US Bureau of Economic
Analysis
From the October 1999 SURVEY OF CURRENT
BUSINESS
Michael A. Mann and Laura L. Brokenbaugh prepared the section on cross-border trade. Sylvia E. Bargas prepared the section on sales through affiliates.
The United States recorded another sizable surplus on cross-border trade in private services in 1998, but the surplus, at $80.4 billion, was smaller than the surpluses recorded in both 1996 and 1997. The decrease reflected a considerably faster rate of growth in U.S. imports of private services than in U.S. exports of private services (chart 1). The growth in imports was 8 percent in 1998, down from 11 percent in 1997, but equal to the average annual rate of growth in 1986–97 (table A). In contrast, the growth in exports was 2 percent—well below both the 9-percent rate in 1997 and the 11-percent average annual growth rate in 1986–97; the sharp slowdown reflected recessionary conditions in Japan and several other countries in Asia and Latin America. The recessionary conditions in Asia, together with a sharp depreciation of several Asian currencies against the U.S. dollar, especially affected travel and transportation receipts. The number of tourists from Asia to the United States declined, and freight and port expenditure receipts were depressed by declines in U.S. exports of goods to countries in the area.
The decrease in the surplus on private services coincided with a record increase in the deficit on trade in goods. The downward movements in the two balances reflected a faster rate of economic growth in the United States than in most other parts of the world. In the United States, real gross domestic product grew 3.9 percent in 1998; in most other industrial countries, economic growth ranged from 1 to 3 percent, and in many countries in Asia and Latin America, the economies were in recession.
The large U.S. surplus on cross-border trade in private services offset a third of the U.S. deficit on trade in goods. The persistent U.S. surplus suggests a U.S. comparative advantage in the provision of services. This advantage is especially apparent in the large U.S. surplus in royalties and license fees./1/ In 1998, U.S. receipts of royalties and licence fees exceeded payments by $25.5 billion—a little less than a third of the total services surplus. Sizable surpluses were also recorded for "business, professional, and technical services," travel, financial services, and education.
For services sold through majority-owned affiliates of multinational companies, U.S. sales also exceeded U.S. purchases in 1997—the most recent year for which data are available. The difference—$52.7 billion—is smaller than the $88.0 billion surplus on cross-border trade in 1997. However, the balance on services sold through affiliates is understated because of redefinitions associated with a new industry classification system, which have raised the value of services sold in the United States by U.S. affiliates of foreign companies in 1997 (see the box "Changes in the Definition and Classification of Sales of Services by U.S. Affiliates" on page 61). A rough adjustment for the understatement would have made this balance about a third larger, but it still would have been smaller than the surplus on cross-border trade.
From 1996 to 1997, sales of services abroad by foreign affiliates of U.S. companies grew 16 percent. The measured growth in sales of services in the United States by U.S. affiliates of foreign companies was 22 percent, but about half of this growth reflects the redefinitions. Thus, based on consistent definitions, the growth in sales was somewhat greater for the foreign affiliates than for the U.S. affiliates.
This article presents detailed estimates of U.S. cross-border exports and imports of private services and of U.S. sales of services through, and purchases of services from, nonbank majority-owned affiliates of multinational companies. Cross-border exports and imports are transactions between U.S. residents and foreign residents. They represent international trade in the conventional sense and are recorded, in summary form, in the U.S. international transactions accounts./2/ Sales of services through nonbank majority-owned affiliates of multinational companies represent services sold in international markets through the channel of direct investment (see the box "Channels of Delivery of Services Sold in International Markets")./3/ The data are drawn from larger data sets on affiliate operations that are presented in annual articles on the operations of U.S. multinational companies and of U.S. affiliates of foreign companies./4/
Highlights for 1997 include the following:
| Change from prior year in millions of dollars | ||||
| Exports | Imports | |||
| 1997 | 1998 | 1997 | 1998 | |
| Private services | 19,323 | 5,245 | 15,366 | 12,874 |
 Travel and passenger fares | 3,926 | -2,844 | 6,323 | 5,713 |
| Other transportation | 932 | -1,488 | 1,556 | 1,498 |
| Royalties and license fees | 1,311 | 3,027 | 1,553 | 1,902 |
| Other private services | 13,154 | 6,550 | 5,934 | 3,761 |
| Percent change from prior year | ||||
| Exports | Imports | |||
| 1997 | 1998 | 1997 | 1998 | |
| Private services | 9 | 2 | 11 | 8 |
| Travel and passenger fares | 4 | -3 | 10 | 8 |
| Other transportation | 4 | -6 | 6 | 5 |
| Royalties and license fees | 4 | 9 | 20 | 20 |
| Other private services | 18 | 8 | 16 | 9 |
The remainder of this article is presented in two parts. The first part discusses cross-border trade, and it presents preliminary estimates for 1998 and revised estimates for 1986–97. The second part discusses sales through majority-owned affiliates, and it presents preliminary estimates for 1997 and revised estimates for 1996.
