| return to Articles & News |
|
CHAPTER I On a recent flight from London to Hong Kong, I met a law professor from London who 1) taught English common law to French law students attending the University of London under a joint degree program with the Sorbonne, 2) was on her way to Hong Kong to teach a six-week course on international commercial law at one of the Hong Kong universities, and 3) was working on a book on international commercial law for international distribution. In the course of our conversation, after I told her about my own activities, she asked, "What is trade in services?" I pointed out to her that every one of her three activities involves trade in services. This was not a unique incident, but revealing. Long-standing perceptions about the nature of services and their role in the world economy make it difficult even for those most intimately involved in international trade in services to perceive what they are doing in terms of trade. Most people struggle with the concept of trade in services because their mental image of trade and their mental image of services are incompatible. The word trade connotes getting something from here- to there. The word services, interpreted through the prism of daily life, evokes an image of an activity that is bound by the here and now, an activity that requires producers and consumers to be at the same place at the same time. The service that seems to come to mind most often is haircutting. If a person in need of a haircut and the barber are not in the same place at the same time, the haircut cannot be performed. In fact, most services consumed by individuals require a close proximity between the producer and the consumer, and this does seem incompatible with trade that takes place between producers and consumers in different countries. The term trade in services thus seems an oxymoron, a term that contains an internal contradiction. The impression that trade in services is not really possible, and if possible could not be very large, is not merely an opinion of uninformed people. Until recently, this was the opinion of most government officials, professors of economics, and business executives, even those who were making a living selling services to foreigners. The conceptual problem disappears once we recognize that there are various ways of preserving the proximity required between producers and consumers of services. The English law professor cited above used different means for delivering services, to the three user groups. The French law students crossed the English Channel so they could attend her law courses (buyer travels to seller). In contrast, her students in Hong Kong remained in place, and she flew to Hong Kong to teach them (seller travels to-buyer). In her third activity involving trade in services, neither she nor the readers of her book on international commercial law had to travel, since the necessary proximity was created through the intermediation of an information medium, namely the book (the product "travels" from seller to buyer). The example illustrates another important point about trade in services: Most services that are produced in close proximity to consumers also have close substitutes that are supplied indirectly. The substitutes may be not exactly like the real thing, but a workable alternative that can fulfill many of the same needs. Listening to a record in one's home may not be the same thing as attending a live concert, but it can be a satisfactory alternative. Reading a book may not be the same thing as talking with the author, but it may be almost as informative. Lugging a television set to the shop or shipping it back to the factory may be far less convenient than having a repairman come to one's home, but it will ultimately accomplish what is needed, which is to get the TV to work. Alternatives are available even for more personal services, including haircuts. The issue of haircuts seems to come up in most discussions of trade in services, even in the deliberations of seasoned officials on the subject. On one occasion, the Swiss delegate to the Trade Committee of the Organization for Economic Cooperation and Development dismissed trade in services by pointing out how impossible it was for him to have his hair cut by a barber in another country. The chairman of the committee, who happened to be a woman delegate from Germany, replied that every woman in Germany had benefited enormously from French exports of hairdressing services, and she was confident that the delegate's wife would confirm the same was true in Switzerland. What the chairman of the Trade Committee meant was that hairdressing services in Germany benefited enormously from French exports of information about hairdressing techniques and hairstyles. Haircutting services involve not only the physical activity of cutting hair, but also the application of information about hairstyles, and to a woman the information available to her hairdresser on hairstyles is as critical as the physical act of cutting her hair.
