Trade in services an introductory survey

The Economic and Social Review, Vol. 20, No. 1, October 1988, pp. 37-48

Trade in Services: An Introductory Survey

C I L L I A N R Y A N *

Cornell College

Abstract: R e c e n t trade t h e o r y l i t e r a t u r e has d e v o t e d c o n s i d e r a b l e a t t e n t i o n to trade i n services. A t issue is w h e t h e r trade i n services c a n be a d e q u a t e l y e x p l a i n e d b y e x i s t i n g m o d e l s o r w h e t h e r there are l i k e l y to be a n y n e w insights to be gained b y c o n s i d e r i n g services as d i s t i n c t f r o m g o o d s . T h i s p a p e r p r o v i d e s a selective s u r v e y o f the r e l e v a n t t h e o r e t i c a l literature a n d c o n s i d e r s several r e c e n t papers t h a t suggest n e w results c a n be o b t a i n e d b y m o d e l l i n g goods a n d services as d i s t i n c t .

his paper suggests that i n the l i g h t o f recent research i t is w r o n g t o treat X goods and services as always theoretically equivalent. I n the paper I con­ sider several recent articles that have suggested new results and survey some of the standard t h e o r y that is p a r t i c u l a r l y relevant t o the debate o n trade i n services.

Over the years there has been a tendency t o m o d e l goods and services as i f they were equivalent. Indeed, i n all branches o f economic theory authors fre­ q u e n t l y refer t o the subject o f their papers as "goods and services". Several recent developments have led t o a reappraisal o f this treatment o f the t w o concepts. First, the service sector has g r o w n i n importance i n m o d e r n western economies, accounting, for example, for 69 per cent o f GNP i n the U n i t e d States. Secondly, the current r o u n d o f G A T T negotiations is considering several proposals o n the liberalisation o f trade i n services. T h i r d l y , the fact

• P r e p a r a t i o n o f this p a p e r w a s s u p p o r t e d b y the I n s t i t u t e f o r R e s e a r c h o n P u b l i c P o l i c y . I a m grateful for h e l p f u l c o m m e n t s f r o m J i m M e l v i n , J o h n O ' H a g e n , D o n a l d C . C e l l , A ' A m e r F a r o o q i a n d the E d i t o r . A s per u s u a l all r e m a i n i n g errors are s o l e l y m y r e s p o n s i b i l i t y .

t h a t there has already been considerable liberalisation o f trade i n goods i n the European C o m m u n i t y suggests that the service sector m a y experience the greatest changes w i t h the c o m p l e t i o n o f the i n t e r n a l m a r k e t i n 1992.

There is n o t unanimous agreement, however, o n the need for this reappraisal. This m a y be due t o the belief o f some trade theorists that services can be analysed i n t r a d i t i o n a l models i n precisely the same w a y as goods. The ques­ t i o n is whether services can simply be treated either as final goods i n them­ selves or as intermediate inputs i n t o the p r o d u c t i o n process. Thus the debate i n the literature is centred o n whether there is any fundamental difference between goods and services perse, whether trade i n services can be adequately explained b y existing models and i f so, w h i c h models are m o s t appropriate, and f i n a l l y , whether there are l i k e l y t o be any new insights to be gained b y considering services as distinct f r o m goods i n such models.

Perhaps the least progress has been made o n the first o f these issues, that is, whether there is a fundamental difference between goods and services. H i l l ( 1 9 7 7 ) argues that goods and services have d i s t i n c t characteristics and that they " b e l o n g i n different logical categories" ( H i l l , 1977, p . 3 1 8 ) . A m o n g the key characteristics that differentiate services f r o m goods according t o H i l l are: c o n s u m p t i o n o f a service m u s t take place simultaneously w i t h its pro­ d u c t i o n , services cannot be stored, and they cannot be transferred f r o m one economic u n i t t o another. Thus H i l l claims that "models o f pure exchange economies o f a Walrasian t y p e . . . are q u i t e inapplicable and i r r e l e v a n t " ( H i l l , 1977, p . 3 1 9 ) . While these characteristics are true o f some services such as medical care or personal services, there are other services w h i c h do n o t f i t this d e f i n i t i o n . Services such as management or engineering consulting, can be carried o u t at arm's length b y telephone or post. Many other w r i t e r s have a t t e m p t e d t o define services either f o r m a l l y or t h r o u g h a t a x o n o m y o f activi­ ties they believe t o be services.1 U n f o r t u n a t e l y , as Kravis, Heston and Summers

