SERVICES TRADABILITY, TRADE LIBERALIZATION AND FOREIGN DIRECT-INVESTMENT

We analyse a two-country general equilibrium model. The countries are identical, except for the existence of an efficiently operating market for producer services in one country, which allows it to gain cost ad vantages by using differentiated services as an intermediate input in the production process. Foreign manufacturers can only use these if th ere is international exchange in services products or services technol ogy. The welfare effects of liberalizing trade in services are mixed. Not only the distinction between trade in services output and foreign direct investment (FDI) is important, but also the specific mode by wh ich FDI is conducted.