International Trade in Services and Intangibles in the Era of Globalization

International Trade in Services

and Intangibles in the Era

of Globalization

Studies in Income and Wealth

Volume 69

National Bureau of Economic Research

Conference on Research in Income and Wealth

International Trade in

Services and Intangibles in

the Era of Globalization

Edited by Marshall Reinsdorf and

Matthew Slaughter

The University of Chicago Press

Chicago and London

MARSHALL REINSDORF is senior research economist at the U.S. De￾partment of Commerce, Bureau of Economic Analysis. MATTHEW

SLAUGHTER is professor of international economics at the Tuck School

of Business at Dartmouth College, and a research associate of the Na￾tional Bureau of Economic Research.

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2009 by the National Bureau of Economic Research

All rights reserved. Published 2009

Printed in the United States of America

18 17 16 15 14 13 12 11 10 09 12345

ISBN-13: 978-0-226-70959-8 (cloth)

ISBN-10: 0-226-70959-0 (cloth)

Library of Congress Cataloging-in-Publication Data

International flows of invisibles : trade in services and intangibles in the

era of globalization / edited by Marshall Reinsdorf and Matthew

Slaughter.

p. cm. — (Income and wealth ; vol. 69)

Papers from the conference entitled International Service Flows

convened under the auspices of the Conference on Research in

Income and Wealth and the National Bureau of Economic Research,

held in Bethesda, Maryland on April 28–29, 2006.

Includes bibliographical references and index.

ISBN-13: 978-0-226-70959-8 (cloth : alk. paper)

ISBN-10: 0-226-70959-0 (cloth : alk. paper) 1. Service

industries—Congresses. 2. International trade—21st century—

Congresses. 3. Contracting out—Congresses. I. Reinsdorf,

Marshall B. II. Slaughter, Matthew J. (Matthew Jon) III. Series.

HD9980.5.I58 2009

382'.45—dc22

2008039264

o The paper used in this publication meets the minimum requirements

of the American National Standard for Information Sciences—

Permanence of Paper for Printed Library Materials, ANSI Z39.48-1992.

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Contents

vii

Prefatory Note ix

Introduction 1

Marshall Reinsdorf and Matthew Slaughter

I. Challenges in Measuring Trade in Services

1. Measuring International Trade in Services 27

Robert E. Lipsey

Comment: J. David Richardson

2. Improved Measures of U.S. International Services:

The Cases of Insurance, Wholesale and Retail

Trade, and Financial Services 75

Maria Borga

II. R&D and Intellectual Property

3. The Effect of Taxes on Royalties and the

Migration of Intangible Assets Abroad 111

John Mutti and Harry Grubert

4. Measuring Payments for the Supply and Use of

Intellectual Property 139

Carol A. Robbins

Comment: C. Fritz Foley

5. R&D Exports and Imports: New Data and

Methodological Issues 175

Francisco Moris

Comment: Wolfgang Keller

6. International Trade in Motion Picture Services 203

Gordon H. Hanson and Chong Xiang

Comment: Phillip McCalman

III. Offshoring of Services

7. Does Service Offshoring Lead to Job Losses?

Evidence from the United States 227

Mary Amiti and Shang-Jin Wei

Comment: Robert C. Feenstra

8. Outsourcing and Imported Services in BEA’s

Industry Accounts 247

Robert E. Yuskavage, Erich H. Strassner, and

Gabriel W. Medeiros

Comment: J. Bradford Jensen

9. We Can Work It Out: The Globalization of

ICT-Enabled Services 289

Desirée van Welsum and Xavier Reif

Comment: Lori G. Kletzer

IV. Topics in the Measurement of Price and Productivity

10. The Contribution of Multinational Corporations to

U.S. Productivity Growth, 1977–2000 331

Carol Corrado, Paul Lengermann, and

Larry Slifman

Comment: Raymond J. Mataloni Jr.

Contributors 365

Author Index 369

Subject Index 373

viii Contents

This volume contains revised versions of most of the papers and discussions

presented at the Conference on Research in Income and Wealth entitled

“International Service Flows,” held in Bethesda, Maryland on April 28–29,

2006.

Funds for the Conference on Research in Income and Wealth are sup￾plied by the Bureau of Economic Analysis, the Bureau of Labor Statistics,

the Census Bureau, the Federal Reserve Board, the Internal Revenue Ser￾vice, and Statistics Canada. We are indebted to these organizations for their

support.

We thank Marshall Reinsdorf and Matthew Slaughter, who served as

conference organizers and editors of the volume.

