Services trade with China

I’ve always been impressed that when the editorial board of the Wall Street Journal gets it wrong, they get it wrong big time. The latest is their attempt to down play the trade deficit, especially with China — A Services Surplus. In that editorial they celebrate our surplus in services trade and “gains America reaps from doing business with China” from “doing a booming business — in services as well as goods.” In other words, everything is just fine.
As the regular read of this blog knows, I publish the monthly breakdown of our trade in services and intangibles (see last month’s numbers). One of the keys to that analysis is to separate out the types of “services” that are reported in the data. The other is to put that data into context.
First, the issue of what are “services”. Trade data on services includes five major categories: travel, passenger fares, other transportation, royalties and license fees and “other private services.” So, in other words, when a foreign good is shipped into the US, part of the cost of that imported good shows up as a “service” export.
To get a clearer picture, I use only the last two: royalties/fess and other private services. The latter is a catch all for a large number of services: education, financial services, insurance services, telecommunications, and business services. International trade in services has been rising steadily. Our surplus in these financial and business services was $72 billion in 2006. But what the Journal’s editorial failed to mention that, in 2006, US imports of “other private services” grew faster (17%) than exports (14%). Our $3.575 billion surplus in these services with China in 2006 was only barely higher than our $3.50 billion surplus in 2005. More worrisome, our imports of services from China grew much faster than our exports (but still at a low level).
Second, the context. That $72 billion financial and business services surplus in 2006 is less than 10% of the $838 billion deficit in goods. And that $3.575 billion surplus with China is 1.5% of our $232.6 billion deficit with that country in 2006.
Trade in intangibles, including business and financial services, is important and growing. But to think that our trade in services is going to offset our deficit in goods — and proves that everything is just fine — is more than wishful thinking. It isn’t even whistling past the graveyard (to use the Halloween rhetoric). It is simply irrelevant.

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