Working Paper: CEPR ID: DP6542
Authors: Keith Head; Thierry Mayer; John Ries
Abstract: Advances in communication technology make it possible for workers in India to supply business services to head offices located anywhere. This has the potential to put high-wage workers in direct competition with much lower paid Indian workers. Service trade, however, like goods trade, is subject to strong distance effects, implying that the remote supply of services remains limited. We investigate this proposition by deriving a gravity-like equation for service trade and estimating it for a large sample of countries and different categories of service trade. We find that distance costs are high but are declining over time. Our estimates suggest that delivery costs create a significant advantage for local workers relative to competing workers in distant countries.
Keywords: distance; gravity; services; trade
JEL Codes: F10; F14; F15; F16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| geographic distance (R12) | service trade (L84) |
| increase in distance (O39) | increase in costs of remote service provision (L86) |
| increase in distance (O39) | decrease in likelihood of offshoring jobs (F66) |
| 10% increase in distance (R12) | decrease in imports of services (F19) |
| distance effect for OCS trade in 1992 (F12) | distance effect for OCS trade in 2004 (F12) |
| delivery costs associated with distance (L87) | wage premium for local workers (J31) |
| time zone differences (J29) | complex impact on service trade (F69) |
| improvements in communication technology (L96) | reduction of distance barriers on service trade (F12) |