The Services Trade Surplus: Does it Matter?

Since the 1980s, the U.S. government has focused on the notion that a strong services economy was as important, or even more important, than a strong industrial base. Industry was expensive. That could be offshored, where labor was cheaper, taxes were often lower, and environmental rules were non-existent.

This is what Big Manufacturing and Big Retail were all saying – make our bath towels in Asia so we can sell them cheaply in our malls. Or, make the Goodyear tires for our pickup trucks in Indonesia, where they can throw waste rubber pollutants down a river with no oversight whatsoever. In other words, for every dollar to the economy lost to a laid-off Goodyear tire manufacturer, could a McKinsey & Company consultant in Virginia be hired by a European company to make up for it? This was, in the simplest of terms, the hope for a post-industrial U.S. economy.

Global insurance and financial services giant, Prudential, is part of America’s services trade surplus.

From a trade balance perspective, the question was whether this strong, high-end services industry could pick up the slack where domestic manufacturing was overtaken by imports.

Usually, when people think of the services industry, they think of the local dentist, shopping mall, and Olive Garden. That is true for the domestic economy, where some 15.8 million people are employed in retail and another 11.7 million in restaurants, according to government figures.

But when it comes to exports, the service industry that matters most is high-paying Wall Street and Silicon Valley jobs.  Could those sectors shrink the trade gap?

Jeff Ferry, CPA chief economist, answers a few questions here about what’s in our services surplus; what’s so great about it; what’s not so great about it; and can it narrow the trade gap with the world? Last year’s total trade deficit was roughly $1 trillion. This year’s promises to be even larger, with the goods deficit topping a record $1.1 trillion for sure this year, barring a deeper recession in the fourth quarter.

Q: The services sector is always in surplus. A bigger one will help cut into our trade deficit. How close are we to making that happen?

Deloitte’s global advisory business — another piece of the small U.S. services surplus puzzle.

Ferry: Not close at all. There are a lot of free traders who raise the issues of services and how you can use that to balance trade instead of growing your manufacturing sectors. This is their argument. But numbers matter. The goods deficit is over $1 trillion, and our services surplus is around $260 billion, so it would have to grow by a factor of four to reduce the goods deficit – and that assumes the goods deficit no longer grows. Our services surplus is not very big given the overall size of our economy.

Q: What are the sectors that contribute most to our service sector exports?

Ferry: The biggest portion of the surplus pie is financial services. When an American investment bank performs a transaction in Asia, it brings that profit back to the U.S. and that money is divided up between its partners. That is a legitimate part of the surplus, but you cannot build an economy that way. It is a niche industry that provides very high income to very few people.

When you look at services altogether, none of these sectors could grow the way manufacturing could grow simply because there are only a few players in the services export space and there are tons of manufacturing sectors that can grow here, instead of being allowed to die out in favor of imports.

Q: Explain how these services work as an export.

Ferry: If a U.S. insurance company sells insurance to a Greek maritime shipping company, those premiums it collects from Greece would become a U.S. export of services. If you’re a US-based fund manager handling international clients, the investments in your fund from those clients abroad doesn’t count as an exported service, but as you likely charge a manager or advisor fee to them, that is an investment service and that would count as a financial service export.

After finance, tech services are next. If a foreign company pays Amazon Web Services (AWS) to store data, that goes into the services surplus. The same goes for companies paying IP or buying Microsoft software. Travel and tourism is in the top five as well – so if you are a foreign tourist visiting Magic Kingdom – that’s a travel export because we are collecting money from foreigners paying for our product here. Education counts here too. Foreign students are paying for a U.S. domestic service.

Business travel, and leisure travel from foreigners, is a major source of our services industry surplus. Most of these jobs are low paying, and often part-time.

Q: Working at a Disney World resort’s international reservations desk is probably decent middle-class income, but nothing like working at Goldman Sachs. Most service industry exports are supporting high-wage jobs. Isn’t that a good thing? We want more of that.

Ferry: You’re right. These are great jobs. But I would not say “most” of those services exports are tied to high-paying jobs. You just said – Disney. Or anyone working the reservation desk at Dream Downtown in New York for all the foreigners coming in. Not high paying, especially for Manhattan living. Our services exports tend to be divided in two categories: very high-paying, niche industries with a small employment base like AWS with unique cloud capabilities that people all over the world pay for. Then travel and leisure, which employ thousands of people and are not really middle-class jobs but are often low-wage jobs, and some are not full-time jobs. Look at Greece and Croatia and the Caribbean Islands if you want to know what an economy based on service exports looks like. There are dozens of countries that have based their entire economy on service tourism and it is not the way to build an economy, especially the United States.

Q: Right, but we are building our economy on Apple and Google, not the Dream Downtown.

Ferry: Fine, but we can all agree that Apple and Google represent a niche industry in one sector of the economy. The U.S. is much more than a high-tech economy. The vast majority of our workers do not work in tech, nor do they want to work in tech, live near places that have high-tech jobs, and if they dream of working for Apple, will need a degree in computer engineering to even apply for those jobs. What happens, then, is you get an unequal economy – whereas all the high-paying jobs go to one sector of the economy that is largely spread out across a handful of very expensive cities. Those that live in those cities get priced out by the demand from high-paid tech workers looking for housing. New York City including most of Manhattan and parts of Brooklyn and Queens, and of course all of Silicon Valley and San Francisco are all unaffordable for the majority of Americans.

