## Section 5 concludes.

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---

### Stylized Facts
- Data and structure:
  - Inter-country input-output structure based on the World Input-Output Database (WIOD).
  - Study covers 30 industries (detailed in A2) and categorizes them into goods and services sectors.
- Households’ expenditure patterns (AEs vs EMDEs):
  - Services expenditure accounts for most household expenditures in both AEs and EMDEs.
  - AE households spend more on domestic services, foreign goods, and foreign services than EMDE households, and spend less on domestic goods.
  - EMDE households spend50.9%less on foreign services while spending54.8%more on domestic goods than households in AEs.
  - Greater share of total services in AEs’ consumption relates to non-homothetic preferences, higher incomes, and lower services trade restrictiveness.
- Producers’ input shares:
  - Goods producers in both AEs and EMDEs spend more on intermediate inputs than on factors.
  - Goods producers in AEs spend more on domestic services, foreign goods, and foreign services than those in EMDEs, and spend less on domestic goods.
  - Goods producers in EMDEs spend88.6%less on foreign services while spending32.2%more on domestic goods than goods producers in AEs.
  - Services producers in both AEs and EMDEs spend more on primary factors than on intermediate inputs and use relatively more services inputs than goods producers.
  - Services producers in EMDEs spend92.9%less on foreign services while spending40.6%more on domestic goods than services producers in AEs.
- Summary statistics and implications:
  - AE households spend 50.9% more on foreign services than EMDE households.
  - AE firms spend 88.6% (goods producers) and 92.9% (services producers) more on foreign services as inputs than EMDE firms.
  - These differences reflect structural transformation; as EMDEs converge toward AE patterns, implications for welfare gains from services trade liberalization arise.
- Counterfactuals set up for analysis:
  - Scenario A: EMDE expenditure/input shares reach AE levels.
  - Scenario B: EMDEs’ expenditure/input shares change following a services trade costs reduction.

### The Model
- Model type and purpose:
  - Multi-country multi-sector general equilibrium trade model with international production networks following Baqaee and Farhi (2024).
  - Captures shock propagation across sectors and countries via supply chains.
- Environment and structure:
  - C countries, N industries; representative firm produces varieties using factors and an intermediate bundle; representative household consumes and supplies factors.
  - Markets are perfectly competitive; factors mobile across sectors but not across countries.
  - Iceberg trade costs affect consumer prices: pc_jm = τc_jm p_jm (equation 1).
  - Expenditures on inputs observed in input-output tables given by Ω definitions (equation 2).
- Household consumption aggregation:
  - Sectoral bundle prices and final consumption price index defined with industry-specific elasticities θ_i and aggregate elasticity σ (equations 3–4).
  - Household budget constraint: P0c C0c = Σ_f W_f L_f (equation 5).
- Producers:
  - Marginal cost of variety p_ic given by nested CES between value-added and intermediate bundle with parameter φ and factor share α_ic (equation 6).
  - Value-added bundle price P_F_ic aggregates over factors with elasticity γ (equation 7).
  - Intermediate input price index P_M_ic aggregates over industry bundles with elasticity ε (equation 8).
  - Industry bundle price P_ic_j aggregates over country varieties with elasticity θ_i (equation 9).
- Equilibrium:
  - Given endowments, technologies, preferences, and iceberg costs, prices and factor allocations adjust so markets clear.
- Welfare decomposition for trade shocks:
  - First-order change in log real income:
    - dlog W_c = − Σ_i λ^W_{c i} dlog τ_i  (Price Effects)
      + Σ_f (Λ_{c f} − Λ^W_{c f}) dlog Λ_f  (Reallocation Effects)  (equation 10)
  - Price effects: direct lowering of consumption basket prices proportional to exposure λ^W_{c i}.
  - Reallocation effects: depend on changes in factor prices and countries’ net exposures (Λ_{c f} − Λ^W_{c f}).
- Solution and calibration:
  - Log-linearized model solved for perturbations to trade costs.
  - Nested-CES production and consumption.
  - Calibration: elasticity parameters set to standard literature values (Table 1):
    - φ ES between factors and intermediate = 0.20
    - γ ES across factors = 1.0
    - ε ES across intermediate inputs = 0.5
    - θ_i ES across country varieties within industry = see Table A2
    - σ ES of household consumption across industry = 0.9
  - Initial expenditure shares and input-output structures calibrated to match WIOD.
  - Model contains 40 countries plus the Rest of the World and 30 industries.

