Trade distortion and protectionism

That little niggle in America’s services trade balance

Visual Capitalist

Published 29 April 2025

Once considered by Adam Smith as "non-tradable" and therefore unproductive of value, services exports now not only are worth US$8 trillion a year but growing at more than three times the pace of goods. The US exports more services to the world than the other way round, and has done so for most of the last 30 years. Visual Capitalist takes a look at a troubling niggle in the rudiments of a new Washington consensus.

(Text by Chuin Wei Yap)

One of the least-discussed missing pieces in the fixation on the US goods trade deficit is its balance of trade in services.

Global services exports amounted to US$8 trillion last year, accounting for about two-thirds of global growth and half of global employment, UN Trade and Development data shows. Globalization isn’t over in the world of services. It’s in fact thriving in plain sight of politicians flinging goods tariffs at each other.

The United States has run surpluses on its services trade balance unbroken every year since the US Bureau of Economic Analysis published its first data point for the sector in 1999. America’s services trade surplus against the world stood at US$295 billion last year, up 6% year-on-year and rising since 2021.

Measured against America’s free trade agreement partners, the surplus is similarly persistent. As Visual Capitalist illustrates in this graphic, America’s largest services surplus last year was US$35 billion against Canada. These surpluses were also strikingly consistent against FTA partners Singapore (US$27 billion), Australia (US$16 billion), South Korea (US$11 billion), Chile (US$3 billion), and Mexico (US$2.5 billion), among others. The measurement against FTA partners is important because it is the closest proxy for frictionless trade flows, in this case conferring the sort of advantage the US perceives it lacks in merchandise trade.

Calculating the value of services has never been easy, hence Adam Smith’s dismissal of it as "unproductive of value." Services are measured in value, but they often get bundled into merchandise. Surges in the value of computer services, as technologies such as AI get more complex, may not align with reported volume terms when calculated by the goods they were shipped within. The difficulty with calculating the extent of "mode 3 services," meaning services delivered to foreign customers by companies that establish a physical presence abroad, make the true picture of services as a driver of a country’s economic growth somewhat murkier than published data suggests.

That said, the vagary in calculating services does not belong to the US alone. On the basis of the US BEA’s dataset, this means, on an apples-to-apples basis, that America’s trading partners still buy much more in services from the US than the US buys from them.

Of course, the Trump administration’s campaign to correct the US goods trade deficit isn’t strictly about the trade deficit. It’s aimed at defending US strategic defense, which necessitates reshoring key manufacturing industry. This is a fair argument – except for the tactics chosen by the US to correct the goods trade deficit.

Viewed in this light, persistent US services trade surpluses might similarly be seen as a threat by other countries, prompting their imposition of tariffs that could derail global economic growth. Worse if those tariffs are computed with a fairly unsophisticated formula.

Were the US formula to be applied, the wonks at Global Trade Alert calculate that other countries might levy the following tariffs on America’s service exports:

Brazil and Saudi Arabia could impose three-digit tariffs on US services exports.
The European Union and eight other economies could apply a minimum 10% rate.
Australia, China, Malaysia, Singapore, South Korea, Switzerland, and Vietnam might feel entitled to apply tariffs on US service exports much larger than US "reciprocal" tariffs imposed on these countries’ goods exports.

Make no mistake. No one in these countries is advocating a global trade war in services (or, for that matter, in goods). It might not even make sense, as taxing services imports is tricky, impractical, and not a matter of priority at this point. What makes services tariffs even less desirable is that services, once considered a non-tradable product, are now not only eminently tradable but deeply embedded in goods.

But desperate times call. As Global Trade Alert’s Simon Evenett and Fernando Martin pithily quip in their study on the subject, "Perhaps necessity will be the mother of invention?"

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