The following persons or companies are all importing
services:
Most services produced in an economy are purchased by individual consumers, while most imported services are purchased by business. The services most commonly purchased by consumers from foreigners-tourism, education, and entertainment-usually involves international travel, since consumption of these services requires close proximity to producers. In contrast, many of the services purchased by business can be produced at a distance and this opens up greater opportunities for trade. The large corporations that buy services around the world operate in an environment that is very difficult for an individual to comprehend on the basis of personal experience. In order to understand trade in services and why it
is so important, one needs to understand how commercial enterprises
use imported services to supply the goods and services we buy as final
consumers. At the same time, most people buy many more imported services
than they realize. Purchases of Imported Services by Consumers Consider the following list of services consumed by the average person: the daily commute by bus or train, a haircut or shoeshine, a doctor's visit, a church service, a call to a travel agent for information on airline schedules, a theater performance or ballet, the radio news, a television program, a movie, insurance on life, health, home, and the family car, a bank check, a course in horticulture or judo wrestling, dinner at a restaurant, a football game. On the face of it this list does not seem to offer extensive possibilities for trade. Yet, the judo instructor could have learned his skills in Japan, the restaurant's cook could have been trained in China, the dance company could be from Russia, the hairdresser could be using hair styles shown in a French trade magazine, the movie could be from Italy, the television program could be from England, and the discussion with the travel agent could involve a vacation in Tahiti. The average consumer is most likely to purchase imported services in connection with international travel. A foreign vacation constitutes a bundle of imported services, including air transport on a foreign airline and hotel, restaurant, entertainment, tour guide, financial, car rental, insurance, air reservation, communication, taxicab, and film processing services. Entertainment represents another major category of imported services purchased by individual consumers. French TV viewers watching an American program such as Dallas or American TV viewers watching a British program such as Upstairs, Downstairs are consuming imported entertainment services. Every New Yorker who attends a performance by the Bolshoi Ballet, or a performance by a Nepalese dance group, or soccer match between Brazil and Britain, or an international beauty contest is consuming imported services. Education is another imported service that is frequently purchased by individual consumers. Since time immemorial, young people have gone abroad to attend a foreign university, to study with world famous artists, musicians, and scientists, or to learn by seeing the world. Nearly one of every five American university students attends a foreign university at one point in his or her education. Forty percent of all graduate students and 60 percent of all graduate engineering students in American universities are from other countries. Other imported services purchased by individual consumers include medical services such as a heart transplant operation performed in a foreign hospital, financial services such as those associated with a secret account in a foreign bank or a credit card issued by a foreign company, and legal services provided in connection with the purchase of a vacation property in a foreign resort or in connection with the settlement of the last will and testament of a foreign relative. Most international trade in services that are purchased directly by individual consumers involves international travel by either the consumer or the producer. Tourists who visit a foreign country, students who attend a foreign university, and patients who go abroad for treatment in foreign hospitals import services by traveling to another country to be in close proximity to the producers of desired services. Producers of services to be traded internationally often have to go abroad to render the service-doctors to treat famous patients or to teach, an orchestra to play guest performances, a beauty queen to participate in a beauty contest, or a sports team to play a game. Someone who wants to open a secret Swiss bank account might succeed in doing so by mail, but probably only if well known in banking circles; the average person will have to make a personal appointment with a Swiss banker. This raises a question: Is there real trade if either the producer or the consumer travels to another country? The answer is that transactions between people who normally live in different countries are usually considered trade. As long as Joe Smith normally lives in France, any money he spends outside France for either goods or services is counted as French imports, and any money he earns from selling either goods or services outside France is counted as French exports, even if he is an American citizen. Services purchased abroad result in an expenditure of foreign exchange just like imports of goods, and income derived from services delivered abroad results in foreign exchange earnings just like exports of goods. Another way to explain the basic idea is that purchases made abroad by tourists, students, or patients have to be paid out of funds earned in the country where they normally live, and income earned abroad by musicians, professionals, or workers who remain abroad only a short time will be available to be spent in the country where they normally live. Statisticians who compile the national income accounts therefore treat all income earned by residents as part of national income, even if the work was performed abroad (see Chapter 4).