( 1 9 8 3 ) p o i n t o u t , i t is generally possible t o f i n d an economic a c t i v i t y that is c o m m o n l y agreed t o be a service that does n o t f i t any d e f i n i t i o n proposed. S i m i l a r l y , I n m a n ( 1 9 8 5 , p . 4) suggests t h a t " l i k e beauty, the d e f i n i t i o n o f a service is o f t e n i n the eye o f the beholder."

I n contrast t o H i l l , H i n d l e y and S m i t h (1984) can see no reason for concern at the neglect o f the d i s t i n c t i o n between goods and services. T h e y argue that goods are n o t an homogeneous c o m m o d i t y and that they have many d i s t i n c t characteristics, y e t we w o u l d expect the theory o f comparative advantage t o c o n t i n u e t o h o l d .

Deardorff ( 1 9 8 5 ) argues that debating definitions w i l l inevitably prove

inconclusive and suggests that the issue can o n l y be resolved b y b u i l d i n g a m o d e l t h a t captures a single characteristic peculiar t o a service, a characteristic " t h a t i n t u i t i o n suggests m a y have a bearing o n trade and comparative advan­ tage, . . . and e x a m i n i n g its i m p l i c a t i o n s " (Deardorff, 1985, p . 6 5 ) . I w o u l d argue t h a t i t is this line o f research t h a t has p r o v e d most successful. T h e models o u t l i n e d i n this paper do n o t suggest that a new t h e o r y is r e q u i r e d to explain all trade i n services, b u t rather t h a t some services can alter the models i n i m p o r t a n t ways leading t o a reversal or a reinforcement o f tradi­

t i o n a l results.

I n the subsequent sections I examine several papers t h a t have i d e n t i f i e d an i m p o r t a n t characteristic o f services and w h i c h derive new results or insights i n t o i n t e r n a t i o n a l trade. I also survey several areas o f trade t h e o r y that are p a r t i c u l a r l y relevant t o trade i n services. Section I I considers three new papers on w h a t are k n o w n as producer services. Section I I I outlines the t h e o r y o f factor m o b i l i t y , an area m a n y economists have suggested is p a r t i c u l a r l y i m p o r ­ t a n t t o the debate. Section I V addresses the issue o f whether free trade i n services w i l l result i n trade i n services becoming more i m p o r t a n t than trade i n goods. Section V considers the existing literature o n t r a n s p o r t a t i o n services and some new results f r o m recent papers. Section V I considers a m o d e l o f education services, while Section V I I outlines future possible research t h a t m a y y i e l d n e w results.

I I C O M P A R A T I V E A D V A N T A G E A N D T R A D E I N P R O D U C E R S E R V I C E S

This section examines three recent papers o n producer services. These are services, such as management or engineering services, w h i c h can be p r o v i d e d b y residents i n one c o u n t r y t o enterprises i n another. D e a r d o r f f (1985) cites the p r o v i s i o n o f those services b y foreign residents as one o f the characteristics that m a y affect the standard results.

I n his frequently c i t e d paper, D e a r d o r f f employs a Heckscher-Ohlin m o d e l where there are t w o countries, t w o factors, one good and a service. The service is n o t tradable and the factors o f p r o d u c t i o n are labour and management.

sector a service at all i n his m o d e l . C o u n t r y B w o u l d still supply management services i f the non-traded sector p r o d u c e d a g o o d rather t h a n a service. Dear-d o r f f himself notes t h a t the p r i n c i p l e can be rehabilitateDear-d i f i t is reinterpreteDear-d t o apply t o the supply o f management services. I n this case c o u n t r y B has the comparative advantage since the relative salary o f management i n B is lower i n autarky.

