Tariffs and the U.S. trade deficit have dominated headlines lately, with both equity and fixed income markets recalibrating based on future growth prospects. And what’s incredible is that market pundits finally agree on one thing for once – tariffs aren’t great for the global economy. For decades, free trade has benefited U.S. consumers and helped lower income countries grow, while allowing the U.S. to focus on investing in high value services and advanced manufacturing.
One important, yet often overlooked, aspect of the trade debate is services. While the United States has a trade deficit on the goods side of the equation, when we focus just on services, we actually run a trade surplus. Keep in mind when we hear the trade deficits referenced by the Trump administration, those generally focus solely on goods. Just because we run a goods deficit with a country, doesn’t necessarily mean we’re getting ripped off. There are two sides to every coin.
Currently, the U.S. workforce revolves around services. Almost 80% of our workforce is employed in the services sector, while the remaining 20% consist of workers in goods-producing industries. Breaking it down even further, less than 10% of Americans work in manufacturing – a massive decline since peaking in the 70s. By prioritizing services-based industries over the years like consulting, banking, logistics, insurance, and travel, we‘ve created new high paying, highly sought after jobs that help keep the U.S. economy churning.
Because most services are delivered digitally or virtually, retaliatory tariffs don’t apply directly and might not hit as hard initially, but the downstream effects resulting from lower confidence from our trading partners aren’t desirable. To target our services exports, foreign countries could tighten licensing requirements and impose bureaucratic hurdles that make it harder for U.S. firms to conduct business overseas.
Nobody knows exactly what the impact of tariffs will be, and the market uncertainty out there is real, but investors can take a little comfort in the fact that the U.S. economy doesn’t rely solely on producing goods – don’t forget about services.
