In 2006 Edward Leamer, an eminent trade economist from UCLA, opened his review of Thomas Friedman's The World is Flat with a fictitious story of how he tried to get away on the quick and cheap by shipping the book to India and having it reviewed there within one day for a nominal charge. The result, however, consisted of two mellifluent yet meaningless sentences so that Leamer, with great disappointment, decided to do the job himself. Despite costless transmission of electronic content and the absence of any policy barriers to this transaction, the current review of Brad Jensen's book on global trade in services has likewise not been offshored but instead procured from a (somewhat) skilled worker based in a high-income economy. This elucidates one of the book's key points: even though many services are becoming increasingly tradable, the fear of large-scale job losses resulting from services being offshored to low-wage countries is greatly exaggerated.
Jensen's insightful study focuses on the labor market impact in the United States of trade in services, and in particular on the likely future effects of increasing specialization associated with an expansion of services trade. Services have traditionally been thought of as largely nontradable and thus not open to − or threatened by − competition from abroad. However, advances in technology as well as some dismantling of policy barriers have led to increased international trade in more and more service sectors; indeed, US services exports have more than doubled in value over the past decade, and global growth in services trade has been on par with growth in merchandise trade. Since a large share of the US workforce is employed in services sectors, and trade in services is on the rise, the key question is whether the US is bound to face substantial job losses in service sectors when specialization would lead to more and more services being offshored, in the same way as the US manufacturing sector shed jobs when certain products, or stages of production, relocated to low-wage countries.
This is a first-order policy issue. To begin, the answer hinges crucially on the degree to which different services are tradable, and next on the characteristics of those tradable services. Yet data to answer such questions are very hard to come by, which may partly explain why perceptions about services trade have gone straight from oblivion to overstatement. Thus, the book makes three important contributions: first, it assembles the most detailed picture to date of the US service sector and services trade, sometimes drawing on the author's privileged access to US Census data. Second, it presents a novel taxonomy for classifying services and occupations as tradable or nontradable, thereby filling a crucial gap in existing data. Third, it combines trade theory and data − existing and generated − to confront the fears with facts and to derive implications for the US economy of increased participation in services trade. Jensen is uniquely qualified to take on this daunting task, for he has co-authored many of the seminal analyses that have defined what most economists regard as the ‘stylized facts’ about firm-level export behavior and the margins of international trade (Jensen et al., Reference Jensen, Andrew, Stephen and Schott2007).
Chapter 1 illustrates the significance of the service sector for the US economy, highlighting that the business service sectors alone – the main focus of the book, including such industries as financial, information, managerial, professional, scientific or technical services – provide more than twice as much employment as the entire manufacturing sector, with employment growing strongly as opposed to the falling trend in manufacturing. Chapter 2 may be regarded as the book's centerpiece as it tackles the question of which services and which occupations are ‘tradable’. The core idea is as simple as it is ingenious: if direct interaction with consumers is required for the delivery of a particular service, this service activity will be scattered widely across the country in accordance with the distribution of demand. In contrast, if production and consumption of a service are geographically separable, one would expect a concentration of services production in certain locations and subsequent trade flows to the points of consumption. Based on this idea, Jensen constructs locational Gini coefficients of concentration to infer tradability from the spatial distribution of production and employment within the US. By extension, activities that appear to be tradable within the US should in principle also be tradable internationally.
The resulting classification of industries using this method corresponds well to prior expectations: retail banking or videotape rentals, for instance, are classified as nontradable, whereas software publishing or certain financial services are deemed tradable. However, to get a sense of how many workers could be exposed to foreign competition, it does not suffice to look at the employment share of tradable industries, for each industry employs a range of occupations that themselves differ in tradability. After all, a domestic worker may lose his job either because his occupation is tradable even though the industry is not (e.g., a payroll officer in a retail bank) or because his industry is tradable even though his occupation is not. Thus, occupations are classified using the same approach, again with convincing results.
