US Politicians' Unfortunate Ignorance of Global Services Trade

The US manufacturing sector has long been a focus of many statewide and national political campaigns, as well as elected officials' trade and fiscal policies.  As I noted a few months ago, many campaigning politicians' obsession with the American manufacturing sector - particularly their belief that it's in desperate need of government support - is completely wrongheaded.  But even if it were true that US manufacturers are struggling mightily in today's global economy, that still wouldn't explain why, particularly when it comes to trade, our politicians don't also obsess over US services and foreign barriers to them.

In fact, for many campaigning pols and elected officials, it's as if the services sector doesn't even exist.  For example, GOP presidential candidate Rick Santorum's fiscal plan involves massive tax cut and other subsidies for domestic manufacturers, but doesn't once mention the services sector.  And, as I've lamented repeatedly on this blog, US and other negotiators in the WTO's Doha round prioritized agriculture and industrial market access, while services liberalization was an afterthought to be negotiated only after modalities in the "important" sectors were resolved.

This obsession might make sense for politicians and trade negotiators in certain developing economies, but it's a huge mistake for their US counterparts.  A cool new book from Georgetown's J. Bradford Jensen entitled Global Trade in Services: Fear, Facts, and Offshoring makes this point clear, showing that the US services sector is globally dominant and that global trade in services provides far more and better opportunities for assisting the American economy's resurgence.  It also demonstrates that fears about outsourcing in the services sector are totally overstated.  I recently attended a presentation by Jensen on his book, and he was kind enough to share some of those materials with me.

Key findings from the book include:

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

• 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 percent higher than average wages in manufacturing.

• Trade in services is growing, both imports and exports, and the share of employment in tradable services activities is large, potentially exposing a large share of the US workforce to foreign competition. Service exports have expanded dramatically over the past decade, doubling over the past decade. And although service imports have also increased significantly over the same period, the United States consistently runs a trade surplus in services—in contrast to its sizable trade deficit in goods.

• 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 United States and thus are at least potentially tradable internationally. Approximately 14 percent of the US workforce is in service industries that this book classifies as tradable. In contrast, only about 10 percent of the workforce is in the entire manufacturing sector. When workers in tradable occupations (such as computer programmers in the banking industry, or medical transcriptionists in the health care industry) within nontradable industries are included, the share of the workforce in tradable service activities is even higher.

• 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 United States is likely to retain and that can support exports. The United States has comparative advantage in high-skill, high-wage manufacturing activities.

• The United States has comparative advantage in services and has been successful in exporting services. Indeed, the nation consistently runs a trade surplus in services. But US service firms’ participation in the international economy lags that of US manufacturing firms: a far smaller share of service output than of manufacturing output is traded. Thus, there seems to be considerable opportunity for US firms and workers from increased service trade.

The implications of Jensen's findings are clear:

Although the United States has 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 United States. Liberalizing 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 barriers well within countries’ borders. 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, well justifies the effort required. Other developed economies also have comparative advantage in services and would be natural partners with the United States in persuading the large, fast-growing countries with high service barriers to liberalize.

Based on his findings, Jensen makes several good, basic recommendations for US trade policy:

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

The United States, 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 United States should make access to a good primary, secondary, and postsecondary education a high national priority.

He then concludes that "the United States should embrace trade in services and pursue liberalization in the services sector aggressively. Both the United States and the world have much to gain and little to lose."

But, hey, maybe you refuse to take the statements above at face value and instead remain committed to our politicians' manufacturing obsession.  Well, fortunately for you, Jensen sent me several great graphics from his presentation, and I've uploaded them here.  Below are a few of my favorites.

First, the importance - in terms of size and earnings - of services to the US economy:

Next, proof that the United States' comparative advantages lie in high-end manufacturing and, you guessed it, services:

Next, the immense advantages of tradable services in terms of earnings, education and quantity:

Finally, a review of just how high are global barriers to trade in services and the most-restrictive countries:

And yet our political class obsesses over manufacturing and constantly frets about global impediments to American goods exports.  Utterly nonsensical, wouldn't you say?