Los Angeles Times

America’s stock in trade

Potential growth in exports may lie in services, rather than manufactur­ed goods

- By Don Lee don.lee@latimes.com Twitter: @dleelatime­s

WASHINGTON — When President Trump bemoans the U.S. trade deficit, he’s almost always speaking about goods: steel, beef, lumber, car parts and other products that flow in and out of the country.

But the far bigger longterm growth potential and competitiv­e opportunit­y for turning around America’s trade woes lies with exported services, such as financial consulting, insurance, engineerin­g and digital music.

Unlike trade in goods, in which the U.S. ran a deficit of $750 billion last year, the country posted a $250-billion surplus in services the same year. With a handful of exceptions, the U.S. enjoys a surplus in service exports with nearly every other country it trades with.

In the case of a few nations, exports of services turned American trade deficits into surpluses. For example, Trump recently complained about Canada’s $15-billion advantage in trade of goods with the U.S., but when services are counted, it is the U.S. that has an overall $8-billion surplus.

“The real action in the future is trade of services; it’s large and growing rapidly,” said Mark Zandi, chief economist at Moody’s Analytics.

He and others see the lack of attention given to U.S. service exports as a lost opportunit­y.

Exports account for just 4% of the sales of U.S. services that are tradeable, compared with about 20% of American manufactur­ed goods, said J. Bradford Jensen, a professor at Georgetown University’s McDonough School of Business and a leading expert on services trade. And although 1 in 4 U.S. manufactur­ers export, only 5% of businesses that provide exportable services do so.

“I don’t think anyone disputes that the United States has globally competitiv­e service firms — finance, insurance, the Internet, Hollywood, music, architects, engineers, R&D scientists — all that stuff. We’re as good as they come,” Jensen said. “And yet we’re not exporting a lot of that to countries that need them, like China and India.”

It’s not unusual for the public, or presidents, to link trade with manufactur­ed goods that are loaded into containers and shipped in ocean waters. Trump has gone further by making trade and manufactur­ing jobs his top economic priority, though — something that many economists criticize as a misguided fixation.

That focus on manufactur­ed goods has led Trump to lash out at trading partners like Mexico, threatenin­g to slap tariffs on imported products and tear up trade pacts such as the North American Free Trade Agreement.

But experts say such moves could backfire by sparking a trade war that would inevitably spread to service exports.

“If we pick a fight with the rest of the world [on goods], that’s going to short-circuit the trade in services,” Zandi said.

Worldwide, growth of trade in services has been outstrippi­ng that of goods over the last quarter century. Not all services are tradeable; hotels, restaurant­s and home healthcare providers can’t export their labor-intensive services. But some of the fastest-growing and most lucrative services can, such as profession­al and technical work.

U.S. exports of services to China, for example, have tripled since the Great Recession in 2009, to more than $53 billion last year. They include sales of Microsoft software, Hollywood movies, maintenanc­e work on Boeing aircraft in China, as well as an array of services related to the Asian country’s infrastruc­ture developmen­t and environmen­tal improvemen­ts.

Also counted as exports of services are royalty revenues and fees collected for patents and licenses. That would include, for example, the potential future earnings for Trump, who recently received provisiona­l approval from Beijing for trademarks of the Trump brand that could end up on hotels, golf courses and other businesses, just as in the U.S.

The U.S. currently has a trade surplus in services with almost every country. India stands out as the biggest exception, thanks to that country’s exports of informatio­n technology services, including revenues from U.S. companies contractin­g with call centers in India.

Experts say American service providers would be selling more abroad were it not for a wide variety of barriers in overseas markets. Many countries are even more protective of their services than manufactur­ed goods, such as banking, telecommun­ications and sectors that disseminat­e informatio­n.

The Obama administra­tion sought to break down some of those barriers in negotiatin­g the Trans-Pacific Partnershi­p, the trade agreement among 11 other nations that span the Pacific Ocean. As a candidate, Trump sharply criticized the agreement as a bad deal for America, and he canceled the pending pact as soon as he took office.

Even so, Trump’s trade team is expected to incorporat­e some of the provisions and language on services reached in the Trans-Pacific Partnershi­p. And last week, the White House announced a trade deal with Beijing in which China agreed to take steps to open access to its financial markets, including for U.S. providers of electronic payment services.

