Trade traditionally focuses on goods, but services trade—transportation, travel, insurance, finance, etc.—underpins globalization. Services are intangible and often embodied in products as intermediate inputs, for example in the design and engineering of a product, through trade facilitation such as transportation and logistics, or bundled with goods such as installation. Some services require physical proximity, such as transportation; without transportation, very little production and trade would exist as it physically connects suppliers and markets. On the other hand, some services do not require physical proximity and can be produced and consumed simultaneously, such as online tutoring.
The distinction between goods and services is increasingly blurred, making goods and services two parts of a whole. As a result, and as people become wealthier, they tend to consume more services, and as trade in services expands, choice and innovation boom. The COVID-19 pandemic accelerated demand for and supply of services: global exports of digital services, including remote learning, increased 37 percent between 2019 and 2022 alone. The United States is a net exporter of services, creating opportunities for American businesses and workers, but US consumers also greatly benefit from growing services trade. For example, Upwork, a jobs website, allowed an American father to interview and hire a PhD mathematician to tutor his son. This mathematician is based in Pakistan and asked for $4 an hour—a steal compared to the average $24 an hour for an American tutor but a well-paid opportunity for the mathematician as this rate far exceeds Pakistan’s less than $1 an hour minimum wage.
The pandemic demonstrated how much services-based work can be performed remotely. The benefits that remote work provides increase living standards and can even help with job retention. In fact, new data illustrates that US labor force participation for women with children under the age of five leapfrogged its pre-pandemic rate, and the flexibility that remote work offers, particularly to caregivers, is a compelling factor behind the trend. Moreover, the flexibility has pro-social benefits by making it easier to become parents or have more children.
However, remote work would not be possible without cheaper electronics. In 1996, the WTO signed the Information Technology Agreement that eliminated tariffs on hundreds of information and communications technology products. Such liberalized trade encouraged global supply chains that significantly contributed to the rise of accessible electronics. Not only can people carry mini computers in their pockets in the form of smartphones, but home offices are made more affordable. Indeed, as documented by Pooley, in 1991, Apple introduced its PowerBook 1000 priced at $2,500. At the same time, the average blue-collar worker made $14.93 an hour, so it took 168 hours to earn one of these laptops. Today, Apple’s 13-inch MacBook Air costs $999, and the average blue-collar worker makes $36.50 an hour, so it only takes a little over 27 hours to earn a laptop. Put differently, today the average blue-collar worker can buy six MacBook Airs for the time price of one PowerBook 1000 in 1991.
Further, cheaper electronic equipment combined with the invention of cloud services created more location options for starting a business. As these entrepreneurs take advantage of remote work and hire workers from anywhere in the world, a feedback loop is created of improved living standards, increased innovation, and higher economic growth—not only domestically but globally.
Insurance is a less considered service but is vital for trade facilitation and comprises a significant part of trade cost by itself (included in the import, cost, insurance, and freight price). Doing business comes with risks, and those risks can be heightened when using suppliers in different countries with different legal systems. Insurance enables businesses to mitigate risk and thus operate more cost-effectively. For example, importers benefit from product liability insurance; importers are responsible for ensuring that the products they import are compliant with domestic law, but product liability insurance protects them if a foreign supplier provides an inadequate product that requires legal action or if the foreign supplier does not have insurance coverage with protection in the importer’s jurisdiction. On the other side, exporters benefit from cargo (or freight) insurance, which protects shipments from loss, damage, or theft during transportation.
More broadly, global insurance protects companies with global operations from a variety of claims, such as property damage, cyber hacks, data breaches, or even personal injury. This risk mitigation streamlines the trading process by ensuring businesses are protected from unforeseen complications while providing resources for navigating what UnitedHealthcare Global calls “a complicated maze of red tape due to language barriers, local laws, customs, and norms that differ from country to country.” Finally, companies based in foreign countries also help communities by providing opportunities for local workers, facilitating trade, enabling foreign direct investment, reinforcing integration, and contributing to global economic growth.
For consumers, services trade further improves living standards by providing more choice. For example, streaming services (bundled in many televisions nowadays) have a breadth of options available that is largely a result of increased digital trade. In fact, 45 percent of Netflix’s library is made up of foreign-language titles. The Korean television show Squid Game became Netflix’s most watched show in 2021 and maintains that record—a testament to not only Americans’ enjoyment of the show but also the benefits of services trade.
As consumers become familiar with foreign services, they often crave more of them. And South Korean services, which have gained popularity around the world starting in the 1990s, are again a good example. After the US-South Korea trade agreement went into effect in 2012, South Korean media exports to the United States surged. The COVID-19 pandemic particularly vitalized US demand for Korean media exports. Moreover, the popularity of Korean media products spills over to other Korean products. In fact, one study of Korean cultural good exports from 2001 to 2007 found “that the export creation of cultural goods led to the export of consumer goods, the trade creation effect that the export of cultural goods drives the export of consumer goods was significantly found.” The authors found that a 1 percent increase in South Korean cultural exports led to a 0.136 percent increase in exports of consumer goods, including information technology products, cosmetics, clothing, and processed foods. Put differently, a $100 increase in Korean cultural goods exports created an average $2,244 increase in Korean exports of other consumer goods. Therefore, the benefits of US-South Korea trade multiply, allowing Americans to consume more varieties of Korean products. The same goes for services from other countries (and, of course, for foreigners’ consumption of American services).