D e a r d o r f f claims, however, that such a r e i n t e r p r e t a t i o n w i l l lead t o problems i f the comparative advantage i n c o u n t r y A is based u p o n a technological advantage i n the p r o d u c t i o n o f services. I n this case, although c o u n t r y A has a higher autarky r e t u r n t o management, i t w i l l e x p o r t management services as l o n g as its technological superiority outweighs the relative costliness o f its management.

The apparent v i o l a t i o n o f the principle o f comparative advantage arises because the technological advantage is specific t o the management factor i n c o u n t r y A . This can be seen i f we consider Markusen ( 1 9 8 3 ) where b o t h goods are traded and the factor e m p l o y e d intensively i n the technologically superior i n d u s t r y enjoys a relatively higher r e t u r n . I f management is used intensively in the technologically superior sector, and b o t h factors are m o b i l e , then managers.will migrate t o c o u n t r y A u n t i l returns are equalised. However, i n Deardorff's m o d e l the managers f r o m c o u n t r y B do n o t become technically more p r o f i c i e n t w h e n they provide services i n c o u n t r y A and their effective r e t u r n is l o w e r because w h i l e the r e t u r n per manager i n c o u n t r y A is higher, the r e t u r n per effective management u n i t is lower. Thus, the o n l y way t h a t c o u n t r y B can enjoy the benefits o f c o u n t r y A's superior technology is t o rent the technically superior management services f r o m A i n r e t u r n for goods. The correct i nd icat or o f comparative advantage i n this m o d e l is n o t the r e t u r n t o the management service, b u t rather the r e t u r n per effective management u n i t .

This m o d e l highlights b o t h the importance o f defining the service a c t i v i t y appropriately and the importance o f choosing the appropriate i n d i c a t o r o f comparative advantage w h e n analysing trade i n services.

M e l v i n ( 1 9 8 9 ) highlights an even more i m p o r t a n t result that follows f r o m this m o d e l . I f one c o u n t r y is relatively well-endowed w i t h the m o b i l e or service factor and i f the i n d u s t r y p r o d u c i n g the tradable good uses this factor i n t e n ­ sively, then efficient w o r l d o u t p u t is possible, b u t the trade p att e rn w i l l n o t be as predicted b y the Heckscher-Ohlin Theo rem. The c o u n t r y that is relatively well-endowed w i t h the i m m o b i l e factor w i l l be observed t o be e x p o r t i n g the good that is intensive i n the m o b i l e factor.

tradable good. I f i t is the m o b i l e factor, the t r a d i t i o n a l fall i n w o r l d trade due t o the i m p o s i t i o n o f a t a r i f f reduces the exports o f the m o b i l e factor, w h i c h i n t u r n causes the o u t p u t o f the tradable g o o d t o f a l l .

Markusen ( 1 9 8 7 ) notes t h a t m a n y producer services, such as engineering and management consulting, require a high i n i t i a l investment i n learning. These services, however, can be p r o v i d e d t o a d d i t i o n a l users at a very l o w cost. Markusen develops a m o d e l similar t o the one i n E t h i e r ( 1 9 8 2 ) i n w h i c h the o u t p u t o f a g o o d is m o d e l l e d as the assembly o f components, and i n Markusen's m o d e l these components are producer services. Since these components are p r o d u c e d w i t h a f i x e d cost and a constant marginal cost, increasing returns t o scale exist. The m a r k e t structure, therefore, is assumed t o take the f o r m o f m o n o p o l i s t i c c o m p e t i t i o n .

Markusen shows that p e r m i t t i n g trade o n l y i n goods is an i m p e r f e c t sub­ stitute for trade i n services, since the gains f r o m specialisation i n services can­ n o t occur. Further, i f a c o u n t r y has m o n o p o l y p o w e r i n trade, a t a r i f f o n i m p o r t s o f producer services reduces specialisation b y servicers and m a y , therefore, cause p r o d u c t i o n and welfare t o decline.

