The Basic Economics of Services Trade

Abstract

Abstract This chapter starts with a brief overview on how services are traded and the different modes of service supply that include: cross-border trade, consumption abroad, foreign direct investment, and labor movement. It then reviews the reasons for trade in services together with the sources of potential welfare as well as the effects of services liberalization on income distribution. It notes that these issues are very similar to the standard analysis of trade in goods and factors. Next the interactions among the different modes of supply are discussed. These interactions are important because restrictions on some modes (such as labor mobility) may either render some services non-tradable, or may force service providers to use another (possibly less efficient) mode. An analysis is then provided of the effects of some of the most common barriers to trade in services, noting in particular how the effects of trade liberalization cannot be analyzed independently of the domestic regulatory system. The relative merits of trade agreements versus unilateral liberalization of services trade are discussed.

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