Trade in Producer Services and Returns due to Specialization under Monopolistic Competition

This paper demonstrates that liberalizing trade in services, while yielding efficiency gains associated with comparative advantage, may yield additional gains for both importing and exporting countries because of an increased division of labor. A model is developed in which producer services coordinate and control the specialized members of complex production processes. The model is used to analyze trade in services and its effect on the division of labor and the realization of returns from specialization. This differs from the recent literature on traded services and specialization because of the explicit role introduced for services in the specialization process.