NEW YORK, April 29 (Reuters Breakingviews) - If an angry trading partner wanted to go for U.S. President Donald Trump’s jugular, its head of state might make a speech something like this: “My fellow citizens, for years our nation has been looted and pillaged by American banks, tech giants and law firms. The United States has ransacked our universities and hollowed out our entertainment industry. Our wonderful software engineers, advertising copywriters and insurance specialists have suffered greatly. All that stops today. I will shortly be imposing reciprocal charges on imports of U.S. services, just as the U.S. has threatened tariffs on goods we export. Today will forever be remembered as Retaliation Day.”
This scenario, while highly implausible, contains a serious point. Trump’s assault on American trading partners has exposed a weak flank in services. The president and his advisers are fixated on ending the country’s supposed disadvantage when it comes to trade in goods. His administration’s “reciprocal” tariffs, now on hold until at least early July, punish countries that send more electronics, agricultural products and other items to the United States than they buy in return. Yet in services it is the United States that often has the upper hand. The imbalance creates an opportunity for other countries to retaliate against Trump - and creates a vulnerability for American technology groups and financial institutions.
Services dominate the U.S. economy, accounting for more than 70% of the country’s economic activity last year, according to the Bureau of Economic Analysis. Much of that stays inside the country: you cannot, as trade economists are fond of pointing out, export haircuts. Nevertheless, a decent chunk crosses the border. Last year, the United States exported services worth $1.1 trillion to the rest of the world, while importing $812 billion. The U.S. trade surplus in services has exceeded $200 billion every year for over a decade. That’s very different from the picture in goods, where the U.S. last year received items worth $3.3 trillion from other countries, while shipping $2.1 trillion in products abroad.
Measuring services trade is inevitably fuzzy. It is easier to track smartphones or soya beans than to monitor the movements of tax advisers or Hollywood movies. Foreign students and tourists spending money in the United States, for example, count as exports of U.S. services. Robert Lighthizer, who was U.S. Trade Representative during Trump’s first term in office, argues that a significant chunk of the country’s services surplus consists of royalties for intellectual property. “Royalty payments are often part of a U.S. tax-avoidance scheme that has no positive effect on our employment or the well-being of our country,” he wrote in “No Trade is Free: Changing Course, Taking on China, and Helping America’s Workers.”
However, there is also evidence that the trade statistics understate the global power of American services. Most big U.S. multinational companies have subsidiaries overseas that supply local clients. These entities disguise the fact that much of the value embedded in a software package, medical treatment or television series originated elsewhere.
To capture this activity, the U.S. Bureau of Economic Analysis calculates how much U.S. multinationals collect from overseas buyers through local subsidiaries, and how much the U.S. units of foreign firms gather from stateside customers. This “hidden” services trade is substantial: U.S. companies charged more than $2 trillion for services through overseas affiliates in 2022 - the last year for which data is available - while their foreign-owned counterparts earned about $1.5 trillion in the United States. Combine these “hidden figures” with the official trade data, and the U.S. surplus in services could be roughly three-quarters of the size of the U.S. goods deficit that Trump considers so unfair.
Regardless of the accounting details, it’s clear that fund managers like BlackRock (BLK.N), consultancies such as McKinsey, and software giants like Microsoft (MSFT.O) depend heavily on international markets. Other countries could therefore deploy Trump’s hostile trade tactics against the United States on services. Simon Evenett and Fernando Martin Espejo of Global Trade Alert took the formula the Trump team used to calculate reciprocal tariffs and applied it to services trade.
Using this logic, countries that receive more services from the United States than they send in the other direction would be justified in wielding tariffs. Brazil could charge a levy of 148%, the authors reckon, while China would justify a 70% duty. Canada and Switzerland could impose tariffs of 32% and 31%, respectively, on U.S. services imports.
To be clear, this is not going to happen. For one, the Trump team’s formula is crude and silly. It is also much harder to devise a tariff on services imports than it is to slap an extra charge on automobiles or semiconductors as they arrive in the country. Yet governments have other ways of making life difficult for U.S. software, media or financial companies. Europe, which has the biggest services trade deficit with the United States, could find new ways to whack tech firms like Google owner Alphabet (GOOGL.O) and Meta Platforms (META.O). France, Britain, Poland and others already tax big tech firms’ local revenue. China limits the distribution of Hollywood movies, and others may follow suit. Regulators could demand that local subsidiaries of U.S. financial firms hold more capital or raise the bar for new licences. Governments can also squeeze U.S. groups by favouring local providers for state contracts.
Such measures might invite further retaliation. They would also dash any hopes among big U.S. services providers that Trump’s trade onslaught will eventually help to remove cross-border frictions. For example, Google has long pressured South Korea to give it access to detailed mapping data used by local rivals. Meta founder Mark Zuckerberg has criticised the EU's digital rules. However, the Trump administration seems more focused on reviving domestic manufacturing of ships, computer chips and other products it deems vital for national security. Boosting American services abroad appears to be a lower priority.
Trump often suggests that massive American consumption of foreign goods gives him the upper hand in trade negotiations, since foreign firms cannot contemplate life without access to the world's largest economy. But as Evenett, a professor at IMD Business School, told Reuters Breakingviews' The Big View podcast, the global success of U.S. services companies is also a weak spot.
“They have built fantastic businesses abroad, which are generating huge amounts of sales and profits, and these affiliates could become targets for retaliation. In that sense, the U.S. really doesn't hold the cards.”
Editing by Liam Proud and Pranav Kiran
