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What the U.S. Offers the World

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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When it comes to stuff, the U.S. buys a lot more from the rest of the world than the rest of the world buys from it. The country last ran an overall trade surplus in 1975, and there are few signs that it will stop running big trade deficits anytime soon.

Still, there is an area where the U.S. runs large and growing trade surpluses: non-stuff, also known as services.

These services surpluses are still swamped by the goods deficits -- but not by nearly as much as in the 2000s.

When you go beyond trade to the current account, which throws in various other cross-border flows of income, there's another source of surplus. The U.S. brings in a lot more income from investments overseas than foreigners get out of investments in the U.S. -- $201.5 billion more in 2015, compared with a services trade surplus of $219.6 billion. Almost all of this surplus comes from direct investments by corporations (as opposed to portfolio investments by money managers). U.S. corporations are effectively getting paid for the use of their brands, technology and capital-allocation skills -- which sounds like another kind of service export, doesn't it?

These surpluses from services and investment reduce the hole dug by the goods-trade deficit, but there's still a big gap between what the U.S. is paid and what it pays out -- a 2015 current-account deficit of $484.1 billion, or 2.7 percent of gross domestic product, the Bureau of Economic Analysis reported Thursday. To fill that, the U.S. has to import capital from overseas. Depending on your inclination, you can see this as Americans borrowing from foreigners to finance an insatiable spending habit, or foreigners investing in the U.S.'s limitless potential. It's surely a bit of both, although I think the record capital inflows that preceded the global financial crisis (the current-account deficit hit 5.8 percent of GDP in 2006) can be fairly described as feckless borrowing more than prudent investing.

So while a current-account deficit isn't necessarily bad, it brings danger. All in all, it would be a good idea to keep the U.S. current-account deficit from ballooning to 5.8 percent of GDP again. And it seems like exporting lots of services (in which I would include the services that are accounted for as investment income) could be key to achieving that.

Let's take a look at what these services are that we export. In his 1992 novel "Snow Crash," Neal Stephenson offered a now-famous depiction of the international trade situation in the 21st century:

When it gets down to it -- talking trade balances here -- once we've brain-drained all our technology into other countries, once things have evened out, they're making cars in Bolivia and microwave ovens in Tadzhikistan and selling them here -- once our edge in natural resources has been made irrelevant by giant Hong Kong ships and dirigibles that can ship North Dakota all the way to New Zealand for a nickel -- once the Invisible Hand has taken all those historical inequities and smeared them out into a broad global layer of what a Pakistani brickmaker would consider to be prosperity -- y'know what? There's only four things we do better than anyone else

music
movies
microcode (software)
high-speed pizza delivery

That's pretty good! The giant ships are here, although they're generally not from Hong Kong, and the dirigibles may be on their way. And here are the three service sectors in which the U.S. runs the biggest trade surpluses:

The major categories of intellectual property that U.S. entities charge for are industrial processes, computer software, trademarks and franchise fees, and audio-visual and related products. Trademarks and franchise fees cover some of the high-speed pizza delivery.  Music, movies and other entertainment fall under audio-visual and related products, and computer software is self-explanatory. Stephenson didn't hit everything, and music of course doesn't bring in the revenue it used to, but again: pretty good.

The big money coming in from intellectual property, financial services and travel helps explain certain political priorities. U.S. trade negotiators, for example, were criticized for being overly protective of copyrights and of Wall Street in the Trans-Pacific Partnership agreement. Strong copyrights and loose financial regulations have their downsides, but they do probably help increase net services exports -- and net investment income as well. Then there's travel. Foreigners spend a lot more money visiting the U.S. for business, education and pleasure than Americans spend traveling overseas. The notoriously slow and unpleasant entry process for foreigners at U.S. airports stands in the way of this money flow -- and whaddya know, the Department of Homeland Security has been working to improve that.

Exporting services somehow doesn't seem as impressive as putting big things on ships and sending them abroad. It also may not create the kind of broadly shared prosperity that exporting manufactured goods can. But for now, it seems to be where the U.S. has a comparative advantage -- and we should probably do whatever we can to maintain that.

  1. All of the trade and current-account data in this column can be obtained from the Bureau of Economic Analysis's interactive data application.

  2. The data on investment income isn't broken down in the way that the services trade data is, so I can't make a useful chart on that.

  3. Pizza Hut owner Yum! Brands, for example, gets about 70 percent of its profits from abroad, although many of its overseas restaurants are company-owned, meaning their profits are counted in investment income rather than service exports.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net