U.S. Trade In Services: Trends And Policy Issues

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U.S. Trade in Services:Trends and Policy IssuesUpdated January 22, 2020Congressional Research Servicehttps://crsreports.congress.govR43291

U.S. Trade in Services: Trends and Policy IssuesSummaryTrade in “services” refers to a wide and growing range of economic activities. These activitiesinclude transport, tourism, financial services, use of intellectual property, telecommunications andinformation services, government services, maintenance, and other professional services fromaccounting to legal services. Compared to goods, the types and volume of services that can betraded are limited by factors such as the requirement for direct buyer-provider contact, and otherunique characteristics such as the reusability of services (e.g., professional consulting) for whichtraditional value measures do not account. In addition to services as independent exports,manufactured and agricultural products incorporate and depend on services, such as research anddevelopment or shipping of intermediate or final goods. As services account for 71% of U.S.employment, U.S. trade in services, both services as exports and as inputs to other exportedproducts, can have a broad impact across the U.S. economy.Rapid advances in information technology and the related growth of global value chains haveexpanded both the level and the range of services tradable across national borders. As a result,services have become a priority in U.S. trade policy, and a significant part of U.S. trade flows andof global trade in general, accounting for 827 billion in U.S. exports in 2018. As the UnitedStates is the world’s largest exporter and importer of services (14% and 10% of the global total in2018), the Administration’s discussions on potential and existing trade agreements that includeservices are significant.A number of economists argue that “behind the border” barriers imposed by foreign governmentsprevent U.S. trade in services from expanding to its full potential. The United States continues tonegotiate trade agreements to lower these barriers. It was a leading force in concluding theGeneral Agreement on Trade in Services (GATS) in the World Trade Organization (WTO) in1994, and in past U.S. free trade agreements, all of which contain significant provisions onmarket access and rules for liberalizing trade in services. Trade negotiations involving trade inservices currently under discussion include the following: Expansion of services liberalization under WTO;Recently approved U.S.-Mexico-Canada Agreement (USMCA);Phase One agreement with China and future Phase Two discussions; andPotential bilateral trade agreement negotiations with the European Union (EU)and/or the United Kingdom (UK).In each case, participants have difficult issues to address and the outlook for progress is uncertain.For most agreements, Congress may consider legislation to implement agreements potentiallyconcluded in the future.Congress and U.S. trade negotiators face additional issues, including how to balance the need foreffective regulations of services with the objective of opening markets for U.S. exports and tradein services; ensuring adequate and accurate data to measure trade in services to inform tradepolicy; and determining whether further international cooperation efforts are needed to improvethe regulatory environment for services trade beyond initial market access. This report providesbackground information and analysis on these and other emerging issues related to U.S.international trade in services. In addition, it examines existing and potential trade agreements asthey relate to services trade.Congressional Research Service

U.S. Trade in Services: Trends and Policy IssuesContentsIntroduction . 1U.S. Trade in Services . 2Modes of Delivery. 2Overall Trends. 3Cross-Border Trade (Modes 1, 2, and 4). 4Commercial Presence (Mode 3). 4Geographical Distribution . 5Trade by Type of Service . 7World Trade in Services . 9Global Value Chains and Services . 9Barriers to Trade in Services . 11The Economic Effects of Barriers to Services Trade . 12U.S. Trade Agreements . 15WTO. 16GATS . 16WTO Ongoing Negotiations . 19Key Concepts for Services in FTAs . 19Market Access and the Negative List Approach . 19Rules of Origin. 20Multiple Disciplines on Services . 20Regulatory Transparency . 21Regulatory Heterogeneity . 21Current U.S. Trade Agreement Negotiations . 22U.S. Trade Negotiating Objectives . 22Trade in Services Agreement (TiSA) . 22U.S.-Mexico-Canada Agreement (USMCA) . 23China . 24Potential Trade Agreements with EU and/or UK . 26Potential Issues for Congress. 27FiguresFigure 1. Four Modes of Service Delivery . 2Figure 2. U.S. Net Trade in Goods & Services, 1999-2018 . 3Figure 3. U.S. Exports by Mode, 2016 . 5Figure 4. U.S. Trade in Services by Geographic Region, 2018 . 6Figure 5. U.S. Services Supplied Through Majority-Owned Foreign Affiliates, 2017 . 6Figure 6. Services Supplied to U.S. Persons by Foreign MNEs Through Their MOUSAs,2017 . 7Figure 7. U.S. Cross-Border Services Exports by Type of Service . 8Figure 8. U.S. Services Exports by Type of Service Through U.S. Majority-OwnedForeign Affiliates. 8Figure 9. Commercial Services Trade: Leading Exporters, 2018. 9Figure 10. Relative Trade Restrictiveness of the United States. 15Congressional Research Service

