Service vs. Goods Exports: A Fight Not Worth Having

April 11th, 2012 at 1:52 pm

I’m with the NYT all the way on the importance of service exports, but I’d add one substantive and one quantitative point omitted from this article.

First, the article intimates that we’d be doing a lot better in terms of balanced trade if we’d just get over this “manufacturing fetish” as one source puts it.

That’s strong language, and too dismissive of those of us—including the White House—who view manufacturing policy as an important role for government both for domestic reasons and for exports.  There are often market failures that lead to sub-optimal investment in making things here, especially innovative things in new areas that are under-capitalized and under-researched.  There are big, important potential spillovers from manufacturing, including jobs multipliers (larger than those from services), R&D, and productivity.

So no one should conflate making the case for the sector with fetishizing it.

Second, let’s look at magnitudes for a second.  Service exports were, as the Times reports, more than $600 billion in 2011 and they’ve been trending up for years, which is an unequivocally positive development.

But goods imports in 2011 were over $2 trillion and the net trade balance was a big negative—about half a trillion, or about 4% of 2011 GDP.  Moreover, our increase in service exports has in recent decades been offset by our increasing goods imports.   Controlling for the business cycle, the ratio of service exports to goods imports has been stuck at around 25% for decades.

In other words, we can theoretically get closer to balanced trade on the back of service exports.  But practically speaking, it makes a lot more sense to include a goods export component to that strategy.

It’s always a mistake in these go-go exports articles to leave out the import side of the equation…it’s like talking about how great your home ball team is doing by quoting all the runs they’re scoring without any reference to the runs the visiting teams are posting.  On the other hand, supporters of manufacturing in America should never be dismissive of the pro-service export arguments made herein.

We need both sectors to be healthy, robust producers and exporters.   They should be complements, not substitutes.


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3 comments in reply to "Service vs. Goods Exports: A Fight Not Worth Having"

  1. davesnyd says:

    It just fundamentally is not clear how we can improve our manufacturing trade balance when nations like China have lower cost production due to lack of labor regulations (minimum wage), OSHA-type safety regulations for workers, pollution regulations, consumer product safety regulations (lead paint on everything), intellectual property protection, and, on top of it, manipulate their currencies.

    We need to either resign ourselves to losing our manufacturing to China or else we need to figure out how (in our WTO world) to place appropriate tariffs on imports in order to compensate.

    • David says:

      No tariffs needed. China allows the yuan to drift upward against the dollar, problem solved, on the whole.

  2. Manmohan says:

    Interesting views by the author on US exports and its role in US Economy.Read an informative whitepaper on Manufacturing and exporting ‘Success within reach A guide to exporting ‘ , with related information you may find useful @