The importance of FATS reflects the nontradability of many services. Given that this constraint presumably was more binding before the recent advances in technology that allow business process outsourcing, the pattern observed in Figure 2 is somewhat surprising. The more rapid rise in FATS than cross border trade in services since the mid 1990s presumably is driven by changes in policy towards FDI and large scale privatization of service sector firms in many countries during the late 1980s and the 1990s.<sup>17</sup> It may well be that increased use of services outsourcing will result in cross-border trade in services again coming to dominate FATS at some point in the future, but this is far from being the case today.

The relative magnitude of FATS and cross border trade is in part determined by accounting conventions. For example, licensing and franchising are often used methods of exploiting firm-specific assets in services industries such as hotels and transportation. Franchising essentially involves a payment flow for an intangible asset (knowledge, reputation, etc.). In principle such payments are captured in the balance of payments under royalties and license fees and/or leasing, so that there is double counting if FATS data for such activities are also included. Similar issues arise more generally with respect to the trade in “headquarter” or “management” services associated with coordination and running of a multinational firm, which is now a basic feature of international trade theory that allows for the existence of FDI (e.g., Helpman and Krugman, 1985; Rivera-Batiz and Rivera-Batiz, 1992; Markusen and Venables, 1998, 2000). How to measure and value the associated intra-firm services transactions/flows is a major challenge for statisticians.<sup>18</sup>

# _Differences between goods and services liberalization_

Do standard concepts and theories explaining the pattern of trade in goods apply to services trade given the complications arising from the existence of alternative modes of supply and the associated factor movement that may occur? A number of papers in the mid 1980s concluded that standard concepts of comparative advantage and theories of the determinants of trade patterns could be applied to services (Hindley and Smith 1984; Deardorff, 1985).<sup>19</sup> Insofar as

> 17 There has also been a marked shift in the composition of global FDI flows. In 1970 finance and trade (distribution) accounted for 65% of the total stock; this dropped to 45% in 2003. Conversely, the share of telecoms, energy, and business services has risen from 17% to 44%. There are also significant differences in FDI inflows into developed and developing countries. Thus, business services accounted for 40% of the total inward FDI stock in developing countries in 2003, compared to only 20% in the OECD. Non-equity FDI is not captured in the forgoing statistics (e.g. franchising, management contracts, or leasing).

> 18 The Bureau of Economic Analysis reports data on such intra-firm transactions. In an early contribution to the trade in services literature, Rugman (1987) argued that the financial returns related to all FDI outflows should be included in the definition of trade in services, as a proxy for non-reported intra-firm trade in intermediate services between parent and affiliates.

> 19 While Melvin (1989) suggested that standard predictions may not hold, this paper focused on a combination of goods and factor trade, not on services trade as a distinct activity.

9