America Has a Surplus in Services

November 13, 2018
Michael Corbat, CEO, Citi

This article originally appeared in The Wall Street Journal.

When future historians look back on the present period of populism and protectionism, smart commentators are likely to observe that much of the hostility was fueled by a simple problem: Both sides couldn’t agree on what they were arguing about. Setting aside whether trade deficits are good, bad or immaterial to any nation’s prosperity, populists and establishmentarians talk past each other because they can’t agree on what a trade deficit is—or what it isn’t.

Much of the hand-wringing over persistent trade deficits is rooted in the dramatic decline in American manufacturing over the past three decades. From January 1989 to January 2018, the number of manufacturing jobs in the U.S. declined by about 5.5 million. The Census Bureau has also determined that the U.S. lost more than 75,000 factories and workshops between 1989 and 2014, the last year for which data are available.

The U.S. trade deficit in goods was more than $800 billion last year. Since 1990, the U.S. has accumulated a trade deficit in goods of more than $12 trillion with the rest of the world. But focusing on these eye-popping numbers is a mistake. Year after year, the U.S.—like most other advanced and competitive economies—runs significant trade surpluses in services with its trading partners.

Last year the U.S. trade surplus in services came to more than $250 billion, bringing the total trade deficit down to around $550 billion. The Economic Report of the President issued in February put it this way: “Focusing only on the trade in goods alone ignores the United States’ comparative advantage in services, which rose as a share of U.S. exports to 33.5 percent through 2017.” We got our start at Citigroup financing the international exchange of goods in the early 19th century. But today we work with thousands of companies that move both goods and services through the world economy.

Services are a primary driver of all advanced economies, but their contributions have long been ignored. In his 1776 treatise “The Wealth of Nations,” Adam Smith questioned the economic value of “churchmen, lawyers, physicians, men of letters, players, buffoons, musicians, opera singers and dancers.” He left bankers—and economists—off his hit list, but you catch his drift.

What’s changed in the 2½ centuries since Smith is a profound evolution in leading economies from manufacturing-dominated to services-heavy activity. In the U.S. today, services account for about 75 percent of jobs in the private economy and nearly all 22 million government jobs. In 2017 exports of services amounted to $730 billion and contributed close to 80 percent of gross domestic product.

Manufacturing is critical to national competitiveness. But in the 21st century the highest-value manufacturers are lean, agile, networked enterprises that combine brains and machinery to produce goods and services that millions want, need, desire and admire.

Consider Silicon Valley. Nations and firms everywhere emulate it not because it’s a manufacturing hub—tech companies haven’t made chips there for a long time—but because it’s one of the world’s most dynamic producers and exporters of services. The majority of dominant tech firms today focus on software, not hardware. Leading tech and media companies like AT&T and Netflix operate with as few hard assets as they can get away with.

While AT&T has invested more than $200 billion in a broadband fiber network that connects 400 million people in the U.S. and Mexico, last year it merged with Time Warner to expand its reach as a content-services provider. Netflix has plowed billions into its streaming content business but its hard assets are nearly negligible.

In this knowledge-based economy, the traditional division between services and manufacturing that permeates so much economic reporting is becoming artificial and obsolete. So many of the best things that firms produce are hybrids—part good, part service. A familiar example is the smartphone, a piece of hardware that connects us to multiple services, from banking and weather apps to streaming videos.

The advanced manufacturing at which diverse economies excel relies on the expert application of a range of services, including information technology, cloud computing, logistics, robotics and 3-D printing. Maintaining and nurturing a strong service sector is crucial to keeping U.S. manufacturing strong.

Apple was the largest American export company last year, followed by Exxon Mobil, General Motors, Ford and Chevron . Three of those top five provide products to the world combining good and services in the same package, with the world’s leading auto companies all increasingly offering a host of services—from media to directional guidance—to car buyers.

That’s why trade today is much more than a straightforward exchange of hard goods. It’s also a complex exchange of multiple soft services and the aforementioned hybrids. Ignoring this is tantamount to pretending that companies like Amazon, Bloomberg, Citi, FedEx, Google, Marriott and Microsoft don’t exist.

The lives of billions of people around the world have been enriched by global trade in goods and services. If everyone saw that more clearly, perhaps our political and economic leaders could find a way to talk to—not past—each other.

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