High tech companies like Facebook have led to massive inequality. See housing in San Francisco and the Bay Area in general as non-tech workers compete with tech workers for living space.

Creating more high-tech jobs will benefit those companies and the cities where they are clustered but will have a very limited impact on middle-class jobs. In 2021, the median pay for a Google employee was over $290,000. They have 139,000 employees, more than Ford Motor Company. As of 2020, the median household income in New York City was $67,000. The median income in Detroit in 2020 was around $33,000. A Ford entry-level operator makes around $46,000. Engineers make over $80,000 and into the six-figure range.

Q: High-tech companies are hiring more and taking up bigger portions of the labor force like the auto industry used to. But I imagine it is easier to get a job at Ford than it is at Google?

Ferry: At least 64% of American adults do not have a four-year degree. You don’t have to be an engineer from MIT to work for Google; you can get marketing jobs inside Google as an English major, but you will need a four-year degree from a top-quality university not some B- rated school. (A look at the top 20 colleges that send students to Google.)

Tech is dominated by a handful of companies that are all extremely demanding in their hiring practices. It is absolutely easier for most Americans to qualify for a job at a manufacturing firm like Ford than at Google or Apple. We need to provide jobs for the average American who does not have a four-year elite degree, is not an engineer, and does not have the resources to move to northern California, Manhattan, or Austin.

Education is a leading source of our services industry surplus. Whenever a foreign student pays tuition at Harvard, seen here, it goes to building America’s surplus in the global education market.

If you go to southern Virginia, not far from the Capital; if you go anywhere in Ohio, you will find people in their 20s and 30s who did not complete their four-year degree. These people are not going to work on Wall Street. They are not going to be designing the Apple hologram phone. But if there are manufacturing jobs nearby – whether they are on the shop floor or in an office – they will have a better chance of supporting themselves and a family than if all they had was the local Walmart. The service surplus economies aren’t going to hire them. Unless maybe they are working for a big university in the international relations department. But I cannot imagine them hiring hundreds of workers.

Q: The services surplus could easily grow. And this would be a way to lower our trade deficit if that happens, assuming manufacturing deficits remain as is.

Ferry: Everything has a chance to grow. But services exports will not grow anywhere close to enough to replace our goods exports. Yes, Goldman Sachs generates a lot of profit overseas, especially when you consider it has only about 450 partners. But there is not that much upside to what our investment banks do around the world, not enough to make a difference to either our trade deficit or our $22 trillion economy or U.S. employment.

Q: Services might not grow due to new competition taking market share. But from a manufacturing standpoint, Tesla can just as easily stagnate due to China’s Polestar copycat EV in Asia where Polestars will be much less expensive.

Ferry: That is true. But here is the kicker to remember about the service surplus guys: It’s a handful of companies in a handful of sectors. Plus travel and tourism, which is much lower pay than manufacturing. There are literally hundreds of goods sectors that we are way behind in that we need to catch up on for improved supply chain resilience alone, or where we can advance in our own market, let alone the export market. You have clean energy products from solar to transformers for an ever-expanding electric power grid. You have mining operations and processing that needs to be done here unless we are going to import our way to a green energy future. You have semiconductor manufacturing that needs to be done here. You have the chemicals industry. You have textiles, an industry that is almost completely lost to imports, now trying to make a comeback. You have steel mills, new ones going up, that were getting lost to imports before tariffs and quotas. You have tooling companies that make things, an industry that was almost entirely wiped out from offshoring. You have pharmaceuticals, another sector that is increasingly turning to India and China for generics, let alone research and development now and outsourcing production of clinical trials and new drugs. There is simply a lot more diversity of opportunity to grow in manufacturing than there is in growing our services exports.

Apple’s headquarters in Silicon Valley. Mostly all of Apple’s manufacturing is done in Asia. But Apple contributes to our services surplus by selling intellectual property rights.

Q: Some will argue that that service revenue goes to more Amazon investment, more U.S. jobs. What do you tell them?

Ferry: The story of the last 50 years is that our labor share in GDP has declined. Profit shares are up, wages stagnant. Services exports are increasing that effect because too much of it is in finance and tech. These are niche players with high income and not hiring tens of millions of employees. You’re right, companies like Amazon and Apple will recycle those profits back and buy other businesses and scale up. See Apple’s big investments in its new UFO-looking office in California. Often times a lot of these companies end up investing in their own stocks, or investing in high-profit business. If your company has a 20% operating margin, you’re not buying a company with a 10% operating margin unless you think you can bring it up to 20%, and even then the way to do that is probably by offshoring half of the resources.

Q: Lastly, we know software engineers make six figures. We know there are probably a million jobs like this between Google, Microsoft, IBM, Apple, and Facebook alone. Compare this to travel and tourism, which is another key component of our services trade surplus.

Ferry: If you look up hospitality in particular – this is business and pleasure travel — the number of workers in that segment as of August was 15.8 million. That is larger than the manufacturing sector, which is between 12 and 13 million workers. Their average hourly earnings is $17.92. Manufacturing’s average hourly is $25 an hour nationwide.

Q: How many people work in tech, and in financial services?

Ferry: It’s hard to work that out, because tech is a sub-sector of electronics, and the sort of financial services you are talking about, i.e. exportable services like investment banking and insurance would exclude the thousands of people working for ordinary banks. But if you said one million in each of those two export-oriented sectors, that would be two million employees. They are paid well. But it just does not have the growth prospects to make a dent in our trillion-dollar trade deficit.




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