The Impact of Conflict on Trade in Services: A Sector-Level Analysis

Conflicts have a negative effect on trade for the involved and neutral countries over time. However, most papers study the case of merchandise trade without paying attention to trade in services, whereas conflicts significantly affect market access and the mobility of factors of production. This article aims to assess the impact of interstate conflicts between belligerents and disentangle the respective effects of these events not only across levels of hostility (use of force or not) and fatality (victims or not) but also across the geographical locations of the belligerents. We use a structural gravity model with robust methods for the period 1985–2016 concerning total flows of trade in services and eight service sectors (communication, construction, finance, insurance, other business services, personal cultural and recreational services, transport, and travel). The results confirm the significant and negative effect of interstate conflicts between belligerent countries on trade in services. We show that conflicts have a higher trade deterioration effect on finance and travel services than on the other sectors. Finance, insurance, and travel services are the most affected by the level of hostility and fatality of these events. Finally, we show that conflicts have dissimilar effects across countries and service sectors.