In 1998, U.S. exports of private services (receipts) increased 2 percent, to $245.7 billion, following a 9-percent increase in 1997. U.S. imports of private services (payments) increased 8 percent, to $165.3 billion, following an 11-percent increase in 1997. The U.S. surplus on private services decreased 9 percent to $80.4 billion in 1998.
The slowdown in exports was primarily attributable to recessionary conditions in several Asian countries. These conditions, which were the result of a variety of financial problems, adversely affected many of the services accounts. Total U.S. exports of services to the Asia and Pacific area fell 8 percent, following a 6-percent increase in 1997. Travel and passenger fare receipts fell, reflecting a sharp decline in the number of visitors from Asia to the United States. "Other transportation" receipts fell when the weak demand for goods by Asian economies resulted in reduced shipments on U.S. carriers to Asia. In addition, a sizable drop in petroleum prices reduced expenditures by foreign vessels refueling in U.S. ports; the reduction in fuel prices was partly attributable to the Asian problems as the weakness in the economies in this area reduced world demand for petroleum. Financial services receipts slowed, as Asian and Latin American investors had fewer funds available to purchase U.S. securities. Several components of "business, professional, and technical services"—especially "computer and data processing services" and "industrial engineering services"—were also adversely affected by the Asian problems.
Several other factors also contributed to the slowdown in services exports. Purchases of U.S. services by Canadian residents—especially travel—were dampened by the continued depreciation of the Canadian dollar, which increased the prices of all U.S. services to Canadian residents. Telecommunications receipts fell as the continued decline in calling rates outpaced the increase in the volume of calls.
In contrast, both services exports and imports were strengthened by favorable business and financial conditions in Europe.
Additional highlights for 1998 are as follows:
In the following sections, cross-border trade in services in 1998 by type of service and by geographic area are discussed. (These sections, along with the accompanying tables, provide information for more types of services and more geographic areas than are available in the quarterly U.S. international transactions accounts.) The estimates of cross-border transactions incorporate recent reclassifications of and improvements in source data (see the box "Revisions to the Estimates of Cross-Border Trade In Services"), and they cover transactions between U.S. residents and both affiliated and unaffiliated foreign residents./5/
Affiliated transactions consist of intrafirm trade by multinational companies—specifically, the trade between U.S. parent companies and their foreign affiliates and between U.S. affiliates and their foreign parent groups. (Cross-border trade between affiliated enterprises differ from sales by affiliates, which are discussed in the second half of this article.)
Cross-border trade in private services is classified into the same five, broad categories used in the U.S. international transactions accounts—travel, passenger fares, other transportation, royalties and license fees, and other private services.
Travel.—This category covers purchases of goods and services by U.S. persons traveling abroad and by foreign persons traveling in the United States for business or personal reasons for less than a year. The types of goods and services most likely to be purchased are lodging, food, recreation and entertainment, local transportation, and gifts. U.S. travel transactions with both Canada and Mexico include border transactions, which often involve stays of less than 24 hours.
U.S. receipts for travel decreased 3 percent in 1998, to $71.3 billion, following a 5-percent increase in 1997. Visitors from Asia (including Japan) decreased 13 percent, and their average expenditures in the United States fell slightly; as a result, receipts from Asia decreased nearly 18 percent. Receipts from Canada fell nearly 10 percent, as the weak Canadian currency discouraged Canadians from traveling to the United States, and the average expenditures in U.S. dollars of those who did visit decreased; the Canadian dollar depreciated 7 percent, reaching a level 30 percent below its value in 1990. Receipts from most other major regions and countries, particularly Europe and Central and South America, increased.
U.S. payments for travel increased 8 percent in 1998, to $56.1 billion, following an 8-percent increase in 1997. The number of U.S. travelers increased 8 percent; growth in travelers to Canada and Western Europe remained strong, while growth in travelers to Asia slowed sharply. U.S. payments to Canada increased nearly 20 percent, as an attractive U.S. exchange rate made Canada a popular destination for U.S. travelers. Same day travelers to Canada by automobile increased 7 percent, and travelers who visited Canada for 1 or more nights increased 10 percent.
Passenger fares.—This category covers fares paid by residents of one country to airline and vessel operators that reside in another country. Exports consist of fares received by U.S. operators for transporting foreign residents between the United States and a foreign country and between foreign countries. Imports consist of fares paid to foreign operators by U.S. residents for travel to and from the United States.
U.S. passenger fare receipts decreased 4 percent in 1998, to $20.0 billion, following a 2-percent increase in 1997; the drop was more than accounted for by a reduction in the number of travelers from Asia. As a result of a slowdown in travel to Asia, U.S. passenger fare payments increased 9 percent, to $19.8 billion, compared with a 15-percent increase in 1997.
Other transportation.—This category primarily covers receipts and payments for freight and port services for the transportation of goods by ocean, air, and truck to and from the United States. Freight receipts of U.S. carriers are for transporting U.S. goods exports and for transporting goods between two foreign points; freight payments to foreign carriers are for transporting U.S. goods imports./6/ Port services receipts are the value of the goods and services procured by foreign carriers in both U.S. sea and air ports; port services payments are the value of goods and services procured by U.S. carriers in foreign sea and air ports.
