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The Blind Spot in the Trade Debate

In today’s world, digital flows and services are already too big and important to ignore. As governments assess their external balances and competitive positions, hammer out trade deals, and set national policy agendas, they need to look beyond manufacturing and agriculture.

BERKELEY – Negotiations to resolve the Sino-American trade conflict have so far centered on soybeans, natural gas, and an assortment of commodities and manufactured goods. Yet, an increasingly important component of US and global trade is scarcely mentioned: services.

Though the US runs a persistently large trade deficit in goods, it maintains sizeable bilateral services surpluses with many of its leading trade partners, including China. In real (inflation-adjusted) terms, the overall US services surplus increased by 145% between 2000 and 2016, and services now account for around 70% of US GDP and 71% of US employment, far exceeding the share of employment in manufactured goods.

Similarly, at the global level, trade in services has grown 60% faster than trade in goods over the last decade; and some types of trade in services (telecom and information technology services, business-to-business services, and intellectual property charges) have outpaced growth in goods trade by a factor of two or three. To be sure, official statistics put the total value of goods traded in 2017 at $17.3 trillion, compared to just $5.1 trillion for services. But as a new McKinsey Global Institute report shows, these data significantly underestimate the role of services in tying the global economy together.