Question

What is the role and future of international services in the U.S economy?

Answer 1

Because of its size and interconnectedness, developments in the US economy are bound to have important effects around the world. The US has the world’s single largest economy, accounting for almost a quarter of global GDP (at market exchange rates), one-fifth of global FDI, and more than a third of stock market capitalisation. It is the most important export destination for one-fifth of countries around the world. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions

At the same time, the global economy is important for the US as well. Affiliates of US multinationals operating abroad, and affiliates of foreign companies located in the US account for a large share of US output, employment, cross-border trade and financial flows, and stock market capitalisation.

Business cycles in the US, other advanced economies (AEs), and emerging market and developing economies (EMDEs) have been highly synchronous .This partly reflects the strength of global trade and financial linkages of the US economy with the rest of the world, but also that global shocks drive common cyclical fluctuations. This was particularly the case at the time of the 2008-09 Global Crisis. It is not a new phenomenon, however. Although the four recessions the global economy experienced since 1960 were driven by many problems in many places, they all overlapped with severe recessions in the US

Other countries tend to be in the same business cycle phase as the US roughly 80% of the time . The degree of synchronisation with US financial cycles is slightly lower, but still significant – credit, housing, and equity price cycles are in the same phase about 60% of the time. Although it is difficult to establish empirically whether the US economy leads business and financial cycle turning points in other economies, recent research indicates that the US appears to influence the timing and duration of recessions in many major economies

Important as the US is to the global economy, the US economy is also affected by its trade and financial linkages with the rest of the world. Global economic developments play an important role in driving activity and financial markets in the US.

US multinationals account for a large share of US output and labour productivity growth, and their presence in financial markets is large. In turn, foreign multinationals operating in the US provide a large share of US employment and exports

Much of the global value chain activity is conducted through US multinational corporations and their affiliates abroad. Overall, one-quarter of US exports represents US value added embedded in other countries' exports. This ‘forward participation’ is particularly high in chemicals, business services, and electronics, and with China, Canada, and Mexico. ‘Backward participation’ is more limited: the average import content of US exports was 13% in 2014, well below the average for other advanced economies (27%). This interconnectedness is an important source of spillovers between the US and the global economy.

The United States has integrated dramatically into the world economy over the past half century. The share of international transactions in our national economy has more than tripled. It now exceeds 30 percent of total output. We are more dependent on external economic developments than the European Union as a group or Japan, the other large high-income parts of the world, which have traditionally been regarded as much more engaged in global competition than the United States.

Over half of our oil, the world’s most important single product, is imported. Almost half the revenues of the top 500 companies based in the United States derive from their international operations. About half of publicly held US government debt is owned by foreign investors. Foreign capital finances much of the domestic investment required to maintain decent economic growth.

The United States has thus joined the world, in two critical senses. We are highly dependent on global developments for our own prosperity and stability. And we are now much more like other countries, for virtually all of whom such international engagement has been a given throughout their histories.

The United States has gained enormously from this globalization. Our country is more than $1 trillion per year richer as a result of its trade integration. This equates to over 10 percent of our entire national income and more than $10,000 per household. Additional benefits accrue from the financial globalization that has accompanied increased trade flows.

The trade gains occur through three distinct channels. Increased imports hold down prices and thus help limit inflation and provide a greater variety of attractive products to consumers and industrial users. Increased exports enable us to do more of what we do best and enhance wages by 15 to 20 percent for workers in those industries. Increased international competition stimulates productivity improvement in our own economy and thus helps provide the foundation for higher incomes.

Like any dynamic economic change, globalization generates costs as well as benefits. About half a million workers (of a total labor force of 150 million) lose jobs annually, most for temporary periods, as a result of increased imports. Some have to accept lower paying jobs for the longer run, suffering lifetime earnings losses. These effects total about $50 billion per year, a substantial amount in absolute terms but only one-twentieth of the annual payoff from globalization.

Hence the United States has on balance gained enormously from our integration with the world economy. Substantial additional benefits, perhaps expanding the present totals by another 50 percent (half a trillion dollars annually), are available from further opening of global markets.