Opinion: Focus on the Services Surplus, Not the Trade Deficit

Blaming the world for the US trade deficit misses a major opportunity: the US is already a global leader in services exports, and that leadership can provide an avenue for the country to develop a sustainable competitive advantage in knowledge-based high-tech solutions such as clean energy, machine learning, intelligent transportation, medical solutions, and educational technology.

The administration has been focusing the trade debate on the goods deficit while ignoring the fact that the United States has a positive services surplus that offsets almost three quarters of its goods deficit. The US exported $5,735 trillion of services while importing $5,125 trillion of services, for a $610 trillion trade surplus in services in 2016 (based on an analysis of 2017 mid-year data). During the same period it had an $802 trillion trade deficit in goods. The $610 trillion services surplus offset 74% of the $810 trillion goods deficit.

The US is among the world leaders in services exports. Over a third of U.S. exports are services, by value. By comparison, China’s services exports were only 6% of its total, Europe’s services exports were 22%, and Asia was 27%. Moreover, the U.S. trade surplus in services has grown in 17 of the past 24 years—from 1993 through 1997, and again from 2004 through 2015—whereas the U.S. trade deficit in goods has grown in 19 of those years.

While products are becoming commoditized via robotic manufacturing and global price competition, US companies have a secular opportunity to offer high-margin solutions comprised of services, technologies, and products. These end-to-end solutions can increase customer satisfaction and loyalty, and be gold mines for recurring revenue because they increase customer switching costs.

For example, in clean energy, Advanced Microgrid Solutions is combining energy storage and load control (technologies) with state-of-the-art data analytics (services) to operate customized fleets of energy storage (solutions) for commercial and industrial users and for utilities.

In artificial intelligence and machine learning, Google, Microsoft and others are training devices (products) to understand human language and have real, unassisted conversations (technologies) that can be used in call centers (services) and as sales tools (solutions) for businesses.

In intelligent transportation, Tesla has been installing software (technology) in its cars (products) to offer autonomous driving (solutions) that can save consumers time and eventually increase road safety (many believe).

In educational technology (Ed Tech), Pearson Education develops rights-based digital courseware (solutions) that administer examinations and other assessments (products) and provide personal adaptive feedback based on data from other students’ correct and incorrect answers (technology). Through university partnerships, teaching (services) is a critical part of the solution.

In medical solutions (Med Tech), Healthcare as a Service is rapidly transforming the medical profession. Based on big transaction data sets stored in the cloud, companies such as IBM Watson Health are offering integrated solutions consisting of Big Data (technologies), customized development and analytics (services), and, in conjunction with partners such as the cancer centers or pharmaceutical companies, treatment (more services) or drugs (products).

For these and similar industries, the US should be building the core skills into educational curricula; funding job training and retraining programs; erecting I.P. walls; and offering R&D grants, tax credits, low-interest rate loans, and export promotion support.

The United States should stop engaging in trade wars to protect its soybean, steel, and aluminum industries – unless they are redefined as globally scaleable product-service-technology solutions such as smart farming infrastructure, digital manufacturing process control systems, and robotic industrial 3D printing and construction platforms.

David S. Jacoby is the author of Trump Trade, and the End of Globalization (Praeger / ABC-CLIO 2018).

The views represented above are the author’s alone and do not represent the opinions or positions of Boston Strategies International.

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