greater effects (and impose greater costs) on cross-border flows of services trade and investment are not overlooked. The section that follows explores this issue.

# **4.1 Recent findings on trade costs for services trade for Modes 1, 2, and 4**

Empirical research devoted to the trade costs resulting from barriers to services trade and investment typically regard such costs as high and often exceeding the average tariff on traded goods. Such costs are further seen to potentially concern all modes of supplying services abroad, including via Mode 3, though most empirical attention tends to be devoted (largely for reasons of data availability) to cross-border transactions (Miroudot et al., 2013; van de Marel and Shepherd, 2019). Beyond factors relating to infrastructure, geography, language, culture, and institutional characteristics, trade costs in services sectors relate chiefly to regulatory measures that either create entry barriers or increase the cost burdens facing firms (Miroudot et al., 2013).

Many factors distinguish trade in services from other sectors (Sauvé, 2019). The fact that services transactions confront complex regulatory regimes, coupled with the requirement for physical proximity characteristic of many interactions between buyers and sellers of services - often referred to as the “proximity burden” (Christen and Francois, 2013) -- tend to significantly increase the cost of trading services.

In the latest (2019) edition of its _World Trade Report_ devoted to trade in services, the WTO Secretariat introduced a novel measure of trade costs which builds upon a recent study on trade costs in the global economy (Egger _et al_ ., 2018, see Box 1).

# **<mark>Box 1: Services trade costs and their decomposition: WTO methodology</mark>**

<mark>Estimates of trade costs for Modes 1, 2 and 4 featured in the World Trade Organization’s</mark> _<mark>World Trade Report 2019</mark>_ <mark>are derived from multiregional input-output data found in the World Input-Output Database (WIOD 2016) and experimental data from the Asian Development Bank (ADB-MRIO). The results are based on data for 44 countries across 34 sectors.</mark> <mark>Trade costs are estimated using a sector-level gravity model specification proposed in Egger et al. (2018). First, the coefficients on country-pair dummies ( d</mark> ı <mark>) are obtained from a fully saturated gravity model with appropriate parameter constraints. Second, these estimates are transformed using a sectoral</mark><sup>�</sup> <mark>elasticity of substitution ( θ ): T</mark> i <mark>= (d</mark> ı <mark>)</mark><sup>−1/θθ�</sup> <mark>To obtain the estimates of T</mark> i <mark>, international and domestic trade data from the World Input-Output Database (WIOD) is used and an experimental data set from the Asian Development Bank (ADB-MRIO). The parameter θ is estimated for each sector in Egger</mark> _<mark>et al</mark>_ <mark>. (2018). A higher θ means a more elastic reaction of demand to prices, and hence a higher responsiveness of import demand to trade frictions. Generally, θ takes on lower values for services than for manufactures, implying that trade in services reacts less to changes in trade costs.</mark> In the subsequent analysis, the factors which explain i , are identified by running a regression analysis and using the results to decompose the explained variation in i into different types of trade costs. TT TT 17