Market Structure and Market Access

We explore an issue at the nexus of domestic competition policy and international trade, the interaction between goods trade and market power in domestic trade and distribution sectors. We examine the effect of variations in conditions of domestic competition in services on trade volumes in goods in the cases of both linear and nonlinear import demand, including standard form CES-based gravity models of bilateral trade flows. Theory suggests a set of linkages between service-sector pricing and goods trade supported by econometrics involving imports of 22 OECD countries vis-a-vis 69 exporters. Competition in distribution services affects the volume of trade in goods. Additionally, because of interaction between tariffs and pricing, the market structure of the domestic service sector becomes increasingly important as tariffs are reduced. Indeed, depending on the degree of competition, market access concessions on tariffs may be effectively undone in some cases by changes in margins. For exporters, we find that service competition in destination markets matters most for exporters from smaller, poorer countries. Our results also suggest that while negotiated agreements leading to cross-border services liberalisation may boost goods trade as well, they may also lead to a fall in goods trade when such liberalisation involves FDI leading to increased service sector concentration.