### Quantitative Results
- Policy shock analyzed:
  - Hypothetical 50% reduction in services trade costs across all countries (noted comparable to Uruguay Round tariff reductions).
- Baseline welfare impacts (Section 4.1):
  - Average real income across countries increases by 3%.
  - Decomposition:
    - Price effects raise average real income by 2.5% through lower consumer prices.
    - Reallocation effects also operate via changes in factor prices and production reallocation.
  - Countries relying on foreign services as consumption and intermediate inputs see especially strong price effects.
  - Reallocation can be negative for countries with large exposure to foreign factor prices; Figure 6 shows a negative relationship between net exposure to foreign factor prices and reallocation effects.
  - Small services-intensive economies gain large income via reallocation effects.
  - Goods exporters (examples cited: Brazil, Türkiye, Mexico) experience negative but small income losses from the shift from goods to services; these losses are offset by lower consumer prices, yielding overall welfare gains.
- Household expenditure shares convergence (Section 4.2):
  - Counterfactual: EMDE households’ expenditure shares converge to AE levels.
  - Result: Average real income across countries increases by 3.7%, which is 0.7 percentage points more than the baseline.
  - Mechanisms:
    - EMDEs spending more on foreign services increases gains from lower consumer prices, though the increase in price effects among EMDEs is small.
    - Larger demand for foreign services amplifies reallocation of trade and production; average real income increases by 1.2% through reallocation effects, significantly larger than baseline reallocation.
  - Distributional outcomes:
    - Exporters of services to large EMDEs (Korea, Taiwan POC, Japan) see larger income gains.
    - The United States reverses its negative reallocation effect from the baseline but gains only slightly more overall.
    - Less services-intensive economies (Mexico, Brazil) may experience minor income losses due to negative reallocation effects offsetting price effects.
- Producers’ input shares convergence (Section 4.3):
  - Counterfactual: EMDE producers’ input shares of services converge to AE levels.
  - Result: Average real income across countries increases by 8.7%, which is 5.7 percentage points more than the baseline.
  - Mechanisms:
    - EMDE producers using more foreign services amplify marginal cost reductions from service trade liberalization, lowering producer prices and thereby consumer prices globally.
    - Price effects: average real income increases by 3.2% through price effects.
    - Reallocation effects: average real income increases by 5.5% through reallocation effects.
  - Distributional outcomes:
    - Largest gains accrue to Korea, Taiwan POC, and Japan.
    - Manufacturing-intensive economies such as Brazil, Türkiye, and Mexico lose out in this scenario.

