International Trade and Economics of Less: Trade in Services

Trade in Services International trade is not confined to merchandise. Nations also trade services. For example, if you take a trip to Italy and choose to fly Alitalia, the Italian airline, then you are importing a transportation service from Italy. Similarly, if French tourists choose to fly American Airlines while they visit the United States, then they will be importing transportation services. Transportation services to move passengers and freight among nations is a major component of international trade and accounted for $59.6 billion of imports and $57 billion of exports for the United States in 1988. Similarly, U.S. business travelers and tourists spent $15 billion for miscellaneous nontransportation services in 1988-for hotels, meals, and local transportation while abroad. Foreigners spent nearly $35 billion for lodging and food while in the United States. American businesses also operate subsidiaries abroad, and many citizens invest abroad by purchasing the stocks and bonds of foreign corporations and by buying foreign government bonds. The profits, interest, dividends, and other investment and business income that U.S. citizens earn from assets they hold in foreign nations constitute the return for investments in foreign lands and loans made to foreigners. Similarly, the income that companies like Toyota and Volkswagen earn from their production facilities in the United States constitutes the return they earn from productive services they engage in at their U.S. plants. Foreigners who purchase U.S. government bonds provide loanable funds for American use. The interest they earn on those bonds is the return they get for exporting their funds as loans to the governments in the United States. As they acquire more and more U.S. assets, as they have been doing in recent years, foreigners also acquire a stream of future income in dollars that will increase their ability to purchase American products in the future. Although you probably have heard quite a bit about foreign acquisition of U.S. assets such as real estate and factories, you may be surprised to know that Americans own a substantial amount of foreign assets. Because of their large holdings of assets abroad, U.S. businesses and households earn substantial amounts of income from foreign sources. In 1988 they earned nearly $108 billion in income from assets held abroad while foreigners earned $105 billion from their holdings of U.S. assets. The United States therefore earned slightly more income from the assets it held abroad than foreigners earned from assets they held in the United States. However, this situation will change if foreigners continue to acquire U.S. assets at a faster rate than the rate at which the value of U.S. holdings abroad increase. In total, in 1988 the United States exported more services than it imported. In that year it earned $210 billion from exports of services while foreigners earned $195.2 from exporting services to us. The U.S. Share of World Exports and Imports The United States is the world's major international trader, accounting for more imports than any other nation in the world. The United States also exports as much as any other nation and ran neck and neck with West Germany in the late 1980s for the title of leading exporter. However, global markets have become increasingly more competitive in recent years. As world trade has grown and as the price of the dollar has fluctuated, the U.S. share of the world export market has dwindled. At the same time growing income in the United States has increased our share of world imports. The graph in Box 2 shows how America's share of world exports has declined and how our share of total world imports has increased since 1960. In that year the United States accounted for 18 percent of the total value of world exports. By the late 1980s we accounted for only a little more than 10 percent of the value of world exports—a clear downward trend. Since 1970, the downward trend has continued but the U.S. share of world exports has fluctuated considerably from year to year in response to a variety of factors, the most important being the increased volatility of the international value of the dollar in the 1970s and the 1980s. The graph also shows that our share of world imports has increased since 1960, rising from 12 percent of the value of world imports in the early 1960s to a peak of 17.8 percent of world imports in 1985. There has been considerable fluctuation throughout the period shown on the graph in response to the volatility of such factors as the international value of the dollar, income in the United States, and the price of imported petroleum products. In the late 1980s, the U.S. share of world imports dropped considerably while the U.S. share of world exports rose. This occurred mainly in response to the fall in the international value of the dollar after 1985. Remember that when the dollar declines in value our exports become cheaper abroad while the price of U.S. imports tends to increase.