Services are the sweet spot of American trade competitiveness

COVID-19 has spared no sector of the economy, industry or company. With lost economic output of nearly $3 trillion, different regions have fared differently. Median middle-income countries have experienced a GDP growth decline of 8.7 percent, wealthier countries 6.4 percent and low-income countries 5.2 percent.

Perhaps no economic feature of the global economy has been affected more than trade, with merchandise trade having fallen nearly 6 percent during the first year of the pandemic and services trade by more than double that amount (the latter no doubt due to a huge falloff in foreign travelers). To use an analogy from biology, if trade is the cardiovascular system of international commerce, supply chains are the oxygenated blood that runs through the arteries. And the current system is in dire need of a bypass operation.

The U.S. is the best case in point. Container ship logjams at the ports of Los Angeles and Long Beach have contributed to shortages and inflation for over a year. A shortage of semiconductors has crippled manufacturers (particularly motor vehicles) dependent on those inputs. And a scarcity of dockworkers, truckers and warehouse space have produced a domino effect. While the congestion has improved somewhat over the past month, offshore producers still have not geared up production to pre-pandemic levels.

During the early days of the pandemic, the shortages of personal protective equipment, ventilators and other medical related products (many produced offshore) shined a spotlight on the nation’s sourcing vulnerabilities, with calls to onshore much more of our manufacturing or at the very least to nearshore it. While it makes perfect sense to build redundancy through domestically manufactured goods (one of national strategic importance) in most all other cases the economics of production and distribution are not cost-effective.

America’s global competitive advantage is not in manufacturing but services. The value added of U.S. manufacturing as a percentage of GDP is barely 11 percent and has been declining for the last two decades. Services account for over 80 percent of U.S. employment and 79 percent of GDP. The services sector runs the gamut from banking and finance, accounting, real estate, hospitality, engineering and construction to retail, health care and education. And it is important to note that manufacturing can have a large services component as well — mainly intellectual property (IP) that goes into the design of aircraft, smartphones, motor vehicles, machinery and medical equipment. Nearly 28 percent of jobs in the U.S. emanate from IP-intensive industries, as does 39 percent of U.S. GDP.

One industry in the services sector that is often overlooked is higher education. Foreign students coming to study in the U.S. generated $44 billion in 2021 alone; and five universities in the U.S., including New York University (NYU), Columbia and Indiana, enroll nearly 75,000 pupils. Additionally, several American universities have established centers and campuses overseas. And let’s not forget that industry giants Apple, Amazon, Google and Facebook were all founded by first- or second-generation immigrants, many of whom came to the U.S. first to pursue their university studies.

Our economy is rapidly becoming more knowledge-based and innovation-oriented, and this is where we can compete in the global marketplace. A manufacturing renaissance is a pipe dream, and isolationist-protectionist politicians who rant about recreating an American industrial landscape akin to that of the 1950s are acting foolishly and irresponsibly. Where the U.S. does succeed is in marrying intellectual property to manufacturing, thereby boosting our exports.

To sustain America’s competitive advantage in services exports, certain actions must be taken. These include investing considerably more in science, technology, engineering and math (STEM) at the university level; greater investment in public and private research and development (R&D) as well as for start-ups and later-stage firms; expanded recruiting of foreign talent to come to the U.S. to study and work; and vigorous outreach efforts by governmental and business organizations to make small and medium-size firms aware of the profitable opportunities in selling to foreign markets. 

These measures, among others, will allow the U.S. to hit the sweet spot of national export competitiveness.

Jerry Haar is a business professor at Florida International University, a global fellow of the Woodrow Wilson International Center for Scholars and a working group member of the Council on Competitiveness. He is also a board member of the World Trade Center Miami.