U.S. receipts for "other transportation" decreased 6 percent in 1998, to $25.5 billion, following a 4-percent increase in 1997. Freight services receipts decreased 5 percent to $11.2 billion, as a sharp decline in ocean freight services more than offset a slight increase in air freight services. This decrease in ocean freight receipts, which was spread among all major areas of the world, largely reflected lower export volumes. Freight receipts from Asia fell, as sluggish economies in the region reduced their demand for imported goods. The slump in export volumes also led to a sharp drop in freight rates, particularly on tramp vessels./7/
Port services receipts decreased 6 percent to $14.3 billion, as both ocean and air port services decreased. A decline in the export volumes carried on foreign vessels and lower average costs in U.S. ports more than offset an increase in the import volumes on foreign vessels. The lower costs in U.S. ports were partly accounted for by lower prices for fuel paid by foreign vessels.
U.S. payments for "other transportation" increased 5 percent in 1998, to $30.5 billion, following a 6-percent increase in 1997. A 10-percent increase in payments for freight services more than offset a 2-percent decrease in port services. The increase in freight payments reflected increases in import volumes transported by foreign ocean and air carriers—particularly the former. The decrease in port services was more than accounted for by a reduction in payments to Asian ports as a result of lower export volume to that region; lower fuel prices also contributed to the decrease.
Royalties and license fees.—This category covers transactions with foreign residents that involve patented and unpatented techniques, processes, formulas, and other intangible property rights used in the production of goods; transactions involving copyrights, trademarks, franchises, broadcast rights, and other intangible rights; the rights to distribute, use, and reproduce computer software; and the rights to sell products under a particular trademark, brand name, or signature.
Receipts of royalties and license fees increased 9 percent in 1998, to $36.8 billion, following a 4-percent increase in 1997. Receipts from both affiliated and unaffiliated foreigners increased sharply. The increase in affiliated services was largely attributable to an increase in receipts of U.S. parent companies from their foreign affiliates. The increase in unaffiliated services was more than accounted for by royalties and license fees associated with industrial processes and software licensing fees.
Receipts from software-licensing fees, one of the fastest growing services categories, increased 20 percent, to $3.2 billion, following a 40-percent increase. Software-licensing agreements remain the primary means through which computer-related services are delivered to foreign markets through cross-border channels. The value of computer-related services delivered through another cross-border channel—"computer and data processing services"—was $2.0 billion in 1998.
Payments of royalties and license fees increased 20 percent in 1998, to $11.3 billion, following a 20-percent increase in 1997. The increase in 1998 was largely accounted for by an increase in affiliated transactions, primarily payments by U.S. affiliates to their foreign parents. Royalty and license fee payments to unaffiliated foreigners increased 20 percent in 1998; the substantial increase was largely due to payments to the International Olympic Committee for broadcast rights to the Winter Olympic Games.
Other private services.—This category consists of a variety of services: Education; financial services; insurance; telecommunications; business, professional, and technical services; and other affiliated and unaffiliated services.
Receipts for "other private services" increased 8 percent in 1998, to $92.1 billion, following a 18-percent increase in 1997. Affiliated services receipts increased 4 percent to $28.3 billion, reflecting increased receipts by U.S. parents from their foreign affiliates. Unaffiliated services receipts increased 9 percent to $63.8 billion, reflecting increases across most services categories.
Payments for "other private services" increased 9 percent in 1998, to $47.7 billion, following a 16-percent increase in 1997. Payments to affiliated foreigners increased 8 percent, to $19.1 billion, following a 14-percent increase; the slowdown was partly attributable to reduced growth in payments by U.S. parents to their foreign affiliates. Payments to unaffiliated foreigners increased 9 percent, to $28.6 billion, following a 17-percent increase in 1997; the slowdown partly reflected a deceleration in payments for financial services and a falloff in telecommunications services.
"Education" receipts consist of expenditures for tuition and living expenses by foreign students enrolled in U.S. colleges and universities; payments consist of tuition and living expenses of U.S. students for study abroad. The number of foreign students studying in the United States continued to greatly exceed the number of U.S. students studying abroad. Education receipts increased 7 percent to $9.0 billion, and payments increased 10 percent to $1.5 billion.
"Financial services" covers a variety of services that include funds management, credit card services, explicit fees and commissions on transactions in securities, fees on credit-related activities, and other miscellaneous financial services; implicit fees paid and received on bond trading are also covered. The increases in both receipts and payments in 1998 were substantially smaller than those in 1997. In 1998, receipts for financial services increased 19 percent to $13.7 billion, as foreigners continued to make large purchases of U.S. stocks and corporate bonds. Payments increased 6 percent to $3.8 billion, reflecting the slowdown in activity in world financial markets that was caused by the financial problems and slower growth in Asian and Latin American countries.
