Crossfire: The U.S. Trade Surplus in Services As America Contemplates An Inward Turn

With the return of Donald Trump to the White House in January 2025, higher import tariffs on goods are expected. The President-elect has stated, repeatedly, that he will impose 60% import tariffs on Chinese goods and 10-20% across-the-board tariffs on imports from other economies. In contrast, Mr Trump has said little about trade in services. Will services trade emerge unscathed from an inward turn of U.S. trade policy?

This briefing explores the likely consequences of increased tariffs on goods for U.S. services trade. I invoke foundational macroeconomic relationships that link net savings to the current account and to the trade balances of goods and services, highlight exchange rate effects, and deploy evidence from the first U.S.–China Trade War to draw lessons about whether services trade will be caught in the crossfire.

My argument is substantiated with four charts based on official U.S. data on trade in services and an Annex table with information on the services exports of over 20 of America’s trading partners. I identify which trading partners are best positioned to benefit from the knock-on effects of higher U.S. goods tariffs on services trade and assess the fallout for American service providers.

Annex Table: Service sector exports to the United States, 2000-2023.

At the core of my argument is the relationship between tariffs on goods and service sector trade. Reason as follows about the effects of higher tariffs on imported goods:

1.      Direct effect on goods imports: Tariffs raise the cost of foreign goods, leading to reduced goods imports into the United States. Other things being equal, this should reduce the American trade deficit in goods.

2.      Indirect effect on trade balance in services: As every economic student knows, and the IMF has usefully summarised, a nation’s current account equals its net saving position. In turn, the current account is the sum of the trade balance, net factor income, and transfer to and from abroad. On the assumption that import tariffs won’t influence Americans’ incentives to save or invest ^[1], then any reduction in the trade deficit in goods (a goal of the President-elect) must be offset by a deterioration in the trade surplus in services because the value of the current account remains unchanged.

3.      Reinforced by a rising U.S. Dollar: A stronger dollar subsequently makes U.S. exports—both goods and services—more expensive and less competitive internationally.^[2]

That’s the logic ^[3], what does the data show?

The United States is heavily involved in the cross-border delivery of services as well as services consumed abroad or supplied to visiting foreigners.[4] According to the latest release from the U.S. Bureau of Economic Analysis (BEA), in 2023 the United States exported over $1,025 billion of services. It imported $748 billion, yielding a trade surplus for services of some $278 billion. From 2000 to 2023 U.S. services exports rose 244% in nominal terms. Services imports rose 238% over the same timeframe.

In 2023, the three most valuable sources of services exports delivered cross-border were “other business services” ($253 billion), business and personal travel ($189 billion), and financial services ($175 billion). In the same year, the following three types of services imports were the ones Americans spent the most money on: business and personal travel ($158 billion), other business services ($145 billion), and transport ($142 billion).

The BEA reports the total value of imports of services from 23 U.S. trading partners, including China, members of the European Union, Japan, and Switzerland. Those 23 trading partners—whose services trade data I deploy later in this briefing—were responsible for $526 billion of U.S. services imports. The Annex to this briefing provides evidence on their bilateral trade with the United States.

Drawing upon this official U.S. data, Figure 1 demonstrates the growing importance of services in total U.S. exports since 2000. However, growth in this share stopped during the first U.S.–China Trade War and has since fallen back. In contrast, the services share of total U.S. imports has remained flat since 2010, implying that goods import increases are largely matched percent-by-percent by higher imports of services.

Notably, the services share in total U.S. exports reached its peak during the first U.S.-China trade war. Let’s examine that precedent further.

Figure 1: The services share of total U.S. exports rose over the past 10 years—not so for the U.S. import share.

Figure 2 tracks the monthly U.S. trade balance in services since 2010. Before the U.S.-China Trade War, the services trade surplus showed a consistent upward trend. However, this trajectory ground to a halt during the Trade War, with the monthly surplus plateauing. During that era of trade tensions, American service imports and exports essentially moved in line with one another.

Overall, the U.S. trade surplus in services peaked in 2018 at $300 billion, a level that has not been exceeded since. This plateau occurred before COVID-19 upended economies and scrambled international trade. By 2019 Canada, Ireland, South Korea, Mexico, Netherlands, Singapore, and the United Kingdom had each expanded their services exports to the United States by more than $2 billion over 2017 levels.

