International Trade in Services

International Trade in Services

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Updated January 21, 2022
International Trade in Services
International trade in services refers to a wide and growing
exports (and 77% of imports) in 2020, according to the U.S.
range of economic activities. These activities include
Department of Commerce.
transport, tourism, financial services, use of intellectual
GVCs divide production processes into discrete stages
property, telecommunications and information services,
located around the world and their growth has heightened
government services, and other professional services, from
the interdependence and interconnectedness of the global
accounting to legal services. In 2020, services accounted for
economy. These networks have also expanded and
82% of total U.S. private employment and 69% of U.S.
redefined the role that services play in international trade.
gross domestic product (GDP). Trade in services, including
Traditional data may understate the role of U.S. services
as inputs to other traded products, can have a broad impact
because trade statistics measure goods based on the value of
across the U.S. economy. The United States is the world’s
the final product, and not on a value-added basis. Therefore,
leading services exporter and importer. The United States
conventional data does not attribute any portion of the
continues to negotiate trade agreements both bilaterally and
traded value of manufactured and agricultural products to
multilaterally in the World Trade Organization (WTO) to
services inputs, such as research and development, design,
lower behind the border barriers that limit U.S. services
transportation costs, marketing, and finance.
exports.
Figure 1. U.S. Net Trade, 2000-2020
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 face a 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
into account their respective nationalities:


Mode 1: Cross-border Supply (consumer and service
Source: CRS, based on data from U.S. Department of Commerce,
supplier located in their respective countries)
Bureau of Economic Analysis. December 2021 release.
 Mode 2: Consumption Abroad (consumer travels)
Figure 2. U.S. Services Supplied Through Majority-
 Mode 3: Commercial Presence in another country (FDI)
Owned Foreign Affiliates, 2019
 Mode 4: Presence of Natural Persons (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
generates greater revenue than cross-border trade and most

of the revenue is from Europe (see Figure 2).
Source: CRS, based on data from U.S. Department of Commerce,
Bureau of Economic Analysis. October 2021 release.
Digital Economy and Services Trade
Cross-border services are often provided online or on the
Impact of COVID-19 Pandemic
telephone. These services are considered ICT-enabled or
When the Coronavirus Disease 2019 (COVID-19)
potentially ICT-enabled (PICTE) services, and include an
pandemic hit, the top U.S. cross-border services export,
array of services, such as insurance and financial services;
travel, declined sharply as countries implemented
customer service; and business services like research,
lockdowns and other restrictions. The WTO noted that
consulting, and engineering. ICT-enabled and PICTE
global trade in services was down 9% year-over-year in Q1
services accounted for 86% of U.S. cross-border services
2021, driven by declines in travel and transport. In contrast,
ICT-enabled and PICTE services, such as online retail and
telecommunications, saw gains as consumers stayed home.
https://crsreports.congress.gov

International Trade in Services
Overall, U.S. services imports and exports in 2020 fell 21%
U.S. Free Trade Agreements (FTAs)
year-over-year, compared to 2019.
In addition to multilateral trade liberalization and rules-
Barriers to Trade in Services
setting efforts in the WTO, the United States works with
select trading partners to develop and implement rules to
As with trade in goods, foreign government barriers prevent
reduce barriers and facilitate trade in services without
U.S. trade in services from expanding to its full potential.
infringing on the sovereign rights of governments to
Unlike trade in goods, however, these barriers are often
regulate services for prudential, sound regulatory, or
behind the border, rather than in the form of tariffs. In
essential security reasons. The United States has also
many cases, some argue, the impediments are government
sought to go beyond the GATS (“WTO-plus” obligations)
regulations or rules that may appear legitimate but may
under more comprehensive rules and market access
intentionally or unintentionally discriminate against foreign
commitments in U.S. free trade agreements (FTAs). Unlike
providers (see text box).
GATS, each U.S. FTA uses a negative list for market
Examples of Service Trade Barriers
access and national treatment coverage and commitments

so that the provisions apply to all categories of services in

restrictions on international payments
all modes of delivery, unless a party to the agreement has

requirements that foreign professionals have local certification,
taken a specific exception.
training, and/or licensing

