Global trade in services: Fear, facts, and offshoring

J. Bradford Jensen 19 November 2012

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Should the US, or indeed the EU, Japan, Canada, or Australia, fear increased trade in services? As the ‘Really Good Friends of Services’ discussions gain momentum in Geneva, it seems an important time to ask1.

Fear of the unknown

Much of this concern is driven by the unknown. Which services are tradeable? Which services will become tradeable tomorrow? How many jobs are in tradeable services? Which service jobs are likely to face competition from low-wage, labour-abundant countries such as India? Answers to these and other questions about services are hard to come by. One reason is the lack of detailed official statistical data on services in general and trade in services in particular.

Addressing a gap in the data

To address this data gap, I have developed a methodology to identify ‘tradeable services’ using domestic production data for the US (Jensen 2011). The methodology relies on the intuition that services that are nontradable will usually be distributed with demand. For example, think of barber shops, beauty salons, grocery stores and divorce lawyers. On the other hand, services that exhibit geographic concentration in production, such as software, movies, financial services, and research and development activities, are traded within the US and thus tradeable internationally.

The developed world needn’t fear trade in services

The US, and the rest of the developed world, should not fear increased trade in services. To the contrary, the US and the EU should be aggressively seeking to liberalise policy impediments to service trade in order to take advantage of the many opportunities that expanded service trade offers.

Trade in services as an opportunity

One outstanding opportunity is presented by the enormous infrastructure boom that the developing world will undertake over the next 20 years. Building masses of infrastructure will require inputs from a wide array of engineering, technical, and other business services in which US firms are highly competitive. As an organising principle and motivating focus for service trade liberalisation, the US should set a goal of ensuring the ability of US service firms and workers to compete fairly for participation in what is an historic undertaking.

The service sector in the US

The service sector is a large and growing contributor to the US economy, employing a majority of American workers. The business service sector alone, which includes, among many others, information, financial, scientific, and managerial services, accounts for 25% of employment in the US – more than twice as many jobs as the manufacturing sector. Employment in the business service sector increased almost 30% over the past decade, while manufacturing employment decreased by over 20%.

Figure 1.

Source: 2007 Economic Census and Census of Government and 2006 Occupational Employment Survey.

The popular perception that most service jobs are ‘bad jobs with low wages’ is wrong. In fact, the business service sector pays significantly higher wages and salaries on average than the manufacturing sector. Average annual wages in business services are more than 22% higher than average wages in manufacturing.

US trade surplus in services

US trade in services is growing, for both imports and exports. The share of employment in tradeable services activities is large, potentially exposing a large share of the US workforce to foreign competition. Service exports have doubled over the past decade and, although service imports have also increased significantly over the same period, the US consistently runs a trade surplus in services – in contrast to its sizeable trade deficit in goods.

Figure 2. Composition of US service exports

Source: Bureau of Economic Analysis.

Figure 3. US goods and services trade balances, 1992-2009

Source: Bureau of Economic Analysis, US International Trade in Goods and Services, www.bea.gov

Many services are potentially internationally tradeable

Many service activities (engineering and architecture services, project management services, movie and music recording production, software production, and research and development services, to cite a few examples) appear to be ‘traded’ within the US and are therefore at least potentially tradeable internationally. Approximately 14% of the US workforce is in service industries that this book classifies as tradeable. In contrast, only about 10% of the workforce is in manufacturing. When workers in tradeable occupations, such as computer programmers in the banking industry, or medical transcriptionists in the healthcare industry, within non-tradeable industries are included, the share of the workforce in tradeable service activities is even higher.

Figure 4. Employment shares for tradeable industries

Source: Author’s calculations using 2007 American Community Survey

High-skill jobs aren’t likely to be lost

Even though these jobs pay high wages, they are not likely to be lost to low-wage countries. Indeed, precisely because they are high-skill, high-wage jobs, they are jobs that the US is likely to retain and that can support exports. In short, the US has comparative advantage in high-skill, high-wage manufacturing activities.

Table 1. Worker characteristics for select industries

Source: Author’s calculations using 2007 American Community Survey

Yet, in spite of having a comparative advantage in business services and globally competitive business service firms, US service firm participation in exporting lags significantly behind export participation in the manufacturing sector. About 25% of manufacturing plants export; in business services only one in 20 establishments export. Looking at exports-to-sales ratios in manufacturing, about 20% of manufacturing sales are exported; in tradable business services, less than 5% of sales are exported.

Implications for US trade policy

What do these findings imply for US trade policy? Although the US has a comparative advantage in services, turning that advantage into real economic benefits for US firms and workers is not automatic. A number of large and fast-growing economies around the world are less open to service trade than the US. Liberalising service trade with these countries is sure to be difficult, because it means not just reducing tariffs and other border controls as was the case with trade in manufactures, but instead fighting through a tangle of regulations, licensing requirements, and other countries’ internal barriers.

Figure 5. Restrictiveness of services trade policies by GDP per capita, 2005

Note: GDP per capita, PPP is in constant 2005 USD.

Source: Gootiiz and Mattoo (2009).

The coming infrastructure boom

But the historic opportunity that increased service trade represents, in particular because of the coming infrastructure boom – over $20 trillion by some estimates – in the developing world, justifies the effort required. Other developed economies also have comparative advantage in services and would be natural partners with the US in persuading the large, fast-growing countries with high service barriers to liberalise.

The US, working through the General Agreement on Trade in Services (GATS), should join with other developed countries in pushing for further liberalisation of business services, to ensure that US service firms and workers have the opportunity to compete in the coming infrastructure boom.

Much of the spending for infrastructure in the coming boom is likely to be controlled or financed, at least in part, by governments -- national, regional, and local. Those governments are sure to be subject to political pressure to favour domestic producers when granting. This makes guaranteeing equal treatment in government procurement a crucial issue for foreign service providers.

WTO Government Procurement

The WTO’s Government Procurement Agreement was negotiated with the intention of reducing preferences to domestic firms in public procurement and opening public works spending to international trade. Its coverage was extended tenfold in the subsequent Uruguay Round, but this large sum obscures the fact that to date only a relative handful of countries have signed the agreement, virtually all of them in the developed world. In particular, none of the large developing countries expected to account for the bulk of infrastructure spending in coming decades, that is, Brazil, China, India, and Russia, are participants in the agreement.

The US, again in cooperation with other developed countries, should strongly encourage large and fast-growing countries to sign on to the WTO Government Procurement Agreement.

The US needn’t fear trade in services

So, should the US fear increased trade in services? No. Indeed, quite the contrary; the US and the developed world should embrace trade in services and aggressively pursue liberalisation in the services sector.

References

Blinder, Alan S. (2006), “Offshoring: The Next Industrial Revolution?”, Foreign Affairs, 85(2), 113–28.

Gootiiz, Batshur, and Aaditya Mattoo (2009), “Services in Doha: What's On the Table?”, Journal of World Trade, 43(5), 1013–30.

Jensen, J. Bradford (2011), Global Trade in Services: Fear, Facts, and Offshoring, Washington, DC, Peterson Institute for International Economics Press,.

Vastine, J. Robert (2012), “A New Form of Services Trade Agreement Moving Ahead in Geneva: The International Services Agreement”, Georgetown Center for Business and Public Policy, Economic Policy Vignette, 4 November.


1 See Vastine “A New Form of Services Trade Agreement Moving Ahead in Geneva: The International Services Agreement,” November 2012.

 

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Topics:  International trade

Tags:  global imbalances, WTO, international trade, protectionism

Professor of Economics and International Business at the McDonough School of Business, Georgetown University