U.S.-Korea Free Trade Agreement: Potential Economy-wide ... - USITC

Econometric Analysis
Following the previous empirical work, the first stage used a log-log specification to
determine the effect of three firm-level measures plus country dummy variables on NIMs.
Country-level pure spreads were then calculated by adding the coefficients of the country
dummy variables to the intercept term. In the second stage these pure spreads were used as
the dependent variable, with country-level independent variables including a trade policy
measure. The Commission developed this trade policy measure by using a technique
suggested by the OECD. 13 The OECD identified restrictions and their relative impact on
trade for each of the four modes of services trade. 14 Commission staff assigned scores to
market access and national treatment commitments on the seven activities defined as banking
services in the GATS. The services included deposit taking and lending services as well as
fee-based services. 15
Where countries scheduled a given subsector as completely open, a score of 0 was assigned,
whereas the absence of a commitment was assigned a score of 1. It is recognized that
countries’ actual practices may be more liberal than their GATS commitments or offers
indicate; therefore the GATS scores, and consequently the TEs developed from the GATS
scores, should be considered an upper bound. A score of 0.25 was assigned if the measure
was deemed to have little effect on trade by the OECD; a score of 0.5, if the measure has a
restrictive effect; and a score of 0.75 if the measure was deemed to have a highly restrictive
effect. Horizontal restrictions were assumed to have an equal effect across all subsectors
unless otherwise noted, and therefore horizontal scores were assigned to each service
scheduled by a given country. The total scores were aggregated across services, modes, and
market access and national treatment categories. This score was then divided by 56, the score
which would be observed if all services in all modes for both market access and national
treatment were unbound. The resulting GATS scores were between 0 and 1. No attempt was
made to weight various restrictions based on their relative importance.
From the coefficient of the GATS score estimated in the second-stage equation and the trade
policy score for each individual country, the TEs were estimated using the equation: 16
(1) TE = 100*(e GATS coefficient*GATS score -1)
Owing to the logarithmic form of the first-stage equation, it is necessary to incorporate e, the
base of the natural logarithm, to the equation calculating TE. Conceptually, the TE measures
the percentage difference between the observed NIM and the NIM that would be observed
in the absence of any trade restrictions.
13 OECD, “Assessing Barriers to Trade in Services: Revised Consolidated List of Cross-Sectoral
Barriers,” 2001, 5–9.
14 Cross-border supply (Mode 1) entails the provision of services from a provider in one country to a
consumer in another; consumption abroad (Mode 2), the provision of a service in the country of the supplier
to a consumer from another country; commercial presence (Mode 3), the provision of a service through an
affiliate established in a foreign market; and the presence of natural persons (Mode 4), the provision of a
service by a natural person in a foreign market.
15 Commitments were scored for (1) acceptances of deposits, (2) lending of all types, (3) financial leasing,
(4) all payment and money transmission services, (5) guarantees and commitments, (6) provision and transfer
of financial information, and (7) advisory, intermediation, and other auxiliary financial services.
16 For the derivation of this formula, see Kalirajan et al., 226–7.
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