Executive Committee

John M. Abowd

Susanto Basu

Ernst R. Berndt

Carol A. Corrado

Robert C. Feenstra

John Greenlees

John C. Haltiwanger

Michael J. Harper

Charles R. Hulten (Chair)

Prefatory Note

ix

Ron Jarmin

John Bradford Jensen

Lawrence Katz

J. Steven Landefeld

Brent Moulton

Thomas B. Petska

Mark J. Roberts

Matthew Shapiro

David W. Wilcox

Introduction

Marshall Reinsdorf and Matthew Slaughter

1

International trade in services is an increasingly important feature of the

U.S. economy. Anecdotal evidence abounds on the rapid growth of new

types of services imports made possible by information and communica￾tions technology (ICT)—for example, call centers, software programming,

legal services, and even medical services such as radiology diagnostics.

Moreover, predictions by some economists about the eventual effects of

this new type of trade in services indicate that it may shape the future of the

U.S. economy in ways that once would have been unimaginable. Now that

the ability to deliver services over a wire has circumvented the traditional

constraint on the growth of trade in services imposed by the need for phys￾ical proximity, what is to prevent trade in services from expanding to a

scale that would have large effects on labor markets and on the U.S. balance

of payments?

Although news stories, controversies, and even novels about life as a call

center worker have given new types of trade in services high visibility, other

types of international service transactions also have important roles in the

evolving structure of global production. Besides advances in ICT, growth

in trade in services has been promoted by liberalized or favorable treat￾ment of services-related foreign direct investment (FDI) by some host

countries, by the growing importance of services in general in advanced

economies, and by the growing fragmentation of the production process

into chains of specialized activities, each of which is located where it can be

Marshall Reinsdorf is chief of the national economic research group at the U.S. Bureau of

Economic Analysis. Matthew Slaughter is associate dean of the MBA program and profes￾sor of international economics at the Tuck School of Business at Dartmouth College, and a

research associate of the National Bureau of Economic Research.

done most efficiently (Feenstra 1998). As a result of these trends, world

trade as a whole has grown faster than world production of goods and ser￾vices, and the services component of trade has tended to grow faster than

the goods component.

The importance of services in overall economic activity in the United

States means that if services activities are becoming more tradable, the

effects on the U.S. economy could be profound. As of April 2007, fully

115.2 million U.S. payroll jobs—83.7 percent of the 137.7 million total—

were in service-producing industries. Indeed, many industries within the

service sectors individually accounted for more American jobs than the

14.1 million jobs found in all of manufacturing; as an example, pro￾fessional and business services, which contains many occupations that

van Welsum and Reif (chapter 9, this volume) find to be vulnerable to

offshoring, had 17.9 million jobs. Clearly, the structure of services em￾ployment matters greatly for the overall performance of the American

economy.

Changes in sort of services that are tradable could also have important

effects on the current account balance of the United States. The United

States has maintained a revealed comparative advantage in services trade

for some time. In 2007, for example, the overall U.S. trade deficit of $708.5

billion masked a deficit in goods of $815.4 billion that was partly offset by

a services surplus of $106.9 billion. It has long been argued that this sur￾plus in services reflects U.S. comparative advantage in activities intensive

in human capital. Given its advantages in the production of tradable ser￾vices, the expanding span of these services could bring the United States

new or improved export opportunities. Yet at the same time, expansions in

the span of tradable services are also likely to alter trade flows in ways that

impart new pressures on some segments of the U.S. labor market and that

reduce incentives to invest within the United States in human capital and

other assets needed to produce tradable services.

Finally, at the macroeconomic level, the sustainability of large U.S.

current-account deficits—which peaked at $811.5 billion in 2006—is a

long-standing concern. Greater tradability of services might foster an addi￾tional margin of adjustment for the U.S. economy, in terms of expanding

the set of “tradable” activities to which resources must shift for production

of exports.

To explore the economic and measurement implications of new types of

trade in services and of growing international flows of invisibles of all

types, we organized a conference under the auspices of the Conference on

Research in Income and Wealth (CRIW) and the National Bureau of Eco￾nomic Research. The conference, entitled “International Service Flows,”

was held in Bethesda, Maryland on April 28–29, 2006.

