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 advantages by using differentiated servicesas an intermediate input in the production process. Foreign manufacturers can only use these if there is international exchange in services products or services technology. 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 which FDI is conducted.
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