Good News for US Trade

The United States service sector generated an all-time high $73.4 billion trade surplus in 1996 on record exports of $224 billion. Not bad considering that the intangible and "invisible" nature of services once made "services trade" an oxymoron. This trade surplus offset 40 percent of the $188 billion deficit in US goods trade in 1996. Considering the incredible growth of the services surplus, we might imagine that it will someday even cancel the goods deficit.

The service sector - from transportation to retail and wholesale trade, business and professional services, education, health care, information, and countless other industries - currently generates three-quarters of US gross domestic product and comprises 80 percent of employment. Amazingly, 2.4 million of the 2.6 million jobs created in the US economy in 1996 were in services. And, contrary to conventional perception, the growth has been concentrated in such well-paid fields as information services, health services, and education and social services.

The fruits of economic growth

Until recently, services were merely a blip in US international trade data. In 1985, the service sector trade surplus was a mere $300 million on exports of only $73 billion, compared to the 1996 surplus of $73.4 billion. In the process, services trade has gone from a statistician's afterthought to a source of hope for eventually balanced trade.

Why this surge in US service sector trade? Global economic growth and US comparative advantages in knowledge-intensive industries are the main reasons.

For example, the US, as a center of international commerce and tourism, attracts businessmen and tourists from around the world. The money they spend on air fare, hotels, restaurants, and entertainment - US exports - has tripled over the last 10 years. Increased goods trade has been a boon for US maritime, port, trucking, railway, and other services related to surface freight transportation. The trade balance for travel and transportation has gone from a deficit of more than $8 billion in 1986 to a surplus of more than $18 billion in 1995.

Businesses engaged in financial services have benefited from increased worldwide economic growth. US financial services companies currently generate a trade surplus of more than $4 billion annually. US capital markets are the most efficient and liquid in the world, and US financial firms are the world leaders in such areas as banking, insurance, investment management, and credit services.

Because of improvements in communications and information technology, US professional and technical consultants are able to assist clients around the world, providing services in the accounting, legal, advertising, engineering, consulting, and information fields. In 1995 alone, these industries produced a US surplus of almost $12 billion.

The strength of the United States university system is recognized as one of our great economic advantages. But few realize that it is also an export machine. The enormous number of foreign students who study at US universities added nearly $7 billion to the US trade balance in 1995.

When foreign students study at American universities; when foreign companies hire US legal, consulting, and advertising firms; and when foreign patients come to US hospitals for health services - these are all exports.

The US currently runs services trade surpluses with all of its major trading partners, in many cases offsetting a significant portion of the bilateral goods deficit. For example, in 1995, the US had a $17 billion services trade surplus with Japan, the largest single market for US services exports. When the final services trade figures come in for 1996, this surplus should come in at around $20 billion, which would offset more than 40 percent of the $48 billion US goods deficit with Japan.

Similarly, the US service sector trade surplus with the European Union in 1995 was $12.1 billion, offsetting virtually all of the goods deficit with the EU. Interestingly, the US services surplus with China, roughly $1 billion, only offsets about 2 percent of the US goods deficit with China. But if past experience is any indication, US services exports to China should surge in the future. This is worth keeping in mind in US-China trade negotiations.

The US must continue to pursue services trade liberalization aggressively. The recently completed telecommunications agreement in the World Trade Organization (WTO) is an encouraging indication that trade issues can be addressed on an industry-by-industry basis. A successful conclusion to the financial services negotiations now pending in the WTO would benefit the US as well as other countries by fostering competition and increasing worldwide access to efficient global capital markets. Trade liberalization in such areas as maritime services and professional services will present further challenges for the multilateral trade negotiation system.

Long-term competitiveness

Although US service companies are making an important contribution to US international competitiveness, it would be dangerous to assume that the US services trade surplus will continue to grow exponentially, with no extra effort. Increased competition lies ahead. In the same way that other countries developed export growth in their goods sectors, they will surely support growth in services exports.

As long as the US continues to demand strong commitments from its trading partners in services trade liberalization, businesses and consumers around the world will benefit from the explosive growth of high-quality, low-cost services.

Manufacturing, of course, still matters greatly, and the US must continue to pursue policies to enhance its competitiveness. The encouraging news on services trade simply means that the service sector has come into its own as a source of US exports and export-related jobs.

* Bob Vastine is president of the Coalition of Service Industries in Washington.