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December 16, 2020
International Trade in Services
International trade in services refers to a wide and growing
GVCs divide production processes into discrete stages
range of economic activities. These activities include
located around the world and their growth has heightened
transport, tourism, financial services, use of intellectual
the interdependence and interconnectedness of the global
property, telecommunications and information services,
economy. These networks have also expanded and
government services, maintenance, and other professional
redefined the role that services play in international trade.
services from accounting to legal services. As services
Traditional data may understate the role of U.S. services
account for over 80% of U.S. employment and 79% of U.S.
because trade statistics measure goods based on the value of
gross domestic product (GDP), trade in services, both as
the final product, and not on a value-added basis. Therefore,
exports and as inputs to other exported products, can have a
conventional data does not attribute any portion of the
broad impact across the U.S. economy. The United States is
traded value of manufactured and agricultural products to
the world’s leading services exporter and importer. The
services inputs, such as research and development, design,
United States continues to negotiate trade agreements both
transportation costs, and finance.
bilaterally and multilaterally in the World Trade
Figure 1. U.S. Net Trade, 2000-2019
Organization (WTO) to lower behind the border barriers
that limit U.S. services exports.
Role of Services in the Economy
Rapid advances in information and communications
technology (ICT) and the related growth of global value
chains (GVCs) are making an expanding range of services
tradable across national borders. Many services require
direct contact between the supplier and consumer and,
therefore, service providers often need to establish a
presence in the country of the consumer through foreign
direct investment (FDI). To account for the variety in how
services are traded, WTO members defined a system for
classifying four modes of delivery for services based on the
location of the service supplier and the consumer, taking
Source: CRS, based on data from U.S. Department of Commerce,
into account their respective nationalities:
Bureau of Economic Analysis.
Mode 1: Cross-border Supply (consumer and service
Figure 2. U.S. Services Supplied Through Majority-
supplier located in their respective countries)
Owned Foreign Affiliates, 2018
Mode 2: Consumption Abroad (consumer travels)
Mode 3: Commercial Presence in another country (FDI)
Mode 4: Temporary Presence (service supplier travels)
Measurements of trade in services are captured in two types
of data: cross-border trade (sold via Modes 1, 2, and 4) and
services sold by a local affiliate of a foreign company to a
consumer of the local economy (Mode 3). The United
States has continually realized surpluses in cross-border
services trade, which have partially offset large deficits in
goods trade (Figure 1). U.S. foreign affiliate trade
Source: CRS, based on data from U.S. Department of Commerce,
generates greater revenue than cross-border trade and most
Bureau of Economic Analysis.
of the revenue is from Europe (see Figure 2).
Impact of COVID-19 Pandemic
Digital Economy and Services Trade
When the novel coronavirus (COVID-19) pandemic hit, the
Cross-border services are often provided online or on the
top U.S. cross-border services export, travel, declined
telephone. These services are considered ICT-enabled or
sharply as countries implemented lockdowns and other
potentially ICT-enabled (PICTE) services, and include an
restrictions. The WTO noted that global trade in services
array of services, such as insurance and financial services;
plunged by a record 30% in Q2 2020 across all regions,
customer service; and business services like research,
with tourism, transport, and distribution impacted the most.
consulting, and engineering. ICT-enabled and PICTE
In contrast, online retail, health, education, audio-visual
services accounted for 69% of U.S. cross-border services
services, and telecommunications saw gains as consumers
exports in 2019.
stayed home. U.S. services imports and exports declined
21% year-over-year for Q1-3 2020.
https://crsreports.congress.gov
International Trade in Services
Barriers to Trade in Services
trading partners to develop and implement rules to reduce
As in trade in goods, foreign government barriers prevent
barriers and facilitate trade in services without infringing on
U.S. trade in services from expanding to its full potential.
the sovereign rights of governments to regulate services for
Unlike trade in goods, however, these barriers are often
prudential, sound regulatory, or essential security reasons.
behind the border, rather than in the form of tariffs or
The United States has also sought to go beyond the GATS
custom regulations. In many cases, the impediments are
(WTO-plus) under more comprehensive rules in U.S. free
government regulations or rules that appear legitimate but
trade agreements (FTAs). Unlike GATS, each U.S. FTA
may intentionally or unintentionally discriminate against
uses a negative list for market access and national treatment
foreign providers (see text box).