Adding up workers that are either in a tradable industry or a tradable occupation (or both), Jensen is able to calculate that about half of US employment is potentially exposed to international trade. The emphasis is on ‘potentially,’ for Chapter 3 then demonstrates that workers in tradable industries and occupations earn appreciably higher wages on average. They also exhibit greater educational attainment, but there is still substantial residual wage inequality which is highest for workers of tradable occupations in tradable industries. (Dynamic aspects such as rising wage inequality are not considered, see e.g. Feenstra, Reference Feenstra2010.) The rising wage premium along the tradability dimension suggests that most of the workers in potentially tradable services jobs are well educated and perform high-skilled activities. Indeed, almost 70% of workers in tradable business services are in industries with average annual wages above $50,000. In contrast, less than one-third of workers in tradable manufacturing are employed in industries featuring such high wage levels.
What would standard trade theory predict about the impact of increased tradability on a sector with such characteristics? Relative to other countries, the US clearly has a comparative advantage in skill-intensive goods and services, which is consistent with the long-run US services trade surplus as well as the fact that tradable, high-skill industries tend to exhibit high exports. Jensen concludes that only about one-third of jobs in tradable service industries may face competition from low-wage countries because the industry's average wage indicates a skill level at which offshoring would seem plausible. For the remaining high-skilled part of employment, increased trade would offer export opportunities along the lines of comparative advantage. In addition, the US service sector will see its average productivity increase, following arguments from standard heterogeneous firm models.
Jensen acknowledges that reallocation along the lines of comparative advantage will also entail an expansion of imports of more low-skill intensive services from low-wage countries. But several arguments suggest this effect will be muted. First, it appears that tradability of services varies systematically along the skill dimension such that services produced by low-skilled workers are inherently less tradable (think a haircut vs. a software program), at least in terms of cross-border trade in services. Second, the study does not clearly distinguish between offshoring and outsourcing, which matters in this context because services that are fundamentally tradable could equally well be ‘outsourced onshore’, especially when skill intensive; yet within the US the impact on jobs would be neutral. Third, recent research (not referenced in the book) shows that tasks that can be digitized and offshored are often complementary to tasks that cannot, which suggests that offshoring complements rather than replaces service activities retained domestically (see Lanz et al., Reference Lanz, Sébastian and Nordås2011).
Based on the strong position of the US in providing business services, Jensen calls for US trade policy to aggressively push fast-growing economies such as China, Brazil, India, Indonesia, Korea, and Russia to open up their services markets and to persuade those countries to sign on to the WTO's Government Procurement Agreement, so as to ensure that US services exporters, in particular engineering firms and financial service providers, will be able to participate in the imminent global infrastructure boom estimated to be worth tens of billions of dollars. However, it is not quite clear what the US is prepared to offer in exchange for better market access to business services abroad. For better or worse, services trade negotiations work on a quid pro quo basis, too. After all, the US are not as open to imports of services at either end of the skill spectrum as the book would suggest. For example, the US imposes hefty ‘regulatory taxes’ on educated Indian professionals (doctors, engineers) providing their services in the US, not all of which appear to be motivated solely by prudential regulation (see Mattoo and Mishra, Reference Mattoo and Mishra2009); Box 7.1 contains a similar example with respect to teleradiology services. The statement in Chapter 6, which reviews work undertaken at the World Bank and the OECD to measure barriers to services trade, that the US is fairly open to trade in services is true overall but less so regarding modes 3 and 4 in professional services (Borchert et al., Reference Borchert, Batshur and Mattoo2012).
More generally, the book focuses predominantly on cross-border trade of services, which tends to obscure the potentially important roles of mode 3 (establishing commercial presence) and mode 4 (the movement of natural persons as service suppliers) with respect to the US labor market and the ability of the US to gain further export opportunities. For instance, when it comes to mutually beneficial specialization, less-skilled countries to which the US seeks market access may have an export interest in lower-skilled services. These may not be tradable cross-border but perhaps via mode 4. Yet the willingness to follow comparative advantage considerations and remove obstacles to trade via alternative modes, primarily via mode 4, appears to be limited to say the least (not just in the US but everywhere). Recalling the ‘Buy America’ legislation in 2009, Jensen rightly points out that US demands towards Brazil, India, or China for a level playing field in government procurement would carry more currency if the US ‘set an example themselves by adhering to its letter and spirit’ (p. 193).
The book offers captivating insights into the US service sector based on meticulous and imaginative data work, and it sets the record straight that the US stands to benefit from more trade in services. The tradability indicator of services industries and occupations is a crucial piece of information in the offshoring debate and a valuable source of information for researchers.
