Hush...Let's not talk about America's huge trade surplus in services

Editor's note: Warwick Powell is an Adjunct Professor at Queensland University of Technology and a Senior Fellow at Taihe Institute, Beijing. The article reflects the author's opinions and not necessarily the views of CGTN.

The centrepiece of US President Donald Trump's unilateral and capricious "reciprocal tariffs" policies is American grievance at its merchandise trade deficits with other countries in the world. Yet, this is an incomplete picture as it does not acknowledge America's substantial trade surplus in services.

Services contribute about 70 percent to US GDP. This includes education and health care services, tourism and hospitality, media and entertainment, software and intellectual property licenses, not to mention the assorted array of financial services such as insurance and the like. Exports of these services contribute an estimated 25 percent to the American economy.

According to the US Bureau of Economic Analysis, for 2023 - the latest year of available data - American exports of services were $1,026.6 billion and imports of services were $748.2 billion. The US surplus in services trade was $278.4 billion. Exports grew 8 percent in the previous year, while imports grew by 5 percent. The major services export revenue generators are in travel (including for education) of $189.1 billion, transport (export) of $97.8 billion, financial services at $175.5 billion, charges for use of intellectual property at $134.4 billion, telecommunications, computers and information services at $70.6 billion and other business services (including accounting, legal, advisory and public relations) of $253.2 billion. Together, these generated $920.6 billion in exports or 89.6 percent of services exports. Education services itself is estimated to have generated around $50 billion in export earnings for the United States, and the tourism industry a further $230 billion.

Education, financial, IP licensing and business services are four largest areas of US services exports. Arguably, as a response to the Trump tariffs on merchandise goods from most countries around the world, the US is vulnerable not only to retaliatory tariffs on its merchandise goods exports, but ultimately to action that impacts American services. This matters from an employment perspective because a little over 79 percent of the US workforce is employed in the services sector.

Already, in the context of escalations of sanctions and tariffs against other countries, prospective travellers to the US are cancelling their planned journeys. Tourism research firm, Tourism Economics, recently estimated that inbound travel to the US will decline by 5.5 percent in 2025, contrasting with 9 percent growth that had been previously forecast. On the education front, there too are concerns that the trade wars will adversely impact the attractiveness of American education service providers, including the higher education sector.

According to The Pie Network, an international education services group, American universities could lose up to 30,000 Chinese students alone, and $1.15 billion in tuition fees over the next decade due to trade-related conflicts. International students contribute up to $50 billion to the American economy, and support some 368,000 jobs in the sector. The recent spate of deportations of international students, coupled with what seems to be a capricious neo-McCarthyist campaign against foreign researchers working in and with US institutions, international students and researchers are beginning to see the US as a risky destination to pursue their education and research careers.

Travel and education are discretionary expenditure categories, in which customers can readily choose alternatives to the offerings from the US.

One area where the US has had a much stronger and "stickier" arrangement relates to the fees charged for the use of intellectual property. These fees include franchises and trademark licensing, licenses to reproduce and/or distribute audiovisual products (movies, television and games), licenses for the use of outcomes of research and development, licenses to reproduce and/or distribute computer software and charges for the use of intellectual property. With the US having been historically dominant in the registration of patents, as well as in the creation of software applications and operating systems, for many organizations and regions in the world, there have been few alternatives.

The case of Europe broadly, and the EU specifically, stand out. In terms of American revenues for licenses to reproduce and/or distribute computer software, in 2023, European nations contributed 50.2 percent ($18.5 billion out of $36.9 billion), with the EU nations making up the lion's share at $16.6 billion. And for charges for the use of intellectual property, European nations contributed 67.45 percent ($67.8 billion out of $100.6 billion), with EU nations contributing $46.1 billion of this.

It is little wonder that the EU, as it contemplates how to respond to Trump's tariffs on merchandise goods, is exploring avenues to tackle US services, particularly in the area of software. This puts the Big 7 American technology giants well and truly in the crosshairs of European regulators. The EU has already initiated some measures that go towards regulating the ways in which American big tech operates in the European market. The Digital Markets Act aims to tackle the market dominance of American big tech, such as Google, Apple, Meta, Amazon and Microsoft. These firms have to varying degrees also run afoul of European laws on privacy, incurring substantial fines over the past decade or so.

American big tech and movie studios have a much smaller footprint elsewhere in the world. Whether it's the Asia Pacific, Middle East, South America or Africa, US technology and entertainment services revenues pale into insignificance when compared with their dominance in Europe. It is, as such, little wonder that US Vice President JD Vance aggressively attacked what he sees as Europe's penchant for regulation as anathema to his version of "freedom of speech". More significantly, one would argue, it's less about some putative claims around "free speech" and a lot more to do with the ongoing market dominance of American big tech.

This matters because America's dominance in research output (measured in terms of registered patents), software applications including AI models, operating systems and the like and entertainment is also coming under pressure. China has recently overtaken the US in terms of research output measured in terms of publications such as on the Nature Index. The quality of Chinese output also exceeds that of American research institutions. In terms of patent filings, China is by far the most significant global contributor.

The expansion of open source technology ecosystems is also transforming the global dynamics of technology value creation and capture. The release of the DeepSeek model as open source is a recent case in point. Recent reports that Chinese scientists have used the open source standard RISC-V to support the development of the world's most complex two-dimensional (2D) semiconductor microprocessor, with the chip set to enter pilot-scale production, is another.

The rise of Chinese cinema and animated gaming is also challenging the preeminent role of Hollywood in the world's largest entertainment market. Indeed, two recent Chinese productions - animated movie NeZha 2 and the computer game Black Myth: Wukong - took the world by storm in the past 12 months. These are just examples of how Hollywood's decades-long domination is being challenged by high production values from other countries.

American services exports have been a dominant feature of the global trading landscape for many decades. Anchored by dominance in intellectual property, business services, education, travel and entertainment, the ability of the American services sector to sustain trade surpluses has tended to slip under the radar screen all the while the American political elite rally against the US deficit in merchandise goods.