Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

241. Memorandum From Secretary of Commerce Richardson to President Ford¹

Washington, September 20, 1976.

SUBJECT

• Report of the EPB Task Force on “Services and the Multilateral Trade Negotiations”²

This memorandum is to inform you of the work of the Economic Policy Board’s Interagency Task Force on “Services and the Multilateral Trade Negotiations.”

Background

For the past 20–30 years, services have been providing the majority of U.S. economic and employment growth. Today services account for close to two-thirds of U.S. economic output and consumption (65.3% of GNP in 1974—52.4% excluding government). Roughly two out of every three Americans in the work force are employed in the services sector.

The Trade Act of 1974 included “services” for the first time within the President’s trade negotiating authority. This inclusion was at the behest of service industry representatives who stated that their international problems had not received adequate attention by the U.S. Government.

In February 1976 the Executive Committee of the Economic Policy Board established an interagency Task Force on Services and the Multilateral Trade Negotiations (MTN), chaired by the Department of Commerce. The Task Force was directed to: review international issues and problems of significance to U.S. service industries; describe forums which exist for international cooperation on these issues; assess the adequacy of the forums for addressing these issues; identify appropriate approaches to the solution of the problems and the relationship of such approaches to the Multilateral Trade Negotiations.

The Task Force has now completed its work. The international problems of 18 individual service sectors—ranging from accounting to transportation—have been identified and analyzed, as have the governmental mechanisms for addressing these. Based on the work of the Task Force, the Commerce Department has prepared a report, “U.S. Service Industries in World Markets: Toward Improved Policy Development.” This report and its recommendations have now been reviewed and approved by the Executive Committee of the Economic Policy Board.³ The following is a summary of principal findings and recommendations which may be of interest.

Summary of Selected Findings

• • The services sector is of increased importance not only to the U.S., but to developed countries generally. (The portion of Gross Domestic Product accounted for by services in each of 13 OECD countries exceeds 50%—as it does for the average of all OECD countries.)
• • Service sector participation in international markets is large and growing—and its international problems have not received adequate government attention.
• • Service sector participation in international markets is predominantly associated with investment rather than with trade. About 86 percent of estimated U.S. service sector sales overseas result from investment in foreign affiliates; exports account for only 14 percent. (To a considerable extent this is inherent in the characteristics of “services.” Most, by their nature, cannot feasibly be shipped.) Service sector affiliate sales abroad are estimated at about $43 billion for 1974—nearly one-fifth of all U.S. non-petroleum affiliate sales overseas. (Upon proper analysis, trade, by contrast, amounted to only $7 billion in 1974.)
• • Service industries face a variety of international problems, most of which are, in whole or in major part, investment-related rather than trade related. Aside from a few industries with very complex problems, service industry trade problems are less significant, scattered and heterogeneous.
• • Five of 18 services industries examined now have serious international problems: air transportation, maritime transportation, insurance, motion pictures, and construction/engineering services. Problems for other service industries presently are not, on the whole, serious—but, for a variety of reasons, seem likely to increase in significance in the future.
• • Most service industries’ investment problems, and some of their trade problems, are similar in kind to those of goods-producing industries. Only a few service industries have complex trade or trade/investment problems that are unique to the particular industry sector.
• • Existing forums for international cooperation on investment problems appear as adequate for service industry investment problems as they are for goods-related problems. While there is clearly a need to improve the effectiveness of existing forums, new investment forums are not needed.
• • While it is the case that service industry trade-related problems have not been addressed in previous trade negotiations, the wholesale introduction of services into the MTN is to be avoided. Substantively, it would not be wholly appropriate; and practically, it would likely be counterproductive.

Summary of Selected Recommendations

It is agreed that, as a general matter, a responsible and comprehensive approach toward the better solution of the service sector’s international trade and investment problems would:

• • Introduce service industry trade problems into the MFN in a highly selective manner calculated both to maximize chances for successful negotiations and to pave the way for future negotiations, focusing on those service industry non-tariff barriers (NTBs) most similar to goods NTBs;
• • Continue to treat certain complex service sectoral problems on a sectoral basis through existing industry-specific forums, paying increased attention to the insurance industry—which generally has been overlooked by the government;
• • Treat generic investment-related services problems within the existing investment forums, but providing increased emphasis on the problems of greatest concern to the service industries;
• • Provide a focal point within the government for addressing service industry international problems and for improving the government’s contact with the service industries; and
• • Improve the longer-run ability of the government to handle present and future service industry trade and investment problems by beginning to increase the analytic, data-gathering, and policy development resources focusing on services.

