International Provision of Trade Services, Trade, and Fragmentation

33 Pages Posted: 20 Apr 2016

See all articles by Alan V. Deardorff

Alan V. Deardorff

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan at Ann Arbor - Department of Economics

Date Written: February 2001

Abstract

By reducing the costs of such trade services as transport, insurance, and finance, liberalizing trade in services can generate benefits in the markets for every kind of trade they facilitate. It can also stimulate the fragmentation of production of both goods and services, thus increasing international trade and the gains from trade even further. Deardorff examines the special role that trade liberalization in services industries can play in stimulating trade in both services and goods.

International trade in goods requires inputs from such trade services as transportation, insurance, and finance, for example. Restrictions on services across borders and within foreign countries add costs and barriers to international trade. Liberalizing trade in services could also facilitate trade in goods, providing more benefits than one might expect from analysis merely of the services trade. To emphasize the point, Deardorff notes that the benefits for trade are arguably enhanced by the phenomenon of fragmentation. The more that production processes become split across locations, with the fragments tied together and coordinated by various trade services, the greater the gains from reductions in the costs of services.

The incentives for such fragmentation can be greater across countries than within countries because of the greater differences in factor prices and technologies. But 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 stimulate the fragmentation of production of both goods and services, thus increasing international trade and the gains from trade even further. Since fragmentation seems to characterize an increasing portion of world specialization, the importance of service liberalization is growing apace.

This paper - a product of Trade, Development Research Group - is part of a larger effort in the group to improve trade policy in goods and services.

Keywords: Services, Trade, Fragmentation

JEL Classification: F1, F13

Suggested Citation

Deardorff, Alan V., International Provision of Trade Services, Trade, and Fragmentation (February 2001). World Bank Policy Research Working Paper No. 2548. Available at SSRN: https://ssrn.com/abstract=632615

Alan V. Deardorff (Contact Author)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
United States

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
458 Lorch Hall
Ann Arbor, MI 48109-1220
United States
313-764-6817 (Phone)
313-764-2769 (Fax)

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