"Insurance" includes premiums earned and paid for primary insurance and for reinsurance; losses paid by U.S. insurers and losses recovered from foreign insurers are netted against the premiums. Primary insurance consists of life insurance, accident and health insurance, and property and casualty insurance. Each type of primary insurance may be reinsured; reinsurance is the ceding of a portion of a premium to another insurer, who then assumes a corresponding portion of the risk. Reinsurance is one way of providing coverage for events with so high a degree of risk or liability that a single insurer is unwilling or unable to underwrite insurance against their occurrence.
In 1998, net insurance receipts increased 14 percent to $2.8 billion. The increase was largely attributable to an increase in premiums received for reinsurance. Net insurance payments increased 15 percent to $6.9 billion, as a sharp rise in premiums paid on reinsurance was only partly offset by a sharp rise in losses recovered from foreign reinsurers. Losses recovered from foreign reinsurers reached nearly $12.0 billion in 1998, as the result of unusually large catastrophic losses from hurricanes, tornadoes, and storms.
"Telecommunications" consists of receipts and payments between U.S. and foreign communications companies for the transmission of messages between the United States and other countries; channel leasing; telex, telegram, and other jointly provided (basic) services; value-added services, such as electronic mail and video conferencing; and telecommunications support services. Receipts for telecommunications services decreased 7 percent to $3.7 billion in 1998, and payments decreased 3 percent to $8.1 billion; a reduction in calling rates more than offset an increase in the volume of calls. The United States continues to run a large trade deficit in telecommunications services because the minutes of outgoing calls from the United States exceed the minutes of incoming calls to the United States./8/ The large number of outgoing calls from the United States reflect several factors, including the relatively low international calling rates from the United States, the relative wealth of the United States, and the large immigrant population.
"Business, professional, and technical services" (BPT) covers a wide variety of services. Receipts increased 8 percent in 1998, to $24.3 billion, following a 15-percent increase in 1997. The slowdown in activity in Asian markets contributed to this development. Receipts from Asian countries for the two subcategories that contributed most to this slowdown—"computer and data processing services" and "industrial engineering services"—fell nearly $100 million in 1998 after increasing $550 million in 1997.
Although growth in receipts for most BPT services categories slowed in 1998, growth in receipts for "construction, engineering, architectural, and mining services" accelerated. Construction receipts from Europe, Latin America, Africa, and the Middle East increased nearly 25 percent. Construction receipts from Asia were little changed, but construction receipts from one Asian country—Indonesia—continued to exceed those to any other country.
Receipts for legal services—one of the fastest growing categories of BPT services—increased 14 percent to $2.5 billion in 1998. Cross-border receipts are realized when a U.S. resident attorney travels to a foreign country to provide services to a foreign client, provides services to a foreign client who has traveled to the United States, or provides services to a foreign client by E-mail, fax, phone, or postal delivery (and neither the attorney nor the client travels to the other's country).
Receipts for "database and other information services" increased 33 percent in 1998, to $2.0 billion, after increasing 27 percent in 1997. In percentage terms, this increase exceeded that of any other services export category in 1998. This service category covers business and economic database services, other database services, and information systems, such as reservation systems and credit-reporting systems.
Receipts for "computer and data processing services" were virtually unchanged at $2.0 billion in 1998. "Computer and data processing services" covers systems analysis, design, engineering, and custom programming; data entry, processing, and tabulation; integrated hardware/software systems; and other services such as maintenance and repair. Cross-border exports of these services are dwarfed by the sales of these services through foreign affiliates./9/ Computer-related services are also delivered from the United States to foreign markets through software-licensing agreements. (As mentioned in the section "Royalties and license fees," computer-software-licensing fee receipts were $3.2 billion in 1998.) The share of computer-related services delivered to foreign markets through cross-border channels is expected to increase as the Internet facilitates the transmission of services from remote locations.
Payments for BPT services increased 21 percent in 1998, to $7.7 billion, following a 15-percent increase in 1997. The United Kingdom remained the leader in providing many types of these services to the United States. For example, the United Kingdom led in providing research, development, and testing services; management consulting and public relations services; and legal services.
Payments for "miscellaneous disbursements" increased 27 percent to $1.4 billion; the step-up was largely accounted for by an increase in the production costs of motion picture companies and of companies producing broadcasts other than news broadcasts. Miscellaneous disbursements also covers outlays to fund the news-gathering costs of broadcasters and the print media, disbursements to maintain tourism and business promotion offices, and disbursements for participating in foreign trade shows.
"Other unaffiliated services" receipts increased 8 percent to $10.3 billion. These receipts consists mainly of expenditures by foreign governments for services related to maintaining embassies and consulates in the United States; expenditures of international organizations—such as the United Nations, the International Monetary Fund, and the World Bank—that are headquartered in the United States; receipts from unaffiliated foreigners for sales and rentals of U.S. motion picture and television films and tapes; and expenditures of foreign residents employed temporarily in the United States. "Other unaffiliated services" payments increased 7 percent to $0.5 billion. These payments primarily consist of payments by U.S. film distributors to unaffiliated foreign residents for purchases and rentals of motion picture and television films and tapes.
