Missed Economic Opportunity

September 27, 2012

J. Bradford Jensen Testifies Before Congress for Services Trade Liberalization to Boost U.S. Economy

J. Bradford Jensen, a professor of international business and economics at Georgetown University’s McDonough School of Business, discussed how removing external barriers to services trade will boost the U.S. economy and provide the potential to rebalance the global economy in his testimony before the Subcommittee on Trade of the House Committee on Ways and Means Thursday, September 21, 2012.

In an Economic Policy Vignette released today by the Georgetown Center for Business and Public Policy that is based on his testimony, Jensen argues that because the United States has a strong comparative advantage in the area of high-wage, high-skill service jobs, it is missing a large economic opportunity to export services to countries experiencing tremendous growth, such as India, China, and Brazil, by not pushing for trade liberalization with those countries.

While manufacturing trade experiences barriers such as tariffs, Jensen said that business services must navigate a “thicket of domestic regulations, policies, and industrial practices” that make outsourcing these services nearly impossible. These include such rules as requiring a commercial presence, economic needs tests, requirements for joint ventures, licensing accreditation, differential tax treatments, and government procurement practices.

He argues that the U.S. government and other advanced economies should work together to encourage the large, fast-growing developing economies to liberalize their service sectors through multilateral negotiations. He identifies two current opportunities through the Trans-Pacific Partnership and the International Services Agreement negotiations.

In his book, Global Trade in Services: Fear, Facts, and Offshoring, Jensen’s research demonstrates how increasing services trade has the ability to boost the U.S. economy while also strengthening the economies of the developing countries in need of these services. His main points include:

•    The U.S. business service sector is large – 25 percent of the labor force – and growing rapidly, increasing about 30 percent in the decade prior to the financial crisis. It also pays high wages – on average more than 20 percent higher than the manufacturing sector.

•    Many service activities, for example software, architectural services, engineering and project management services, and insurance, appear to be traded within the United States and have the potential to be tradable internationally.

•    The United States has comparative advantage in business services because it consistently runs a trade surplus in this area. Service exports now account for almost 30 percent of U.S. exports, and about 16 percent of U.S. imports are service imports. The trade surplus in services was $172 billion in 2011 (triple the surplus in 1992).

•    Despite the comparative advantage in business services and globally competitive business service firms, U.S. service firm participation in exporting lags significantly behind export participation in the manufacturing sector. About 25 percent of manufacturing plants export; in business services, only 1 in 20 establishments export.  Looking at exports-to-sales ratios in manufacturing, about 20 percent of manufacturing sales are exported; in tradable business services, less than 5 percent of sales are exported.

•    An important source of the lagging export performance is likely to be the high barriers to services trade imposed by the large, fast-growing emerging markets. India, China, and Brazil (countries where U.S. comparative advantage is most pronounced) all have relatively high barriers to services trade, much higher than the United States or other developed countries.

In addition to teaching at Georgetown’s McDonough School of Business, Jensen is a senior fellow at the Peterson Institute for International Economics, a research associate of the National Bureau of Economic Research, and a senior policy scholar at Georgetown’s Center for Business and Public Policy. His work focuses on the relationship between international trade and investment and firm performance.
Jensen’s research has been supported by the National Science Foundation, the Alfred P. Sloan Foundation, and the John D. and Catherine T. MacArthur Foundation. He has authored articles published in such scholarly journals as the American Economic Review, Review of Economics and Statistics, Journal of International Economics, Journal of Monetary Economics, and Harvard Business Review. Jensen’s research has been cited in the popular press, most recently by the Economist, Wall Street Journal, New York Times, Fortune, and Businessweek.
Prior to joining Georgetown in 2007, Jensen served as deputy director at the Peterson Institute. He also has served as the director of the Center for Economic Studies at the U.S. Census Bureau, on the faculty at Carnegie Mellon University, and as a visiting professor at the Tuck School of Business at Dartmouth College.
Jensen received a Ph.D. in economics from Stanford University and a B.A. from Kalamazoo College.

About the Georgetown Center for Business and Public Policy
The Georgetown Center for Business and Public Policy is an academic, non-partisan research center whose mission is to engage scholars, business people, and policymakers in relevant inquiries and dialogue to impact key business, economic and public policy issues confronting American and international businesses today.  Housed at Georgetown University’s McDonough School of Business, the Georgetown Center was created in 2002 to encourage thoughtful discussion and to document and disseminate knowledge on a range of issues in the public interest.

About Georgetown University’s McDonough School of Business
Georgetown University’s McDonough School of Business provides a transformational education through classroom and experiential learning, preparing students to graduate as principled leaders in service to business and society. Through numerous centers, initiatives, and partnerships, Georgetown McDonough seeks to create a meaningful impact on business practice through both research and teaching. All academic programs provide a global perspective, woven through the undergraduate and graduate curriculum in a way that is unique to Washington, D.C. – the nexus of world business and policy – and to Georgetown University’s connections to global partner organizations and a world-wide alumni network. Founded in 1957, Georgetown McDonough is home to some 1,400 undergraduates, 1,000 MBA students, and 1,200 participants in executive degree and open enrollment programs. Learn more at http://msb.georgetown.edu. Follow us on Twitter @msbgu.