Every commercial enterprise, whatever it produces, needs a large number of service inputs in running the business. It needs the services of accountants, tax advisers, management experts, market analysts, personnel managers, lawyers, economists, computer programmers, system analysts, salesmen, statistical analysts, and financial experts. Those enterprises that build their own physical facilities need the services of architects, engineers, interior decorators, landscape designers, electricians, and those who repair, maintain, and clean the facilities. A company that produces services as outputs also needs a wide variety of services as inputs, some of which require specialized knowledge. A beauty parlor, for example, needs service inputs from experts on the latest trends in hairstyles. A bank needs service inputs from experts in every type of financial transaction desired by customers, from foreign exchange trading. and export financing to mortgage financing. A manufacturing company needs the service inputs of research scientists, engineers, and industrial designers to develop new products and the service inputs of many different kinds of engineers to design the machinery and production process. The trend in recent years has been toward increased demand for service inputs by business enterprises and toward a greater variety of specialized service inputs. In many manufacturing enterprises, the cost of service
inputs now exceeds the cost of production workers by a considerable
margin. A number of manufacturing companies now employ more white-collar
workers than blue-collar workers, while ten to fifteen years ago the
inverse was true.1 Moreover, among blue-collar workers, an increasing
proportion are engaged in repair, maintenance, and other support functions
normally categorized as services jobs, rather than assembly line work. In large service enterprises, such as large money center banks, major insurance companies, or large department stores, there is usually a high degree of specialization, and each of the tasks listed above is often subdivided into dozens of subtasks and is performed by experts in a narrow area of specialization. Even large firms often find it cheaper and more efficient to buy specialized services from outside suppliers who can afford to develop the necessary skills. Advances in technology and management techniques have made it necessary to develop a high degree of specialization among producers of sophisticated services. Most of the service inputs used by a business enterprise can be either purchased from outside suppliers or produced within the firm itself. The choice depends partly on whether it is cheaper and more efficient to hire the person who can supply the desired expertise or to buy that expertise from an outside vendor. It also depends on operational considerations such as the degree of interaction required between the managers of the firm and the person supplying the service input, the need to protect the confidentiality of the firm's activities, and the organizational philosophy of the firm. The trend has been toward producing fewer service inputs within the firm and buying more of the service inputs from outside vendors. Retail businesses have to purchase many service inputs from other firms. The local insurance agent and the local travel agent merely represent the firms that actually produce the insurance or the travel services. A local bank may turn to a larger bank for such specialized services as foreign exchange transactions, export financing, or traveler's checks. A local bank may also resell some of the mortgages it has acquired to other financial institutions. An insurance company may reinsure a risky policy or an unbalanced portfolio with other insurance companies. An architect may ask a colleague to design the foundation of a building being constructed on a difficult geological site. Many of the more specialized service inputs purchased by businesses selling services are also produced locally. Often, however, the local firm has to turn to firms that are located in distant cities or even other countries. This is possible because most of the services purchased by businesses can be transmitted from the supplier to the user in the form of information. The producer and the business user therefore often do not have to be in the same place. In this respect services purchased by businesses tend to be fundamentally different from services normally purchased by consumers.2 Modern communications, data processing, and transportation facilities have dramatically reduced the cost and time required to acquire services from more distant suppliers, and this has expanded the geographic area within which service inputs are bought and sold. The advantages of centralizing the production of service inputs over a large geographic area is demonstrated by the existence of large regional, national, and international chains of service establishments providing hotel, fast food, car rental, banking, real estate, temporary labor, and retail services. These chains have evolved because there is an economic advantage in centralizing the production of service inputs over large geographic areas. Centralized production of service inputs on an international scale results in international trade in services, both when the service inputs are produced and consumed within the same firm and when they are purchased from independent suppliers outside the firm. Engineering, computer programming, and research and development services provided centrally by a multinational corporation to its subsidiaries in other countries thus constitute exports of services from the home country. This is the case whether the company is primarily a manufacturing or a service business. Hilton Hotels and General Electric are thus both major exporters of U.S. engineering, computer programming, and management consulting services, and Sony and Nomura Securities are major exporters of Japanese research and development services. International trade in business service inputs is important in businesses that experience intense international competition. The quality and cost of the engineering, design, and marketing services can mean the difference between success and failure in the marketplace. This has been well demonstrated with respect to the global competitiveness of firms producing manufactured goods such as cars, textiles, clothing, footwear, kitchen appliances, and consumer electronics. Companies that want to compete on a global scale must acquire world-class design, engineering, and marketing services or fail in the marketplace. If services of that caliber are not available at home, or if they can be acquired at home only at a significantly higher cost, then they must be purchased from suppliers in other countries. Both American and Japanese auto manufacturers have found it advantageous to commission Italian industrial artists to design new sport models and to commission design studios in California to develop yuppie models. Designers in different parts of the world thus tend to develop a reputation for a certain look, and, depending on current fashions and public tastes, even the most successful companies find that they must turn to outside designers to expand the appeal of their products. Many textile manufacturers have thus turned to Finnish designers for designs used in industrial fabrics, while French designers have retained their reputation in the design of clothing apparel. Similarly, some countries have developed a reputation for professional excellence in certain areas of engineering, software design, accounting, management consulting, architecture, economic analysis and forecasting, printing, data processing, and advertising. In some cases, the competitive edge of one country over another in some area of services has nothing to do with the national environment, but is the result of the professional excellence or artistic flair of an individual. The fact that a person with a particular set of skills or expertise lives in a particular country could be pure chance. In most cases, however, the strength of a country in various services is the result of the unique blending of national culture, education, local role models, and individual talent.
