A model of trade liberalization in services

Abstract

This paper develops an intra-industry service trade model taking into account important features of services. We find that service trade liberalization between identical economies is welfare enhancing when the pre-trade domestic market liberalization is limited. This holds regardless of the degree of trade liberalization and of the mode of supply. However, if the pre-trade environment is characterized by a free-entry equilibrium, then service trade liberalization is not necessarily welfare improving. It is welfare enhancing if the trade liberalization is full and the mode of supply is cross-border. The gain from trade in our model comes from the improvement in service quality - better matching between consumers' ideal varieties and firms' product specificity. The implications for the mode of supply in service trade are also explored. © 2006 The Authors; Journal compilation © Blackwell Publishing Ltd. 2006.