Why Services Are the New Frontier in Trade

The world is charging ahead in pursuit of new market-opening trade agreements, as explained earlier in this series, but in recent years Washington policymakers have been sitting on trade policy’s sidelines. The United States derives huge benefits from trade and trade agreements, but a bolder, forward-leaning approach is needed to ensure U.S. competitiveness in the decades ahead.

In this context, the vast and often overlooked world of trade in services is drawing new attention. Consider:

• Services rule. Services dominate the U.S. economy. Broadly speaking, services provide about 80% of all American jobs (approximately 126 million of 158 million American jobs in 2021, according to data from the Bureau of Labor Statistics).
• More jobs, higher pay. Professional and business services employ 22.5 million Americans, making this sector a larger employer than manufacturing (75% larger, in fact). What’s more, these are good jobs: Wages in these fields are 25% higher on average than those in manufacturing (average hourly earnings of $39 versus $31).
• Increasingly tradeable. Thanks in part to digital trade, about two-thirds of all services can be exported today, particularly in professional and business services such as audiovisual, software, architecture, accounting, engineering and project management, banking, insurance, and advertising.
• Competitive advantage. As the world’s largest exporter of services, it is in the interest of the United States to focus on services trade. U.S. services exports reached nearly $800 billion in 2021. In addition, services sales by foreign affiliates of U.S. multinational companies reached $1.65 trillion.
• Untapped potential. Despite these big numbers, the potential for service industries to engage in international trade is almost untapped. One in four U.S. factories exports, but just one in every 20 providers of business services does so. Just 3% of U.S. services output is exported, according to the Peterson Institute for International Economics.

To capitalize on America’s strength in services, U.S. trade agreements have long tackled foreign barriers to American services exports — just as they do for manufactured goods and agricultural products.

U.S. trade pacts include services provisions to secure access to foreign services markets and bar discrimination against U.S. services industries. In addition, they lift foreign governments’ limits on U.S. investments in their services sectors.

As for the results, consider these highlights from the U.S. Department of Commerce:

• Under NAFTA (which was replaced by USMCA in 2020), U.S. services exports to Canada and Mexico have tripled, rising from $27 billion in 1993 to $101 billion in 2019. Services imports from Canada and Mexico have grown from $17 billion to $69 billion.
• Under the U.S.-Singapore Free Trade Agreement (FTA), U.S. services exports to Singapore have nearly quadrupled, increasing from $5.9 billion in 2003 to $23.3 billion in 2019. Services imports from Singapore have grown from $2.1 billion to $11.2 billion.
• Under the U.S.-Chile FTA, U.S. services exports to Chile have quintupled, increasing from $1 billion in 2003 to $5.6 billion in 2019. Services imports from Chile have grown from $622 million to $3.2 billion.
• Under the U.S.-Australia FTA, U.S. services exports to Australia have tripled, increasing from $6.9 billion in 2004 to $21.9 billion in 2019. Services imports from Australia have grown from $3.9 billion to $8.7 billion.
• Under the U.S.-South Korea FTA, U.S. services exports to South Korea have grown by 40%, increasing from $16.7 billion in 2011 to $23.5 billion in 2019. Services imports from South Korea have grown from $9.7 billion to $11 billion.

As noted, digitalization is unleashing new potential in services trade, which in the past decade has been growing about twice as fast globally as trade in goods.

The U.S. Chamber of Commerce examined this trend in a major report entitled The Digital Trade Revolution: How U.S. Workers and Companies Can Benefit from a Digital Trade Agreement. The report underscores the promise of digital trade as a driver of dynamic growth and good jobs in the U.S. and abroad. The report includes details on a host of industry sectors and state-by-state fact sheets.

However, rising digital protectionism abroad presents a serious threat, and scores of countries have imposed data localization measures and other trade and regulatory barriers that put a brake on services trade.

A recent study by the Information Technology & Innovation Foundation found that “the number of data-localization measures in force around the world has more than doubled in four years. In 2017, 35 countries had implemented 67 such barriers. Now, 62 countries have imposed 144 restrictions— and dozens more are under consideration.”

In the U.S. Chamber’s view, the best defense is a good offense: The United States should pursue a high-standard digital trade agreement with a coalition of like-minded countries that share U.S. ambitions. Doing so could secure new opportunities for American workers, small businesses, services industries, and others. (Read more, including on the U.S. Chamber’s objectives for such an agreement.)

Nor would the benefits of a digital trade agreement be confined to the United States: A 2017 study by the U.S. Chamber estimated that reducing market and regulatory barriers to digital trade could boost global GDP by an impressive $1.72 trillion.

For U.S. services industries and many others, a digital trade agreement is a major opportunity to spur U.S. economic growth and job creation. On services as in other areas, the United States needs to lead on trade — and on new trade agreements.

Story by John G. Murphy, US Chamber