October 18, 2011
Washington—Policymakers have largely overlooked the export potential of the economy's fast-growing services sector, which could become an abundant source of well-paying jobs for Americans. A new book published by the Peterson Institute for International Economics, Global Trade in Services: Fear, Facts and Offshoring by senior fellow J. Bradford Jensen, lists several misconceptions about the kinds of jobs in that sector. A common belief is that business services such as software, finance, architecture and engineering are niche sectors. However, these jobs account for 25 percent of US workers—more than double those in manufacturing. In the past decade, employment in services has grown by over 20 percent while manufacturing declined by 20 percent.
Another misconception is that services are "bad jobs with low wages." However, in 2007 the average annual income in manufacturing was $46,000; business services was $56,000. Educational differences account for this wage gap. The ratio of workers with a bachelor's and advanced degree in tradable services versus manufacturing is two to one.
Additionally, some experts argue that services are not tradable. Jensen finds that there are more jobs in the tradable business service sector than in the entire manufacturing sector. In addition, some have expressed fears that jobs in tradable services will be lost to overseas competitors. On the contrary, the US consistently runs a trade surplus in services because the United States enjoys many comparative advantages in this sector.
Over the next 25 years, tradable services will be in high demand. The world faces an enormous infrastructure boom that presents a huge opportunity for US firms to increase exports in services. An estimated $40 trillion will be up for grabs, primarily in developing countries as they work to build roads, airports, water systems and residential and commercial buildings. Some of these projects are already underway with skills and expertise provided by US firms. Successes include a $10 billion Lavasa city development project in India, designed by HOK of St. Louis, Missouri and DDG of Baltimore, Maryland; and the $35 billion Songdo International Business District in South Korea, under the direction of Gale International and Kohn Pederson Fox, both New York-based firms.
Despite recent successes, significant hurdles to expansion of services trade persist. Chief among them are policies that restrict incorporation, foreign partnership and ownership, and investment. Other requirements regarding nationality, residency and local presence, and licensing and accreditation for foreigners inhibit expansion. Developing countries are likely to give preferential treatment to locally-based firms because of political pressures. This undercuts their obtaining the highest quality services at the best price and puts foreign firms at a disadvantage. To level the playing field, the United States should, in collaboration with other developed countries, push for further liberalization of trade in services through the General Agreement on Trade in Services and the World Trade Organization's government procurement agreement.
The author concludes that the United States and other developed countries should act quickly or risk missing the opportunities for job creation presented by the coming infrastructure boom. The United States must press developing countries for greater openness in procurement practices, respect for intellectual property rights, simplified licensing procedures, and reduction of other barriers to trade. Meanwhile, developing countries need to recognize their gains from access to the highest quality, most cost effective services available to meet their infrastructure needs.
Global Trade in Services
J. Bradford Jensen
ISBN paper 978-0-88132-601-7
September 2011 | 246 pp. | $25.95
About the Author
J. Bradford Jensen, senior fellow, is professor of economics and international business at the McDonough School of Business at Georgetown University. He is also a senior policy scholar at the Georgetown Center for Business and Public Policy and a research associate of the National Bureau of Economic Research. He has been affiliated with the Peterson Institute for International Economics since 2003, serving as deputy director from 2003 to August 2007. Before joining the Institute, he served as director of the Center for Economic Studies at the US Census Bureau and on the faculty of the Heinz School of Public Policy and Management at Carnegie Mellon University.
About the Peterson Institute
The Peter G. Peterson Institute for International Economics is a private, nonprofit, nonpartisan research institution devoted to the study of international economic policy. Since 1981 the Institute has provided timely and objective analysis of, and concrete solutions to, a wide range of international economic problems. It is one of the very few economics think tanks that are widely regarded as "nonpartisan" by the press and "neutral" by the US Congress, its research staff is cited by the quality media more than that of any other such institution. Support is provided by a wide range of charitable foundations, private corporations and individual donors, and from earnings on the Institute's publications and capital fund. It moved into its award-winning new building in 2001, and celebrated its 25th anniversary in 2006 and adopted its new name at that time, having previously been the Institute for International Economics.