US-China tariff war masks ascendant trade in services

With the daily headlines about the US and China imposing tariffs on merchandise in each other’s markets, you might get the impression that all that matters in international commerce today is the exchange of goods between countries, such as raw or refined commodities, textiles and clothing, steel products, and other manufactured items. However, you would be dead wrong.

A large portion of cross-border transactions in the modern economy is in the services sectors, a swathe of diverse activities, including transport, banking, tourism, telecommunications, e-commerce, management consulting, education, accounting, and informatics. In fact, worldwide growth in services trade has significantly outpaced that of products.

In 1975, total global merchandise trade (both exports and imports) accounted for 27 per cent of the world’s GDP. At that time, the share of global GDP represented by total services trade was only 6 per cent. But by 2018, services trade as a percentage of the world’s GDP had more than doubled, whereas trade in goods as a share global GDP increased by only 70 per cent.

Skewed fixation

To be sure, the current White House’s obsession with merchandise trade is most pronounced in the case of US-China economic relations. Washington’s current trade war with Beijing is predicated on the bilateral deficit in the two countries’ trade in goods. That deficit totalled $419.2 billion (Dh1.53 trillion) in 2018. This is why US President Donald Trump’s trade weapon of choice with the Chinese is the imposition of tariffs on US imports of goods from China. If Trump could eliminate the bilateral deficit in merchandise trade with China by applying higher and higher tariffs — or perhaps more simply if Xi Jinping would just write him a check for $419.2 billion — Trump would declare victory.

That objective is wrong-headed for two reasons.

First, Trump ignores the fact that the Chinese in 2018 bought $41.5 billion more services from Americans than the US bought from China. That is, the US is actually running a surplus in services trade with China. This surplus means the overall US bilateral trade deficit with China is actually lower than what Trump thinks. It is $377.7 billion.

A structural issue

Second, bilateral trade deficits in and of themselves are not economically meaningful. To this end, the problems with China’s trade practices are far more fundamental: it is that they are not consistent with Beijing’s legal market reform commitments made in 2001 with China’s accession to the WTO, including ending subsidies to state-owned enterprises; protecting intellectual property; and transparently and consistently applying administrative procedures and laws, among other items.

No matter how high the tariffs, they will not induce these structural reforms.

Many people, with Trump at the head of the pack, do not seem to understand that growth of international trade in services runs in parallel with the prosperity of nations, epitomised by the wealthiest countries — the members of the OECD. The two largest OECD participants in services trade with the rest of the world are the US, whose global trade in services totalled $1.3 trillion in 2016, and Germany, where the corresponding number was $607 billion, less than half the magnitude of the US.

Trump will no doubt be surprised to learn that while the US.’ balance of global trade in services is in surplus by $247 billion, Germany’s global services trade balance is in deficit of $23 billion.

Still abstract

The notion that there actually can be cross-border trade in the provision of services was, at one time, surely a seemingly abstract concept. I know this first-hand from the 1990s, when I served as the lead US trade negotiator in charge of developing today’s system of multilateral rules governing such transactions.

Those rules are embodied in the General Agreement on Trade in Services (GATS), which was established part and parcel of the World Trade Organisation (WTO) at the latter’s inception.

While the importance of services trade to US competitiveness may have once been out of the mainstream of trade policy thinking, that was decades ago. If Trump’s economic advisers are worth their salt, they should know better. If they do, then why can’t they get through to the boss?

Perhaps Trump’s distorted view towards the importance of international trade in services stems from sheer ignorance. That is hard to believe. After all, he did attend the Wharton School of Business at the University of Pennsylvania, from which he graduated in 1968 with a Bachelor’s Degree in Economics.

Such training, one would assume, equipped him with the tools to understand the concept of cross-border services transactions, even if they were not as commonplace then as they are today.

Alternatively, does it stem from a nostalgic hope to return to years gone by when manufactured merchandise and other goods dominated economic activity in the US and elsewhere? If so, he would do well to recognise that such a wish is far-fetched. Why?

Because over the last 20 years, in every country of the world — rich as well as poor — manufacturing’s contribution to GDP actually has been declining while the share of GDP accounted for by services has been rising.

It’s ironic that not only is the core of the Trump Organization in the real estate industry, a prime component of the services sector, but Trump’s course concentration in economics at Wharton was in real estate. Even television, Trump’s second occupation, is a services industry.

Despite this, Trump might well believe that a shift to a services-oriented economy is a sign of economic decline. If so, the latest data, which are for 2015, suggest he would be quite mistaken. In high-income countries, services’ share of GDP has risen to 75 per cent. In low- and middle-income states, the share of GDP accounted for by services has increased to 56 per cent.

Whatever the reason for Trump’s myopia toward the fastest growing portion of international trade, he needs to realise that he — like the rest of us — is not living in an economy of years gone by.

— Harry G. Broadman is a Partner and Chair of the Emerging Markets Practice at Berkeley Research Group and on the faculty of Johns Hopkins University.