The red shaded area in Figure 2 shows the deviation between the pre-trade war trend growth path and the actual outcomes. That deviation is significant and is consistent with the proposition that the trade balance in services can be influenced by higher import restrictions on goods.

Figure 2: No trend improvement in the U.S. services trade balance seen after Trade War started with China.

Figure 3 provides a comparative analysis of how dependent U.S. trading partners are on services exports. Economies such as Hong Kong (74%), the UK (58%), and Australia (38%) have high shares of their bilateral exports to the United States in the form of services. Vietnam (1.2%), China (4.5%), Malaysia (5.3%) and Mexico (8.5%) find themselves in the opposite situation. This disparity underscores how tariffs on goods could differentially impact trading partners.

While trading partners’ reliance on services reveals their potential exposure, the growth dynamics of services versus goods exports provide further insights into how global trade patterns might evolve, as shown in Figure 4.

Figure 4 illustrates the long-term growth trajectories of services exports compared to goods exports for the 23 trading partners the BEA reports services exports data for. For most economies, services exports have grown at a faster rate. That can be seen by the number of economies whose growth dynamics lie in the green shaded area.

Notably, India, with a compound annual growth rate (CAGR) of 14% in services exports to the U.S., is very well positioned to benefit from any reshuffling between goods and services trade. Similarly, Switzerland and China (both with CAGRs of around 8%) have achieved robust growth in services, indicating their capacity to expand further if U.S. demand increases. In contrast, Vietnam, with an impressive 23.86% CAGR in goods exports but “only” 7.51% in services, reflects a manufacturing-dominated economy that may struggle to pivot toward services.

Figure 4: Since 2000 most trading partners’ services export growth has exceeded that of goods.

Taken together, this evidence suggests that trading partners with strong services export growth and high reliance on services in their export portfolios are best positioned to benefit from any tariff-induced reshuffling of foreign imports from goods and services. The UK, Switzerland, and India emerge as likely winners. Additionally, economies like Ireland and France, with moderate reliance on services, may see some gains, though their goods exports remain significant.

Conversely, manufacturing export-intensive economies such as Vietnam and Mexico face challenges in offsetting lost goods trade with services growth. China occupies an intermediate position, with strong growth in services but a low current share of services in total exports.

Since election day, the U.S. Dollar has appreciated, according to financial market participants and news reports largely on account of the impact of anticipated regulatory and fiscal policy moves that are thought to make U.S. financial assets more attractive than those abroad. A rising U.S. dollar further tilts the competitive balance in favour of foreign service providers vis-a-vis American rivals.

While the Trump administration’s tariff policies target goods imports, their indirect effects on services trade should not be overlooked. Indeed, the greater the impact on goods trade of any American turn inwards, the larger the impact on U.S. exports and imports of services.

Higher import tariffs essentially reshuffle trade balances between goods and services. If the Trump team is “successful” in reducing the U.S. trade deficit in goods, as a byproduct it must reduce the U.S. trade surplus in services.

Significant service-exporting economies, such as India, Switzerland and the UK, are poised to benefit as the U.S. services trade surplus adjusts. The rising value of the U.S. Dollar will further reinforce the gains to foreign service exporters. Meanwhile, the limited services export penetration in U.S. markets of China, Malaysia, Mexico, and Viet Nam means they will struggle to compensate for any losses in goods exports.

U.S. service sector exporters, traditionally a pillar of strength of the American economy, will be caught in the crossfire should the incoming Trump Administration sharply raise import tariffs on goods. If the experience of the first U.S.-China Trade War is anything to go by, the principal impact on American services providers will be to blunt further growth in their exports, rather than pare them outright. However, there is no guarantee of that relatively benign outcome—especially if foreign governments retaliate against higher U.S. import tariffs with protective measures against American services firms.

Simon J. Evenett, an international trade economist, is Professor of Geopolitics & Strategy at IMD Business School, Switzerland. He is also Founder of the St. Gallen Endowment for Prosperity Through Trade, home of the independent monitoring initiatives Global Trade Alert, Digital Policy Alert and the New Industrial Policy Observatory and Co-Chair of the World Economic Forum’s Global Futures Council on Trade & Investment.

I thank, without implying any agreement with the arguments developed here, Ingo Borchert and Bernard Hoekman for their advice in researching and preparing this briefing.