At the G-20 summit in Pittsburgh last month, the world's major economic powers promised "to adopt policies that promote balanced global demand." For the United States, that means producing more of what Americans consume, while foreigners consume more of what is produced here.
Growing the exports of U.S.-made services such as insurance, banking, architectural and legal expertise can make an important contribution toward this needed rebalancing of American trade. Although services account for nearly two-thirds of global economic activity and, in recent years, services trade has actually been growing more rapidly than manufacturing production and merchandise trade, services still account for less than one-fifth of world trade.
But, as participants in the Global Services Summit hosted by the Coalition of Services Industries heard this week in Washington, the obstacles to expanding that commerce are formidable. Realizing America's services export potential will require hard-nosed negotiating in the ongoing Doha Round of multilateral trade negotiations and creative new thinking about possible services-only trade agreements with Europe and Japan.
It has been the goal of every U.S. administration in recent history to grow exports. But the persistence of trade imbalances is testimony to the fact that imports have consistently increased faster than exports. The current U.S. account deficit, the broadest measure of America's balance sheet with the world, was 5.3 percent of GDP in 2007. By the end of 2009 it will have fallen to about 3 percent, which most economists think is sustainable and poses no destabilizing threat to the world economy.
However, much of the recent improvement is due to a falloff in imports, down 33 percent this year thanks to the recession. Once the U.S. economy picks up, imports could return with a vengeance.
To head off the renewed global financial instability that could ensue, the Obama administration has a limited number of rebalancing options:
A weak dollar. The dollar has fallen about 9 percent on a trade-weighted value since March 2009, according to estimates by the St. Louis Federal Reserve. But it is still worth more than in much of 2007 and 2008. So a further weakening of the dollar is in order.
Trade policy. U.S. merchandise exports were down 24 percent in the first eight months of this year compared to the same period in 2008. Services exports were down by only 12 percent. The global market for American-made services remains relatively strong. And the Obama administration needs to focus on completing trade deals that offer the greatest opportunity to sell more U.S. services abroad, especially in markets, such as Europe and Japan, where services constitute a large share of the local economy.
At the moment, the Doha Round of multilateral trade negotiations offers little prospect of that beneficial outcome. Harvesting what is now on the negotiating table in Geneva in agriculture and manufacturing would actually result in U.S. imports growing twice as fast as exports, according to recent estimates by the Peterson Institute for International Economics.
Economists have long argued this would be good, because imports benefit consumers. But in the post-financial crisis world, with a new priority in rebalancing international accounts, a trade agreement that worsens the trade imbalance is not in America's interest.
For the Doha Round to be successful, greater trade liberalization is necessary, especially in services. But, as U.S. Trade Representative Kirk told the Services Summit, "the offers on the table right now, in the services sector, just aren't there." They would deliver no "meaningful new market access" according to an assessment by the Coalition of Services Industries this summer.
To correct this shortcoming, the Peterson Institute analysts suggest a "topping up" of the Doha agenda: a 10 percent cut in services' trade barriers. By their calculations, such an outcome could increase annual U.S. services exports by $10.8 billion, more than the likely combined growth in agricultural and goods exports from the Doha Round.
But the Peterson analysts readily acknowledge that this is an optimistic goal, given the limited services liberalization under discussion.
So the Obama White House needs to think more broadly. Former U.S. Trade Representative Charlene Barshefsky suggested to the Services Summit that the administration consider a services-only trade agreement with Europe and Japan. This effort could supplement whatever is accomplished in the Doha Round and, while difficult to conclude, might ultimately deliver greater benefits than are possible in Geneva at this time.
The rebalancing of the global economy and, more specifically, the establishment of a more sustainable American trade balance is long overdue. These goals cannot be achieved simply by growing exports in lieu of other measures, such as a weakening of the dollar. But, in that context, the expansion of services exports -- through more ambition in the Doha Round and new services deals with large and growing markets -- can be an important part of the solution.
This article appears in the October 17, 2009 edition of NJ Daily.