The Report makes 27 specific recommendations which are consistent with this general approach. Among these, the following are noteworthy:

Re: Services and the MTN

• Recommendation (1): Service industry trade problems should be raised for discussion in the MTN on a carefully-selected basis, focusing on those problems most similar to the goods-related NTBs already scheduled for discussion.
• Recommendation (2): The wholesale introduction of service sector negotiations for either services as a whole or for individual service industries should be avoided in the MTN.
• Recommendation (4): As services have not previously been dealt with in multilateral trade negotiations, realism should be maintained and the generation of undue expectations of success is to be avoided. A longer-term objective in raising services in the MTN should be to put our trading partners on notice that greater attention will be paid to services in future negotiations.

Re: Government Industry Consultation

• Recommendation (6): A service sector “ISAC” (Industry Sector Advisory Committee—as established in connection with the MTN) should not be created.
• Recommendation (7): A “Service Industries Consultation Committee” should be established under the auspices of the Department of Commerce. This committee would be comprised of industry and labor representatives of those service sectors that participate most heavily in international commerce, but should not focus on the transportation industries which already possess good communications channels with the government.

Re: Government Organization

• Recommendation (12): A Commerce/State/Treasury/Labor/STR committee, chaired by Commerce and reporting through the EPB, should be formed to focus attention on the international trade and investment matters relevant to the service industries—on a routine, ongoing basis.

Re: Services and Investment

• Recommendation (15): The analyses in this study tended to indicate the mix and priority of service industries’ investment problems differed from those of the extractive and manufacturing industries, but the analyses were not conclusive. This point should be discussed in the Service Industries Consultation Committee. Its advice should be employed by the joint committee recommended in (12) to determine whether and how the government’s process of assigning priority to individual investment issues should be modified.
• Recommendation (16): The joint committee should also determine the means by which specific investment problems of the service industries can be more fully included in bilateral investment discussions, particularly with LDCs.

Re: Services and the LDCs

• Recommendation (18): The creation of small and inefficient service companies by LDCs can in many instances retard, rather than advance, economic development by consuming resources in a less than optimal manner. Barriers to foreign service companies can also retard technology and managerial know-how transfer. A study of the economic behavior, contributions, and costs of service industry investments in LDCs should be initiated. Its results, both positive and negative, should be provided to U.S. service industries, developmental agencies, and appropriate LDCs.
• Recommendation (19): The joint committee recommended in (12) should investigate the means by which specific investment problems of service industries can be more fully included in bilateral investment discussions with LDCs and in multilateral investment discussions—particularly in UNCTAD.

Re: Selected Sectoral Initiatives

• Recommendation (21): The joint committee recommended in (12) should develop a detailed proposal for upgrading the existing OECD insurance mechanism into a forum that addresses the fundamental disagreements that now exist regarding liberalization of insurance in the developed countries.
• Recommendation (22): The joint committee should also investigate the means by which specific U.S. insurance industry complaints can be discussed with particular LDCs in bilateral negotiations, and should review strategies and approaches taken by the United States with regard to insurance in UNCTAD.

Implementation of the full set of recommendations should improve significantly the U.S. Government’s capacity to address this important area of emerging importance and interest: the services sector in the international economy. Progress will be monitored through the new committee noted above—with reports to you, as may be appropriate, through the EPB.

Eliot L. Richardson

⁴

1. Source: Ford Library, L. William Seidman Papers, Box 62, Economic Policy Board Subject File, E.P.B.: Task Force on Services and the Multilateral Trade Negotiations (1). No classification marking. Sent for information.
2. The full report, which is over 300 pages long, is ibid., E.P.B.: Task Force on Services and the Multilateral Trade Negotiations (2).
3. Documents generated during the EPB consideration of the report are ibid., E.P.B.: Task Force on Services and the Multilateral Trade Negotiations (1).
4. Richardson initialed “ELR” above his typed signature.