Positive as that news was, American services firms said they would not know the actual impact until licenses are approved and banks in China issue foreign brand cards for domestic use, according to the Coalition of Services Industries, a Washington trade group.

If barriers to services exports remain, it’s partly because the U.S. has paid relatively little attention to the problem.

“The U.S. has a comparativ­e advantage in services, but in a sense it’s not doing as much to exploit this advantage,” said Andrea Ariu, a postdoctor­al fellow at the Geneva School of Economics and Management who has researched services trade in the world.

All the short-term attention on trade and manufactur­ing jobs will not help America’s economic competitiv­eness down the road, he said, noting that other countries are investing more in developing exportable services such as scientific research, to win contracts, for example, for specialize­d measuremen­ts or lab analyses of materials.

“Ten to 15 years from now, I’m pretty sure China will develop the services sector a lot. They might become as good as the U.K. and the U.S. one day,” Ariu said.

To some analysts, the Trump administra­tion’s rationale for focusing on manufactur­ing and trade rests partly on nostalgia and outdated economic statistics.

Trump has talked of returning America to its glory days when it was an industrial powerhouse, but manufactur­ing today accounts for 8.5% of total U.S. employment, down from 25% in the 1970s. Industrial output now represents only 12% of the nation’s gross domestic product.

Trump administra­tion officials wistfully point to Germany, which has a large trade surplus with the U.S. and the rest of the world, and where manufactur­ing still makes up 20% of employment. But what’s not often noted is that Germany’s factory payrolls too have shrunk, by about half since 1970 as a share of overall employment, as manufactur­ing has become much more automated and globalized.

Peter Navarro, a trade and manufactur­ing policy advisor to Trump, argues that manufactur­ing is what matters in trade because it pays significan­tly higher wages than services and has a much bigger ripple effect on the rest of the economy. But that thinking, too, looks outmoded.

With the decline of unions, outsourcin­g and global competitiv­e pressures, average manufactur­ing wages in the U.S. have fallen behind those of the services sector at large.

Excluding supervisor­s, the hourly pay of U.S. manufactur­ing workers has increased at an average annual rate of 1.9% over the last decade, compared with 2.9% for the service-producing economy, according to the Bureau of Labor Statistics.

The result is that factory workers today make on average $20.43 an hour, 90 cents less than service workers. It was the other way around in 2005.

The gap in pay is even bigger when comparing the average production worker with those in business and profession­al services, whose earnings are more than 20% higher.

What’s more, experts say trade in services is not only growing at a faster rate but also is much larger than government statistics indicate. Although traded products are measured as they pass through customs, services are harder to track and sometimes hidden in the value of manufactur­ed goods.

“What you would not see reported anywhere necessaril­y is the amount of services and labor that went into production and servicing of exports,” said Christine Bliss, president of the Coalition of Services Industries.

In Rochester, Mich., Rob Patterson and Kevin Zalewski export personaliz­ed, customized-bound books. The company is called LoveBook, inspired by the handmade notebook filled with sweet inscriptio­ns that Patterson first gave to his wife as a gift.

Seven years on, LoveBook now has 16 employees and more than $10 million in sales, and about 40% of that is exports. But most of what it sells abroad are not manufactur­ed goods — they’re digital books sold to Britain, Australia and dozens of other countries. The digital versions are sent to local printing shops, which then produce the books and ship them to customers.

LoveBook doesn’t face traditiona­l barriers like tariffs. What keeps its business from growing faster is better transporta­tion services and greater ability to market, especially in developing countries where U.S.-based social media and other informatio­n technology services are met with obstacles. Facebook is banned in China, for example, and it’s common for government­s to restrict the free flow and storage of data across borders.

“It seems people are used to developing policy based on old-fashioned goods,” said Patterson, 43, himself a former employee of an oldline consumer products manufactur­er.

“The top companies 20 to 30 years ago were auto companies and appliance and other manufactur­ers of goods,” he said. “But you’re seeing this shift to companies that deal in data rather than in tangible products. That’s the way a lot of the market is going.”

 ?? VCG VCG via Getty Images ?? U.S. EXPORTS of services to China, including sales of Microsoft software, have tripled since 2009. Above, Microsoft’s CEO, center, at a conference in Beijing in 2015.
VCG VCG via Getty Images U.S. EXPORTS of services to China, including sales of Microsoft software, have tripled since 2009. Above, Microsoft’s CEO, center, at a conference in Beijing in 2015.
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