Barriers to Services Globalization and Domestic Firm Performance: Evidence from Brexit

How does international market access affect domestic services production? Despite the growing importance of services in global trade and production, answering this question remains difficult due to institutional complexity and limited measurement of barriers to services trade.

We develop a framework to measure and quantify the effects of barriers to services globalization on firm performance. Exploiting Brexit as a natural experiment representing a major reduction in deep economic integration, we construct novel and highly granular measures of regulatory trade barriers by systematically coding the legal provisions of the UK–EU Trade and Cooperation Agreement at the service-destination level.

We incorporate these measures into a model of firm production in which regulatory frictions constrain international market access. Consistent with the model, we find that UK services firms experienced significant increases in regulatory barriers to EU markets after Brexit, resulting in declines in revenue productivity and aggregate output. Our findings provide the first firm-level evidence on the domestic consequences of reduced services market access and underscore the importance of regulatory frictions as a central determinant of services globalization.