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Spotlight on Strength of U.S. Trade in Services

· June 26, 2018

The current Administration’s trade agenda emphasizes trade deficits as the primary tool to evaluate the strength of U.S. trading relationships. There are serious shortcomings to using deficits alone to measure strength and fairness of a trade relationship, a view held by most economists (here and here and here) and even by the White House’s own Council of Economic Advisers (here).

Nonetheless, the Administration seems committed to evaluating trade through this lens. It would be wise not to overlook key industries when lamenting the state of U.S. trade. Recent data from the U.S. International Trade Commission shows that the United States is not exactly “losing” on trade.

2018 U.S. International Trade Commission Report

In June, the U.S. International Trade Commission (ITC) released its annual report on trends in U.S. trade in services, a report that provides a qualitative and quantitative overview of services trade and highlights key sectors in the U.S. economy. The report shows that U.S. services trade continues to grow, offering trade surpluses in a variety of services-related sectors.

The United States remained the largest cross-border services exporter and importer in 2016, with service exports amounting to $733.6 billion and imports amounting to $483.1 billion, netting a surplus of $250.4 billion. Projections suggest that exports grew 3.8 percent to $761.7 billion in 2017 and imports grew by 6.8 percent to $516.0 billion.

For the 2018 report, the ITC chose to focus on “electronic commerce” which, according to the report, comprises audiovisual, computer and data processing, information services, telecommunications services, and computer software. Electronic commerce accounts for 12.7 percent of all service cross-border exports.

There are two key observations from the electronic commerce data that illustrate how electronic commerce is a key driver to U.S. trade. First, value added by the U.S. electronic services sector was $989.0 billion, and the sector accounted for 6.9 percent of U.S. private sector GDP in 2016. Second, the United States exported $93.4 billion in cross-border electronic services and imported $54.3 billion, resulting in a trade surplus of $39.1 billion.

The report also looks at three individual sectors of “electronic commerce”: audiovisual services, computer and data processing services, and telecommunications services.

For audiovisual services, the United States was the largest market for audiovisual services in 2016. These services include content that is distributed through digital technology, opening up consumer access on a variety of devices and streaming services around the world. The report notes the advent of streaming services, such as Netflix and Amazon Prime Video, “creates opportunities and increases competition for established U.S. content producers, as streaming service providers are producing more original content.” The U.S. was also the largest market for telecommunication services, and in 2016 there was a surplus of $6.7 billion in cross-border exports of telecommunications services.

In the ITC report, “computer and data processing” encompasses information technology services, cloud computing, and software. While there is currently a deficit in computer services (exports totaled $17.3 billion in 2016, imports amounted to $29.0 billion), the report notes that this has been decreasing in recent years. Since 2011, U.S. exports have grown at a rate of 8.8 percent and imports have only grown at a rate of 4 percent. The report also notes that the economic output for computer and data processing services grew from 1.8 percent to 2.2 percent from 2011-2016.

Cloud services stand out from other IT services as a particular U.S. success with the United States having a 57 percent share of the world cloud services market. The report also favorably calls out the digitization of manufacturing, which has greatly facilitated global value chains by lowering costs and increasing efficiency.

Preserving and Expanding Gains in Digital Trade

The value of this services trade documented in the report is threatened by increasingly common trade barriers. Artificial barriers that close off these markets are detrimental when considering the cross-border nature of the Internet, and the services that rely on it. This is true not only for services, but for goods that rely on the distribution methods enabled by the Internet and the goods themselves that utilize broadband connections.

Threats to cross-border services take the shape of numerous non-tariff barriers. With respect to computer and data processing services, the report notes that countries have increasingly introduced barriers to trade which undermine export of computer services such as data localization regimes. Audiovisual services mentioned in the report are threatened when the regime does not have adequate copyright provisions for online intermediaries and flexible limitations and exceptions to encourage new works, in addition to copyright protection and enforcement. Taxation of digital services in a manner that departs from international norms, including those that single out the digital economy for additional taxation, discourages foreign investment.

The Office of the United States Trade Representative agrees, and has frequently identified threats of barriers to digital trade, most recently noting that:

[D]igital trade is under threat from a growing number of laws and regulations that block the flow of data across borders, impede the provision of services such as cloud computing, or otherwise restrict the ability of firms to take advantage of best-in-class digital services.  Some of these government actions are explicitly protectionist, while others impose unnecessary burdens on digital trade in seeking to address legitimate public policy goals.

The data also shows why trade liberalization to remove these barriers, as well as maintaining key trading relationships, is so important. For example, Canada is the second largest export market for computer services. Modernizing the North American Free Trade Agreement to ensure that these trends not only are maintained, but continue to grow, is critical. Other top markets for U.S. services include Japan, the UK, and Ireland. The absence of comprehensive agreements with the United States and these countries undermines the potential that could be made with respect to electronic commerce and innovation.

Barriers are not only presented by the actions of foreign countries, but by current U.S. policy. It is concerning that this Administration continues to pursue isolationist policies with respect to trade. While enforcement of trade rules is essential to protecting U.S. industries, the unrestrained use of unilateral tariffs, especially considering the current state of global supply chains and the growing threat of escalation, will have unintended consequences across the economy.

Conclusion

The strength of U.S. trade in services should not be overlooked. Whatever the tool used to evaluate trade in the United States, it would be wise to consider the readily available data and evidence to formulate policy affecting trade, especially in a critical sector to the global economy.

Digital Trade

Companies rely on clear, predictable rules that facilitate digital trade to export their products and services around the world. These rules include balancing the competing interests between encouraging investment and enabling information access; promoting the free flow of information online; and maintaining balanced intermediary liability regimes.