International Trade and Investment

U.S. Competitive Advantage in Services

   A large and growing part of the U.S. economy and workforce is employed in services. In 1800, 9 out of 10 American workers were employed in agriculture; today that number is less than 1 in 10. In contrast, nearly 8 in 10 American workers are employed today in the service sector.

   The vast economic benefits from trade liberalization for services stem in part from our competitive advantage in services. That is, the United States can produce many services at a lower cost than our trading partners, and our trading partners can produce some other set of goods and services at a lower cost than the United States. When we trade our lower cost services for their lower cost goods, we and our trading partners gain from trade. Chart 8-2 shows the changing structure of U.S. trade, which in part mirrors the changing structure of the U.S. economy. Since the 1970s, the United States has consistently run a surplus in services trade, with a $66 billion surplus in 2005.

         Technological Change Is Fostering International Trade in Services.

   Services have become increasingly tradable, particularly knowledge-based or information technology-enabled services that are beyond the traditional notion of internationally traded services such as transportation, travel, and tourism. For many of these services, a physical commercial presence is necessary. For example, a financial institution is able to offer a host of financial products to international clients, but the multinational firm must still set up intermediary branches to serve their clients overseas. Other services can be delivered with virtually no physical presence. An increasingly wide range of commercial transactions ranging from stock trades, to manufacturing orders, to airline reservations, can occur almost entirely over networked digital media located in many countries around the world.

   Trade in services previously involved high transaction costs between businesses and customers. Technological innovations and changes in global technology such as the Internet, information technology (IT) hardware such as personal computers, and IT networks have greatly reduced communication and transaction costs for trade in services.

   Trade growth in "other private services" has far outpaced growth in the rest of services. From 1995 to 2005, U.S. exports of "other private services" grew 143 percent, compared with 44 percent growth in all other services. The bulk of the overall trade surplus in services comes from the "other private services" category, which accounted for 90 percent of the overall U.S. services trade surplus in 2005, up from 38 percent in 1995. In contrast, the surplus in more traditional services (e.g., travel and transportation) has fallen. The surplus in "other private services" has grown from $30 billion in 1995 to $60 billion in 2005, and the surplus in the rest of services has fallen from $48 billion to $7 billion. Many of these trends are consistent with the global IT advancements that have fostered international trade in services over the past decade.

         High Barriers Restrict International Trade in Services.

   Barriers to trade in services are mostly regulatory and investment restrictions and tend to be higher than trade barriers in merchandise. For instance, U.S. banks that wish to offer retail banking services abroad face a host of barriers that limit their ability to compete in foreign markets. Examples of such barriers might be investment restrictions that limit the number of bank licenses the country will issue to a U.S. bank; requirements for U.S. banks to enter the banking market through a joint venture with a domestic bank; or limits on the degree of control that a U.S. bank can exercise over its foreign affiliate. Foreign firms wishing to enter the U.S. airline industry face ownership restrictions that limit their ability to compete with domestic firms.

   Despite such barriers, services trade is expected to continue to grow. Research suggests that as countries incomes grow, their demand for services and their trade in services will each grow more than one-for-one with income. U.S. producers are well-positioned to continue to engage in increased services trade, as many have already incorporated the technology in their operations to facilitate trade.