Tuesday, October 2, 2012

Expanding U.S. Exports of Services

When I'm asked (usually with deep suspicion) about how globalization benefits the U.S. economy, I of course have my pre-packaged explanation about comparative advantage, specialization, and gains from trade. But I've found that another answer is often more powerful. The main growth in the world economy in the next few decades is, by all accounts, most likely to be in nations like China, India, Brazil, and others. The U.S. economy should be looking for ways to hitch itself to this growth locomotive--and globalization is one name for this process.

Pedro Amaral and Margaret Jacobson offer some encouraging recent news about U.S. exports in a short article in  Economic Trends from the Federal Reserve Bank of Cleveland. "In fact, despite the recovery’s frustratingly slow growth, exports have averaged 8 percent yearly growth since the beginning of 2010 and continue to reach record levels in terms of total nominal and real dollars. The ratio of exports to GDP has been growing at a far faster rate in the current recovery than in an average one." They point to strong demand from abroad--and it's not from high-incomne countries like Europe or Japan!--as well as to a lower foreign exchange rate of the U.S. dollar as driving the rise in exports.


But how can the high-wage U.S. economy hope to compete in the lower-wage world economy? J. Bradford Jenson offers a nice discussion of "Opportunities for U.S. Exports of Business Services" in some recent Congressional testimony that I ran across at the website of the Peterson Institute for International Economics.

I liked Jenson's discussion because it pushes all of us to see international trade and the U.S. economy as it operates today, not through a gauzy nostalgia for the role played by manufacturing in the U.S. economy of a  half-century ago.  He writes :

"When we think of trade, most of us envision wheat, copper, crude oil, and manufactured goods such as clothing, furniture, consumer electronics, cars, and jet aircraft. We need only visit a port, border crossing, or big-box superstore to find an abundance of such goods from virtually every country in the world. By contrast, many believe the service sector is largely insulated from the international economy. Because many services require face-to-face interaction between buyer and seller, the prevailing assumption is that most services are not tradable. This belief has always been a misconception, and in today’s economy, it is an increasingly inappropriate one. The falling costs of travel and increased ease of communications, thanks to the Internet, have vastly expanded opportunities for services to be traded across long distances, including across borders."

He focuses in particular on "business services." "This group includes the information, finance and insurance, real estate, professional, scientific, and technical industries; management, administrative support, and waste remediation industry groups; and industries such as software, engineering services, architectural services, and satellite-imaging services. ... The business service sector accounts for about 25 percent of the US labor force—two and a half times the size of the manufacturing sector. Moreover, the business service sector is growing. Over the past decade or so, manufacturing sector
employment has decreased by about 20 percent, while business services have increased by about 30 percent. And business service jobs are good jobs: Average wages in business services are more than 20 percent higher than average wages in manufacturing.

"Many people hold an outdated view of the US economy. Just as an example, consider the relative size of one service industry, engineering services, relative to two important manufacturing industries: the automotive industry (including assembly and parts) and the aerospace industry. It might surprise you to learn that engineering services is the largest in terms of employment. Engineering services (NAICS 541330) employed 980,000 people in 2007—more than the automotive industry (910,000), and more than twice as many as aerospace (440,000), according to the most recent economic census. Average earnings in engineering services ($73,000) are significantly higher than in auto production ($52,000) or even in aerospace ($68,000)."

Here's a figure from the ever-useful FRED website at the St. Louis Fed showing the trade surplus that the U.S. economy has been running in the service sector as a whole.  The figure shows monthly data, so the U.S. trade surplus in services has been was running about about $5-6 billion per month for much of the 1990s and first half of the 2000s--call it $60-$72 billion per year. But since early 2011, the monthly trade surplus in services has been more like $15 billion per month--call it a services trade surplus of $180 billion per year.

Graph of Trade Balance: Services, Balance of Payments Basis

Jensen's testimony focuses in particular on how world trade talks could bring down barriers to exports of U.S business services, and while that is important, I suspect it is at least as important that U.S. business services providers have been orienting themselves more toward international markets. As the U.S. government and economy struggles to get its debt burdens under control in the years to come, export growth in services is one of the most promising sources of additional demand for U.S.-made output.