Trade Effects of the European Union's Service Directive: Contrasting Ex Ante Estimates with Empirical Evidence

type="main" xml:id="twec12149-abs-0001"> One of the top priorities to improve the European Union's growth performance is the creation of a single market for services. The directive on services adopted by the Parliament and the Council by the end of 2006 aims at removing barriers to the free movement of service providers on the internal market. Previous studies quantified ex ante sizable effects of implementing the directive in its original form. This paper is a first attempt to evaluate ex post the trade effects induced by a directive – which excludes the country-of-origin principle – by performing a difference-in-difference-(in-differences) estimator on a sample of EU- and non-EU countries in the period 2004 to 10. We account for non-tariff trade barriers and the endogeneity of regional trade agreements and find that the service directive adds to a reallocation of business services trade within the EU. Accounting for the trade effect of past deregulations, the EU directive fosters a deeper integration of the new member states into the European service value-added-chain and promotes business service exports from third countries towards the EU significantly more than trade of country pairs in the control group. The reorientation of the EU-15 towards the new members is in turn associated with less intense intra-EU-10 businesses, while business trade between EU-15 members is not significantly affected.