These papers have i m p o r t a n t i m p l i c a t i o n s for t r a d i t i o n a l trade t h e o r y . Trade i n services can lead t o greater gains f r o m trade, t o a v i o l a t i o n o f the Heckscher-Ohlin T h e o r e m and tariffs can lead t o a fall i n welfare even f o r large countries.

I l l S E R V I C E S A N D F A C T O R M O V E M E N T S

This section surveys the t h e o r y o f factor movements i n i n t e r n a t i o n a l trade. We do this because v i r t u a l l y every paper o n this topic cites the fact that factor movements are i m p o r t a n t to the theory o f trade i n services. F o r example, many services require direct contact between the producers and consumers. Thus, medical and dental care, direct education and other personal services require t h a t either the producer or the consumer migrate i f the service is t o be p r o v i d e d b y a non-resident producer. D e a r d o r f f ( 1 9 8 5 ) shows t h a t although one m i g h t expect factor m i g r a t i o n to provide problems for the p r i n c i p l e o f comparative advantage, this is n o t the case.

c o m p l e m e n t a r y t o trade i n goods. Markusen ( 1 9 8 3 ) develops a m o d e l where b o t h countries have identical factor endowments b u t where one c o u n t r y is technically superior i n the p r o d u c t i o n o f one g o o d , and he shows t h a t factor m o b i l i t y is c o m p l e m e n t a r y t o trade i n goods. I n such a m o d e l , factor migra­ t i o n permits a c o u n t r y t o become relatively better endowed w i t h the factor e m p l o y e d intensively i n its e x p o r t i n d u s t r y , and the v o l u m e o f trade conse­ q u e n t l y increases.

There is also an extensive literature o n o p t i m a l factor m i g r a t i o n policies w h e n a c o u n t r y can discriminate between returns t o domestic and foreign factors. Ramaswami ( 1 9 6 8 ) shows that i f one factor is i m m o b i l e , t h e n the c o u n t r y should a l l o w the m o b i l e factor t o move u n t i l the rents t o the h o m e c o u n t r y are maximised. The economic rationale is simply t h a t i f any c o u n t r y can choose t o either i m p o r t the scarce resource or e x p o r t the abundant factor, then the former p o l i c y is o p t i m a l f r o m the perspective o f the domestic eco­ n o m y since this permits factors t o be used i n the same r a t i o t h r o u g h o u t its e c o n o m y . I f the factors are e x p o r t e d t h e n there is an efficiency loss i n the home c o u n t r y , since its m o b i l e factor is being used more intensively i n one c o u n t r y than another. I f , however, d i s c r i m i n a t i o n is n o t possible then, as Calvo and Wellisz (1983) have shown, i t is preferable t o e x p o r t the abundant factor. K u h n and W o o t o n ( 1 9 8 7 ) , i n a m o d e l where there is sector specific capital and l a n d , o b t a i n a richer set o f possible p o l i c y outcomes, i n c l u d i n g the e x p o r t a t i o n o f b o t h capital and labour i f the home c o u n t r y can discriminate.

I V T H E C H A R A C T E R I S T I C S A P P R O A C H A N D T H E T R A D A B I L I T Y O F S E R V I C E S

I f we relax the i n t e r n a t i o n a l restrictions o n trade i n services are we l i k e l y t o observe more trade i n services i n the future than trade i n goods? I n this section we examine a paper b y Z w e i f e l (1986) that considers this question. I t may be recalled that there exists an extensive literature o n trade i n the pre­ sence o f traded goods w h i c h o f t e n refers to services as examples o f non-traded goods.2 B u t as we have seen already, there are m a n y services that can

be traded. Thus, engineering or management consulting can be conducted b y post, telephone or c o m p u t e r , while repairs and alterations to goods can be c o n d u c t e d b y transferring the p r o d u c t .