Europe and Asia and Pacific together accounted for two-thirds of total U.S. cross-border exports and for two-thirds of total U.S. cross-border imports of private services in 1998 (chart 4). Seven countries—the United Kingdom, Japan, Canada, Germany, Mexico, France, and the Netherlands—accounted for nearly half of both exports and imports of U.S. services and for half of the U.S. surplus on private services (table B).
Exports of private services increased $5.2 billion, or 2 percent in 1998. A $7.0 billion increase in U.S. exports to Europe and a $4.0 billion increase to Latin America and Other Western Hemisphere more than offset a $6.2 billion decrease in exports to Asia and Pacific and a $1.0 billion decrease in exports to Canada.
Imports of private services increased $12.9 billion, or 8 percent, fueled by the continuing strength of the U.S. economy. Imports from Europe and from Asia and Pacific accounted for two-thirds of the increase, and imports from Latin America and Other Western Hemisphere accounted for another 14 percent.
Europe.—Europe accounted for 39 percent of U.S. exports of private services, and for 42 percent of U.S. imports of private services in 1998. The U.S. services surplus with Europe decreased 3 percent, to $25.4 billion, following a 5-percent decrease in 1997. Imports of private services increased 12 percent after a 15-percent increase, and exports increased 8 percent in both years.
The United Kingdom accounted for 11 percent of all U. S. exports of services in 1998, compared with 10 percent in 1997, and it ranked second to Japan as a destination of U.S. exports of services. Exports to the United Kingdom grew $2.9 billion, or 12 percent, and accounted for more than half of the $5.2 billion increase in total U.S. exports of private services. The strong growth reflected an 18-percent increase in "other private services" that was partly accounted for by a 24-percent increase in exports of financial services. The sharp increase in financial services was largely attributable to active British participation in U.S. equity markets. Receipts for travel and passenger fares from the United Kingdom increased $0.5 billion, or 6 percent.
The United Kingdom accounted for 14 percent of all U.S. imports of services in both 1997 and 1998 and was the leading source of U. S. imports of services. Imports from the United Kingdom increased $1.2 billion, or nearly 6 percent in 1998, compared with an 8-percent increase in total U.S. imports of private services. Payments by U.S. residents for travel and passenger fares to the United Kingdom increased $1.0 billion, or 12 percent. The U.S. services surplus with the United Kingdom was $4.4 billion, up 64 percent.
U.S. exports of private services to other European countries increased 6 percent, and U.S. imports from these other countries increased 16 percent. These countries accounted for about 28 percent of both U.S. exports and U.S. imports of services and for $21.0 billion of the U.S. services surplus.
Asia and Pacific.—This area accounted for 28 percent of exports of private services and for 24 percent of imports of private services in 1998. The U.S. services surplus with Asia and Pacific, the largest for any area, decreased $7.1 billion, or 20 percent in 1998, to $28.0 billion, following a 2-percent increase in 1997. The decrease in the surplus was attributable to a falloff in exports to this area, as the purchasing power of Asian economies was weakened by their financial problems and by the depreciation of several Asian currencies against the dollar.
Japan accounted for nearly 13 percent of total U.S. exports of services in 1998, down from 14 percent in 1997, but it was still first as a destination of U.S. services exports. U.S. services exports to Japan fell $3.7 billion, or 11 percent. Receipts for travel and passenger fares from Japanese visitors to the United States fell $3.5 billion, or 21 percent, to $13.0 billion. The number of Japanese visitors declined, reflecting the 8-percent depreciation of the yen against the U.S. dollar and the weakened spending power of businesses and private consumers that was caused by the stagnant Japanese economy.
Japan accounted for 8 percent of total U.S. imports of services in 1998, ranking second as a source of U.S. imports of services. U.S. services imports from Japan decreased $0.4 billion, or 3 percent, in 1998. "Other private services" more than accounted for this decrease. The U.S. services surplus with Japan was $17.0 billion in 1998, down 16 percent from 1997. This drop—along with the $8.2 billion, or 14-percent, increase in the trade deficit in goods with Japan—reflected the strength of the U.S. economy relative to that of Japan./10/
U.S. exports of private services to all the other countries in Asia and Pacific decreased 6 percent in 1998, to $37.5 billion, and U.S. imports increased 5 percent, to $26.5 billion; the U.S. services surplus was $11.0 billion. The combined exports of private services to the five countries that were most affected by the Asian financial problems—South Korea, Indonesia, Malaysia, Thailand, and Hong Kong—fell 16 percent. Exports to China increased 8 percent, exports to Singapore decreased 8 percent, and exports to Taiwan decreased nearly 17 percent.
Latin America and Other Western Hemisphere.—This area accounted for 19 percent of both exports and imports of private services in 1998. The U.S. services surplus with the region was $15.2 billion in 1998, up 16 percent from 1997; U.S. exports to most of the major countries in this area increased more rapidly than imports. Travel and passenger fares accounted for $6.2 billion, or 40 percent, of the surplus.
