Problems With U.S. Service Exports to China

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This is an enormous topic, so I’ll try to stick to just a few points that I saw in a recent New York Times article on the subject. The argument in that piece was essentially that U.S. policy, in addition to the international trading system and nations like China, are at fault for the lack of growth in the services trade. (Note: there is growth, just not as fast as some would like.)

A central point here is that U.S. policy is to support manufacturers, and it does so not only with direct actions such as tax incentives, but also in the attention it pays to the interests of manufacturers when it comes to bilateral and multilateral trade negotiations. I mostly agree with that, although the U.S. government does work furiously on behalf of sectors like financial services and entertainment, sometimes I think to the detriment of other industries.

But let’s stipulate that manufacturers are given special attention, which doesn’t make much sense since the U.S. has a much more significant comparative advantage when it comes to services. I like this quote from a bona fide authority on international trade:

“There is for some reason this manufacturing fetish in America that is not consistent with U.S.’s fundamental economic interests.” said Aaditya Mattoo, the research manager at the World Bank. “Meanwhile, there are these barriers which American services companies face in establishing abroad, and no one talks about them.”

The Times article quotes another expert who believes that U.S. services exports have the potential to double in value. I’m not sure what the timeline there was or the preconditions under which that doubling will occur, but again, let’s just stipulate that there is a lot of potential growth to be had.

So what’s holding all this back? Here are some suggestions:

To some extent American companies are staying at home because of cultural or language barriers, worries about intellectual property protection and corruption, and sometimes lack of interest.

True, although this is not service-company specific. Just as many manufacturers, if not more, decide not to come to China because they fear for their IP assets.

Often, though, countries ban or place quotas on services from abroad that make these imports prohibitively expensive. One 2010 study estimated discrimination against services imports in some of the major emerging markets like China, India and Indonesia was effectively equivalent to a tariff on these imports of more than 60 percent.

This is more persuasive. Do the rules themselves make provision of, or investment in, these services more expensive? Absolutely true, but I think it’s dangerous to generalize here. Consider the regulatory burdens between a simple business consulting agency (essentially no barriers to entry and setup in China) and a law firm (very restricted, and the setup is time consuming). We could make the same comparison between a very simple factory that does widget assembly and a wafer fab facility. So there are lots of barriers, but these vary considerably by sector.

Let’s have a look at a couple of the examples in the Times article used to prove that these barriers exist for services companies that do business in China:

China has many similar partnership requirements, along with other limits on foreign businesses. For example, the government tightly restricts the routes of planes operated by foreign delivery services.

[ . . . ]

Cigna has been selling health insurance in China since 2003 (with a Chinese partner), but has been allowed to expand into only one new province a year, according to Tyrrell Schmidt, Cigna International’s chief marketing officer.

A director at a major international bank — who asked to remain anonymous for fear of retaliation from the Chinese government, as did managers at other companies interviewed about expanding abroad — said the organization had scores of employees in China, and about 90 percent of them were there solely to deal with the country’s regulatory issues and licensing requirements for foreigners.

OK, we’ve got insurance, banking and air delivery. All three are restricted and highly regulated sectors, and even their domestic counterparts spend a great deal of resources on compliance issues. But there’s a bigger point here about the international trading system and its emphasis on goods.

The Times says that one reason the U.S. doesn’t do anything about these regulatory and licensing barriers is that although the multilateral trading system (i.e. WTO) has been successful in reducing tariffs, it hasn’t done as good a job when it comes to services. The U.S. simply doesn’t have the legal authority under WTO law to challenge these barriers.

True, but this point needs a bit more detail for it to make sense. There are two WTO agreements at play here, the GATT, which covers goods, and the GATS, which handles services issues. The GATT is the much older agreement, and indeed the Western nations that got together after World War II to negotiate trade matters were chiefly concerned with tariffs and tariff-rate quotas. Services didn’t enter the picture until several decades later.

When a country joins the WTO, it makes many promises with respect to goods and services in its Accession Protocol. The WTO system says no problem, you can maintain certain kinds/levels of tariffs and other barriers to trade as long as you tell us now and you don’t raise those barriers later on. So when China joined, it specified the kinds of restrictions it wished to maintain on foreign banks, law firms, insurance companies, etc. These restrictions are indeed trade barriers and one reason why service trade growth has not been more robust. However, it’s completely part of the system as envisioned by the folks who set up the WTO, and the U.S. (and all other Member States) were able to extract concessions from China when it joined the group a decade ago.

I’m generally in agreement with the basic points of the Times piece. Services trade is a huge opportunity for the U.S., whose government should push for liberalization around the globe, and perhaps stop playing favorites when it comes to manufacturers. However, it’s a bit dangerous to harp on specific existing trade barriers, many of which are completely legal and allowable under the WTO system. It’s not cool to bash China or any other Member State for maintaining barriers that they disclosed when they joined the organization. That being said, barriers that violate existing rules are certainly fair game and should be brought up early and often during bilateral negotiations.