Z w e i f e l uses a version o f the demand m o d e l developed b y Lancaster ( 1 9 6 6 ) , i n w h i c h the characteristics o f a good, rather than the good itself, f o r m the arguments o f an agent's u t i l i t y f u n c t i o n . B o t h I n m a n (1985) and K i e r z k o w s k i (1987) have suggested that this may be an appropriate m o d e l for analysing

trade i n services since m a n y services have several characteristics t h a t can y i e l d consumer u t i l i t y .

The variant o f this m o d e l envisaged b y Z w e i f e l is one i n w h i c h agents can c o m b i n e goods linearly i n order t o o b t a i n a bundle w h i c h m o r e closely repre­ sents their desired bundle o f characteristics. Z w e i f e l suggests t h a t services, however, because o f their nature, cannot be c o m b i n e d i n this fashion. I f a good possessed b y a consumer requires some alteration or repair then the set o f possible outcomes is restricted b y the fact t h a t the i d e n t i t y o f the g o o d m u s t be preserved i n the service process. Z w e i f e l attaches considerable i m p o r ­ tance t o i d e n t i t y preservation as one o f the features o f a service (a r e s t r i c t i o n also n o t e d b y H i l l ) , and hence the range o f permissible changes are l i m i t e d t o some region o f the original characteristics.

The d i f f i c u l t y a b o u t the p r o v i s i o n o f services i n these circumstances, accord­ ing t o Z w e i f e l , is t h a t t h e y are almost never consumed i n linear c o m b i n a t i o n s . This m a y be due t o the fact that i t is d i f f i c u l t t o a p p o r t i o n the degree o f repair or a l t e r a t i o n effected b y an i n d i v i d u a l servicer, the fact that p r o p e r t y rights remain w i t h the i n d i v i d u a l w h o is being serviced or whose good is being serviced or the fact that servicers cannot simultaneously w o r k o n a project and t h a t the efforts o f one servicer m a y impinge o n the o u t p u t o f another. For example, i t is n o t possible t o linearly combine the expert assessment o f t w o cancer specialists o n the need f o r an operation.

Z w e i f e l suggests that the i n a b i l i t y t o combine services linearly implies t h a t services are more l i k e l y t o be traded than goods. Since services cannot be c o m b i n e d t o y i e l d the desired characteristics, the need for variety is greater. I t follows t h a t , since i n t e r n a t i o n a l trade facilitates greater variety w h e n dif­ ferentiated products are p r o d u c e d under increasing returns t o scale, services are m o r e l i k e l y t o be traded t h a n goods.

V T R A N S P O R T S E R V I C E S

U n l i k e other services, t r a n s p o r t a t i o n services have received considerable a t t e n t i o n i n the trade l i t e r a t u r e , w h i c h is n o t surprising given its i m p o r t a n c e in w o r l d trade. K i e r z k o w s k i ( 1 9 8 6 ) , for example, argues t h a t the value o f t r a n s p o r t a t i o n services m a y be as m u c h as 13 per cent o f the value o f w o r l d merchandise trade. This section outlines the existing t h e o r y o n transport services and reports o n several recent papers that y i e l d new results.

be affected, however, and this w i l l alter e q u i l i b r i u m o u t p u t and c o n s u m p t i o n . The major drawbacks o f the Mundell-Samuelson m o d e l is t h a t transport costs are n o t d e t e r m i n e d endogenously, and that the m o d e l does n o t suggest w h i c h c o u n t r y w i l l supply transport services. Herberg ( 1 9 7 0 ) a t t e m p t e d t o relax the f i x e d cost assumption, b u t he makes the a d d i t i o n a l restrictive assumption that each c o u n t r y m u s t carry its o w n i m p o r t s .

The p r i n c i p a l result o f m o d e l l i n g transport i n this fashion is that high transport costs m a y act as a barrier t o trade, j u s t as do tariffs. This d i s t o r t i o n w i l l also mean t h a t the factor-price-equilisation theorem w i l l n o t be satisfied even i f all the usual necessary conditions are. O n the other hand, the presence o f t r a n s p o r t a t i o n costs does n o t necessarily i m p l y that the price o f i m p o r t s m u s t rise. Iceberg t r a n s p o r t a t i o n costs have the same effect o n offer curves as a tariff, t h a t is, the curve is shifted p r o p o r t i o n a l l y downwards towards the i m p o r t i n g axis. As a consequence, i f the foreign c o u n t r y ' s offer curve is inelastic, then an effect similar t o the Metzler paradox can occur leading t o a l o w e r price for i m p o r t s .