Service firms can use four different approaches to reach and serve foreign clients. They can establish local production and distribution facilities in the importing country, use local businessmen to market and distribute services in the importing country, establish partnership or other cooperative arrangements with local firms in the importing country, or serve foreign customers out of the home office, or regional offices in third countries. Each of these approaches has its advantages and disadvantages and is more widely used in some industries than in others.
Most services purchased by consumers have to be produced
on the spot where sold. With respect to services purchased by businesses,
there is usually greater flexibility in locating production facilities
at some distance from the buyer,' but even businesses often find it
most practical and convenient to buy from vendors with local facilities.
Most large service firms that are serious about selling to foreign
customers therefore find it advantageous to establish a local business
in the market they want to serve. A foreign producer can thus locate
all the activities that require close proximity to the customer in
the foreign market, while locating other activities that can benefit
from economies of scale in the home country or in third countries. Using Local Agents, Contractors, and Licensees
In some service industries, a whole chain of agents, brokers, wholesalers, and retailers gets involved in marketing and selling services offered by foreign suppliers. A tourism or transportation company, for example, can use travel agents throughout the country to market its tour packages. An insurance company can use local insurance brokers to market its insurance policies. The one service industry where this kind of arrangement is not used is retail banking, though banks often establish corresponding banking relationships with local banks in other countries to attract business from -foreign clients. In order to manage the relationship with local agents,
contractors, or licensees, the foreign companies usually find it useful
to establish a national sales office in the importing country, and
in some cases even regional sales offices. In some industries, a foreign
supplier may also have to establish itself as a separate legal entity
in the importing country in order to satisfy local fiduciary regulations.
The foreign firm may be required to maintain deposits in local banks
or to invest in local assets. In many cases, a government might even
require a foreign producer to perform certain production activities
inside the country as a precondition to the right to sell services. Another approach to international trade in services is to establish an international association or partnership among independently owned service firms.3 Such an association or partnership can be no more than a mutual referral service, or it can establish common standards and offer common administrative services to its members. Many international professional firms in law, accounting, consulting, executive recruiting, and real estate are legally international associations of national partnerships. Each national partnership in such an arrangement is an independent business, but agrees to maintain agreed standards and share certain common costs. Some international hotel chains such as the Relais and Chateaux chain headquartered in France are in reality international associations of independently owned hotels. International franchising companies in consumer-oriented services such as fast food, car rental, and retail stores are frequently international associations of locally owned businesses that use the common name, technology, support services, and standards supplied by the franchising company. All of these arrangements allow small, consumer-oriented businesses to take advantage of the economies of scale made possible by a large international business while maintaining the incentives and regulatory advantages of local ownership. Selling Services to Foreign Clients in the Home Country of the Supplier As a fourth option, a foreign supplier could decide to serve foreign customers out of the home market. The cost of establishing even an indirect presence in the import market in the form of a sales office and local agents may be too high in relationship to the potential business, or it may be much too difficult to overcome restrictive and burdensome regulations imposed by the importing country government. By forgoing the local production and the local distribution of services in the importing country, a foreign producer often can escape these costs or limitations and still be able to export services to such a country. Since the actual production of the service takes place in the producer's home country or a third country, however, both the buyer and the seller may incur high travel and communication costs. A service company that intends to sell services to foreign customers from its home office could still open a representative office in the importing country and place advertisements in local papers and magazines. The presence of a local office can save the customer many of the costs of doing business in another country. Any deals that might come out of local contacts