DP6080 Trade in Business Services in General Equilibrium

Author(s): James R. Markusen , Bridget Strand

Publication Date: February 2007

Keyword(s): business services , foreign investment in services , fragmentation , offshoring , outsourcing , trade in services

JEL(s): F0 , F23

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP6080.asp.asp

Trade in business services has been attracting attention from academic researchers, policy makers, and business journalists. While there are many anecdotes, there has been little in the way of formal theory applied to this issue. In this paper, we adapt a general model of fragmentation of production activities to try to capture the specific features of business services. Following a general discussion, we calibrate a numerical general-equilibrium simulation model to a situation in which both trade and foreign investment in services are initially banned to technically infeasible. We then compute three counter-factual scenarios: one in which trade but not investment in services is feasible or allowed, one in which investment but not trade is allowed, and one in which both trade and investment in services are allowed.