 and 4. As can be seen, trade cost components show considerable cross-sectoral variance. For instance, the effects of information and transaction costs are more pronounced in sectors such as transport and logistics, as well as for post and telecommunication services. Governance quality and trade policy barriers play a major role in the trade costs of telecommunications, financial intermediation and professional services. Meanwhile, infrastructure, transport and border costs matter more for construction, real estate activities, education, health and social work.

The WTO’s analysis of the different cost components affecting trade in services under Modes 1, 2 and 4 inevitably raises the question of how best to measure trade costs for Mode 3 transactions. This question is all the more important since establishing a commercial presence in a host country often entails not only the adoption of a different (i.e. adapted) business model for services suppliers, but also compliance with differing economic, political, social and even environmental requirements in host country markets, all of which are likely to affect the cost of trade or, in this case, the cost of serving clients through an established presence abroad.

Contrary to the other three modes of supplying services, where WTO estimates show cost components associated with the quality of governance to be of lesser significance, recent research undertaken by the World Bank Group shows that the opposite holds true for Mode 3 trade (Echandi, 2019). Indeed, as noted earlier, firm-level surveys reveal that as much as one-quarter of all FDI projects in services may be totally 20