Should the United States fear increased trade in services?

Several years ago, the answer might have been a simple "No, services are nontradable," or a dismissive "Why worry about the services sector? Manufacturing is what matters." More recently, however, one is more likely to hear a more alarmist answer: "Yes, of course. The United States will lose its service jobs to India, just like it lost manufacturing jobs to China."

Much of this concern is driven by the unknown. Which services are tradable? How many jobs are in tradable services? Which service jobs are likely to face competition from low-wage, labor-abundant countries such as India? Answers to these and other questions about services are hard to come by.

I am finishing a book for the Peterson Institute for International Economics with the purpose of drawing a detailed picture of U.S. services in the national and global economies. The book provides the most comprehensive services fact base to date, a framework for interpreting those facts, and a set of factual answers to the many questions the growing service sector raises. As a natural by-product, I hope the book will dispel some common misconceptions about trade in services and the risk of losing high-skill service jobs to low-wage countries.

Tradable service activities are high-wage, high-skill activities: software development, computer services, and engineering, for example. My analysis yields the following conclusion: The United States should not fear increased trade in services. Instead, we should aggressively seek to liberalize the policy impediments that hold us back.

The U.S. is relatively open to service trade, while a number of large and fast-growing economies are less so. These fast-growing economies benefit from access to the U.S. market for goods and services, so the U.S. needs to encourage liberalization of services trade as it would allow U.S. firms with a strong comparative advantage in services to increase their exports to these countries. In short, the United States should push aggressively to open these markets to services trade.

For example, the world is about to undertake an infrastructure boom of historic proportions. Some estimates suggest that $40 trillion will be spent over the next 25 years — with more than 80 percent of it outside the U.S. The engineering services required to plan, design, and manage construction of large infrastructure projects provide a perfect example of tradable services. The industry employed almost 1 million workers in 2007 and paid average wages of about $74,000. This industry alone is roughly one-tenth the size of the manufacturing sector. It employs more people than the automobile industry and twice as many people as the aerospace industry, and it pays higher average wages than both.

U.S. firms should be able to compete for these burgeoning infrastructure projects globally. Pushing for liberalization through the World Trade Organization would be a starting point; encouraging the world’s largest and fastest-growing countries to sign the Government Procurement Agreement would help, too.

We also must remember a crucial point: Education matters.

Observers say that education does not prevent your job from being outsourced, but this is not true. It is true that education does not prevent your job from being tradable, however. Indeed, tradability and education are positively correlated; workers in tradable jobs have higher skills and higher education. But because a job is tradable does not mean that it will be lost.

As long as we have a high-skill workforce, high-skill, high-wage jobs are likely to stay inside the United States. Education remains a good investment for individuals and for the country.

J. Bradford Jensen is an associate professor of international business and economics at the Georgetown University McDonough School of Business, a senior fellow at the Peterson Institute for International Economics, a senior policy scholar at the Georgetown Center for Business and Public Policy, and a research associate of the National Bureau of Economic Research.

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