Mexico accounted for 5 percent of total U.S. exports of services and for 6 percent of total U.S. imports of services in 1998. Mexican visitors to the United States accounted for 5 percent of total U.S. travel and passenger fare receipts, and U.S. visitors to Mexico accounted for 9 percent of travel and passenger fare payments. U.S. exports to Mexico increased 8 percent, to $11.8 billion, following a 16-percent increase. These increases reflected the continued strength of the Mexican economy, which grew 6.8 percent in 1997 and 4.8 percent in 1998. U.S. imports from Mexico decreased slightly to $10.0 billion, following a 12-percent increase in 1997. The U.S. services surplus with Mexico was nearly $1.8 billion, almost double the previous year.
U.S. exports of private services to all the other countries in Latin America and Other Western Hemisphere increased 10 percent, and imports increased 9 percent. The U.S. services surplus with the region was $13.5 billion, up 10 percent.
Canada.—Canada accounted for 8 percent of U.S. exports of private services and 9 percent of U.S. imports of private services in 1998. U.S. imports from Canada increased 11 percent, while exports to Canada decreased 5 percent, reflecting the strength of the U.S. dollar against the Canadian dollar. The U.S. services surplus with Canada was $4.5 billion in 1998, down 36 percent from 1997; nearly a third of the surplus in 1998 was attributable to travel and passenger fares. Partly reflecting the high volume of goods shipped by truck, pipeline, and inland waterway between the United States and Canada, both U.S. exports to, and imports from, Canada of "other transportation" services were second only to U.S. exports to, and imports from, Japan of these services. U.S. imports of "other private services" from Canada were second only to those from the United Kingdom.
Other.—The remaining areas—Africa, the Middle East, and "International organizations and unallocated"—combined accounted for 7 percent of exports of private services and for 5 percent of imports of private services in 1998. Exports to these areas increased 10 percent, and imports from these areas increased 13 percent. The U.S. services surplus with these areas was $7.3 billion, up 8 percent.
In 1997, the latest year for which data are available, worldwide sales of private services by U.S. multinational companies through their nonbank, majority-owned foreign affiliates were $272.9 billion, up 15 percent from 1996 (table C)./11/ Worldwide sales of services by foreign multinational companies through their nonbank, majority-owned U.S. affiliates, at $219.0 billion, were 22 percent higher than in 1996, but about half of the increase reflects the changes in the definition of sales of services. As discussed in the box "Changes in the Definition and Classification of Sales of Services by U.S. Affiliates," there is a break in 1997 in the series on sales by U.S. affiliates of foreign companies due to the adoption of a definition of sales of services that is based on the North American Industry Classification System (NAICS).
Sales by affiliates—both of goods and of services—are predominantly local transactions. In 1997, 82 percent of worldwide sales of services by foreign affiliates of U.S. companies were transactions with parties located in the same country as the affiliate (local sales); the corresponding share for goods was 63 percent. The larger share for services reflects the importance of proximity to the customer in the delivery of services, which ordinarily cannot be stored or transported. Sales to parties in other foreign countries accounted for 13 percent of worldwide sales of services by foreign affiliates; only 5 percent were sales to parties in the United States (U.S. persons), and three-fourths of these sales were transactions between the affiliate and its U.S. parent. Partly reflecting the large U.S. market, local sales by U.S. affiliates of foreign companies accounted for 94 percent of sales of services and for an estimated 89 percent of sales of goods./12/
Sales by foreign affiliates to foreign persons and sales by U.S. affiliates to U.S. persons both represent services delivered to international markets through the channel of direct investment. Unlike cross-border transactions, which are generally classified by type of service, these sales are classified by the primary industry of the affiliate; they are shown by country of affiliate or by ultimate beneficial owner (UBO) for 1990–97 in table 8./13/ Sales by industry of affiliate that are cross-classified by country in 1996 and 1997 are shown in table 9 for foreign affiliates of U.S. companies and in tables 10.1 and 10.2 for U.S. affiliates of foreign companies. The industry disaggregation shown in table 10.2 for sales of services by U.S. affiliates in 1997 reflects the new NAICS-based classifications and a new treatment of petroleum-related activities (see the box on the changes in the definition and classification).
In 1997, sales of services to foreign persons by majority-owned foreign affiliates of U.S. companies were $258.3 billion. By area, affiliates in Europe accounted for 57 percent of the total; about half of the sales by affiliates in Europe were accounted for by affiliates in the United Kingdom. Sales of services by affiliates in Canada and Japan were roughly equal, at about 9 percent of the total. By primary industry of the affiliate, affiliates classified in the "services" division of the Standard Industrial Classification (SIC) accounted for $93.6 billion, or more than one-third of the total./14/ Within "services," affiliates in computer and data processing services had the most sales. However, computer-related services are also likely to have been sold by affiliates in industries that are not classified in "services," particularly by those classified in "computer and office equipment manufacturing" (part of "machinery" in table 9) and wholesale trade in "professional and commercial equipment and supplies." The combined sales of services to foreigners by affiliates in these three industries were nearly $60 billion in 1997./15/ After "services," sales were largest for affiliates in insurance, followed by "other industries" (particularly electric, gas, and sanitary services).
