Research

The digitalisation of services trade has been accompanied by increasingly complex domestic regulation and a proliferation of digital provisions in preferential trade agreements (PTAs), yet systematic evidence on how these regimes shape cross-border services trade remains limited. Combining bilateral services trade flows with detailed measures of digital policy in a gravity framework, this paper isolates the effects of regulatory divergence from those of PTA-based digital commitments, exploiting changes in digital policy while addressing policy endogeneity. Regulatory divergence depresses bilateral services trade, while digital provisions in PTAs facilitate it. Both effects are strongest for digitally enabled services but run through distinct margins: divergence operates mainly through intellectual property and payment system rules, whereas the impact of PTA provisions depends on their content — IPR provisions matter most for digitally and regulation-intensive services, while e-commerce and data-economy provisions matter more for traditional services. PTAs' trade-facilitating effects are largest where domestic institutions are weakest, suggesting international commitments can partly substitute for a weak regulatory environment. Digital services integration thus hinges both on the compatibility of national regulatory regimes and on the substantive rules governing digital trade within PTAs.

Foreign direct investment in services now exceeds that in manufacturing, yet evidence on spillovers to domestic firms remains scarce, reflecting in part the limited applicability of MNE spillover measures to the services setting. This paper constructs firm-level measures of proximity between domestic services firms and foreign-owned services multinationals (FSMs) from their revealed trading behaviour, and exploits the sequential trade policy shocks associated with Brexit to examine how such proximity shaped export adjustment. Using firm-level data from the UK, I find that proximity to FSMs does not uniformly enhance resilience. Production complementarity amplifies the contraction, lowering export participation by 3.1 percentage points and export value by 21% per standard deviation of exposure, indicating that firms positioned similarly in production networks absorb the same disruption as the multinationals they resemble. The contraction is compositional: firms narrow their range of exported services while raising the complexity of those retained, shifting toward more knowledge- and digitally-intensive activities, consistent with reallocation toward capabilities in which they hold comparative strength rather than proportionate withdrawal. Market relatedness attenuates the shock, raising participation by 2.1 percentage points and entry into previously unserved destinations, including more distant and institutionally demanding markets, without a corresponding gain in export value once those markets are served — consistent with lower informational barriers to entry rather than improved competitiveness. Among firms holding foreign affiliates, horizontal proximity lowers cross-border export value, indicating that competitive overlap is absorbed differently when an alternative mode of supply is available. The findings suggest that the domestic value of services FDI depends on the nature of the linkage between foreign and domestic firms, and on how that linkage interacts with trade policy frictions.