bution reduce imports and impose substantial welfare costs, the magnitude of which is similar to that caused by border trade barriers. As is stressed in other CGE papers that analyze the impact of services policies, the extent to which inflated margins reflect excess costs or are captured by domestic agents as rents is important. If it is assumed that half of the excess margin generates rents, the simulation generates an increase in real income (equivalent variation) of 1.7 percent across the sample.<sup>35</sup> Francois and Wooton (2001a) focus on a related issue, developing a theoretical structure where trade requires transport costs supplied by a shipping sector operating as an oligopoly. Working with both their theoretical model and numeric examples in a simple CGE model, they link shipping prices to the combination of supply and demand elasticities. Hummels, Lugovsky, and Skiba (2009) offer empirical support for such a framework, finding that shipping firms charge much higher freight rates when demand is relatively inelastic. In general, the message from this literature is that with intermediate service firms exercising market power on two price-cost margins (meaning they act collectively as both an oligopoly vis-a-vis final consumers and an oligopsony vis-a-vis producers), the gains from trade in goods hinge on the degree of competition in service sectors. As such, trade and FDI policy in services may impact directly and substantively on trade in goods. This issue is little explored in a CGE framework, in part due to data constraints.<sup>36</sup> In principle, the GTAP database includes estimates of bilateral shipping costs. These data are admittedly crude, and do not include information on market structure, per unit and per weight charges, and the variation in these charges by route. However, with new data sources emerging, this situation should improve.<sup>37</sup> International trade in services is dominated by a small number of large firms, and much of global trade takes place within these firms. For example, trade within multinational companies (affiliate trade) accounted for 25.9 percent of U.S. exports of private services in 2005 and for 22 percent of U.S. imports of private services. Affiliated trade in business, professional and technical services accounted for 50.1 percent of total exports and for 69.6 percent of total imports in 2005. In the United States, the top 8 consumer lenders accounted for 75 percent of receipts, the top 4 international trade financing companies accounted for 70 percent of receipts, the top 8 securities firms accounted for 50 percent of receipts, and the top four direct life insurance carriers accounted for 81 percent of receipts. Similar

> 35In a parallel paper, Bradford and Gohin (2006) calculate that a 10% reduction in Japan’s final goods distribution margins would benefit it as much as worldwide free trade would. In a finding similar to that of Konan and Maskus (2006), they also find that, compared to trade opening, reducing margins leads to smaller inter-sectoral production shifts and thus may engender less political opposition.

> 36A related issue is restrictions on trade in cabotage services – see e.g., Arce et al. (1996).

> 37For example, the OECD (2011) has recently organized a dataset on precisely these values, and indications are that this will be updated over time.

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