Looking for Export Growth in All the Wrong Places

The Issue:

President Trump’s trade team says it is committed to improving America’s competitiveness in global markets. But nearly all the emphasis so far has been on trade in manufactured goods, in which the nation runs a large deficit.

The focus on manufacturing ignores America’s significant strength in services, and the rapid expansion in services trade driven by ongoing technological change.

The Facts:

• The U.S. exports much more in services than it imports from abroad: America chalked up a nearly $250 billion surplus in trade in services in 2016. While media and policy attention have focused on the ballooning trade deficit in goods, the trade surplus in services more than quadrupled in dollar terms over the past 15 years (see chart). In contrast, America’s trade deficit in goods was nearly $750 billion last year, an increase of nearly 78 percent in dollar terms over the same period. Service exports include a diverse set: from Wall Street firms that serve foreign clients, to internet and cloud-based service providers who serve companies located abroad, to tourism services at Florida theme parks or at Dollywood in Pigeon Forge, TN. The growth in the service trade surplus has primarily been driven by business services—which includes items such as financial services and consulting — and the receipts from the sale of American intellectual property (which includes movies, software, and the licensing of industrial technology).
• Despite the rapid growth in services exports that has already taken place, there are good reasons to believe that there is more room for growth. The share of revenue derived from exports – even in the parts of the service sector that lend themselves most easily to trade – remains far lower than the share of revenue derived from exports in manufacturing.  According to calculations based on data from the Census Bureau, the ratio of exports to sales in tradable business services is only one-fifth that of manufacturing (see this report for details). This lower ratio reflects a number of factors, including pervasive market access barriers in important trading partners. The lower ratio also reflects the reality that the information technology (IT) revolution that has made services increasingly tradable is still relatively recent – exporters around the world are still catching up to the possibilities opened up by new technology. As the digital revolution allows a greater range of services and other activities to be conducted online, and as American firms continue to break new ground in the technological domains of artificial intelligence, machine learning, and data analytics, export opportunities are likely to expand.
• Available evidence suggests that trade in services is far less free and open than trade in goods. The long history of extensive trade in goods, the relatively simple nature of many barriers to trade in goods (i.e., tariffs or quotas), and the cumulative result of six decades of multilateral, bilateral, and regional trade liberalization efforts have resulted in a global economy in which the formal barriers to trade in goods are reasonably low, especially in the advanced industrial countries. The barriers to trade in services are more complex and, therefore, harder to quantify. Rather than focusing on tariffs and quotas, expanding trade in services requires focusing on intellectual property protection, professional licensing and other regulations, and restrictions on the foreign affiliates of U.S. firms. Estimates of the service barriers to trade suggest that the aggregate level of discrimination against services exports in important emerging markets like China, India, and Indonesia is equivalent to a tariff on these exports of greater than 60 percent (see this report for individual country barrier estimates).
• Some experts believe that the services most amenable to trade could eventually become as intensively traded as manufactured goods (see here and here for examples). What would that imply in terms of increased exports and jobs? If services exports rose sufficiently to make the exports to sales ratio in tradable business services even half the current level in manufacturing, that could imply an increase in annual services export flows in the range of $300 billion, according to calculations by Gary Clyde Hufbauer and his co-authors.  An increase in exports that large could easily support more than 1.5 million jobs (this calculation applies estimates obtained by the Commerce Department during the Obama Administration, which indicated that $1 billion worth of exports supported roughly 5,000 jobs.) If services exports rose high enough to equal the exports to sales ratio in manufacturing, that would imply a services exports increase of $600 billion, supporting more than 3 million jobs. There are many reasons to believe that these calculations overstate the potential growth of services exports, at least in the near term. International trade in services faces linguistic and cultural barriers that even a successful liberalization effort may not fully overcome. Service exporters may choose to supply key elements of their services through employees based in local affiliates rather than through direct exports. Remaining technological barriers to trade in some services may prove difficult to overcome. Nevertheless, these numbers are so large that we could shrink them substantially, and we would still be looking at potential gains that are orders of magnitude larger than those almost any other conceivable trade policy initiative might yield.
• The potential for expanding manufacturing employment is limited. Manufacturing employment has declined sharply over the last fifteen years. And the fraction of total employment comprised by manufacturing jobs has been declining for decades in the U.S. and other advanced industrial countries. Today, the entire manufacturing sector only accounts for about 8.5 percent of total U.S. nonfarm employment. In contrast, J. Bradford Jensen has estimated that 14 percent of the U.S. workforce is employed in tradable services industries. It’s not that America does not make things anymore – the value of total manufacturing output is at an all-time high. And there are skill- and capital-intensive industries in which America runs a consistent surplus, such as aerospace, which generated a record trade surplus of about $90 billion last year. But the modern technology used in American manufacturing means that we can produce more than twice as much as we did in the mid-1980s, with one-third fewer workers (see this EconoFact memo.)