Predicting the Effects of Services Trade Liberalization

ABSTRACT

This paper uses a computable model of trade to estimate the effects of a free trade agreement on the services and the manufacturing sector. It is parameterized using 2005 data for 6 services industries and total manufacturing sector in 32 countries. The results show that a 10% reduction in both services and total manufacturing trade costs in all the countries will increase welfare by an average 10.20% across all countries. The average welfare gains across all countries are higher in case of reduction in only services trade costs compared to a 10% reduction in only manufacturing trade costs. Interestingly, however there are some countries in which trade liberalization in manufacturing brings more welfare than trade liberalization in services, while in other countries it is vice versa. The simulation results also show that implementing a trade agreement between the U.S. and the U.K. which reduces trade costs in both services and manufacturing by 10% would increase welfare in both the countries: 1.18% in the U.K. and 0.98% in the U.S. In the U.S. specialization increases in travel services, other services and manufacturing. In the U.K. specialization increases in financial services, construction services and manufacturing.

KEYWORDS:

• Free trade agreement
• specialization
• comparative advantage
• computable models

Acknowledgements

The author is grateful to Serge Shikher at the United States International Trade Commission for the invaluable feedback and help. I thank the Editor and an anonymous reviewer for their helpful suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 The commercial services category is defined as being equal to services minus government services, not included elsewhere.

2 Availability of services output data determines the choice of our service industries and sample countries.

3 Kortum (1997) and Eaton and Kortum (1999) provide microfoundations for this approach.

4 It follows from $p_{nj}={\left[{\int }_0^1{p}_{nj}{(s)}^{1-\sigma }\text{d}t\right]}^{1/(1-\sigma )}={\left[{\int }_0^{\mathrm{\infty }}{p}_{nj}^{1-\sigma }d{G}_{nj}(\rho )\right]}^{1/(1-\sigma )}=E[P_{nj}^{1-\sigma }{]}^{1/(1-\sigma )}=\gamma {\mathrm{\Phi }}_{nj}^{-1/\theta }.$ The last equality follows directly from Eaton and Kortum (2002).

Additional information

Notes on contributors

Parul Deswal

Dr. Parul Deswal received her PhD in Economics from Suffolk University, Boston, MA USA. Dr. Deswal's research areas are International Trade and International Macroeconomics, with secondary interests in Development Economics.