And its increasing importance to the U.S. Economy
International trade often conjures images of huge shipping vessels, laden with enormous crates chocked full of goods, traveling the globe’s oceans or cargo planes transporting items from one country to another. This relates to the trade of goods. And if you’ve caught even a snippet of the news in the past few years, you know the U.S. currently is working at trade deficit, a predicament the federal government is looking to reverse.
But trade also – increasingly – refers to services. Consulting, accounting, finance, advertising and insurance are just a few U.S. businesses within the services sector that enjoy a trade surplus, exporting more than importing. The importance of services trade is the focus of the sixth installment of the Business Bites Webinar Series, sponsored by Creighton University’s Heider College of Business in partnership with the Greater Omaha Chamber. In it, Kristie Briggs, PhD, professor of economics and director of Creighton’s Doctorate in Business Administration (DBA) program, discusses how services trade has become increasingly important to the U.S. economy, especially in reducing the overall U.S. trade deficit.
MODES OF SERVICES TRADE
What is an export? Simply put, it is the sale of goods and services from a U.S. resident to a non-U.S. resident. Products go out, and money comes in. However, the “going out” differs between goods and services. Goods cross physical borders; services may or may not leave the country in order for them to be traded. The modes of services trade illustrates how:
- Mode 1: Cross-Border Supply – both supplier and consumer remain in their respective countries. For instance, clients abroad can access U.S. online banking services or a foreign wine company uses the services of a U.S. marketing firm.
- Mode 2: Consumption Abroad – the consumer travels abroad to consume services. For instance, a foreign exchange student comes to the U.S. to attend college or a person from a foreign country travels to the U.S. and stays in a U.S. hotel, or travels to the U.S. for a medical procedure.
- Mode 3: Commercial Presence – a U.S. company supplies a service through an affiliate firm or branch located abroad. For instance, a U.S.-based accounting firm establishes a wholly or majority-owned affiliate abroad to serve the local market.
- Mode 4: Temporary Presence of Natural Persons – individuals travel abroad to supply a service. For instance, a U.S. financial expert travels abroad to provide training or management consultants travel to a foreign country to provide consulting services to a foreign client.
COMPARATIVE ADVANTAGE AND TRADE
So why do we care about services trade? For many reasons. In “U.S. Trade in Services: Trends and Policy Issues,” the Congressional Research Service states that 71% of total U.S. employment is in the service sector; 69% of the U.S. GDP is in services; and U.S. exports $827 billion in services annually.
Further, the U.S. is the leading exporter and importer of services worldwide, exporting 14% of services across the globe and accounting for 11% of the world’s service imports. It has a services trade surplus, which means U.S. services trade carries a comparative advantage in that it helps balance out the trade deficit of U.S. goods trade.
And this may not even be the full story. “Economists agree that services trade data are significantly underestimated,” says Briggs.
Regardless, services trade is opportunity, which is why the U.S. government is leveraging services trade as a priority to support growth and expansion of the country’s economy.
GREAT OPPORTUNITY-SUBSTANTIAL BARRIERS
Just because your business has the capability to operate remotely doesn’t mean it will automatically be easy to export your services to different countries, Briggs cautions. Government limitations to “buy domestic,” work visa limitations for non-domestic employees and data transfer regulations are common barriers businesses face in the services sector.
In an effort to widen the corporate client base to foreign countries and further increase the services trade surplus while diminishing the overall trade deficit, the U.S. government has sought to eliminate such barriers. It has prioritized bilateral and multilateral free trade agreements (FTAs), such as the United States Mexico Canada Agreement (USMCA). It has called on the World Trade Organization (WTO) to grant most favored nation status for all WTO members, including no additional restrictions to services trade between one country and the next. It has advocated national treatment for foreign suppliers in such instances as portfolio management, electronic payment services and investment recommendations.
BENEFITS, ALL AROUND
Briggs says the benefits of easing restrictions of services trade benefits not just Fortune 500 companies and other large corporations. Small business owners benefit as well. According to a U.S. Chamber of Commerce Technology Engagement Center and Google study, entitled “Growing Small Business Exports: How Technology Strengthens American Trade,” economists estimate a 14% increase in exports over the next three years, generating $81 billion in revenue and 900,000 new jobs in the U.S.
“You can’t talk about trade without services entering the dialogue,” says Briggs.
This content was developed as part of our Business Bites series, a virtual education opportunity sponsored by the Heider College of Business in partnership with the Greater Omaha Chamber. Request the full interactive Business Bites session to learn more.
Dr. Kristie Briggs is a professor of economics and Faculty Director of the Doctor of Business Administration Program at Creighton University Heider College of Business. Trained as an international trade and development economist, Dr. Briggs is an active researcher of intellectual property rights and innovation in the global context. Her role as a teacher-scholar is particularly important to her. “I am energized by research and feel blessed to be able to share my passion with graduate students who are finding their own research identities.”