FDI, Trade in Services, and Employment and Wages in U.S. Service Industry Firms

Abstract

[Excerpt] Service industries in the United States, which have been the locus of much of U.S. comparative advantage in trade, and some of which had been thought to be virtually impervious to foreign competition, now are the subject of frequent warnings in the press and in academic analyses that their competitiveness is declining or disappearing, or at least that they are newly subject to competition from abroad, especially from developing countries with low wage levels. The main force behind the change in outlook is the fall in communication costs. These play, for services, the role that transportation costs play for goods as a determinant of the location of production and the extent and direction of trade. A fall in communication costs opens U.S. markets for services to exports by low-cost producers of services in other countries that were previously excluded from the U.S. market by the high cost of international communication. At the same time, it opens markets in other countries to exports by low-cost U.S. producers of services that were previously excluded from foreign markets by international communication costs.