International Trade and Investment

Looking Ahead to Larger Gains from Trade Liberalization

   Despite decades of trade liberalization, the world economy is still far from a global marketplace of unfettered trade. Many of the remaining barriers lie in services, and the prospective gains for the United States from further trade reform are substantial. While global tariff liberalization in manufacturing and agriculture could generate over $16 billion in income for the United States each year, the prospective gains from services liberalization are immense: an estimated $575 billion in annual U.S. income (4.3 percent of GDP). Summing up, this is an additional $591 billion in annual income that will be foregone in the absence of further trade reform.

   The magnitude of the payoff to the United States from services trade liberalization reflects a number of factors: the U.S. competitive advantage in many services, the large share of services in the global economy compared to the relatively small share of services in global trade, and the high barriers to services trade. These barriers are often regulatory in nature or involve restrictions on the form of investment, such as foreign equity restrictions that limit foreign investors holdings and control in a company, transfer limitations on capital flows, and the repatriation of profits. Removing these barriers would free up capital to move across borders to the location with the highest rate of return.

   Developing countries also stand to benefit greatly from global liberalization of services trade. The service sector share of GDP exceeds the manufacturing share in most developing countries. The increased availability and quality of services enhances the competitiveness of manufactured goods, agricultural products, and existing services. For instance, India stands to gain an estimated $12 billion in national income each year (1.7 percent of GDP) from removing barriers to trade in services, and China stands to gain an estimated $105 billion (4.0 percent of GDP) each year.