### 4.4 Policy Convergence: Services Trade Reforms in EMDEs
- Scenario and calibration:
  - Scenario: reductions in trade costs facing services implemented only by EMDEs.
  - Reductions are calibrated to match the average difference between EMDEs and AEs in the ad-valorem tariff equivalent of the OECD services trade restrictiveness index (STRI) for each sector.
  - Sectoral reductions vary by sector, ranging from from 29.6% (Transport) to 66.5% (Personal services).
  - Methodology:
    - Use a structural gravity model with both international and domestic trade flows to estimate the ad-valorem tariff equivalents (AVEs) of services trade restrictiveness indices (STRIs) sourced from OECD.
    - Estimated elasticities of trade to STRIs are given by the coefficients on the interaction term between STRI and an indicator for international flows.
    - AVEs are calculated according to the formula:
      - ̂퐴푉퐸 푖푗푠푡 =푒푥푝( − 푆푇푅퐼 푗푠푡 ̂ 훽 푠 ̂휎 푠 −1 ) − 1, where ̂휎 푠 is the elasticity of substitution between varieties, taken from Egger et al. (2021).
    - A concordance is created between WIOD sectors and EBOPS 2010 sectors when no exact match is available (see Appendix B).
- Sectoral trade-cost reductions (EMDE to AE):
  - Table B2: Trade cost reductions in EMDEs by services sector (Percentage decrease)
    - Electricity, Gas and Water Supply: none
    - Construction: 33.5
    - Sale, Maintenance and Repair of Motor Vehicles and Motorcycles; Retail Sale of Fuel & Wholesale Trade and Commission Trade, Except of Motor Vehicles and Motorcycles: 49.9
    - Retail Trade, Except of Motor Vehicles and Motorcycles; Repair of Household Goods: 49.9
    - Hotels and Restaurants: 66.6
    - Inland Transport: 29.6
    - Water Transport: 29.6
    - Air Transport: 29.6
    - Other Supporting and Auxiliary Transport Activities; Activities of Travel Agencies: 49.9
    - Post and Telecommunications: 48.2
    - Financial Intermediation: 51.0
    - Real Estate Activities: 51.0
    - Renting of Machinery and Equipment and Other Business Activities: 33.2
    - Public Admin and Defence; Compulsory Social Security: 66.6
    - Education: 66.6
    - Health and Social Work & Other Community, Social and Personal Services & Private Households with Employed Persons: 66.6
- Quantitative impacts and distributional patterns:
  - Average real income across EMDEs increases by 1.2% in this policy-convergence case.
  - All countries benefit from the reduced trade costs facing services in EMDEs.
  - Welfare gains accrue to EMDEs through greater relative price effects compared to AEs.
  - Reallocation effects are highly heterogeneous and reflect existing trade links among the liberalizing economies:
    - Eastern Europe gains the most.
    - Some medium sized EMDEs and Taiwan POC lose on reallocation effects.
  - Biggest beneficiaries of policy convergence (without household and firm expenditure convergence): Eastern European EMs, followed by China, Brazil and Türkiye.
  - Expenditure responses:
    - Expenditure on imported final and intermediate services rises.
    - Expenditure on domestic goods also rises as a result of combined wealth and substitution effects due to lower services input costs.
- Interpretation and policy implications:
  - Partial liberalization (EMDE-only services trade cost reductions) can be beneficial, particularly where existing barriers are high.
  - However, results highlight the need for multilateral efforts:
    - Multilateral reductions in trade costs in both AEs and EMDEs are needed to achieve broadly distributed welfare gains.
  - Caveats and likely underestimation of gains:
    - Long-run gains from trade are generally larger in dynamic models with endogenous capital accumulation, including human capital (Baldwin, 1992).
    - As countries become wealthier, the share of services in consumption rises; non-homothetic preferences could amplify welfare gains (planned future model extension).
    - Future research could explore the causal impact of openness in services on the pace of structural transformation in a dynamic setting and the impact of long-run demographic trends (population aging) on services consumption.

*Source: wpiea2025061-print-pdf - Section 5 concludes. Canonical URL: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025061-print-pdf.pdf*

### Section 5 concludes.

### Section 5 concludes.

### Stylized Facts
- Data and structure:
  - Inter-country input-output structure based on the World Input-Output Database (WIOD).
  - Study covers 30 industries (detailed in A2) and categorizes them into goods and services sectors.
- Households’ expenditure patterns (AEs vs EMDEs):
  - Services expenditure accounts for most household expenditures in both AEs and EMDEs.
  - AE households spend more on domestic services, foreign goods, and foreign services than EMDE households, and spend less on domestic goods.
  - EMDE households spend50.9%less on foreign services while spending54.8%more on domestic goods than households in AEs.
  - Greater share of total services in AEs’ consumption relates to non-homothetic preferences, higher incomes, and lower services trade restrictiveness.
- Producers’ input shares:
  - Goods producers in both AEs and EMDEs spend more on intermediate inputs than on factors.
  - Goods producers in AEs spend more on domestic services, foreign goods, and foreign services than those in EMDEs, and spend less on domestic goods.
  - Goods producers in EMDEs spend88.6%less on foreign services while spending32.2%more on domestic goods than goods producers in AEs.
  - Services producers in both AEs and EMDEs spend more on primary factors than on intermediate inputs and use relatively more services inputs than goods producers.
  - Services producers in EMDEs spend92.9%less on foreign services while spending40.6%more on domestic goods than services producers in AEs.
- Summary statistics and implications:
  - AE households spend 50.9% more on foreign services than EMDE households.
  - AE firms spend 88.6% (goods producers) and 92.9% (services producers) more on foreign services as inputs than EMDE firms.
  - These differences reflect structural transformation; as EMDEs converge toward AE patterns, implications for welfare gains from services trade liberalization arise.
- Counterfactuals set up for analysis:
  - Scenario A: EMDE expenditure/input shares reach AE levels.
  - Scenario B: EMDEs’ expenditure/input shares change following a services trade costs reduction.

