Services and the Innovation Economy: The International Trade Dimension

1
Services and the Innovation Economy The
International Trade Dimension

• Conference on Service Innovation in the
• 21st Century
• November 17-18, 2004
• IBM Almaden Research Center
• San Jose, California
• By Robert Vastine
• President, Coalition of Service Industries
• www.uscsi.org

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What is CSI?

• Private sector organization
• Founded 1982
• To bring services trade and investment into
  global legal framework
• To educate about role of services in US economy
• To lobby for services trade liberalization
• Legislative and executive branches
• Foreign governments
• International organizations
• To advance USG statistical programs
• Entirely funded by its members

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CSI Advisory Role to Government

• Principal private sector advisor on services
  trade objectives
• For negotiations in all forums
• Government calls on CSI
• Needs to know market conditions, trade/investment
  barriers
• Accepts that the goal of trade negotiations is to
  create market opportunities for service
  businesses
• But CSI more frequently initiates contacts
• To ensure priorities being met
• Mainly agree, but freely disagree with government
• An informal relationship
• Developed over time
• Based on mutual respect and confidentiality

4
CSIs Global Networks

• CSI has worked hard to build global alliances to
  advance goals
• Financial Leaders Group
• Unites financial services companies/associations
  in many countries
• Coalition of Global Services Associations
• CSI, European Services Forum, Japan Services
  Network, Hong Kong Coalition of Service
  Industries, Australia Services Roundtable,
  Colombia Coalition of Services, Singapore
  Coalition, Brazil Services Forum
• Global Services Network
• More than 600 businessmen, academics/others
• www.globalservicesnetwork.com
• Friends of Services
• 6300 contacts

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Critical Objective Better Statistics

• When CSI was founded services role in the US and
  international economy was very poorly understood
• by policy makers, politicians, and statisticians
• STILL IS poorly understood
• especially by politicians
• the concept of the good job
• In 1982 imperative to develop measures in order
  to understand services - STILL IS
• Developing adequate measures slow but steady
  effort
• BLS new Quarterly Service Survey
• BEA refinement of measures of trade/investment
• Recent Brookings book on services productivity

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USG Makes Slow, Sure Progress Toward Adequate
Statistics

• New Census Bureau Quarterly Services Survey
  tracks information, communications, business
  services sectors
• Released in September
• Covers 15 of economy, or 1.6 trillion, of GDP!
• Bureau of Economic Analysis (BEA) has improved
  trade data
• Quarterly survey of services trade covers large
  and volatile categories
• Improved estimates of banking and insurance
  services
• Improved estimates of travel and tourism
• Estimates of distributive services of US
  affiliates
• BEA has accelerated release of macroeconomic
  statistics including GDP by industry

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Improved Measures of Services Productivity

• Recent groundbreaking Brookings Institution work
  found
• Bulk of post-1995 acceleration of US productivity
  growth took place in services
• Service productivity increased faster than
  manufacturing
• Information technology is a major driver
• Authors Triplett and Bosworth credit improved
  services data as tool that enabled them to
  conduct this research
• Underscores need for continued funding for USG
  statistical programs
• Measurement problems are severe, as detailed by
  authors

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Critical Objective Develop Statistical Capacity
in Other Countries

• Accurate information underlies good policy
• Accurate information necessary in a transparent,
  market driven economy
• Better statistics help explain why we must press
  for free markets
• For developing countries inability to see stake
  in global trade means these countries are
  reluctant to negotiate trade liberalization
• Developing countries reluctance to liberalize
  restrains US most competitive, innovative sectors
• NEED promote development of better services
  statistics globally
• Through trade capacity building efforts

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Critical Objective Services Jobs

• Growth of US services employment is a long term
  trend
• Over 88 million Americans have service jobs
• More than 80 of the entire non-farm workforce
• Average annual compensation 47,200
• Hamburger flipper vs. knowledge workers

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Services Jobs

• Since 1987, service jobs have increased by over
  30 million, whereas goods producing jobs have
  decreased by almost 4 million

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Growth in Services Employment (1987-2004)

• Since 1987, Health, Education, Professional
  Business Services, Information, and Leisure
  Hospitality Services have had the highest growth
  rates

12
Services Sector Composition

• In mid 2004, the services sector consisted of
• (compensation as of 2002)

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Compensation in Services Sector

• Compensation for service jobs has increased by
  90 since 1987, to 47,200 in 2003
• This is equal to the increase in compensation in
  goods producing jobs

14
US Leads in Services Trade

• Services sales to foreigners demonstrate power of
  our innovation economy
• US cross-border services trade was 51 billion in
  surplus in 2003
• US strength derives from knowledge/technical
  leadership our knowledge edge, our creativity
  and innovation
• Fostered by great institutions of learning and
  entrepreneurial business environment
• Constant infusion of new talent and creativity
• US exports consist largely of crossborder trade
  conducted electronically
• And consumption of US services by foreigners who
  come
• To buy our education, health, legal and tourist
  services
• To enjoy the fruits of our highly innovative
  economy
• US foreign affiliates sales of services were
  401 billion (in 2002)
• affiliate sales have special significance for
  services

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Still Ahead the Boom Eraof Global Services
Trade

• Services are on average 68 of global economy
• Yet only 20 of total world trade of 9 trillion
• Still dominated by goods
• US must lead the drive to reduce services
  barriers
• Improving our competitive edge in services is in
  the national interest
• In light of huge structural deficit on trade
  in goods
• The real potential for growth of services trade
  lies ahead - a boom era as result of successful
  Doha Round?