Falvey ( 1 9 7 6 ) and Cassing (1978) i n c o r p o r a t e d the transport service sector i n t o the t r a d i t i o n a l Heckscher-Ohlin m o d e l . B y treating t r a n s p o r t a t i o n as j u s t another p r o d u c t i o n sector, Falvey is able t o allow m a r k e t c o n d i t i o n s t o deter­ m i n e w h i c h c o u n t r y w i l l supply services. As w i t h any Heckscher-Ohlin m o d e l , the result w i l l depend crucially u p o n the relative factor intensities o f the three sectors and the factor e n d o w m e n t o f the countries. I f the service sector is m o r e capital intensive than b o t h o f the goods' sectors then the capital-rich c o u n t r y w i l l produce services. I f t r a n s p o r t a t i o n is m o r e capital intensive than o n l y one o f the goods, then we cannot predict a priori w h i c h c o u n t r y w i l l supply the transport services. Cassing points o u t t h a t for the purpose o f the Metzler paradox i t is i m p o r t a n t t o differentiate between the case where tariffs are imposed o n fob ( p o i n t o f sale) prices and tariffs imposed o n c i f (delivery) prices.

factor payments. Using a similar m o d e l w i t h f i x e d factors, R y a n also shows t h a t free trade i n services can lead t o a loss o f economic rents and a decline i n welfare f o r a l l agents i n the service i m p o r t i n g c o u n t r y .

K i e r z k o w s k i ( 1 9 8 6 ) suggests t h a t since m a n y services such as shipping and telecommunications are characterised b y oligopolistic m a r k e t structures, i t w o u l d be m o r e appropriate t o use a version o f the i n t r a - i n d u s t r y trade m o d e l such as those e m p l o y e d b y Brander and K r u g m a n (1983) and Brander and Spencer ( 1 9 8 4 ) . K i e r z k o w s k i develops a d u o p o l y m o d e l o f i n t e r n a t i o n a l ser­ vices b y assuming t h a t there are t w o countries each w i t h a well-specified i m p o r t demand f u n c t i o n and each w i t h a shipping c o m p a n y that acts as a C o u r n o t d u o p o l i s t . Each shipping c o m p a n y chooses the q u a n t i t y o f goods i t w i l l carry i n each d i r e c t i o n and perfect c o m p e t i t i o n is assumed t o o b t a i n i n the m a r k e t for goods. K i e r z k o w s k i shows that, ceteris paribus, an increase i n a c o u n t r y ' s costs w i l l reduce the m a r k e t share o f its shipping c o m p a n y , raise the prices o f t r a n s p o r t a t i o n i n b o t h countries and reduce the overall level o f services. I f b o t h countries' costs were t o rise, due t o an o i l price shock for example, then the t o t a l level o f services w o u l d f a l l , b u t the relative m a r k e t share o f each c o u n t r y w o u l d remain constant.

These recent papers have given us a set o f models t h a t p e r m i t a richer set of outcomes t h a n the t r a d i t i o n a l m o d e l . The significance o f these new develop­ ments is something that can o n l y be established b y future empirical testing.

