The Covid-19 shock and services trade : explaining the heterogeneous decline

Abstract

Global services trade declined by 20% during 2020 with significant heterogeneity across countries, geographical regions and sectors. The decline was correlated with COVID-19-case incidence; stringency of imposed lockdowns; the decline in merchandise trade; and with different ways of transacting services trade across sectors. The latter depends on the sectoral composition of services trade across countries, which in turn emanates from more fundamental determinants of comparative advantage in services. Results from empirical analysis suggest that smaller, more capital- and PTA-intensive economies with more digital-trade-restrictive policies and lower ability to leverage ICT infrastructure were associated with relatively larger declines. Regulatory quality is found to have played both alleviating and intensifying roles in the decline, while geographical remoteness is found to be inversely related to it. Finally, the expected role of GVC-integration in accentuating the services trade decline finds strong support in both aggregate GMM and bilateral structural gravity results across sectors.