U.S. Trades In on Its Know-How

Fears of an impending U.S.-Japanese trade war obscure it, and worrisome reports about America’s global trade gap may make it hard to believe.

But in the increasingly important arena of services--from finance to electronic data to health care to tourism--the United States enjoys a growing, multibillion-dollar trade surplus with Japan and the rest of the world.

The U.S. edge, which could exceed $50 billion when 1993 statistics are released next month, dramatically improves the picture of America’s trade performance at a time when attention is fixed on frustrations with Japan.

Moreover, it highlights U.S. strength in knowledge-intensive fields that are increasingly rewarded in the global marketplace and at the heart of continuing trade negotiations.

“People talk about the trade deficit, but it’s like having your left shoe on and not your right shoe on” when they omit services, said Margaret S. Wigglesworth, executive director of the Coalition of Service Industries in Washington.

Mindful of the dramatic numbers, the Commerce Department announced that starting next month, it will include services in its monthly trade summary for the first time.

“There’s a danger that somebody’s going to come along and say that the reason we’re doing this is to make the trade numbers look better,” said Larry Moran, a research economist at the Commerce Department’s Bureau of Economic Analysis.

But the real reason for overhauling the widely followed monthly trade report, he said, is “to give a better look at our competitiveness in today’s world--which includes both goods and services.”

The United States ran a $100-billion trade deficit in goods for the first nine months of 1993, according to the Bureau of Economic Analysis. That means Americans bought $100 billion more in goods from other countries than they sold to them.

But toss in the U.S. $43.2-billion services surplus for the same period and the picture is altered markedly: the $100-billion gap narrows to $56.8 billion.

Japan alone accounted for $43 billion of the U.S. deficit in goods traded in that period, but U.S. service industries managed to tote up a $9.5-billion surplus with Japan despite ongoing disputes about insurance, banking and other services.

The Japanese “perceive the quality of our services more highly than they perceive the quality of our products,” said Richard King, an international trade adviser in Los Angeles.

While the statistics are quirky--a European visitor’s hotel bill in San Diego counts as a U.S. export--they nonetheless tell a story: “Lo and behold--yes, we’re competitive,” said Patrick T. Harker, director of a center on the service sector at the University of Pennsylvania’s Wharton School of Business.

That competitive standing comes at a price. Firms in communications, insurance, banking and finance have dominated this year’s layoff announcements as corporate America continues to slash costs in a quest for greater productivity.

“Our airlines fly more people per employee,” Harker said. “Our financial institutions have more accounts per employee than other institutions around the world.”

Until recently, international trade frictions centered on things that come packed in crates and boxes, such as factory products and farm commodities.

But changes in the global economy have pushed the service sector--often derided as the dreary world of hamburger flippers and minimum-wage cashiers--into the international spotlight.

For example:

* U.S. demands that Japan open up its insurance market--the world’s second largest--to American firms helped torpedo recent U.S.-Japanese trade talks and sparked fears of a trade war.

* Late last year, much-ballyhooed international negotiations in Geneva almost ground to a halt when France insisted on restricting imports of U.S. movies and television programs.

* The 117 nations involved in those talks also failed to agree on rules for financial services, an area of strong U.S. competitiveness. Future talks will cover expanding global issues in financial services, telecommunications, maritime services and other areas.

“It’s a global game--no question about it,” said Isaac Shapiro, international coordinator at the New York-based Skadden, Arps law firm, which has opened up 12 foreign offices since 1987, when the firm expanded into Tokyo.

But protectionist barriers continue to complicate the game, even as services trade expands.

Japan, for instance, does not allow foreign law firms to register in the country under their official name (the managing partner’s name is used) or appear in court. Rules even limit the display of firm names on office doors.

Foreign law firms cannot even hire Japanese attorneys to do the local legal work that is off-limits to outsiders.

Instead, those firms vie for much narrower opportunities, such as advising Japanese clients on overseas business investments and financial transactions.

The hiring restriction “is our principal competitive disadvantage in Japan,” Shapiro said during a telephone interview from his firm’s office in Paris.

But many business executives and economists say they view such barriers as temporary headaches on a path that is leading toward expanded opportunities throughout the world.

In part, the U.S. 1992 global services surplus of $56 billion reflects the country’s popularity with well-heeled foreign tourists. The money they dole out for hotel rooms, airline tickets, meals and assorted amusements is counted as a U.S. export--and added up to more than a third of the nation’s overall surplus, government figures show.

Similarly, tuition paid by foreign students in U.S. colleges is reflected as a U.S. export. Education exports soared from $3.8 billion in 1987 to $6.1 billion in 1992.

Yet in other cases, U.S. know-how is the precious commodity for sale overseas, offered by U.S. investment banks, advertising agencies, architects, software writers, consultants and others.

Exports of computer and data-processing services rocketed from $649 million to more than $2 billion from 1987 to 1992. Engineering, architecture and construction tell a similar tale. Overall, U.S. service exports soared 84% in the same period.

“We don’t go to Japan for health care. We don’t go to Japan for education,” Wigglesworth said. “The U.S. service sector is the most productive and competitive in the world.”

Some experts forecast that Japan’s purchase of U.S. services will continue to grow in a variety of areas once that nation emerges from a painful recession. The U.S. services surplus with Japan jumped almost fourfold between 1987 and 1992, to $12.6 billion from $3.2 billion.

“You’re going to find American health care management companies . . . moving in to own and manage hospitals,” predicted King, whose firm specializes in advising Asian and U.S. firms doing business overseas.

Another promising area, he said, is entertainment technology. Los Angeles-based firms are already participating in such emerging fields as virtual reality, a world of illusion created with the help of computers.

The rising importance of services is not universally hailed. Many economists argue that manufacturing is more valuable to an economy than services because it fuels more job creation, including such services as transportation, retail, finance and design.

But other economists say they believe that a globally competitive service sector should ultimately spawn many new job opportunities as today’s cost-cutting mania subsides.

“Engineering, consulting, Americans designing buildings in other countries--you’re selling people’s labor,” said David Wyss, an economist with DRI-McGraw Hill in Lexington, Mass.

Services suffer from a bad rap, argued Harker, who directs the Fishman-Davidson Center for the Study of the Service Sector.

Research suggests that service-sector wages are just a few cents-an-hour below those in manufacturing, he said, if the vast retail sector is left out of the calculation.

“The issue is skilled jobs and unskilled jobs,” he said. “Whether they’re service or manufacturing really doesn’t matter. How many poorly paid bankers do you know?”