Comments and Questions

The assessment is as follows. 1. the basic point about gains from cross-time-zone trade is right, though previously made by Marjit and others. 2. The basic model could be cleaned up a bit because it inserts capital in the production function but removes it from the cost function by assuming that its rental rate is equal to zero. 3. The zero price of capital makes the attempt to move from static trade theory to capital accumulation quite dubious. If growth is to be treated seriously, the static model should incorporate a positive price of capital. 4. The paper does not sufficiently stress in various places that it applies to what it calls ‘virtual’ trade exemplified by a special type of services trade such as call centers and the like. This could mislead casual readers.5. Looking to future implications, the gains from virtual trade being larger for partners far enough away to have disjoint working days suggests a new dimension to efficient free trade areas. The existing ideas about FTA formation are based on trade costs increasing in distance. Thus proximity is associated with greater likelihood of trade creation exceeding trade diversion, a presumption from theory that jibes with the geography of most actual FTAs. The rise of services trade, and thus of potential gains from cross-time-zone trade, suggest a contrary force is rising in importance. Related to this, the relative desirability of FTAs vs. full multilateral agreements is probably modified.