### The Model
- Model type and purpose:
  - Multi-country multi-sector general equilibrium trade model with international production networks following Baqaee and Farhi (2024).
  - Captures shock propagation across sectors and countries via supply chains.
- Environment and structure:
  - C countries, N industries; representative firm produces varieties using factors and an intermediate bundle; representative household consumes and supplies factors.
  - Markets are perfectly competitive; factors mobile across sectors but not across countries.
  - Iceberg trade costs affect consumer prices: pc_jm = τc_jm p_jm (equation 1).
  - Expenditures on inputs observed in input-output tables given by Ω definitions (equation 2).
- Household consumption aggregation:
  - Sectoral bundle prices and final consumption price index defined with industry-specific elasticities θ_i and aggregate elasticity σ (equations 3–4).
  - Household budget constraint: P0c C0c = Σ_f W_f L_f (equation 5).
- Producers:
  - Marginal cost of variety p_ic given by nested CES between value-added and intermediate bundle with parameter φ and factor share α_ic (equation 6).
  - Value-added bundle price P_F_ic aggregates over factors with elasticity γ (equation 7).
  - Intermediate input price index P_M_ic aggregates over industry bundles with elasticity ε (equation 8).
  - Industry bundle price P_ic_j aggregates over country varieties with elasticity θ_i (equation 9).
- Equilibrium:
  - Given endowments, technologies, preferences, and iceberg costs, prices and factor allocations adjust so markets clear.
- Welfare decomposition for trade shocks:
  - First-order change in log real income:
    - dlog W_c = − Σ_i λ^W_{c i} dlog τ_i  (Price Effects)
      + Σ_f (Λ_{c f} − Λ^W_{c f}) dlog Λ_f  (Reallocation Effects)  (equation 10)
  - Price effects: direct lowering of consumption basket prices proportional to exposure λ^W_{c i}.
  - Reallocation effects: depend on changes in factor prices and countries’ net exposures (Λ_{c f} − Λ^W_{c f}).
- Solution and calibration:
  - Log-linearized model solved for perturbations to trade costs.
  - Nested-CES production and consumption.
  - Calibration: elasticity parameters set to standard literature values (Table 1):
    - φ ES between factors and intermediate = 0.20
    - γ ES across factors = 1.0
    - ε ES across intermediate inputs = 0.5
    - θ_i ES across country varieties within industry = see Table A2
    - σ ES of household consumption across industry = 0.9
  - Initial expenditure shares and input-output structures calibrated to match WIOD.
  - Model contains 40 countries plus the Rest of the World and 30 industries.

### Quantitative Results

- Policy shock analyzed:
  - Hypothetical 50% reduction in services trade costs across all countries (noted comparable to Uruguay Round tariff reductions).
- Baseline welfare impacts (Section 4.1):
  - Average real income across countries increases by 3%.
  - Decomposition:
    - Price effects raise average real income by 2.5% through lower consumer prices.
    - Reallocation effects also operate via changes in factor prices and production reallocation.
  - Countries relying on foreign services as consumption and intermediate inputs see especially strong price effects.
  - Reallocation can be negative for countries with large exposure to foreign factor prices; Figure 6 shows a negative relationship between net exposure to foreign factor prices and reallocation effects.
  - Small services-intensive economies gain large income via reallocation effects.
  - Goods exporters (examples cited: Brazil, Türkiye, Mexico) experience negative but small income losses from the shift from goods to services; these losses are offset by lower consumer prices, yielding overall welfare gains.
- Household expenditure shares convergence (Section 4.2):
  - Counterfactual: EMDE households’ expenditure shares converge to AE levels.
  - Result: Average real income across countries increases by 3.7%, which is 0.7 percentage points more than the baseline.
  - Mechanisms:
    - EMDEs spending more on foreign services increases gains from lower consumer prices, though the increase in price effects among EMDEs is small.
    - Larger demand for foreign services amplifies reallocation of trade and production; average real income increases by 1.2% through reallocation effects, significantly larger than baseline reallocation.
  - Distributional outcomes:
    - Exporters of services to large EMDEs (Korea, Taiwan POC, Japan) see larger income gains.
    - The United States reverses its negative reallocation effect from the baseline but gains only slightly more overall.
    - Less services-intensive economies (Mexico, Brazil) may experience minor income losses due to negative reallocation effects offsetting price effects.
- Producers’ input shares convergence (Section 4.3):
  - Counterfactual: EMDE producers’ input shares of services converge to AE levels.
  - Result: Average real income across countries increases by 8.7%, which is 5.7 percentage points more than the baseline.
  - Mechanisms:
    - EMDE producers using more foreign services amplify marginal cost reductions from service trade liberalization, lowering producer prices and thereby consumer prices globally.
    - Price effects: average real income increases by 3.2% through price effects.
    - Reallocation effects: average real income increases by 5.5% through reallocation effects.
  - Distributional outcomes:
    - Largest gains accrue to Korea, Taiwan POC, and Japan.
    - Manufacturing-intensive economies such as Brazil, Türkiye, and Mexico lose out in this scenario.

