A numerical example showing globally welfare-worsening liberalization of international trade in banking services

Abstract

This paper argues that the analytical basis for the desirability of free trade in services may be more fragile than many have realized. We use an explicit intertemporal international trade general equilibrium model to analyze the consequences of trade liberalization covering banking services. In this model, these services allow gains from trade to be exploited, but do not directly enter preferences. We construct a numerical example in which all consumers in both countries are made unambiguously worse off with free trade in banking services compared to an equilibrium with no trade in banking. The implication we draw from our analysis is that free international trade in banking services need not be preferred from a global efficiency point of view to autarky in an intertemporal, international trade, general equilibrium model, in which there is costly intertemporal intermediation.