The slug below the caption on Michael Corbat’s op-ed in the Wall Street Journal is “Arguments about the balance of trade often focus only on goods. That misses half the equation.” There is no ordinary definition of the word “half” by which that statement is true.
Let me put this, as Alex Trebek says, in the form of a question. Imagine that U. S. services trade is one-third of our total exports of our total trade in goods and services and our trade deficit in goods is increasing six times as fast as our trade surplus in services. When will our trade in services reduce our overall trade deficit?
The answer, as even the most math-challenged among us should recognize, is never. This is a handy reference.
Or, in other words, the entirety of Mr. Corbat’s op-ed is moot. Let’s quote a bit of it anyway:
The U.S. trade deficit in goods was more than $800 billion last year. Since 1990, the U.S. has accumulated a trade deficit in goods of more than $12 trillion with the rest of the world. But focusing on these eye-popping numbers is a mistake. Year after year, the U.S.—like most other advanced and competitive economies—runs significant trade surpluses in services with its trading partners.
Last year the U.S. trade surplus in services came to more than $250 billion, bringing the total trade deficit down to around $550 billion. The Economic Report of the President issued in February put it this way: “Focusing only on the trade in goods alone ignores the United States’ comparative advantage in services, which rose as a share of U.S. exports to 33.5 percent through 2017.”
We got our start at Citigroup financing the international exchange of goods in the early 19th century. But today we work with thousands of companies that move both goods and services through the world economy.
Services are a primary driver of all advanced economies, but their contributions have long been ignored. In his 1776 treatise “The Wealth of Nations,” Adam Smith questioned the economic value of “churchmen, lawyers, physicians, men of letters, players, buffoons, musicians, opera singers and dancers.” He left bankers—and economists—off his hit list, but you catch his drift.
What’s changed in the 2½ centuries since Smith is a profound evolution in leading economies from manufacturing-dominated to services-heavy activity. In the U.S. today, services account for about 75% of jobs in the private economy and nearly all 22 million government jobs. In 2017 exports of services amounted to $730 billion and contributed close to 80% of gross domestic product.
His last paragraph is untrue in so many ways it’s hard to know where to start. The most important change over the last 250 years isn’t some spontaneous shift by “leading economies” from manufacturing to services. It’s the change from economies based on hard currencies to economies based on credit. You would think that someone in the banking industry would be self-aware enough and not so much of a fool as to realize that. It should also be noted that David Ricardo, the first great economist champion of international trade, acknowledged that when capital was portable between countries comparative advantage no longer operated and only absolute advantage was a factor.
At no point in the op-ed does he ever ask why leading economies have made that transition, not over the period of the last 250 years but the last 40 years? My answer is that we’re subsidizing the production of services and, as with any other subsidy, it results in a glut.
We presently subsidize the production of services to the tune of at least $2 trillion annually through means that range from cash subsidies to barriers to entry to the granting of monopolies while the governments of China, Japan, and North Korea are all subsidizing the export of goods. There’s a good reason for this: jobs. Over the period of the last 40 years we have lost millions more jobs in manufacturing and other goods production than have been created in the production of services that we export. Most of the service jobs we have created domestically have been of the bed pan emptying or fast food variety.