between a representative office and a client have to be concluded in the exporting country_ or in third countries, however. As soon as a local office or a local agent assumes responsibility for the sale of services, the official point of sale is transferred from the producer's country to the buyer's country, and such sales become subject to local laws and regulations. In order to illustrate how a deal is arranged through a representative office, let us assume that the Bank of America has a representative office in Sweden, which is contacted by a Swedish construction company that wants to borrow money. The representative office could supply the construction company with an application blank and pass the completed form to the nearest branch, which could be located in London. If the bank indicates a sufficient interest to pursue the loan, an executive of the Swedish firm would be expected to fly to London to meet with the loan officer of the bank and conclude the deal. Representative offices are commonly used in banking, transportation, consulting, data processing, tourism, engineering, and construction. One bank in New York, for example, does business with firms in about sixty countries, has no foreign branches or subsidiaries, but has representative offices in about fifteen of those countries.
In order to decide whether to buy at home or abroad, a buyer must weigh the cost and inconvenience of buying abroad, as against the advantages of buying abroad. A buyer must consider the cost of travel and the ongoing communications costs. A buyer must also consider the inconvenience and aggravation of not being able to meet the supplier on short notice when something goes wrong. Advances in technology have reduced the cost and enhanced the quality and speed of international transportation and communications, but the fact remains that it is more costly and less convenient to meet someone in another country than to meet someone who works in the same city. On the other side, the buyer must consider the cost savings associated with a lower price or the higher quality of the services that can be obtained abroad. Where the home market is highly protected, both the price and quality differentials could be quite large. Finally, the buyer must also consider whether government regulations restrict the use of services obtained abroad. Plans drawn by a foreign architect, for example, might not be eligible for a building permit, or an audit performed abroad might not fulfill an audit requirement, or a foreign insurance policy might not satisfy compulsory insurance regulations. Buying services abroad is a practical option only in certain situations: First, buying abroad makes sense if a large business needs to buy a relatively homogeneous service that does not require frequent contacts between the customer and the producer. The amount of money involved has to be large enough to justify the added costs and inconvenience. Production of the service must not require extensive knowledge of the local environment. Services that meet these criteria include data processing, data entry, large loans, insurance of large liabilities such as supertankers, reinsurance, printing, large consulting projects, economic forecasting, and preparation of advertising copy. Second, buying services abroad also makes sense when the required services pertain to international transactions. Examples of such transactions are export financing, export insurance, hiring an executive to work in a third country, advertising in an airline magazine, setting up a global communications system for a company, providing security for an international credit card company, and putting together a multinational project. Third, buying abroad is a practical option where any buyer, large or small, needs a highly specialized service that can only be purchased abroad. A gourmet, for example, may go to Paris twice a year just to eat. Other examples include seeking medical treatment for a rare disease, studying with a world expert on some subject, or visiting a foreign shrine. Businesses that operate in a global market are likely to find that they frequently need expertise that is available only in certain countries. A Texas company, for example, may be known for its skill in extinguishing fires in oil wells or for its data on international oil movements. In other cases, the scale of the proposed project may be so large that only a handful of services firms in a few key cities may be large enough to provide the necessary services. A company that wants to float a billion-dollar bond issue may be able to do so only in New York and London. Only a handful of architectural firms may be able to take on a hundred-story building. Only Lloyd's of London may be able to provide liability insurance on a mega tanker.
International business would not be possible without extensive international trade in services. Every aspect of international business-international trade in goods, finance, travel, and the operation of multinational enterprises-requires international trade in services. The service industries provide the transportation, the communications, the financing, the insurance, the know-how, and all the other support systems that are needed for world commerce.