U.S. Trade in Services: Trends and Policy IssuesContactsAuthor Information. 28Congressional Research Service

U.S. Trade in Services: Trends and Policy IssuesIntroductionServices are a significant element across the U.S. economy, at the national, state, and local levels.The term “services” refers to an expanding range of economic activities, such as audiovisual,construction, computer and related services, express delivery, telecommunications, e-commerce,financial, professional (such as accounting and legal services), retail and wholesaling,transportation, and tourism. Services not only function as end-use products but also facilitate therest of the economy. For example, transportation services move intermediate products alongglobal supply chains and final products to consumers; telecommunications services open ecommerce channels; and financial services provide credit for the manufacture and consumption ofgoods or the production of crops.Services account for a majority of the U.S. economy—69% of U.S. gross domestic product(GDP) and 71% of total U.S. employment.1 Services have also become a significant componentof U.S. international trade, accounting for 827.0 billion of U.S. exports in 2018. As such, it is anincreasingly important component of U.S. trade policy and of global trade in general.2Rapid advances in information technology and the related growth of global value chains aremaking an expanding range of services tradable across national borders. However, certaincharacteristics have limited the types and volume of services that can be traded; for example, ahair stylist must be physically near a client. Other service providers are no longer required to bein the same location as the customer, such as a graphic designer who can send a product (e.g., anelectronic file of a design) to a client across the globe.3 A number of economists have argued thatforeign government barriers prevent U.S. trade in services from expanding to its full potential.4Under the Trump Administration, the United States continues to engage in trade negotiations onmultilateral, plurilateral, bilateral, and regional agreements with one goal being to lower thesebarriers.Congress has a significant role to play in negotiating and implementing trade-liberalizingagreements, including those on services. In fulfilling its responsibilities for regulation ofcommerce and oversight of U.S. trade policymaking and implementation, Congress monitorstrade negotiations and the implementation of trade agreements. Congress establishes tradenegotiating objectives and priorities, including through trade promotion authority (TPA)legislation and consultations with the Administration. More directly, before a trade agreementrequiring changes to U.S. law can enter into force in the United States, Congress would need topass legislation to implement the agreement.This report provides background information and analysis on U.S. international trade in services,including the types and volumes of traded services. It analyzes policy issues before the UnitedStates, especially relating to negotiating international disciplines on trade in services and thecomplexities in measuring trade in services. The report also examines emerging issues andcurrent and potential trade agreements, including the recently approved U.S.-Mexico-CanadaAgreement (USMCA) to replace the North American Free Trade Agreement (NAFTA), ongoingnegotiations with China, ongoing multilateral and plurilateral negotiations at the World Trade1U.S. International Trade Commission, Recent Trends in U.S. Services Trade: 2019 Annual Report, Publication 4975,September 2019, p. 13.2 U.S. Bureau of Economic Analysis, Trade in Goods and Services table: http://www.bea.gov/international/index.htm.3 These services are considered Information and communications technology (ICT)-enabled or potentially ICT-enabled(PICTE) services.4 See, for example, J. Bradford Jensen, Global Trade in Services: Fear, Facts, and Offshoring, Peterson Institute forInternational Economics, August 2011, p. 7.Congressional Research Service1

U.S. Trade in Services: Trends and Policy IssuesOrganization (WTO), and potential trade negotiations with the European Union and the UnitedKingdom.U.S. Trade in ServicesModes of DeliveryThe basic characteristics of services are complex (especially compared to goods) due to theirintangibility and their ability to be delivered via various formats, including electronically anddirect provider-to-consumer contact. To address this complexity, members of the World TradeOrganization have adopted a system of classifying four modes of delivery for services to measuretrade in services and to classify government measures that affect trade in services in internationalagreements. The General Agreement on Trade in Services (GATS) modes of supply are definedbased on the location of the service supplier and the consumer, taking into account theirrespective nationalities (see Figure 1).Figure 1. Four Modes of Service DeliverySource: CRS based on WTO.Congressional Research Service2

