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Thursday, April 17, 2008

Fisher on the Global Services Opportunity
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Here are a few good excerpts from Richard Fisher's Chicago speech today that highlighted the Dallas Fed's new report on global services.

At forecasted growth rates, we calculate that China will add $116 billion to world demand for medical care in just one year. India will contribute an additional $25 billion. Together, the incremental demand for medical care from just these two markets will be more than four times larger than the contribution from the U.S. Turning to global spending on recreational services, one year’s added demand comes to $79 billion from China and $16 billion from India, compared with $23 billion from the U.S. Down the line, these gains should be even bigger, provided China and India continue to grow their economies.

Now throw in all the services beyond medical care and recreation. Then consider the world beyond China and India, a mix of emerging nations and traditional markets, most seeing their incomes rise. This is new business. Their domestic producers will meet a good chunk of the added demand, but China, India and other countries will shop the globe for what they cannot find at home or what is better elsewhere. Here, we have advantages in many areas. Medicine, finance, education, legal services, forensics, architecture and design, engineering technology, film and other aspects of entertainment—in these service areas and more, America is second to none....

The Bureau of Economic Analysis divvies up services exports into 20 categories. In three-fourths of them, U.S. exports exceed imports. Our edge is nearly 24 to 1 in industrial engineering, which includes American technicians who install computerized control systems, design industrial robots and streamline supply chains. Marquees all over the world tout our movies, and we have a 13-to-1 trade ratio in the distribution of films and television shows. We are crackerjack suppliers of construction services, information management, legal and financial services, and education. Because of our deep reservoir of copyrights and patents, what we receive from foreigners in licensing fees and royalties exceeds what we pay to other countries by better than 2 to 1.

All told, our service exports exceed imports in 15 of 20 categories. In 10 categories, our service exports are more than double our imports—some exceeding even 10 times as much, such as medical services, TV and film, and industrial engineering. In only two service categories are our imports more than double our exports—freight and insurance....

This is a very key point. Other nations may have a trade surplus, but, because of the far higher value of the goods and services we produce, the U.S. has a massive profits surplus.

Fisher also gets the key role of information technology in this new global story:

The economics textbooks I had in college told me it was far easier to export goods than services. Physical things could be mass produced, crated, put on ships, warehoused and sold abroad. Most services, in contrast, had to be delivered directly to clients. They faced obstacles in export markets largely because of technological limitations and the high costs involved with communications, travel and information transmittal.

These barriers to services trade have been crumbling. The story goes back to the late 1960s, with the Defense Department’s project for decentralizing communications, which a few decades later grew into the Internet we know today. In the mid-1970s, the two Steves—Jobs and Wozniak—sold their first Apple I, the first step toward the desktops and laptops that keep today’s businesses humming. Information Age technology expands the range of services that can be delivered over great distances. It makes it cheaper and easier to find and interact with customers overseas.

The upshot is changing trading patterns. The growth rate for U.S. exports was faster for goods than services until the early 1980s. Then, foreign sales of services began rising faster than goods. Since 1985, our services exports have grown nearly 260 percent, eclipsing the 200 percent growth in goods exports. Today, services represent nearly 30 percent of our overseas sales....

Economic theory tells us that nations will export what can be produced by factors they have in relative abundance. This is the principle of comparative advantage. Countries with significant mineral wealth will sell oil or copper. Those with large tracts of fertile land will sell wheat, corn or beef. Those with cheap labor and large stocks of machinery—think China—will sell run-of-the-mill factory goods. America’s highly knowledgeable and experienced services workers are our nation’s relatively abundant factor. That is what we sell to the world. That is where our future lies.

Another of my favorite prime ministers was Winston Churchill. In the early years of the 20th century, Britain had a donnybrook of a debate—with Churchill and his free traders pitted against Joseph Chamberlain and the protectionists. Churchill saw how global competition would push a nation to make higher value-added products. Here is how he put it: “The country in which the superfine processes are performed—in which the superfine, the most complicated terminal stages of manufacture are performed—is the country which possesses what may be called commercial ‘leadership.’ ” Today, I would broaden Churchill’s words to emphasize services and find commercial leadership in nations, like ours, that possess the talents and experience needed to provide the highest-valued services.

The answer to competition from the new countries that have joined the capitalist race is not to wrap ourselves in the toxic, defensive mantle of protectionism. That is akin to embracing inflation as a remedy to the credit market correction. The answer is to go on the offensive, to master and dominate the “superfine processes.” We must continue climbing the value-added ladder into the most profitable and productive services. We must exploit this competitive advantage, so we can continue growing our economy and expanding the welfare of our citizens.

posted by Bret Swanson @ 9:34 PM | Global Innovation

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