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International Provision of Trade Services, Trade, and Fragmentation

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  • Alan V. Deardorff

Abstract

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.

Suggested Citation

  • Alan V. Deardorff, 2001. "International Provision of Trade Services, Trade, and Fragmentation," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 233-248, May.
  • Handle: RePEc:bla:reviec:v:9:y:2001:i:2:p:233-248
    DOI: 10.1111/1467-9396.00276
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    1. repec:fth:michin:458 is not listed on IDEAS
    2. repec:fth:michin:460 is not listed on IDEAS
    3. Alan V. Deardorff & Robert M. Stern, 2009. "What the Public Should Know about Globalization and the World Trade Organization," World Scientific Book Chapters, in: Globalization And International Trade Policies, chapter 2, pages 19-52, World Scientific Publishing Co. Pte. Ltd..
    4. Bernard Hoekman & Carlos Braga, 1997. "Protection and Trade in Services: A Survey," Open Economies Review, Springer, vol. 8(3), pages 285-308, July.
    5. Alan V. Deardorff, 2011. "Fragmentation in simple trade models," World Scientific Book Chapters, in: Robert M Stern (ed.), Comparative Advantage, Growth, And The Gains From Trade And Globalization A Festschrift in Honor of Alan V Deardorff, chapter 16, pages 165-181, World Scientific Publishing Co. Pte. Ltd..
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    8. Deardorff, A.V., 2000. "Financial Crisis, Trade, and Fragmentation," Working Papers 458, Research Seminar in International Economics, University of Michigan.
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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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