U.S. Trade in Services: Trends and Policy IssuesOverall TrendsU.S. international trade in services plays an important role in the overall U.S. economy and globaltrade. The wide range of existing and potential services, from e-commerce to engineering, isdelivered through multiple modes that often complement, or integrate with, one another.5Measurements of trade in services are captured in two types of data: cross-border trade includesservices sold via Modes 1, 2, and 4, described above.6 The second set of data measures servicessold by an affiliate, that is, the services a local affiliate of a foreign company sells to a consumerof the local economy (Mode 3).7In 2018, total cross-border trade (Modes 1, 2, and 4), services accounted for 33.1% of the 2,501billion total in U.S. exports (of goods and services) and 18.1% of the 3,129 billion in total U.S.imports.8 Figure 2 shows that the United States has continually realized surpluses in cross-borderservices trade, which have partially offset large trade deficits in goods trade in the U.S. currentaccount.9 U.S. services net exports have been increasing in contrast to the expanding deficit ingoods trade.Figure 2. U.S. Net Trade in Goods & Services, 1999-2018Source: CRS, based on data from U.S. Department of Commerce, Bureau of Economic Analysis.5U.S. International Trade Commission, Recent Trends in U.S. Services Trade: 2017 Annual Report, May 2017, p. pdf.6 For example, the purchase by a foreign visitor of a hotel stay and of other services in the United States are counted asU.S. exports and such purchases by a U.S. visitor to a foreign country are counted as U.S. imports from that country.7 Affiliates are enterprises that are directly or indirectly owned or controlled by an entity in another country to theextent of 10% or more ownership of the voting stock for an incorporated business, or an equivalent interest for an unincorporated business.8 U.S. Bureau of Economic Analysis, online tool http://www.bea.gov/iTable/index ita.cfm.9 The current account includes trade in goods and services as well as income earned on investments and unilateraltransfers.Congressional Research Service3

U.S. Trade in Services: Trends and Policy IssuesCross-Border Trade (Modes 1, 2, and 4)Information and communications technology (ICT)-enabled services fall under Mode 1 of crossborder services. These include services such as online banking, web-hosting, and servicesprovided via telephone when providers and customers are from different countries. Given theincreasing role of digital technologies in facilitating cross-border trade, in October 2016, the U.S.Bureau of Economic Analysis (BEA) began to identify trade in ICT services and potentially ICTenabled (PICTE) services, reflecting the growth and economic impact of digital trade anddigitally-enabled services.10 PICTE services include a wide array of services: insurance andfinancial services, as well as many business services like research, consulting, and engineeringservices which could be delivered electronically.In 2018, exports of ICT services accounted for 71.4 billion of U.S. exports while potentiallyICT-enabled services exports were another 451.9 billion, demonstrating the impact of theinternet and digital revolution. Together, ICT and potentially ICT-enabled services were 63% oftotal U.S. service exports in (and 57% of U.S. service imports).To measure the actual mode of cross-border delivery, as opposed to potential (e.g., a financialservices consumer could travel abroad to a bank to conduct a transaction or do so online), BEAconducted a survey. BEA found that, for some sectors, such as computer and legal services, thevast majority is conducted via Mode 1 (e.g., by phone, online, etc.), while other services, such aseducation, are predominantly delivered in person with either the customer or provider travelingabroad (via Mode 2 or 4).11Inbound travel and tourism is a big driver of Mode 2 exports (e.g., a Japanese tourist visitsWashington, DC). Travel by foreigners to the United States had been increasing until April 2018.Since that time, it has declined slightly, apart from a rebound in February and March 2019. Someobservers note the decline in U.S. travel exports reflects an overall global economic growthslowdown, while others contend it may be due to recent changes in U.S. domestic policies,including immigration and travel rules. U.S. exports of financial and business services hasremained robust in 2019 (see Figure 6).Commercial Presence (Mode 3)Many services require direct contact between the supplier and consumer and, therefore, serviceproviders often need to establish a presence in the country of the consumer through foreign directinvestment (FDI). For example, providers of legal, accounting, and construction services usuallyprefer a direct presence because they need access to expert knowledge of the laws and regulationsof the country in which they are doing business. They also require proximity to clients.Companies establish a commercial presence abroad through a foreign affiliate. It is unclear howadvances in information and communications technology will affect trade in services via Mode 3as virtual delivery via the internet expands the range of services offered and also drives increaseddemand.In 2017 (the latest year for which published data are available), U.S. firms sold 1,558 billion inservices to foreigners through their majority-owned foreign affiliates, and foreign firms sold 1,083 billion in services to U.S. residents through their majority-owned foreign affiliates located10For more information, see Grimm, Alexis N., BEA, Trends in U.S. Trade in Information and CommunicationsTechnology (ICT) Services and in ICT-Enabled Services, May 2016, http://www.bea.gov/scb/pdf/2016/05%20May/0516 trends %20in us trade in ict serivces2.pdf11 Michael A. Mann, “Measuring Trade in Services by Mode of Supply,” BEA, Augu

General Agreement on Trade in Services (GATS) in the World Trade Organization (WTO) in 1994, and in past U.S. free trade agreements, all of which contain significant provisions on market access and rules for liberalizing trade in services. Trade negotiations involving trade in services currently under discussion include the following: