Trade in services: Vital to US economic growth Issues by the Numbers, March 2017

Introduction

In the heat of political debate, issues can get reduced to sound bites. In the case of trade, the sound bite often repeated in 2016 was that “US trade deals cost American jobs.” But as with most important issues, the reality is far more complicated. In particular, the US services sector makes a very strong showing on the international stage—one that benefits the US economy and creates jobs. This powerful economic position could be strengthened even further by a new generation of deal-making and trade liberalization.

Much of the rhetoric surrounding international trade and international trade agreements during the 2016 US presidential campaign focused specifically on tying trade to a decline in US manufacturing employment. This simplified a very complex set of economic circumstances, where the proverbial “devil” is, in fact, in the details.¹ Examples of this simplification include little or no discussion of the interaction of global supply chains, as well as scant consideration of the nuances involved in valuing domestic and foreign goods and services. For instance, in 2011, a quarter of the value of imports into the United States actually originated in the country in the first place, while only 11 percent of the value of US exports originated in another country;² yet this fact appeared to be barely taken into account, if at all, by the candidates and the popular press, nor has it entered into discussions of trade by the new administration.

The fact does remain that the United States has a sizable and growing trade deficit—a condition that has persisted for over 40 years.³ When looking at trade on a gross flow basis, however—that is, counting the dollar value of goods and services as they cross the border—it is clear that the deficit is due to an imbalance in goods trade, which includes manufactured products, raw materials, and agricultural products. In the other major component of trade—services—the United States runs a substantial and growing trade surplus, which represents an asset to the economy and an impetus for job creation. The importance of services to trade is even more evident when one considers that a substantial portion of the value added in goods exports “are produced with large amounts of domestic services, such as financial services, real estate, and other business services. In contrast, nearly all of gross services exports represent services value-added, as those sectors use few inputs either from domestic goods sectors or from abroad.”⁴

Given the critical role that services play in the economy and trade as a whole, it is important that any changes to existing trade arrangements or any new negotiations undertaken serve to bolster, not diminish, the US advantage in this sector.

The role of services in a modern economy

The services sector has become the most important driver of US economic activity in terms of employment, value added, and trade. In 2016, the services-producing industries contributed 68.9 percent of US GDP, amounting to $12.9 trillion, and 83.8 percent of total private employment, representing 102 million employees.⁵ Most industrialized nations have witnessed a similar shift, with services contributing to over 60 percent of output and employment in most Organisation for Economic Co-operation and Development (OECD) member countries (figure 1). Even emerging economies are shifting toward services. For instance, between 2005 and 2015, the services sector’s contribution to GDP in China, a noted manufacturing powerhouse, increased from just over 40 percent to 50 percent.⁶ The Asia Pacific Economic Cooperation (APEC) forum⁷ and the Association of South East Asian Nations (ASEAN)⁸ have also renewed their focus on the importance of a competitive services agenda to realize overall growth and development across their respective regions.

As shown in figure 2, the categories of service activities are wide-ranging, including everything from education and health care services to professional business services.

Trade in services dominated by the United States

Services trade makes up more than 39.2 percent of world trade as measured in value-added terms,⁹ with the United States playing a major role. In fact, the United States is the largest single-nation exporter and importer of private-sector (commercial) services in the world. On a gross trade basis, the United States contributed 14 percent of global services exports and 9 percent of global services imports in 2014. The second- and third-largest single-nation service exporters were the United Kingdom and France, accounting for only 7 percent and 6 percent of the world’s global services exports, respectively. The United States also has a larger proportion of its trade tied to services than do most other industrialized nations—a proportion on par with France and the United Kingdom, the other two lead traders in this sector. From a value-added perspective, the United States remains one of the world leaders in the total contribution of services to exports.

Trade and value added

Since 1992, services industries have maintained a steady trade surplus, thereby partially offsetting the trade deficit of goods-producing industries (figure 4). As of 2016, the United States had a surplus of $247.8 billion in traded services (figure 5).

Five out of nine service categories contributed positively to the trade balance, as shown in figure 6.

Not only do US services exports have a much higher degree of domestic content than do goods exports, but the content of US goods exports also contains a substantial proportion of service production. As shown in figure 7, it is this value-added services component of goods exports, along with the very high proportion of service production in services exports, that leads to services’ larger value-added contribution to total US exports than goods.

Services exports support US jobs

Just as the majority of overall US employment is in the services sector, so too is the majority of jobs supported by exports (figure 8). Although a larger proportion of manufacturing jobs is supported by exports (26 percent of total US manufacturing employment), in absolute terms, the total number of manufacturing jobs supported by exports is just over 3 million, as seen in table 1. In services, while only 8 percent of employment is supported by exports, the larger contribution of services to total US employment means that this 8 percent equates to 7.8 million jobs.

As always, the aggregate can mask underlying variation. For instance, 19 percent of transportation and warehousing jobs (845,000) and 12 percent of business and professional services jobs (2.3 million) are accounted for by exports, while only 8 percent of wholesale and retail trade employment is driven by exports.

Exports are an important part of an economic growth strategy

Trade, particularly trade in services, has helped to grow our economy.

For the last 70 years, through the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS),¹⁰ the activities of the World Trade Organization (WTO), and a host of preferential trade agreements that bind trading partners, trade has contributed significantly to the global economy’s expansion by stimulating competition, encouraging technology, and opening new markets for investment flows. The things consumers enjoy on a daily basis are more readily available as a consequence of greater openness and economic integration. Standards of living have improved greatly.¹¹

Two major trade agreements of the 1990s—the Uruguay Round of Multilateral Trade Negotiations (Final Act) and the North American Free Trade Agreement (NAFTA)—generated increased purchasing power of $1,300 to $2,000 per year for the average American family of four.¹² These agreements also lend further visibility to the pivotal role services play and the benefits they bestow across the entire supply chain, including attracting foreign direct investment.

The globalization of business has accelerated our services trade surplus. A large proportion of services exports occur through the commercial presence of US companies in foreign markets (figure 9). Since 1998, exports of services to foreigners through majority-owned foreign affiliates have increased substantially, as more US firms are preferring to have a direct presence in the foreign countries where they are doing business. In 2014, US firms traded $1.5 trillion in services through their majority-owned foreign affiliates, compared with only $743.3 billion in services through nonaffiliated cross-border trade.

The impact of the digital economy

Increasingly, services are being delivered—that is, traded—digitally. The associated economic growth that comes with this type of trade—particularly for micro, small, and medium enterprises (MSMEs)—represents a huge growth opportunity for the trade agenda. The International Trade Administration estimates that digital trade increased annual US GDP by almost 5 percent in 2011.¹³ This contribution will likely continue to increase as more people connect to the Internet and trade digitally with the rest of the world.

This increase in digital trade brings a relatively new discussion point to trade deal-making: the terms of trade for data flowing across borders. Efforts to advance digital trade should include smart approaches to creating regulations around data flows that are not overly restrictive, yet still allow for data protection. Much of this will require trade dialogue to focus on what is happening “behind the border” in trading nations. Indeed, “behind the border” is very much at the heart of most modern trade discussions for both digital and services trade more broadly. It is important for the rules of trade to fully appreciate and respond to these emerging dynamics and realities of doing business.

Building on success

The United States has a comparative advantage over other nations in providing services, and there is enormous room for growth, particularly as the digital economy continues to evolve and data flows through trade increase. Leveraging the growth of services can significantly benefit the United States and the global economy in the long term. This makes it important for the United States to adapt to the new paradigm and bring renewed energy into rulemaking around services trade.

While it is beyond the scope of this paper to delve into existing and future possible trade deals and the details of the rules that underpin such accords, it is nevertheless important to introduce the rules governing services trade and to identify where there may likely be appetite for a refresh. We touch on this because, while trade continues to evolve, many—specifically citing the lack of attention to trade in services—argue that this agenda has not progressed as much as originally envisioned. As a result, there has been a growing divide between the realities of and the demands placed on the services economy on the one hand, and the rules governing its trade on the other. That said, we have recently seen a growing appetite to renew the spotlight on services trade, led in large part by the United States.¹⁴ Much of the reasoning for this is highlighted in this paper: Services matter for growth and jobs.

Table 2 highlights a few of the key issues around negotiating rules governing services trade.

Looking forward

The United States has the good fortune to be home to abundant natural resources and inventive technology, but we should plan for sustained growth over the long term. If the United States wants continued economic prosperity, then it should consider focusing on industries that are hard to imitate—and many of the services industries fit the bill. The United States has an advantage over other countries in services: Many services are difficult to imitate and require long-term investment in human capital, something the United States does well. This, in large part, is what makes services key to sustained returns and a rising standard of living.

With their increasing tradability and their rising importance as inputs to traded goods and services, services are poised to play an increasingly vital role in the United States’ economic growth and trade. As the international trade conversation continues to evolve, the role of trade in services provides an opportunity for the United States to bolster its economy and build on a strong track record of growth. We do not minimize the importance of manufacturing to the overall health of the economy, but priorities should also recognize services’ essential role. A healthy services sector is no less vital to a strong US economy than a healthy manufacturing sector. The United States should be at the international negotiating table on both topics.