International Provision of Trade Services, Trade, and Fragmentation

This paper examines the special role that trade liberalization in service industries can play in stimulating not only trade in services but also in goods. International trade in goods requires inputs from several services industries (trade services, such as transportation, insurance, and finance) in order to complete and facilitate international transactions. Restriction on the ability of national service providers to provide these services across borders and within foreign countries creates additional costs and barriers to international trade above those that would arise in otherwise comparable intranational exchange. As a result, trade liberalization in services can yield benefits, by facilitating trade in goods, that are larger than one might expect from analysis of the services trade alone. This paper explores this idea using simple theoretical models to specify the relationships between services trade and goods trade. The paper also notes the role of services trade in a model of international industrial fragmentation, where production processes can be separated across locations but at some cost in terms of additional service inputs. The incentives for such fragmentation can be larger across countries than within countries, owing to the greater differences in factor prices and technologies available. However, the service costs of international fragmentation can also be larger, especially if regulations and restrictions impede the international provision of services. As a result, trade liberalization in services can also stimulate fragmentation of production of both goods and services, thus increasing international trade and the gains from trade even further.     

Patterns of Trade and Growth across Cones

This paper examines the implications of the Heckscher-Ohlin (HO) Model for the patterns of production and trade that will emerge as a country grows. It focuses primarily on world equilibria that include two or more cones of diversification. Starting with the textbook model of two factors and two goods, growth paths for production and trade are derived in terms of a country's capital-labor ratio relative to that of the world. With additional goods and countries, multiple cones create a ladder of comparative advantage that a country will climb as it accumulates capital relative to the world. With additional factors as well, more complicated patterns can emerge. In a three-factor model based on Krueger (1977), a country with fixed land, growing labor, and faster growing capital can first work its way down the ladder of comparative advantage before climbing back up. Using a graphical representation due to Leamer (1987) of a more general three-factor model, cones of diversification with large numbers of goods take the form of polygons that a growing country may pass through, then cross between. In all cases, the lesson of the HO Model is that growth causes repeated and extreme changes in patterns of specialization and trade over time.     

Rue the ROOs: Rules of origin and the gains (or losses) from trade agreements

ABSTRACT

This article provides three-good, three-country examples of trade in both intermediate inputs and final goods. These show the adverse effects that rules of origin (ROOs) can have, even in a world where every country has a free trade agreement (FTA) with every other country. ROOs may cause ubiquitous FTAs to yield a level of welfare, for everyone, that is worse than if there were no FTAs at all, and all trade were subject to common nondiscriminatory tariffs. Thus, the move to an ever increasing number of FTAs may be reducing world welfare.