Trade in services has become topical, but little theory has been developed. This paper assumes that one commodity and the services of capital are tradable and examines the traditional trade results. Service trade can produce the same equilibrium as commodity trade, but substantial differences exist depending on whether the tradable commodity is capital or labor intensive. Tariffs on either commodity have the same commodity price effects and will always increase the welfare of the immobile factor labor. Factor income taxes can also affect trade patterns. When both goods and capital services are tradable, there is an indeterminacy in trade patterns, and tariffs, while reducing commodity trade, may not reduce welfare.

Trade in services has become topical, but little theory has been developed. This paper assumes that one commodity and the services of capital are tradable and examines the traditional trade results. Service trade can produce the same equilibrium as commodity trade, but substantial differences exist depending on whether the tradable commodity is capital or labor intensive. Tariffs on either commodity have the same commodity price effects and will always increase the welfare of the immobile factor labor. Factor income taxes can also affect trade patterns. When both goods and capital services are tradable, there is an indeterminacy in trade patterns, and tariffs, while reducing commodity trade, may not reduce welfare.