FACTOR MARKET BARRIERS ARE TRADE BARRIERS - GAINS FROM TRADE FROM 1992

This paper argues that some factor market barriers act as trade barriers. Consequently removal of such barriers can create gains from trade, even in countries which already have free trade in goods. The basic argument is simple. For some types of goods, international vertical integration is essential to efficient international trade. That is to say, for such goods it is cheaper to conduct trade on an intra-firm basis, rather than an inter-firm basis (for instance in the U.S., roughly half of all imports are intra-firm). In such industries, those factor market barriers which raise the cost of foreign control of local assets have the effect of raising the cost of trade. Consequently, removing such barriers can lead to gains from trade. © 1990.