The 2015 Trade Promotion Authority (TPA) legislation,

localization restrictions (e.g., local content requirements, data
now expired, contained specific trade negotiating objectives
flow limitations)
on services trade, digital trade in goods and services, and

government-owned monopoly service providers
cross-border data flows. Trade liberalization is complex as

restrictions on FDI or movement of personnel
negotiations are handled by the federal government, but
states often regulate services, including licensing and
The 2020 OECD Services Trade Restrictiveness Index
certification requirements. While regulations may vary
shows that the U.S. business environment is relatively open
across states, all must comply with the commitments made
and competitive for services, compared to the 45 other
by the federal government in international trade deals.
countries studied. Apart from a few sectors, such as air and
maritime transport, foreign providers are allowed to
U.S.-Mexico-Canada Agreement (USMCA) USMCA
compete equally and have access in the United States.
modernized and revised the former North American Free
WTO and General Agreement on Trade
Trade Agreement (NAFTA), which included basic
in Services (GATS)
obligations, such as transparency and nondiscrimination in
the services trade chapter. USMCA has a new annex on
The GATS, concluded in 1994, is essentially the only
express delivery and maintains NAFTA’s separate chapters
multilateral framework of principles and rules for
for financial services, telecommunications, and temporary
government policies and regulations affecting trade in
entry (Mode 4). For telecommunications, USMCA has the
services. The GATS contains commitments that apply to all
effect of binding Mexico to its 2013 constitutional reforms,
services, including nondiscriminatory treatment of foreign
such as ensuring the independence of the regulator, without
service providers, transparency, and other regulatory
imposing new obligations on Canada or the United States.
obligations, such as impartiality and reasonableness.
USMCA also has a new chapter on digital trade, with broad
Other commitments for national treatment vary by WTO
provisions on cross-border data flows and restrictions on
member as they apply only to those service sectors and
data localization requirements. The financial services
modes of delivery listed in each member’s schedule (so-
chapter has a similar provision to ensure the free flow of
called positive list of commitments). For these sectors, the
data and also regulator access to data for prudential reasons.
GATS addresses market access barriers in the form of
U.S.-Japan Digital Trade Agreement.
restrictions on: the number of foreign service suppliers,
Signed in 2019, the deal parallels the USMCA digital trade
total value of service transactions or assets, number of
chapter, but does not cover broader trade in services issues.
transactions or value of output, type of legal entity or joint
Issues for Congress
venture through which services may be supplied, and share
of foreign capital in terms of ownership or total value of
Potential policy issues Congress could consider include
FDI. After finalizing the GATS, 56 members concluded
How should future trade agreements address rapid
negotiations on financial services, and 108 members agreed
technological changes and new trade barriers in the services
to commitments on telecommunications services. The
sector? Should the USMCA and U.S.-Japan Digital Trade
United States is a party to both agreements.
Agreement serve as models for future sectoral negotiations
on digital services?
Despite lack of progress on broader multilateral GATS
negotiations, in December 2021, the United States and 66
What should U.S. trade negotiating priorities be for further
other parties, representing 90% of world services trade,
updating GATS, whether on a plurilateral or multilateral
concluded negotiations on the Joint Initiative on Services
basis, and expanding other WTO members’ commitments?
Domestic Regulation to increase transparency and lower
How will the U.S.-EU Trade and Technology Council
barriers related to licensing and qualification requirements
impact U.S. domestic regulation and export of digital and
and procedures, and technical standards. Members are to
ICT services?
incorporate the new commitments into their existing GATS
Given the role of state regulators, how might U.S.
schedules and apply them on a most-favored-nation (MFN)
policymakers involve them in ongoing and future trade
status for all WTO members.
negotiations or regulatory cooperation efforts?
https://crsreports.congress.gov

International Trade in Services

IF11706
Rachel F. Fefer, Analyst in International Trade and
Finance

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https://crsreports.congress.gov | IF11706 · VERSION 5 · UPDATED