Happily, the authors who wrote papers for the conference chose to in￾2 Marshall Reinsdorf and Matthew Slaughter

terpret the topic of services in the conference title broadly. This book’s title

of International Trade in Services and Intangibles in the Era of Globalization

conveys the breadth of topics covered more clearly than the title used at the

conference itself. For example, a theme of several of the papers was the im￾portance of international transactions involving the creation, use, or own￾ership of intangible assets such as intellectual property in the emerging

globalized economy. This result builds on the papers at a previous CRIW

conference on Measuring Capital in the New Economy (Corrado, Halti￾wanger, and Sichel, eds., 2005), which revealed the role of intangible assets

as key constituents of the capital stock of a modern service-oriented econ￾omy. Besides services and intangibles, another category of invisibles con￾sidered by some of the papers is the income recorded in the current ac￾count. (Invisibles comprise all elements of the current account in the

balance of payments other than merchandise trade.)

Progress on Measurement Challenges

The globalized economy presents some new kinds of measurement chal￾lenges for our statistical system, which the papers presented at the confer￾ence help us to meet. Equally important, the papers allow us to assess our

progress and to identify the gaps and limitations of the data that hinder our

ability to understand the emerging globalized economy and to analyze key

policy questions. For nominal flows of invisibles, notwithstanding such

problems as tax-related distortions of economic flows or transactions in in￾tangibles whose country of residence can be ambiguous, the overall picture

is reasonably optimistic. In the face of formidable measurement difficul￾ties, however, development of the price indexes needed to deflate nominal

flows is proceeding more slowly. Poorly measured real flows of interna￾tional services may therefore become an increasingly serious obstacle to

knowing how globalization is affecting the U.S. economy.

Nominal Flows

Research that Ascher and Whichard (1991) presented at the 1989 CRIW

conference “International Economic Transactions” documented the de￾velopment at the U.S. Bureau of Economic Analysis (BEA) of comprehen￾sive measures of trade in services.(Data on trade in some services, such as

shipping and passenger travel, had long been available for the United

States and other countries, as documented by Hoeksta and Stern [1991].)

Research attention next turned to products delivered through foreign affili￾ates of multinationals—which are especially key in the case of services—

and the development of the ownership-based framework of the current ac￾count. The usefulness of ownership-based accounting in a world where

trade is increasingly conducted through affiliates and where intangibles

Introduction 3

with no definite geographic location are increasingly important was high￾lighted in 1995 at the CRIW conference “Geography and Ownership as

Bases for Economic Accounting” (Baldwin, Lipsey, and Richardson 1998.)

With these accomplishments behind us, research on trade in services can

now be focused on particular commodities that are emerging in impor￾tance, changing in character, or where improved measurement techniques

have become available. Among such topics covered at the “International

Service Flows” conference were trade in banking and insurance ser￾vices (Borga, chapter 2, this volume), business’ use of offshored services

(Yuskavage, Strassner, and Madeiros, chapter 8, this volume), and intangi￾ble assets such as R&D (Moris, chapter 5 this volume) and intellectual

property in general (Robbins, chapter 4, this volume). Measures of R&D

and intellectual property transactions are important both because of these

products’ key role in the modern economy and because of the role of R&D

assets in the forthcoming revision of the international guidelines for the

preparation of national accounts of the 1993 System of National Accounts

(SNA93).1

Reassuringly, no evidence was presented at our conference to corrobo￾rate suspicions that imports of ITC-enabled of services may have been

missed in the U.S. accounts. Nevertheless, the conference uncovered some

important gaps in the data and provided striking evidence of ways in which

those data that are available could be misleading. In a case study of an im￾portant U.S. export, motion pictures, Hanson and Xiang (chapter six, this

volume) find that UN Comtrade data misses most of the value of this trade,

and that even though BEA data are better, private data sources must be

used to obtain the geographic detail needed to study the drivers of this

trade. Furthermore, Lipsey (chapter 1, this volume) and Mutti and Gru￾bert (chapter 3, this volume) suggest that some reported patterns of trade

in international transactions in intangible assets and their services are

heavily influenced by the tax treatment of transactions with affiliates lo￾cated in tax havens, which could lead to a distorted picture of the true eco￾nomic flows. Lipsey also notes how the lack of geographical nexus of

international transactions in services and other invisibles makes measure￾ment more challenging.

Prices

In the case of the prices needed to deflate international service flows, the

recent measurement story is, unfortunately, one of growing ignorance.

This is especially disappointing in light of the good foundation laid by ear￾4 Marshall Reinsdorf and Matthew Slaughter

1. Information on the forthcoming revision of the SNA, including draft chapters, is avail￾able on the United Nations Statistics website at http://unstats.un.org/unsd/sna1993/snarev1

.asp.