coverage and commitments so that the provisions apply to
all categories of services in all modes of delivery, unless a
Examples of Service Trade Barriers
party to the agreement has taken a specific exception.
restrictions on international payments
The 2015 Trade Promotion Authority (TPA) legislation
requirements that foreign professionals have local certification,
contained specific trade negotiating objectives on services
training, and/or licensing
trade, digital trade in goods and services, and cross-border
localization restrictions (e.g., local content requirements, data
data flows. Trade liberalization is complex as negotiations
flow limitations)
are handled by the federal government, but states often
regulate services, including licensing and certification
government-owned monopoly service providers
requirements. While regulations may vary across states,
restrictions on FDI or movement of personnel
they all must comply with the commitments made by the
federal government in international trade agreements.
The 2019 OECD Services Trade Restrictiveness Index
shows that the U.S. business environment is relatively open
U.S.-Mexico-Canada Agreement (USMCA).
and competitive for services, compared to the 45 other
USMCA modernized and revised the former North America
countries studied. Apart from a few sectors, such as air
Free Trade Agreement (NAFTA), which included basic
travel, foreign providers are allowed to compete equally
obligations such as transparency and nondiscrimination in a
and have access in the United States.
services trade chapter. USMCA has a new annex on express
WTO and General Agreement on Trade
delivery and maintains NAFTA’s separate chapters for
in Services (GATS)
financial services, telecommunications, and temporary
The GATS, concluded in 1994, is the only multilateral
entry (Mode 4). For telecommunications, USMCA has the
effect of binding Mexico to its 2013 constitutional reforms,
framework of principles and rules for government policies
such as ensuring the independence of the regulator, without
and regulations affecting trade in services. The GATS
contains commitments that apply to all services, including
imposing new obligations on Canada or the United States.
USMCA also has a new chapter on digital trade, with broad
nondiscriminatory treatment of foreign service providers,
provisions on cross-border data flows and restrictions on
transparency, and other regulatory obligations such as
impartiality and reasonableness.
data localization requirements. The financial services
chapter has a similar provision to ensure the free flow of
data and also regulator access to data for prudential reasons.
Other commitments for national treatment vary by WTO
member as they apply only to those service sectors and
U.S.-Japan Digital Trade Agreement.
modes of delivery listed in each member's schedule (so-
Signed in 2019, the deal parallels the USMCA digital trade
called positive list of commitments). For these sectors, the
chapter, but does not cover broader trade in services issues.
GATS addresses market access barriers in the form of
Issues for Congress
restrictions on: the number of foreign service suppliers,
total value of service transactions or assets, number of
Potential policy issues for Congress to consider include:
transactions or value of output, type of legal entity or joint
Should TPA be updated to take into account rapid
venture through which services may be supplied, and share
technological changes in the services sector? Should the
of foreign capital in terms of ownership or total value of
USMCA and U.S.-Japan Digital Trade Agreement serve as
FDI. In addition to the GATS, 56 members concluded
a model for future sectoral negotiations on digital services?
negotiations on financial services, and 108 members agreed
What should U.S. trade negotiating priorities be for
to commitments on telecommunications services. The
updating GATS and expanding other WTO members’
United States is a party to both agreements.
commitments?
A subset of WTO members, 63 parties representing 73% of
Should the executive branch pursue enhanced regulatory
world services trade, are currently negotiating on domestic
cooperation with key trading partners or join the ongoing
regulation of services. The negotiations aim to develop
WTO negotiation to lessen the burdens created by varied
disciplines to mitigate barriers related to licensing and
regulatory regimes across different markets?
qualification requirements and procedures, and technical
Given the role of state regulators, how might U.S.
standards. The United States is not involved in these talks,
policymakers involve them in ongoing and future trade
but has engaged in the stalled multilateral discussions to
negotiations or regulatory cooperation efforts?
update the GATS and further liberalize services trade.
Rachel F. Fefer, Analyst in International Trade and
U.S. Free Trade Agreements (FTAs)
Finance
In addition to multilateral trade liberalization and rules-
setting efforts in the WTO, the United States works with
IF11706
https://crsreports.congress.gov
International Trade in Services
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