Abstract

While services are increasingly flowing across borders, little is known about barriers to trade in services. This paper examines their impact focusing on banking services. Banking services are a key part of financial services -- the most traded service globally. We exploit changes in barriers imposed by the European Union (EU) on banks operating in the United Kingdom (UK) due to the UK's withdrawal from the EU. Banks provide intermediation services, i.e. take deposits and provide loans, and generate income from these services. We study export of these services and the stocks corresponding to these exports. Using cross-country bilateral data from the Bank for International Settlements and confidential bank-level data on UK-resident banks from the Bank of England, we find that although there is no change in export of intermediation service by UK-resident banks to European Economic Area (EEA) relative to non-EEA, the stocks of deposits taken from  and loans provided to (i.e. the quantities corresponding to these exports) an average EEA country relative to non-EEA falls after the withdrawal from the EU in January 2021, with some impact appearing after the referendum itself. Moreover, banks with higher share of EEA in stocks corresponding to exports, before the referendum, see a decline in these stocks of deposits from and loans to EEA due to the referendum, with some increase in stocks with non-EEA. This coincides with increase in trade of UK-resident banks with intragroup entities in the EEA relative to non-EEA. We investigate the channels behind these facts: whether this reflects a relocation of UK activity to maintain access to EEA markets or a move away from EEA markets. We build a framework that embeds a multinational structure in a model of banking across borders to rationalise these facts and study how trade barriers affect banks' exports and their structure across countries. The framework enables a counterfactual analysis to quantify the impact of trade barriers on the UK banking sector.

Abstract

Brexit led to the biggest reversal of deep international economic integration in the modern era, with the Trade and Cooperation Agreement (TCA) introducing new non-tariff barriers to trade and investment in services between the United Kingdom (UK) and the European Union (EU). This paper quantifies the impact of these non-tariff barriers on trade in services by taking a deep dive into the provisions of the TCA. We create a novel measure of non-tariff barriers by coding the reservations applied in the TCA, by country and service-type. We find that there was a reduced likelihood of the UK exporting services that had reservations applied to cross-border trade under the TCA with the EU, relative to the same services being exported from the UK to non-EU countries where these reservations would not apply. We build a model that incorporates reservations as non-tariff barriers in a Melitz framework, requiring firms to satisfy “production standards” to export to EU countries, to understand firms’ investment and trade decisions. We calibrate the model using estimates from our empirical analysis and quantify the aggregate economic implications for productivity.

Abstract

Firms in technologically less developed countries largely rely on adopting existing technology developed in advanced countries, However, developing countries have been contributing to innovation especially since their trade liberalisation. This paper studies how import competition affects firms’ decision to upgrade technology in countries far from the technology frontier, to determine the effects on productivity and growth. I use firm-level data from India to estimate changes in firms’ adoption and innovation activities following the trade liberalisation in 1991. Then, I develop an endogenous growth model in which firms can improve their technology by either adopting technology developed abroad or developing new ones. A fall in trade cost on output increases import competition and changes incentives to improve technology through the two processes for domestic firms, where the processes differ in their cost, productivity gain and advantage of backwardness. The framework assesses the role of import competition in accounting for adoption, innovation and growth, and studies the counterfactual of a reduction in trade cost.