Internationally traded goods have to be transported, whether by ship, truck, train, or airplane. International trade also requires the services of intermediaries such as traders, merchants, and wholesalers. Goods in transit need to be financed and insured. In order to develop a market abroad, exported goods have to be advertised. The services of lawyers are required to deal with the many different health, safety, and other regulatory requirements abroad, and to settle the disputes that can so easily arise when people involved come from different countries with conflicting cultures, customs, and laws. The services of translators and interpreters are needed. Finally, in order to keep track of everything, and to calculate the profits, international trade needs to be supported by accountants, data clerks, and data processing experts. International trade in technologically complex goods also has to be supported by a wide range of customer support services. A computer, for example, requires not only software that can cost more than the computer itself, but also the support of systems engineers, documentation and training specialists, and repair personnel. Similarly, the export of industrial robots, complete factories, and power plants may require the assistance of experts in a dozen different areas of expertise to install the machinery, to get it running, to train local managers to keep it running, and to assist in subsequent maintenance and improvements. Sometimes these support services are purchased in the exporting country, and sometimes they are purchased in the importing country; sometimes they are provided as part of the export price quoted by exporters to foreign importers, and sometimes they are billed separately. Statisticians and economists have therefore never been sure whether to count such services as part of the value of internationally traded goods or to identify them separately as international trade in services.
Banks engage in international trade in services whenever they supply financial services to someone who lives in another country-when they accept deposits from foreign clients, when they lend money to firms located in other countries, when they sell foreign bonds, when they provide cash management services to foreign clients, and when they transfer funds for foreign clients. In carrying out their international activities, banks are also large users of communications services, data processing services, legal services, accounting services, economic information services, data entry services, computer programming services, and advertising services. The fees charged by banks for their services (in the form of a spread between deposit rates and loan rates, or between buying and selling rates for foreign exchanged in effect cover the cost of a bundle of business services that go into the production of international banking services. When a bank uses service inputs produced at home to support a foreign client, it is indirectly exporting a large number of different services. Banks also export services more directly when they sell such services to their foreign branches and subsidiaries, or when they sell such services to foreign clients for a separate fee. Banks also import services whenever they use services produced by one of their foreign branches or by a foreign vendor in offices at home.
International travel generates trade in a wide variety of services. Expenditures by Americans while traveling abroad constitute U.S. imports of services, while expenditures of foreign tourists while traveling in the United States constitute exports of services. Travelers have many different needs. First of all, travelers need transportation. Travelers need places to eat and sleep. They may also need the services of travel agents, credit card companies, insurance companies, and tour guides. International travel has increased rapidly in the past few decades as it has become cheaper and easier to travel, even to faraway places like Tibet, North Borneo, or Mauritius that until recently were inaccessible. A steady increase in the standard of living has also meant that more people could afford to take their vacations abroad. The needs of a high-tech world and the needs of a more highly integrated and interdependent world have also made it necessary for an increasing number of scientists, sports officials, business executives, engineers, and government officials to travel to other countries on a regular basis. Many people thus spend a considerable amount of time and money traveling to other countries both on business and for pleasure. By expanding the amenities available in otherwise inhospitable or underdeveloped regions of the world, international trade in travel services can substantially improve the quality of travel and reduce the psychological and physical stress of travel. The operation and management of multinational enterprises has to be supported by extensive international trade in services. To a considerable extent, international trade in supportive business services takes place within the company itself. The head of international operations in the home office exports managerial services to all the countries in which the company has facilities; so do the central data processing department, the accounting department, the legal office, the central office design staff, the advertising staff, the government relations office, and the economics department whenever they do work related to the operation of a factory, a warehouse, a maintenance facility, or a sales office located abroad. On the other hand, research carried out in one of the company's laboratories abroad, or support services supplied by a foreign subsidiary to the home office, constitute imports of services. Multinational companies also regularly buy services from outside vendors on an international scale. Advertising, management consulting, investment banking, accounting, data processing, and other business services are regularly