You are about to read a short case about the growing trade in services. By 2040, trade in services is expected to accoun

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You are about to read a short case about the growing trade in
services. By 2040, trade in services is expected to account for
one-third of all international trade. Yet, unlike trade in
products, trade in services is limited by various regulatory
barriers. You will be asked to answer questions linking your
knowledge from the chapter to the situation detailed in the case.
This activity is important because as a manager, you must be able
to understand why nations trade with each other and why it can be
beneficial to trade even when a country can produce the product or
service itself. Policies designed to protect producers typically
result in less efficiency and higher prices for consumers. The goal
of this activity is to demonstrate your understanding of
international trade theory and the benefits of specialization and
free trade. Read the case and answer the questions that follow.
When people talk about international trade, they normally think
about the cross-border shipment of physical goods—steel, cars,
soybeans, computers, clothes, and the like. But increasingly,
cross-border transactions involve international trade in services,
not goods. Services include distribution services (retail,
wholesale, and logistical services), financial services,
transportation, telecommunications and computer services, tourism,
educational services, and health services, among other categories.
For example, when a Japanese tourist flies to America to visit the
Grand Canyon, the money she spends counts as export earning to the
United States. When a radiology department in an American hospital
outsources the diagnosis of CAT scan images to a radiologist in
India, and pays for that services with U.S. dollars, that counts as
the importation of radiology services from India to America. When
Microsoft sells software services to a French firm, that counts as
a U.S. export. When a foreign student comes to an American
university to get her education, her fees and expenses in the
country count as American exports (by accepting foreign students,
American higher educational institutions are earning exports). The
share of services in world trade has grown from around 9 percent in
1970 to over 20 percent today. Moreover, although services only
account for one-fifth of the total value of cross-border trade,
trade in services is growing more rapidly than trade in physical
goods. While the value of goods exported has increased by a modest
1 percent per annum a year over the last decade, the value of
services has expanded at 3 percent per annum. At this rate, by 2040
services could account for as much as one-third of all trade. To
some extent, the growth of international trade in services reflects
the fact that services, not manufacturing, account for the largest
chunk of economic activity in most nations and that the share of
services in total output continues to grow. In most developed
nations, services account for over 75 percent of gross domestic
product today, up from 61 percent in 1980. In the United States the
figure is over 80 percent. This is occurring not because
manufacturing is in decline, but because services are in higher
demand and growing more rapidly (manufacturing output in the United
States has more than tripled since 1970, even as the share of
manufacturing in the economy has declined). In addition to the
growing share of services in economic output, international trade
in services is now being driven by digitalization and low-cost
telecommunications networks. As a consequence of these trends, many
services that were at one time nontradable—because they had to be
delivered face to face in fixed locations—have now become highly
tradable because they can now be delivered remotely over long
distances. Thus, it is now possible and increasingly common for
Americans to have their medical images diagnosed in India, tax
returns prepared in the Philippines, and calls to company customer
service centers answered by someone located in Mexico. However,
while the world trading system has been successful at fostering
cross-border trade in goods, it has been more difficult to do the
same for services. While trade in goods has been enabled by
multinational agreements designed to lower tariffs and quotas,
trade in services has been hampered by a wide range of different
regulatory barriers to cross-border transactions. Differences in
professional standards, licensing requirements, investment
restrictions, work visas, and tax codes have all made cross-border
trade in services more difficult than they could be. For example,
recently many European nations have been considering placing a
digital service tax on the revenues that large (mostly American)
digital enterprises make in their countries. France, for example,
has introduced a 3 percent tax on revenues earned by large
companies that provide digital services in the country. This would
imply that the revenues that Google and Facebook earn from
advertising to French customers would be taxed in France. The
office of the United States Trade Representative has described such
a tax as “a trade barrier for innovative American companies and
small businesses.” The American view is that such a tax represents
an import tariff on the sales of American digital companies.
President Donald Trump has gone so far as to threaten the French
with retaliatory tariffs on $2.5 billion of French products,
including French wine, if they continue to impose this tax. In
another example, China places restrictions on the routine
cross-border transfer of information, imposes data localization
requirements on companies doing business in China, bans foreign
companies from directly providing cloud computing services to
Chinese customers, and blocks many legitimate websites in order to
control the flow of information to Chinese citizens. Such
administrative rules have made it challenging for companies such as
Google, Facebook, and Microsoft to export their services to China.
Most economist agree that if countries are to realize the
substantial gains from trade to be had from making it easier to
trade services across borders, they will have to agree to common
standards, rules, and regulations and take concrete steps toward
removing barriers that impede cross-border trade in services.
Sources: World Trade Report 2019, World Trade Organization; B.
Fung, “US Threatens 100% Tariffs on French Cheese and Champagne,”
CNN, December 3, 2019; Fact Sheet on 2019 National Trade Estimate:
Key Barriers to Digital Trade, Office of U.S. Trade Representative,
March 2019.
1c. International trade in services is reflected in the ________
…
International trade in services is reflected in the ________
account of a country’s balance of payments.
Multiple Choice
capital
normal
primary income
secondary income
current