Measurement and Modeling of the Economic Effects of Trade and Investment Barriers in Services

TLDR

The model assumes monopolistically competitive firms that differentiate products by R&D and location, incur fixed production costs, set optimal mark‑ups, and choose export or local production based on barrier types. The study adapts the Michigan Model of World Production and Trade to include cross‑border services trade and foreign direct investment. The model incorporates services trade and FDI by treating service‑trade barriers as extra costs of variable capital and labor, extending the Michigan framework. Introducing national treatment for multinational firms in all countries raises welfare, alters trade, factor prices, sectoral output, economies of scale, and multinational activities.

Abstract

In this paper, the authors adapt the latest version of the Michigan Model of World Production and Trade to incorporate cross‐border services trade and foreign direct investment (FDI). Firms are taken to be monopolistically competitive. Each firm produces products differentiated by the original R&D that defines the basic product and by location of production. Each firm faces a fixed cost in the country where production occurs, and sets an optimal mark‐up for sales from each location. Firms locate production for export or for local consumption depending on the type of barriers faced. Barriers to trade in services take the form of an additional cost of employing variable capital and labor. The paper reports the impact on welfare, trade, factor prices, sectoral output, economies of scale, and activities of multinationals following the introduction of national treatment of multinational firms in all countries.