purchased from large firms located in key commercial centers such as New York, London, Paris, Tokyo, Hong Kong, and Singapore. Most international trade in services is organized and carried out by large corporations. Only large enterprises can afford to pay the overhead transportation and communications costs of maintaining frequent and extensive contacts between producers and users of services that are separated by long distances. While communications and transportation costs have declined significantly in recent years, they remain a barrier for smaller enterprises. The large enterprises that are the principal actors in international trade in services, however, do not buy exclusively from each other. Their wide reach enables them to find and to develop relationships with small suppliers of services in many different places around the world. In fact, that ability to tap into small centers of professional excellence gives these large organizations one of their distinct advantages. Large organizations inevitably have their limits, however, particularly when they are spread over wide distances. Centralization of management control over large geographic areas can lead to decisions that are out of touch with local conditions. Centralization also tends to discourage innovation by local managers. Large department stores have thus given way in many areas to shopping centers filled with dozens or even hundreds of boutiques. In fact, the very dynamism of the American economy in recent years has been the result of an explosion of small businesses, largely in services. The same shifts that have been observed in retailing have also taken place in banking, insurance, real estate, and stock brokering. Over the years, small local service establishments have been absorbed by larger firms covering wide geographic areas that are better able to improve quality and reduce costs through greater specialization in managerial and professional support functions. The growth of these large service firms, however, has now created a new movement to smaller, specialized service firms that retain the advantages of specialization without sacrificing the expanded possibilities for innovation and entrepreneurship in a small firm. Wall Street has therefore seen the emergence of so-called- financial boutiques that occupy specialty niches in the financial market. The inherent advantages of local enterprises in services - familiarity with local conditions, the opportunity to innovate in a small organization, and the ability to cultivate relationships with local clients-limit the expansion of trade in services. Trade in services is thus unlikely to reach the same level of penetration in local markets as trade in goods. It is easy to underestimate, however, the potential international scope of smaller enterprises and even individuals. Small businesses that produce high-quality services and individuals who achieve professional excellence inevitably get to know each other, even across national frontiers. Such contacts lead to a flow of ideas, knowledge, and skills. These informal networks also serve as channels of trade, as leads on potential clients and suppliers are passed from person to person. It is interesting to speculate whether cheaper international telecommunications will enhance the role of such informal networks in international trade in services. In the United States, the rapid growth of electronic bulletin boards and interest sections within such electronic bulletin boards is creating a new system for the dissemination of information among individuals with similar interests, and electronic banking is gradually transforming the organization of the banking industry. Only the future will tell to what extent these new channels of communications will alter the production and distribution of services globally.
Since services are absorbing an increasing proportion of national resources, the cost of services is becoming an important economic issue, with major implications for the standard of living. In fact, lagging productivity gains in the service sector are slowing economic growth in most countries today, and this is putting the spotlight on policies that affect the cost of services. 4 Government regulation of services has thus become a major public policy issue in many countries. Similarly, government policies that restrict imports of cheaper and better services are bound to become an equally important public policy issue. Tradeable services constitute an increasingly important input into the production of manufactured goods, and the quality of such inputs is therefore often crucial to the global competitiveness of a country's manufacturing industry. To the extent a country is able to produce high-quality service inputs into advanced manufacturing processes and products, it will be able to strengthen its manufacturing industries and expand services exports. To the extent that a country lacks critical service inputs into manufacturing, it must import such services if it wants to preserve the competitiveness of its industries. Some critics have argued that the growing public policy focus on services is a threat to a country's manufacturing sector. They could not be more wrong. While the most important public policy issues in services concern services purchased by businesses, increased trade in services consumed by individuals can also add considerably to the quality of life. The services most frequently imported by consumers are tourism, education, and entertainment services. Expenditures on these items constitute a significant portion of the consumer budget, and the increase in value provided by imports of services in these categories can significantly enhance an individual's sense of economic well-being. Policies that affect the expansion of trade in services will play an increasingly important role in stimulating domestic economic growth and raising the national standard of living. --------------------------------------------- |