*Source: wpiea2025061-print-pdf - Section 5 concludes. Canonical URL: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025061-print-pdf.pdf*

### 4.4    Policy Convergence: Services Trade Reforms in EMDEs

### 4.4    Policy Convergence: Services Trade Reforms in EMDEs

### Scenario and calibration
- Scenario: reductions in trade costs facing services implemented only by EMDEs.
- Reductions are calibrated to match the average difference between EMDEs and AEs in the ad-valorem tariff equivalent of the OECD services trade restrictiveness index (STRI) for each sector.
- Sectoral reductions vary by sector, ranging from from 29.6% (Transport) to 66.5% (Personal services).
- Methodology:
  - Use a structural gravity model with both international and domestic trade flows to estimate the ad-valorem tariff equivalents (AVEs) of services trade restrictiveness indices (STRIs) sourced from OECD.
  - Estimated elasticities of trade to STRIs are given by the coefficients on the interaction term between STRI and an indicator for international flows.
  - AVEs are calculated according to the formula:
    - ̂퐴푉퐸 푖푗푠푡 =푒푥푝( − 푆푇푅퐼 푗푠푡 ̂ 훽 푠 ̂휎 푠 −1 ) − 1, where ̂휎 푠 is the elasticity of substitution between varieties, taken from Egger et al. (2021).
  - A concordance is created between WIOD sectors and EBOPS 2010 sectors when no exact match is available (see Appendix B).

### Sectoral trade-cost reductions (EMDE to AE)
- Table B2: Trade cost reductions in EMDEs by services sector (Percentage decrease)
  - Electricity, Gas and Water Supply: none
  - Construction: 33.5
  - Sale, Maintenance and Repair of Motor Vehicles and Motorcycles; Retail Sale of Fuel & Wholesale Trade and Commission Trade, Except of Motor Vehicles and Motorcycles: 49.9
  - Retail Trade, Except of Motor Vehicles and Motorcycles; Repair of Household Goods: 49.9
  - Hotels and Restaurants: 66.6
  - Inland Transport: 29.6
  - Water Transport: 29.6
  - Air Transport: 29.6
  - Other Supporting and Auxiliary Transport Activities; Activities of Travel Agencies: 49.9
  - Post and Telecommunications: 48.2
  - Financial Intermediation: 51.0
  - Real Estate Activities: 51.0
  - Renting of Machinery and Equipment and Other Business Activities: 33.2
  - Public Admin and Defence; Compulsory Social Security: 66.6
  - Education: 66.6
  - Health and Social Work & Other Community, Social and Personal Services & Private Households with Employed Persons: 66.6

### Quantitative impacts and distributional patterns
- Average real income across EMDEs increases by 1.2% in this policy-convergence case.
- All countries benefit from the reduced trade costs facing services in EMDEs.
- Welfare gains accrue to EMDEs through greater relative price effects compared to AEs.
- Reallocation effects are highly heterogeneous and reflect existing trade links among the liberalizing economies:
  - Eastern Europe gains the most.
  - Some medium sized EMDEs and Taiwan POC lose on reallocation effects.
- Biggest beneficiaries of policy convergence (without household and firm expenditure convergence): Eastern European EMs, followed by China, Brazil and Türkiye.
- Expenditure responses:
  - Expenditure on imported final and intermediate services rises.
  - Expenditure on domestic goods also rises as a result of combined wealth and substitution effects due to lower services input costs.

### Interpretation and policy implications
- Partial liberalization (EMDE-only services trade cost reductions) can be beneficial, particularly where existing barriers are high.
- However, results highlight the need for multilateral efforts:
  - Multilateral reductions in trade costs in both AEs and EMDEs are needed to achieve broadly distributed welfare gains.
- Caveats and likely underestimation of gains:
  - Long-run gains from trade are generally larger in dynamic models with endogenous capital accumulation, including human capital (Baldwin, 1992).
  - As countries become wealthier, the share of services in consumption rises; non-homothetic preferences could amplify welfare gains (planned future model extension).
  - Future research could explore the causal impact of openness in services on the pace of structural transformation in a dynamic setting and the impact of long-run demographic trends (population aging) on services consumption.

*Source: wpiea2025061-print-pdf - 4.4    Policy Convergence: Services Trade Reforms in EMDEs*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025061-print-pdf.pdf_