ABSTRACT
A multilateral round of trade negotiations ultimately results in the liberalization of trade barriers, which include tariffs, non-tariffs, and regulatory. Barriers to trade in services are of the third kind, that is, they are typically regulatory barriers, rather than taxes. (Refer to Section 5.5.) Barriers to market access are often designed to protect incumbent firms from any new entry, which could be domestic or foreign. Trade liberalization, tariff slashing, and the dismantling of restrictive regulatory barriers increase returns to capital in three ways. First, by increasing the return to capital in some sectors and stimulating overall investment in the economy. Second, some sectors would gain directly from the removal of tariffs that act as an implicit tax on their inputs. Third, the wealth effect would surely raise demand in the liberalizing economy for a large range of products, which should raise the return to capital in the short term. Higher investment can be financed out of domestic savings. But it is likely that a rise in the savings level would be delayed because consumers prefer not to reduce current consumption significantly to benefit from the higher returns to capital. If so, international financial capital, which has been highly mobile in recent decades, would fill the gap. Higher returns can rapidly attract capital inflows. The result would be to generate additional GDP. However, domestic consumption gains might not show up directly because foreign capital owners would repatriate returns from higher production. Thus when foreign capital flows are brisk, it is important to evaluate trade liberalization in terms of (1) income gains and (2) consumption gains, rather than by change in GDP.
