Thwarting tariffs! Proper division of labor among nations vital for global trade to boom

Talking about global trade, many of us may easily assume that it's mainly about buying and selling tangible goods, such as cars, clothes, food or phones, between trading partners.

So, when a certain country happens to sell much more goods than it buys, some of its trading partners may think they are sort of "losers" if they adopt a "winners-take-all" mentality that tends to treat trade as a zero-sum game.

More than merchandise

But there is more to global trade than meets the eye. Cross-border exchanges of intangible services, like finance, consulting and intellectual-property licensing, also hold sway in the balance of trade and, for that matter, overall economic growth. Trade in services has even gained more momentum than trade in goods. And there's a clear winner here.

Despite apparent anxiety among quite a few businesses, consumers and public officials about tariffs, protectionism and uncertainty that cloud global trade these days, a senior official from the World Trade Organization (WTO) has suggested a reason for cautious optimism.

Ngozi Okonjo-Iweala, director-general of the WTO, recently wrote in a widely circulated article: "In fact, beyond the tariff-induced gloom, there are some bright spots. Global trade in services, for example, is booming. And there is a clear winner on this front: the United States."

She noted that finance, legal, entertainment and high-tech services, among other things, have "quietly" become a major source of US economic strength.

Why "quietly?" She explained that tradable services tend to be invisible. In other words, they are usually impalpable. For example, one may not "see" it when a law firm sells its services to a foreign customer, or when a certain app store is used by many people from different countries, but all of this is part of international trade anyway.

To show how the US has become "a clear winner" in tradable services, Okonjo-Iweala let figures speak for themselves: In 2023, US services exports hit more than US$1 trillion, accounting for 13 percent of the global total. In the final analysis, the US enjoyed a services trade surplus with most major economies – amounting to nearly US$300 billion in 2024.

This reminds me of the theory of comparative advantage advanced by many economists, including Adam Smith (1723-1790), who concluded in his definitive book "The Wealth of Nations" that the ultimate cause of economic growth is the division of labor. In general, specialization works for countries as well as for individuals.

Ever since its publication in 1776, "The Wealth of Nations" has stood the test of time due in part to its well-argued case for comparative advantage arising from a proper division of labor. As Scottish philosopher D.D. Raphael (1916-2015) explained in his introduction to "The Wealth of Nations," if one man grows corn while another bakes bread, their cooperation will create a greater stock of food than if each did both jobs for himself.

Similarly, in today's global trade landscape, you won't expect a country to produce everything from corn to bread. Rather, each country has its own comparative advantage. Although the US has suffered a deficit in merchandise trade for many years, it has enjoyed a surplus in services trade with most economies.

The balance of trade should not be taken to mean only the sale of an equal amount of corn to each other. Rather, it should mean a proper play of each country's comparative advantage. Instead of being a so-called "a loser" in global trade, the US has a promising future as one of the world's leading exporters of services trade. And in an important way, services trade can boost a country's manufacturing competitiveness, as in the case of software design and development.

It's not the first time the WTO director-general has painted a rosy picture of global trade in services, in which the US has an advantage. In a message accompanying the WTO 2024 report, she wrote: "In 2023 – the main period covered by this report – merchandise trade volumes fell by 1.2 percent after growing 3 percent the year before, as many countries dealt with the lingering effects of inflation and high energy prices. But this decline was partially offset by strong growth in services trade, which increased by 9 percent in value terms, boosted in particular by the post-pandemic surge in tourism."

According to the WTO 2024 report, total commercial services trade recorded a strong 9 percent increase in current US dollar terms in 2023 to reach US$7.54 trillion. Growth in services trade partly offset the decline in merchandise trade, leaving total world goods and commercial services exports on a balance of payments basis down just 2 percent in 2023 at US$30.8 trillion.

The report further explained that services trade was boosted by travel spending, which was up 38 percent following a 71 percent post-pandemic surge in 2022.

Opening up

China also witnessed a robust growth in services trade in 2024, boosted by travel in particular. But while the US accumulated a trade in services surplus, China recorded a deficit on this front.

China's overall services trade surged more than 14 percent in 2024 over the previous year, to the tune of 7.5 trillion yuan (US$1.1 trillion), latest statistics from the Ministry of Commerce show. In the final analysis, China had a services trade deficit of nearly 1.2 trillion yuan in 2024.

It was not the first time China had recorded a services trade deficit, but in the face of persistent deficits, China has chosen to further open up its service sector.

At a regular press conference on March 20, a spokesperson from the Ministry of Commerce said the country had already approved three newly established foreign wholly owned hospitals and given 13 foreign-funded enterprises a go-ahead to engage in value-added telecom services.

China has made it clear that it will further expand the opening-up of telecom, medical and education services on an experimental basis while promoting an orderly opening-up of the Internet and cultural sectors, among others.

As early as in 2015, Beijing became the first city in China to experiment with an expanded opening-up of the service sector. As a result, foreign-funded firms could establish wholly owned performance agencies in the capital. A few years later, many more Chinese cities were given approval to try out expanding the opening-up of the service sector.

China Central Television reported on March 21 that actual foreign investment in China's service sector hit around 120 billion yuan in the first two months of this year, accounting for more than 70 percent of total foreign investment in the country. These latest figures attest to China's readiness to further open up its service sector as well as the huge potential of profiting from the country's trade in services.

Just as division of labor can give fuller play to comparative advantages of different countries and regions, opening-up may better balance international trade by fostering a competitive global market where trading nations complement each other with what they specialize in and excel at.

Building protectionist barricades in the form of unilateral tariffs or restrictive regulations do not bode well for global trade, which is so important to countries' overall development.

Said Okonjo-Iweala: "Since 1995, global trade has expanded nearly five-fold in value terms, driving faster growth in developing and developed economies, and helping lift over 1.5 billion people out of extreme poverty."

Tariffs are all about trade in goods, leaving trade in services largely out of the bigger picture of global commercial exchanges. But the bigger picture matters, because trade can't balance on just one leg.

Even if we consider only trade in goods, history has proved that tariff wars don't make trade any better. In my last article ("A lesson in history! Protectionist tariff as a weapon never works"), it was made clear that the Smoot-Hawley Tariff Act signed into law in the 1930s did no country any good: not America itself nor its trading partners. Protectionist tariffs would only boomerang.

In Adam Smith's time, imports from rival countries were often discouraged by protective tariffs, and exports were encouraged by bounties (subsidies). As D.D. Raphael noted, Smith described such a set of policies as a mercantile system that protected the activities of merchants from the full effects of competition.

Certainly, even Smith agreed that free trade was by no means absolute, and that certain restraints might be justified in the interests of national defense.

But, for global trade to boom, people simply need to recognize that a proper division of labor does boost the comparative advantage of each trading nation, an advantage that makes trade better and beneficial to all.