CGE Modeling

Author(s)

Tani Fukui, Christine McDaniel

The services sector is the next frontier in trade liberalization, and progress in this area is likely to bring enormous economic gain to developed and developing economies. A major impediment to services trade liberalization, however, is the lack of rigorous analytical work on its potential impact. Our aim in this paper is to propel the policy relevant research forward. Restrictions on services trade are far more complex than those on goods. While goods trade liberalization is relatively straightforward to model and its implications are fairly well understood, the same is not true for services. Services trade policy is often opaque and does not fit easily into computational models. Our survey of the current literature reveals a set of stylized facts that we hope will be useful in this area of computable general equilibrium modeling research: (1) barriers to trade in services are complex and heterogeneous across sectors; (2) services have significant effects on downstream industries; (3) market structure assumptions are crucial; (4) foreign presence is often necessary for services trade; and (5) many barriers are entry or fixed cost barriers that restrict foreign and domestic new entrants.