Services, Services

October 29, 2018

Our Trade Guys podcast was fortunate last week to have Christine Bliss as our guest. She is president of the Coalition of Service Industries (CSI), the main organization in town representing services companies. Before coming to CSI, she was assistant U.S. trade representative for services, investment, telecommunication, and e-commerce, responsible for overseeing all multilateral, regional, and bilateral negotiations and policy issues in those areas for the agency. She also served as the lead U.S. negotiator in the World Trade Organization (WTO) Doha Services Negotiations. So, she’s been doing services for a long time and knows what she’s talking about.

The conversation began with what sounded like a softball question but was not: what are services anyway? It turns out that is a complicated question, and I will spare you the details except to mention two traded services that you might not have thought of. First is education. When international students come here for an education, their college provides the service—teaching—but the tuition they pay is actually a service export—it is a foreign party paying a U.S. party for specific services. Likewise, when a foreign tourist comes to the United States, the money she spends here—hotel, travel in the country, and so on—are also U.S. services exports.

Thinking about services that way makes it easier to see that they are a big deal. First of all, we have become a services economy—about 75 percent of our GDP is services—and they have become an important and positive element of our trade profile. Last year, for example, we had a $255 billion trade surplus in services. That was overshadowed by an $807 billion deficit in goods trade, but it had the effect of significantly reducing our overall deficit to $552 billion. And our services exports are growing nicely—nearly $40 billion from 2016 to 2017. The China-only picture is similar—a $40 billion surplus last year—but year-on-year growth has not been as great.

This relatively good news led to our next question: how do service industries cope with a president who pretty clearly is not interested in them? The president only talks about goods, often citing a bilateral goods deficit as the total picture and ignoring services’ positive contribution. Even within goods, he focuses primarily on steel and automobiles. The answer was: by doing a lot of outreach and reminding everyone, including administration officials, how important to the economy services are.

Part of that reminding is pointing out how services permeate our daily lives, including manufacturing. In 2011, services accounted for about 25 percent of intermediate inputs bought by manufacturers, according to a government study. For manufacturers of high-tech products like computers, services made up as much as 47.6 percent of intermediate inputs. Manufacturers rely on services for market research, product design, efficient warehouse use and product distribution, advanced manufacturing and automation, and more. An enormous growth area has been digital trade, or e-commerce. The end result may be actual physical things arriving on your doorstep, but the ordering and delivery are services.

Agriculture is another example of an industry where the embrace of services can boost output. The combination of new tools to collect data on land type, soil nutrition, expected rainfall, weather patterns, and then process that data and distribute it via the cloud has enabled farmers to optimize crop cycles and make better decisions. Companies, such as Microsoft, are leveraging their expertise in intelligent cloud services to enhance agricultural output and efficiency in India and parts of Africa to meet food supply challenges there and beyond.

That part of our economy continues to grow, but with growth comes new issues, two big ones being governments interfering with the free flow of data and demanding data localization—that data be stored on servers in its country of origin. For financial services, in particular, those kinds of restrictions can be crippling, as an effective international banking system, to take one example, depends on being able to move and store data across borders.

Those issues had a fairly happy ending in the new United States-Mexico-Canada Trade Agreement, thanks in large part to the language being borrowed from the Trans-Pacific Partnership agreement that the president pulled out of in 2017. That suggests a policy of benign neglect when it comes to services may not be an entirely bad thing. Staying beneath the radar and building widespread support for your agenda seems to be effective—so far—but let’s face it, Canada and Mexico are a lot easier to deal with on these issues than others.

The bigger danger on e-commerce issues is other countries determined to control the internet for their own purposes in their own countries. Sometimes those purposes are simply protectionist—promoting the development of a domestic digital services industry and the jobs that come with it. More often, however, the motivation is to maintain control over and access to individuals’ data. If those efforts succeed, the result, in addition to restricting the growth of the U.S. services industry, will be the balkanization of the internet. You can see that happening already as we struggle with China’s “Great Firewall” and its insistence on accessing data in China and controlling its own citizens’ access to the internet. We also struggle with the European Union’s growing emphasis on privacy, which will have the effect of marginalizing their own high technology sector while slowing down growth for everyone else. In the end, it is in no one’s interest to have multiple internets, but right now that is not a winning argument.

That means Christine and CSI have their work cut out for them. So far, the administration has weighed in on their side, which is a good thing, but the more difficult battles remain ahead.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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