V I E D U C A T I O N A L S E R V I C E S

A n o t h e r area o f the recent trade t h e o r y literature that relates t o trade and services is the literature o n the f o r m a t i o n o f h u m a n capital. F i n d l e y and K i e r z k o w s k i ( 1 9 8 3 ) developed a m o d e l where there are t w o goods, x and y , and t w o factor i n p u t s , skilled and u n s k i l l e d labour. U n l i k e the t r a d i t i o n a l Heckscher-Ohlin m o d e l , the e n d o w m e n t o f these t w o factors is n o t deter-m i n d e d exogenously, b u t rather the q u a n t i t y o f skilled labour is an endogenous variable. T h e y assume that there is a stationary p o p u l a t i o n , i n w h i c h N agents are b o r n ( w i t h a life span o f T periods), and N agents die i n each p e r i o d . Individuals have a choice o f entering the labour force i m m e d i a t e l y or o f c o m b i n i n g their labour i n p u t (for n periods), w i t h a f i x e d educational factor in order t o become skilled workers. I n a c o m p e t i t i v e stationary e q u i l i b r i u m the n u m b e r o f skilled workers i n an economy w i l l depend u p o n the q u a n t i t y of the f i x e d educational factor and the agents' rate o f t i m e preference. Thus in a w o r l d w i t h free trade i n goods, the c o u n t r y w i t h the higher discount rate or the higher stock o f educational capital can be expected to e x p o r t the skilled-labour-intensive good and i m p o r t the unskilled-skilled-labour-intensive good.

each n a t i o n w i l l depend crucially u p o n the e n d o w m e n t o f the f i x e d educa­ t i o n a l factor. I f there were some w a y o f guaranteeing equal access t o this factor f o r a l l the p o p u l a t i o n i n the w o r l d , then the discounted i n c o m e o f all agents w o u l d be equal. Thus, welfare c o u l d be increased i f foreign labourers c o u l d avail themselves o f the f i x e d educational factor, thereby equalising the r e t u r n t o the educational factor i n the t w o countries. Once again, free trade i n services requires t h a t the receivers o f the service (students) or the providers o f the service (professors) migrate. A l t e r n a t i v e l y , education can be e x p o r t e d via books or, as i n the case o f Britain's Open University, b y television.

This line o f research has considerable p o t e n t i a l i n explaining the problems c i t e d b y Lucas ( 1 9 8 8 ) i n reconciling g r o w t h t h e o r y and the process o f eco­ n o m i c development.

V I I C O N C L U S I O N

As I i n d i c a t e d i n the i n t r o d u c t i o n , I do n o t believe t h a t the debate a b o u t the a p p l i c a b i l i t y o f models o f trade i n goods to trade i n services is one t h a t can be settled i n a definitive manner. L i k e D e a r d o r f f I believe t h a t the o n l y w a y t o settle this question is t o m o d e l w h a t we believe t o be the special features o f services and investigate the a p p l i c a b i l i t y o f t r a d i t i o n a l trade t h e o r y . This paper outlines several models w h i c h y i e l d results t h a t differ f r o m the standard trade results or t h a t add new insight t o our understanding o f inter­ n a t i o n a l trade. The significance o f these new developments has y e t t o be d e t e r m i n e d and future research must evaluate their empirical relevance.

However, a considerable a m o u n t o f theoretical research remains to be done since there are m a n y characteristics o f services w h i c h we have n o t cap­ t u r e d i n the existing models. H i n d l e y and S m i t h ( 1 9 8 4 ) , for example, have n o t e d t h a t licensing and regulation are a feature o f m a n y service industries and some economic rationale has t o be advanced to explain this. I n m a n (1985) has suggested t h a t this m a y be because many services are characterised b y asymmetric i n f o r m a t i o n problems. Thus, i t may be more d i f f i c u l t to assess the q u a l i t y o f a foreign service or the r e p u t a t i o n o f foreign servicer than the q u a l i t y o f a foreign good. This m a y lead to domestic regulation that impedes trade. A m o d e l t h a t can capture this feature o f services is highly desirable.

F u r t h e r , trade i n financial services as w e l l as trade i n educational services may be relevant i n reconciling the problems c i t e d b y Lucas (1988) w i t h g r o w t h t h e o r y and economic development.

F i n a l l y , Markusen notes that m a n y producer services e x h i b i t features o f inreasing returns t o scale due either t o extensive education requirements or private i n f o r m a t i o n . These specialised producers are also a feature o f m u l t i ­ n a t i o n a l enterprises. F u t u r e research o n these enterprises needs t o evaluate the role o f these producer services.

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