15 March 2012
“Global Trade in Services: Fear, Facts, and Offshoring”
A Real Jobs Plan For The 21st Century
Ed Black, Contributor
Tech Association CEO
Times are tough. So it is not surprising that so many politicians are talking about employment and jobs. President Obama has proposed a $450 billion jobs package and Mitt Romney has a comprehensive jobs plan that can be downloaded as an eBook. What you don’t hear is how we can boost exports by 40 percent, bring American companies $800 billion in new revenue and create 3 million new jobs. That’s right: 3 million, which would reduce current unemployment by almost 25 percent.
How can we do something so positively transformative? The answer, according to a new book by J. Bradford Jensen, an eminent international trade economist at Georgetown University, is aggressively liberalizing trade in services. My organization has been talking about this for years, particularly in relation to the Internet, which as a medium has done more to enable the global trade in services than anything in history.
Services include the expertise provided by doctors, lawyers, accountants, engineers, musicians, computer programmers, reporters, and teachers. For a more abstract representation, the Economist humorously quipped that they are the “products of economic activity that you can’t drop on your foot.” Once theorized as un-tradable, advancements in technology, such as high-speed transit, telecommunications and the Internet, have allowed many services to join tangible goods as a major force in the global marketplace. Despite making up a considerably larger chunk of the world’s economy than manufacturing, services trade has received much less attention than trade in goods.
Why is this? Well, for one, trade in services in much harder to measure. When an Italian suit, a bottle of French wine or a Ford truck is exported, it passes through customs, it is identified, assessed levies (if appropriate), and catalogued. The stats are then compiled and shipped to economists and academics around the world that use the data to paint a very clear picture.
However, when an architect gets on a plane or when a lawyer advises an international client by phone, it is far harder to identify, quantify and catalogue. As a result, the products (and profits) of this lucrative trade can go undocumented or get underreported. The policy implications of this are profound. Too often, especially among OECD countries, politicians and trade negotiators fight to protect the last vestiges of obscure manufacturing sectors while expending little effort and political capital on liberalizing trade in services, which would confer far greater benefits.
When U.S. politicians discuss trade in services, the stereotypes of the overseas call centers or low paid computer programmers from China or India often dominate the discourse. However, as Dr. Jensen makes clear, this mischaracterizes the reality. A few examples:
Significantly more people work in the “engineering services” sector of the U.S. economy than work in the manufacture of automobiles and automotive parts.
Almost three times the number of people in the United States are employed in the “computer systems design engineering” sector than the entire field of aerospace manufacturing.
At least 60 percent of the U.S. economy is services related – and some metrics suggest it is more like 80 percent of the economic activity of the United States.
“Business services,” which make up some of the most easily exportable services, account for nearly a quarter of the U.S. economy. Compare this to manufacturing, which accounts for only 10 percent of employment in the United States. Furthermore, these are not low-paying jobs, as the average business services employee makes 25 percent more than the average manufacturing employee. And the majority of U.S. “business services” are in sectors in which the United States has a comparative advantage. Therefore, these industries will only expand as the international trade in services becomes more liberalized. The story is likely similar in other developed countries, especially in the European Union. As discussed earlier, the relative gains would be massive.
The costs associated with the displacement of current workers from foreign competition are small compared to the gains that come from liberalization, and these costs more easily borne as well. Unlike manufacturing jobs lost to exports that are largely centered in specific cities and regions, tradable service activities are largely scattered among the major urban centers that have dynamic and diverse local economies. In fact, no region of the country has more than 3 percent employment in the type of low-wage services that would be the likely candidates to be replaced by foreign workers.
If focusing on services liberalization is a win-win for all involved, what stands in the way of achieving this? First of all, liberalizing in service sectors is more difficult. As opposed to lowering tariffs on goods, which is relatively easy in practice once the political will exists, lowering barriers to trade in services requires hard work. Regulations, certifications and licensing need to be harmonized. Also, protectionist measures can be more easily disguised. A country can claim to be holding up its own high-standards in a particular industry by not allowing practitioners from other countries into the market and countries like China can cite national security and public morals concerns to block foreign web services and platforms but not domestic ones.
In the international arena, some strides have been made but much work still needs to be done. The General Agreement of Trade in Services (GATS) is good start but it has some major defects. The most glaring problem is that the GATS is a “positive list” treaty where signatory countries have to commit to which sectors they want to liberalize, as opposed to under its “goods” cousin, the GATT, where countries have to explicitly say which goods they are not including.
The difference might sound mundane and procedural, but the consequences are real. In the services world, each new advancement in technology has to be added to the list of commitments if it is to enjoy the protection of the GATS. This especially impacts cutting edge industries, like the Internet and technology sectors, where new products and services are being created at a much faster speed than the wheels of international economic diplomacy turn.
What are the opportunities going forward?
Currently there is an effort underway in Geneva to create a GATS+ agreement that takes unilateral commitments made by negotiating parties in their bilateral FTAs related to electronic commerce and “internationalizes” them across all countries willing to participate. This process is just one part of a new focus on electronic commerce that WTO member countries have committed themselves to. Significant strides can also be made in the plurilateral Trans-Pacific Partnership (TPP) talks, which include a number of highly advanced Pacific Rim economies, including the United States, Australia and Singapore.
Progress also needs to be made on the Agreement on Government Procurement (GPA) as a global boom in infrastructure investment, largely by developing country governments, could generate as much as $40 trillion in spending over the next two decades. It is precisely these major projects that need the assistance of the world-class expertise available in the U.S. business services sectors.
Finally, the Internet must take center stage in modern trade agreements. As I have argued in the past, it is time for a 21st Century trade agenda that focuses much more attention on the Internet. More than any other medium, the Internet enables the worldwide exchange of “services” to an extent never possible before. It does this in a way that is inherently “borderless” and that gives clever people in any country in the world the opportunity to export their ideas and services – provided they can get a good Internet connection.
If the international trade regime is to keep pace with the modern world, bits and bytes must be afforded the same protection as beef and bolts in modern trade negotiations.
Unfortunately a cloud looms over the services sector as more nations move to place restrictions on the free flow of information and online commerce. If service providers and web platforms are made liable for the actions of all of their users or countries are allowed to indiscriminately block access to companies providing goods and services over the Internet, the gains made on international trade in the 20th century will soon begin to erode as the most dynamic platform for trade in services in human history is reined in.
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