[OPE-L:4654] A hard landing?

From: Rakesh Narpat Bhandari (rakeshb@Stanford.EDU)
Date: Fri Dec 08 2000 - 21:10:44 EST

Full Text:
Copyright Dow Jones & Company Inc Dec 4, 2000

MEXICO CITY -- NetLink Transaction Services LLC's contribution to the 
U.S.-Mexico trade balance is barely a drop in a river of bilateral
transactions now rushing by at a rate of over $200 billion a year. 
But those dollars are part of an emerging trend that some economists 
signals a tidal shift: a U.S. trade surplus.

Netlink, Rochester, N.Y., which calls itself a "virtual 
banking-services provider," maintains the books for 6,000 Mexican 
factory workers in the
border city of Reynosa. Essentially, Netlink "exports" its ability to 
monitor offshore payrolls from databanks in New York. To add 100,000
workers next year, Netlink in June sold equity stakes to raise the 
$7.5 million it needs to add capacity in Rochester.

Payroll services are one small example of how growing imports from 
Mexico lead directly to growing exports of U.S. expertise. Simply 
put, as
Mexico increases its exports of merchandise, it needs more imported 
brainpower to grease the flow. That's the silver lining behind a 
trade deficit with Mexico, which through the first nine months of 
this year ran to $18.6 billion.

World-wide, the U.S. trade deficit is set to surpass $450 billion. 
But while the gap in merchandise trade keeps growing, some economists 
indications that the trend won't last the decade. The reason: the 
growing U.S. trade in services, which now tops $250 billion annually 
and runs a
surplus of $80 billion. And both numbers, say economists, are poised 
to explode over the next 10 years.

"Services trade is the unsung hero of our trade balance," says Robert 
Litan, director, economic studies, at Washington's Brookings 
According to a University of Michigan forecast, U.S. service exports 
will hit $650 billion by 2010 -- about the same volume of current U.S.
exports of farm and factory goods. World-wide, cross-border sales of 
services are around $1.3 trillion, most booked by U.S. providers.
Services sold by the No. 2 exporter, Britain, total just $100 billion.

To be sure, predictions of services-as-saviors aren't new; in the 
early 1990s, an opening of the world's financial markets was expected 
to usher
U.S. firms into a world of profits formerly locked behind national 
borders. Today, that seems naive.

They merely may have been premature. A proliferation of free-trade 
agreements around the globe has blurred the boundaries between
economies, so much so that economists now wonder whether the strength 
of the service trade is not so much untapped as uncounted.

"Accounting for service-sector transactions is difficult enough at 
home, it's even more challenging when services cross borders," says 
Mann of the Institute for International Economics in Washington. Take 
packaged software, she says, whose delivery can be via CD-ROM in a
box, loaded onto a computer, or downloaded via the Internet. As such, 
while overseas sales of software by U.S. companies topped $13 billion
as long ago as 1995, the most recent data in the U.S. balance of 
payments, for 1998, show software exports of just $3 billion.

Another accounting anomaly: The more demand grows, the faster exports 
disappear. That's because as service providers increase sales abroad,
they advance beyond the export stage to establish subsidiaries 
in-country. Consequently, sales to foreign customers are booked as 
transactions between a branch of a U.S. multinational and a local 
buyer. Last year, more than $300 billion in such intracompany service 
went unreported in the U.S. trade balance, slightly more than the 
$250 billion in services officially exported from the U.S. Combined, 
the two
figures very nearly match all U.S. exports of merchandise.

Electronic Data Systems Corp., Plano, Texas, booked revenue of $18.5 
billion in 1999, 42% of that amount -- more than $7 billion -- derived
from overseas transactions. Yet barely 2% of EDS's sales are 
considered "exports" since sales of services that originate in the 
U.S. pass through
an overseas EDS vendor. For example, EDS's $200 million in sales to 
Mexico include operations in Charlotte, N.C., where EDS employees run
information systems for Aeromexico and Mexicana airlines. Besides 
running programs for reservations and flight planning, they process
frequent-flier miles and run the systems that print tickets, boarding 
passes and baggage tags.

Although EDS charges the Mexican airlines millions of dollars each 
year, company officials say none of that is counted as an export.

That experience suggests much of what is exported is not being 
counted, particularly with larger trading partners. Just since 1990, 
over a dozen
countries joined the ranks of importers buying $1 billion or more 
worth of U.S. services annually. Among the newcomers: Venezuela, 
Indonesia, Thailand, Israel, Malaysia and South Africa. Meanwhile, 
Brazil, South Korea and Australia have already cracked the $5 billion
threshold, as Mexico, Britain and Germany each topped annual service 
imports of $10 billion.

Those ranks will grow, thanks to the World Trade Organization's 
General Agreement on Trade in Services negotiations. The latest round 
last week in Geneva, where knocking down trade barriers for 
telecommunications, data processing, energy and financial services is 
on the

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