Revisiting Squalli-Wilson’s Measure of Trade Openness in the Context of Services Trade

This study re-examines Squalli-Wilson's measure of trade openness from the perspective of services. An attempt was made to compose all modes of services supply to form a composite measure of service openness that has rarely been used in trade literature. A global sample comprising different regions based on cross-country data was applied to test the reliability of this measure using correlation coefficients, income, and environmental quality models. Ordinary Least Square (OLS) and Two-Stage Least Square (2-SLS) Instrumental Variables approach were applied. Findings from the growth impact of trade are robust and consistent with prevailing literature supporting the positive impact of service trade on economic growth. However, our empirical estimate based on the two measures of environmental pollutants, shows that services openness reduces SO2 and increases CO2 emissions. These findings are consistent with most of the existing literature supporting the "gains from trade" hypothesis in the case of SO2 and the "pollution havens” hypothesis in the case of CO2 emissions. Nonetheless, the results provide further support in the context of services for the use of composite trade intensity proposed by Squalli-Wilson that not only considered trade/GDP ratio but also the relative importance of the country to the world trade. The inverted U-shaped EKC was also verified in both two measures of environmental pollutions. The policy implications of these findings are that care must be taken while increasing openness in areas of services to increase economic growth and to reduce the phenomenon of pollution haven in the case of CO2 emissions.