Will Services Trade Lead the Future for US Exports?

Will Services Trade Lead the Future for US Exports?

Timothy Taylor 16/10/2020 4
Will Services Trade Lead the Future for US Exports?

At least for a time, one legacy of the pandemic is likely to be a decrease in physical connections around the world economy, from tourism and business travel to shipping objects.

But international trade in services is delivered online. For the US, trade in services has been becoming a bigger part of the overall trade picture, and the pandemic may give it an additional boost. Alexander Monge-Naranjo and Qiuhan Sun provide some background in "Will Tech Improvements for Trading Services Switch the U.S. into a Net Exporter?" (Regional Economist, Federal Reserve Bank of St. Louis, Fourth Quarter 2020). 

The authors point out that shifts in transportation routes or shipping method like containerization have had large effects on international trade in the past. They write: 

The U.S. is a world leader in most high-skilled professional service sectors, such as health, finance and many sectors of research and development. Moreover, leading American producers have been ahead of others in the adoption of ICT in their production networks. The global diffusion of ICT—including possibly the expansion of 5G networks—is prone to make many of these services tradeable for servicing households and businesses....  Similarly, the day-to-day activities of many businesses all involve tasks that can be automated and/or performed remotely and, of course, across national boundaries. Thus, a natural prediction would be that the U.S. should become a net exporter of high-skilled, knowledge-intensive professional services because of its comparative advantage.

Here are some illustrations of the patterns already underway. This figure shows the US trade balance separating out goods and services. The US trade deficit in goods plummetted from the early 1990s up to about 2006--with an especially sharp drop after China entered the World Trade Organization in 2001 and China's global exports exploded in size. But notice that US trade in services has consistently been running a trade surplus over this time, and the services trade surplus has been rising in recent years. 


Indeed, the long-run pattern seems to be that for the US economy, services have stayed about the same proportion of total imports in recent decades, but have become a rising proportion of total exports. 


Some of the big areas of gains for US services exports have been information technology and telecommunications services, insurance and financial services, and other business services (which includes areas like "professional and management consulting, technical services, and research and development services"). 

Monge-Naranjo and Sun don't actually make a case that a rise in services exports could be enough to turn the overall US trade deficit into a surplus; in that sense, the title of their short article overstates their case. But they do show that trade in services is not only a large and rising part of US exports, but may be the part of US economic output with the biggest upside for expanding US exports in the future. 

Supporting this potential for rising US exports in services requires a different public-sector actions. It's not about better transportation systems for physical goods, but rather about faster and more reliable virtual connections across the US and to other places around the world. A substantial and ongoing improvement in this virtual infrastructure also seems potentially quite important for the US economy as it adapts to a new reality of online meetings, online healthcare, online education, online retail, online work-from-home, and more. The US economy isn't going to move back to its manufacturing-dominant days of several decades ago, and at least in the medium-term, it probably isn't going to move back to to the social-clustering times way back in January 2020, either.   

In addition, there is "A Fundamental Shift in the Nature of Trade Agreements,"as I called it in a post a few years ago, where the emphasis is less about tariffs and import quotas, and more about negotiating the legal and regulatory frameworks to open up foreign markets for US exporters of services. The kinds of trade agreements needed to facilitate, say, US insurance companies operating overseas, are quite different from the trade agreements about tariffs on objects like tariffs or steel.  

A version of this article first appeared on Conversable Economist

 

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  • Phil Ashton

    Services trade employ the most workers and create the majority of new jobs globally.

  • Scott Douglas

    For generations, trade barriers were measured by tariffs, quotas and voluntary export restraints. Today, services generate more than two-thirds of world gross domestic product, employ the most workers, and create most new jobs globally.

  • Elias Worrell

    Yes it's playing an increasingly large role in the US economy and in everyday life now that most countries are in lockdown.

  • Charles Osborn

    This is certainly the future of US exports

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.

   

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