Foreign affiliates' sales increased $35.1 billion, or 16 percent, in 1997, following a 17-percent increase in 1996. As in 1996, sales grew strongly despite a significant appreciation of the dollar against the currencies of host countries, which reduced the dollar value of foreign-currency-denominated sales by foreign affiliates./16/ The 1997 increase resulted from additions to the affiliate universe due to some large acquisitions by U.S. multinational companies, and from relatively favorable economic conditions in a number of major host countries. Some of the largest acquisitions were of investment firms, reflecting a continuing trend towards integration of the global securities markets; these acquisitions were spurred by the considerable potential for growth in the securities markets of Europe. Factors that are expected to fuel demand for securities in Europe include the creation of a single market for securities services in the European Union, a large number of unfunded—or "pay-as-you-go"—pension plans that are likely to be funded in coming years, and an aging population saving for retirement./17/ In addition, there were several acquisitions of overseas electric power providers in response to recent privatization and deregulation programs in a number of foreign countries. In developing countries, these changes in policies were motivated by the need to meet rapidly growing demand for electricity and the need for outside sources of financing. In developed countries, the policy changes were motivated by the desire to introduce competition into the electric power industry in order to reduce the price of electricity and to improve the quality of service./18/
Nearly two-thirds of the increase in sales of services by foreign affiliates of U.S. companies was accounted for by a $21.3 billion increase in sales by affiliates in the United Kingdom; the increase primarily reflected the sales of newly acquired businesses—particularly the energy providers and investment firms. Foreign sales of services by affiliates in Latin America and Other Western Hemisphere rose $8.5 billion—nearly a fourth of the total increase. In this area, half of the increase was accounted for by affiliates in Bermuda; much of the rest was accounted for by affiliates in Brazil. The increase in Bermuda reflected the growing presence of insurance and other financial affiliates of U.S. multinational companies that were attracted by a favorable regulatory and tax environment; the increase in Brazil reflected strong demand for computer-related services and sales by recently acquired insurance affiliates. Sales by affiliates in Canada increased $3.2 billion, and sales by affiliates in the Asia and Pacific area increased $3.1 billion. For the second consecutive year, sales by affiliates in Japan were virtually unchanged, reflecting problems in the Japanese economy, which dampened demand for services provided by foreign affiliates, and a 14-percent appreciation of the dollar against the yen, which reduced the value of sales in terms of U.S. dollars.
By industry of affiliate, the largest increase was in "other industries"—particularly electric, gas, and sanitary services—followed by "services," finance (except depository institutions), and insurance. In both "other industries" and finance, the increases primarily reflected sales by newly acquired businesses in the United Kingdom. The increase in "services"—also concentrated in the United Kingdom—reflected strong overseas demand for computer-related services and acquisitions of affiliates in the equipment rental and leasing industry. In insurance, the increase was concentrated in Bermuda.
In 1997, sales of services to U.S. businesses and to U.S. individuals by majority-owned U.S. affiliates of foreign companies were $205.5 billion. By area, affiliates with UBO's in Europe accounted for 61 percent of the total, reflecting the large number of mature companies in Europe that have the ability and resources to take advantage of investment opportunities beyond their national and regional borders. Affiliates with UBO's in the Asia and Pacific area accounted for 19 percent of the total, those with UBO's in Canada accounted for 16 percent, and those with UBO's in Latin America accounted for 3 percent. By individual country, sales were highest among affiliates with UBO's in the United Kingdom, followed by those with UBO's in Canada and Japan.
By NAICS-based industry group, finance (except depository institutions) accounted for 35 percent of the total; insurance accounted for most of the sales in finance and for 29 percent of the total. The large foreign presence in the U.S. insurance market results from investment flows over many years. European and Canadian insurers that wanted to expand into foreign markets have been attracted to the U.S. insurance market because of its size and because the opportunities to invest in some other countries have been limited by restrictions on foreign participation in the local insurance market. Affiliates with UBO's in the United Kingdom accounted for the most sales in insurance in 1997. Affiliates with UBO's in Canada accounted for the most sales among life insurance carriers, and those with UBO's in Switzerland accounted for the most sales among carriers of other types of insurance.
"Other industries" accounted for 25 percent of total sales, followed by information, at 16 percent. In "other industries," sales were largest for affiliates in transportation and warehousing (particularly support activities for transportation), in administration, support, and waste management (which includes employment services and travel and reservation services), and in accommodation and food services. In information, sales were largest in publishing; sales were also large in motion picture and sound recording and in broadcasting and telecommunications.
As noted earlier, about half of the 22-percent measured growth in 1997 in sales of services in the United States by U.S. affiliates of foreign companies is due to the change in the definition of sales of services. Thus, the growth in 1997 that was unrelated to the change in definition was probably less than the 13-percent growth in 1996. The growth in 1997 was primarily accounted for by net additions to the affiliate universe—as a result of a large number of new direct investments by foreign multinational companies—rather than by existing affiliates.
