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AbstractIt has long been established in theory that uncertainty impacts on firm behaviour. However, the empirical basis for quantifying the uncertainty-reducing effects of trade agreements has not been firmly established. In this paper, we develop estimates of the effect of reducing uncertainty regarding regulation of foreign services markets by making commitments that are bound under a trade agreement. Specifically, we identify the effect on services trade of services trade restrictions, as measured by the OECD's Services Trade Restrictiveness Index (STRI), and the separate effect of ‘water’ in binding commitments, as assessed by the difference between countries’ commitments under the General Agreement on Trade in Services (GATS) or free trade agreements (FTAs) and applied levels of market access, as captured by STRI scores. Using a gravity model, we find that services trade responds positively but inelastically to reductions in services trade barriers, as measured by the STRI and, in our preferred regression, the response to actual restrictions is more than twice – specifically 2.4 times – as strong as the response to comparable reductions in uncertainty, as measured by water. Moving from GATS commitments to FTA commitments leads to a 4.7% increase in services trade because of the reduction in uncertainty.

The mega-regional trade agreements, particularly the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership, and the Trade in Services Agreement, represent a new phenomenon for the global trading system. As major preferential trade agreements that involve the world’s largest economies (the United States and the European Union), they cover a large share of global trade and, thus, generate large spillover effects on non-parties to the negotiations. Further, the ambitious rule-making agenda shifts the locus of global rule-making and standard-setting from the inclusive World Trade Organization to the small number of participants in these negotiations. These rules and standards will shape markets and, thus, amplify the direct effect of discriminatory preferences. This article discusses the factors driving the mega-regionals, considers the significance of these negotiations for excluded parties, and suggests how India, in particular, might respond.