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Using Trade Negotiations toBreak Down Barriers
to US Knowledge Exports

• US brought services into global trade system
• GATS 1994
• Framework of rules for liberal trade in services
• Major element of the WTO
• Few commitments
• Doha Round is multilateral
• 148 Members
• Bilateral Free Trade Agreements (FTAs)
• Singapore, Chile, and Morocco have been
  implemented
• Australia, Bahrain, CAFTA, and Dominican Republic
  have been completed, but not implemented
• Andean countries, Panama, Southern African
  Customs Union (SACU) and Thailand are being
  negotiated
• Regional efforts like Asia-Pacific Economic
  Cooperation (APEC) and Free Trade Area of the
  Americas (FTAA)

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Critical Objective Expand Crossborder
Trade/Innovation

• Cross border trade includes electronic sales of
  services
• As opposed to provision through local affiliates,
  or movement of people
• A major goal of Doha Round is to expand
  commitments to freedom of cross border trade
• This is where outsourcing occurs
• Mainly business and professional services
• Open cross border trade gives fullest scope for
  electronic commerce
• The US has a surplus in cross border trade of 51
  billion
• US has surplus of 48 billion in business,
  professional and other private services
• We are the worlds most competitive in-sourcer
  (or exporter) of these services
• These tend to be our most innovative sectors

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Critical Objective Transparency

• Transparency is essential to democratic
  institutions, honest markets, and trade and
  investment in services
• In the US regulatory transparency is thoroughly
  accepted
• Based on Administrative Procedures Act (APA)
• Uniformly accepted by USG agencies
• Few other governments apply

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Transparency and Trade Negotiations

• Transparency is a CSI/USG priority for trade
  negotiations
• Strongly affects the business climate
• Directly affects foreign investment flows
• Essential to fight corruption
• Goal is regulatory and licensing transparency
• An overriding US objective in the WTO and Free
  Trade Agreements (FTAs)
• Substantial progress made in FTAs
• Renewing our effort in WTO

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Elements of Transparent Regulatory Regimes

• Major elements
• Notice and comment
• Requires publication of proposed regulations
• Reasonable time for comment before implementation
  
• Agencies prepared to receive and assess public
  comments
• Licensing procedures
• Applications for licenses should clearly state
  all requirements
• System for answering inquiries about licensing
  requirements
• No discrimination among applicants
• Denials based on factors previously identified
• Applications should be processed promptly
• Written statement of reasons if registration is
  denied
• Reasonable opportunity to appeal and re-apply

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Transparency Elements - Continued

• Enforcement
• Violators notified immediately
• Must have opportunity to be heard, retain counsel
• Burden of proof is on regulator
• Administrative/Judicial Remedies
• Complainants should be allowed to file for relief
• Independent administrative or other tribunals
  should be available to hear cases
• Judgments should be impartially applied
• Independent Regulators
• Not accountable to any provider

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Critical Objective Temporary Entry

• Movement of natural persons for temporary
  assignments is a key element of services trade
• Restraints on entry drain US competitiveness and
  blunt our leading edge scientific and technical
  excellence
• Without the ability to move personnel to perform
  short term assignments, US businesses cannot
  fulfill obligations
• Two problems
• The law creating visa categories and requirements
• The administration of these laws
• Toughened and more restrictive after 9/11
• 30 fewer visa applications
• Primacy of security over competitiveness/trade
• The flight of the creative class

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Law New Visa Needed

• Coalition of business groups determined need for
  new visa, requiring amendment of law
• A new business visitor visa for temporary entry
  for short-term assignments
• To be used for negotiations in Doha Round
• Necessary because other countries will not
  liberalize services and goods markets unless the
  US responds to their wish to obtain entry
• Necessary because no current visa mechanism
  allows temporary entry to do work

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Administration Must Be Improved

• Delays and administrative barriers to obtain US
  visas for assignments and training also create a
  trade impediment
• US lost 30.7 billion in revenues and added costs
  over the last two years as a result of visa
  delays
• Trading partners demanding faster approvals for
  travel by their citizens to the US
• Delays also materially affect US tourism,
  education, and health services

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Global Services Agenda

• Reap benefits of liberalization
• University of Michigan study
• Global welfare gains of 1.7 trillion
• Expand markets for US knowledge-based services
• Achieve critical objectives
• Better understanding of US and other services
  economies through better measurement/capacity
  building
• Necessary for critical analyses
• Greater crossborder trade
• Necessary for electronic commerce
• Greater transparency in government regulation
• Brings many benefits
• Greater mobility of personnel
• To fuel our innovative momentum
• A core curriculum embracing these and other
  subjects