Because of the discontinuity introduced by the use of the NAICS-based definition of sales of services by U.S. affiliates of foreign companies, changes between 1996 and 1997 cannot be analyzed in detail.
Box: Detail on Intrafirm Trade in Services
Box: Data Sources and Availability
Footnotes:
1. These fees represent receipts and payments for intellectual property rights, such as rights to use computer software, rights to industrial processes, and rights to sell a product under a particular trademark.
2. See tables 1 and 3 in the quarterly article on the U.S. international transactions in this issue. In table 1, cross-border exports of private services are presented in lines 6–10, and cross-border imports, in lines 23–27. In table 3, additional detail is provided.
3. These data cover all sales of services by nonbank majority-owned affiliates, irrespective of the percentage of foreign ownership. The data are limited to nonbank affiliates because in most years, the surveys used to collect the data do not cover banking affiliates. The data exclude minority-owned affiliates because data on sales of services by foreign affiliates are collected only for affiliates that are majority-owned by U.S. direct investors. The exclusion of minority-owned affiliates may also be preferred because the direct investor may own as little as 10 percent of a minority-owned affiliate and thus have less interest than local investors in the affiliate's sales.
4. See Raymond J. Mataloni, Jr., "U.S. Multinational Companies: Operations in 1997," SURVEY OF CURRENT BUSINESS 79 (July 1999): 8–35, and William J. Zeile, "Foreign Direct Investment in the United States: Preliminary Results From the 1997 Benchmark Survey," SURVEY 79 (August 1999): 21–54.
5. The term "affiliated" refers to a direct investment relationship—that is, a relationship in which an investor in one country directly or indirectly owns or controls 10 percent or more of the voting stock of an incorporated business, or an equivalent interest of an unincorporated business, in another country.
6. By balance-of-payments accounting convention, the importer is deemed to assume ownership of the goods when they cross the border of the exporting country and to bear all subsequent transportation costs. Thus, receipts of U.S. carriers for transporting U.S. imports are excluded from U.S. transportation receipts because these receipts represent transactions between U.S. importers and U.S. vessel, airline, and truck operators. Similarly, payments to foreign carriers for transporting U.S. exports are excluded from U.S. payments because they represent transactions between foreign importers and foreign carriers.
7. Tramp vessels carry dry cargo on an unscheduled basis; liner vessels carry dry cargo on a schedule; and tanker vessels carry liquid cargo.
8. Under the current settlements-based system for international telecommunications transactions, a carrier in one country agrees on a price (an accounting rate) for handling a call with a carrier from another country. If a carrier originates more minutes of calls to a foreign carrier than it completes, it periodically makes a settlement payment to the foreign carrier.
9. Sales of these services are made not only through foreign affiliates classified in this industry but also by affiliates in several other industries, particularly machinery manufacturing and wholesale trade.
10. Real gross domestic product (GDP) in the United States grew 3.9 percent in both 1997 and 1998; real GDP in Japan decreased 2.8 percent in 1998 and grew 1.4 percent in 1997.
11. In this section, sales of services are defined as sales that are characteristic of establishments classified in particular industries. The industry groups used for this purpose are listed in the note to table C.
12. Because the data on sales of goods by U.S. affiliates are not disaggregated by destination, the local and foreign shares have been estimated using the data on exports of goods shipped by affiliates. Exports of goods shipped by U.S. affiliates in 1997 represented 11 percent of sales of goods by these affiliates during the year.
13. The UBO of a U.S. affiliate is that person (in the broad legal sense, including a company), proceeding up the affiliate's ownership chain beginning with the foreign parent, that is not owned more than 50 percent by another person. The UBO ultimately owns or controls the affiliate and derives the benefits associated with ownership or control. Unlike the foreign parent, the UBO of a U.S. affiliate may be located in the United States.
14. In the SIC, the "services" division includes a variety of business and personal services (see the group "services" in tables 9 and 10.1), but it excludes several industries—such as finance, insurance, transportation, and communication—that are classified as services-producing industries in BEA's direct investment surveys in order to disaggregate total sales into sales of goods and sales of services.
15. Not all services sold by affiliates in these industries are computer and data processing services, but most of them probably are. In addition, some computer and data processing services may be sold by affiliates classified in other industries.
16. In 1997, the weighted average U.S.-dollar price of the currencies of 23 major host countries (in terms of gross product of nonbank majority-owned foreign affiliates) fell 7.8 percent.
17. See Department of the Treasury, National Treatment Study (Washington, DC: U.S. Government Printing Office, 1998): 210–216.
18. See Chris Melly, "Deregulation Fosters Globalization of the Electric Power Industry," Industry, Trade, and Technology Review (September 1998): 31–58. For additional information about U.S. direct investment abroad in 1997, see Sylvia E. Bargas, "Direct Investment Positions for 1997: Country and Industry Detail," SURVEY 78 (July 1998): 35–45, and Mataloni, "Operations in 1997."
