trade, but also the effects of policies. Whether different modes of supply are complements or substitutes will have important implications for the effects of specific policies. Thus, if modes are substitutes, a particular policy restriction may be redundant or less restrictive than it would appear to be when considered in isolation. Moreover, as discussed further below, policies that restrict one mode more than another may generate inefficiencies.

It is well known that liberalization need not be welfare improving if there are sectors that are subject to increasing returns or there are terms of trade effects. Given the prevalence of increasing returns and imperfect competition in many services industries, a policy implication is that countries are more likely to gain from liberalization of trade in services as long as it is undertaken on a wide enough basis to offset any potential negative terns of trade effects.<sup>26</sup> As noted in some of the papers discussed below, not all types of partial liberalization will necessarily raise welfare. Much depends on market structure and the contestability of the service industries concerned and the nationality of ownership of firms. However, a number of arguments have been offered in the services context that imperfect competition may well (further) increase the gains from liberalization. First, liberalizing trade in services is likely to encourage greater specialization, thus helping to realize increasing (international) returns where these exist. Even if a country does not happen to have comparative advantage in certain services, liberalization may have a positive effect in terms of encouraging further fragmentation of production activities, fostering exports of merchandise and/or other services. If mode 3 is the main mode of supply, the prices affected by liberalization are internal prices, so that the associated terms of trade effects can be neutral or even positive (Dee and Sidorenko, 2006).

One channel through which “magnification effects” may occur is through a reduction in trade costs, many of which are services-related. Trade costs are often (much) greater in _ad valorem_ equivalent terms than the border barriers that confront goods when entering an export market. The most obvious source of such costs is infrastructure-related services. For example, shipping margins have been found to be a multiple of tariffs for developing country exports to the US (Fink, Mattoo and Neagu, 2001). Limão and Venables (2001) show that infrastructure is quantitatively important in determining transport costs. They estimate that poor infrastructure accounts for 40 percent of predicted transport costs for coastal countries and up to 60 percent for landlocked countries. Francois and Manchin (2006) use data on bilateral trade for a large set of countries, including instances of zero observed trade, to examine the influence of institutions,

> 26 It is sometimes argued that informational asymmetries (e.g., quality uncertainties) are important for some service activities and may justify infant industry protection. If so, liberalization will not be optimal. However, Grossman and Horn (1988) show that informational barriers to entry do not justify barriers to trade as these do not offset the source of the market failure.

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