University of Chicago Legal Forum Volume 1986 | Issue 1 Article 5 1986 The conomicE s of the World Market for Business Services: Implications for Negotiations on Trade in Services Theirry J. Noyelle [email protected] Anna B. Dutka [email protected] Follow this and additional works at: http://chicagounbound.uchicago.edu/uclf Recommended Citation Noyelle, Theirry J. and Dutka, Anna B. (1986) "The cE onomics of the World Market for Business Services: Implications for Negotiations on Trade in Services," University of Chicago Legal Forum: Vol. 1986: Iss. 1, Article 5. Available at: http://chicagounbound.uchicago.edu/uclf/vol1986/iss1/5 This Article is brought to you for free and open access by Chicago Unbound. It has been accepted for inclusion in University of Chicago Legal Forum by an authorized administrator of Chicago Unbound. For more information, please contact [email protected]. The Economics of the World Market for Business Services: Implications for Negotiations on Trade in Servicest Thierry J. Noyelle* and Anna B. Dutka** INTRODUCTION This paper examines key economic, historical and institutional forces that have shaped the development of a world market for business services since the end of World War II, and continue to do so today. The objective of the paper is to identify a few critical conceptual issues underlying the discussion of trade in business services and to show how these issues inform the entire debate on trade in services. This is done through an analysis of trends in the development of the world market for four business services: legal services, accounting, management consulting and advertising. These four industries were selected for analysis because of the considerable overlap in the services provided by organizations in each of these four fields, and because of our interest in investigat- ing the extent to which non-licensed business services, such as ad- vertising and management consulting, and licensed business ser- vices, such as law and accounting, face similar constraints in the development of new markets. The information presented in this article was obtained through extensive interviews with senior managers in business ser- vice firms and senior public officials in regulatory and trade agen- Cies, as well as from published materials referred to in the foot- notes. In all, over thirty executives and senior public officials were interviewed in the United States and three countries from the Eu- ropean Communities between 1984 and 1986. Arguments devel- oped in this paper are based on those interviews unless otherwise t The research materials presented in this paper were developed under a contract from the American Enterprise Institute (AEI) as part of the Institute's "Competing in a Changing World Economy" Project. The views expressed in this paper are those of the authors and do not necessarily reflect the views of the staff, advisory panels, officers or trustees of AEI. * Senior Research Scholar, Conservation of Human Resources, Columbia University. * Senior Research Associate, Conservation of Human Resources, Columbia University. 58 THE UNIVERSITY OF CHICAGO LEGAL FORUM [1986: indicated. To preserve confidentiality, those interviewed are not identified. Following this introduction, the paper is divided into five sec- tions. Section I presents overall measures of the importance of li- censed and non-licensed business services in the U.S. and world markets. Section II reviews the development of a world market for business services following the Second World War, explaining where major growth occurred geographically, why it did where it did, and what kinds of market changes are now underway that may alter the course of development. Section III describes some of the principal constraints on in- ternational trade in business services. In Section IV we discuss the three basic conceptual issues that are shaping the debate on trade in services: the distinction between "pure trade" in services and "investment" in services (i.e., the distinction between transborder sales of services and sales by foreign affiliates); the importance of labor migration, visa and professional licensing issues in relation to trade in services (i.e., the need for transborder movement of per- sonnel); and the problem of competition in both domestic and in- ternational markets for services. We conclude, in Section V, with the key implications of our analysis. In contrast to what seems to have become the conven- tional wisdom, we do not believe that processes of modernization and rationalization underway as a result of the introduction of ad- vanced computerized systems will change the geography of service production to the extent that services will "behave" increasingly like goods.1 We therefore believe that negotiations on the liberali- zation of trade in services must address issues not traditionally dealt with in discussions of trade in goods. It is true that the new technology is making it increasingly possible to "can" the process of service production in the form of software, or to "store" service outputs in the form of electronic digits, so that the production of services can be separated from the point of final consumption. Nevertheless, there are equally power- ful developments both in the technology of service production it- self and in the evolution of markets that require increasingly close interaction between producers and consumers. In addition, even if ' For contrary views, see Jonathan D. Aronson and Peter F. Cowhey, Trade In Ser- vices: A Case for Open Markets (1985); Geza Feketekuty and Jonathan D. Aronson, The World Information Economy, a paper presented at the Conference on Policy Issues in the Canadian-American Information Sector, McGill University (Nov. 1983) (copy on file with the authors). MARKET FOR BUSINESS SERVICES transborder trade in services grows dramatically in the years ahead, a significant part of that trade will continue to involve the movement of people as carriers of expertise ("human capital") as much as the movement of material objects such as printed docu- ments, electronic messages and so forth. We think that these ten- dencies are very much in evidence not only in business services but in other service industries as well. These observations have significant implications for the way negotiations on trade in services should be structured. We believe that negotiating an open trade system for a world service economy will demand addressing not only "pure trade" issues but also local investment issues and visa, labor migration and professional licens- ing issues. We draw no conclusions as to whether these three sets of issues should be addressed in one or several forums, but we do think that a one-sided focus on "pure trade" issues would be misguided. I. MEASURING THE MARKET FOR BUSINESS SERVICES A. The Size of the U.S. and World Markets for Business Services In 1982, the last year for which detailed data are available, U.S. output in licensed and non-licensed business services amounted to nearly $200 billion, or 6.5 percent of the U.S. gross national product (GNP) (Table 1). That same year, these indus- tries employed approximately 4.7 million persons, slightly over 5 percent of the nation's total non-agricultural employment.2 Broadly defined, and in keeping with the U.S. Standard In- dustrial Classification Manual, the business service sector in- cludes: the business service group (SIC 73) with large components such as advertising (SIC 731), computer and data processing ser- vices (SIC 737), and management consulting and public relations services (SIC 739); the legal services group (SIC 81); and the mis- ' U.S. Bureau of the Census, 1982 Census of Services, Geographic Area Series: United States 3-6 (1984). 60 THE UNIVERSITY OF CHICAGO LEGAL FORUM [1986: Table 1 Business Services in the United States, 1972 and 1982 Gross Receipts of Establishment with Payroll (billions of dollars) Compound Annual Receipts Rates of Growth SIC Codes/Sectors and Subsectors 1972 1982 1972-82 73 Business Services $35.5 $111.4 12.1 731 Advertising 2.3 8.4 7311 Advertising Agencies 1.8 5.9 12.6 737 Computer and Data Processing 3.4 22.7 20.9 739 Other Business Services 7392 Management, Consulting 3.6 18.0 17.2 and Public Relations pt 1 Management and Admin- istrative Services pt 2 Management Consulting 3.3 6.0 pt 3 Economic Research 2.6 pt 4 Consulting Services 2.1 pt 5 Public Relations 0.3 1.1 81 Legal Services 9.7 34.7 811 pt 1 Legal Services 9.7 34.3 811 pt 2 Legal Aid Societies, etc. n.a. 0.4 89 Miscellaneous Services 891 Engineering, Architectural and Surveying 893 Accounting, Auditing and Book- n.a. 14.6 keeping Total SIC 73, 81, 89 n.a. 196.5 Gross National Product 1,185.9 3,069.3 Source: U.S. Bureau of the Census, Census of Services, 1972 and 1982. cellaneous service group (SIC 89), with such major components as engineering, architectural and surveying services (SIC 891) and ac- counting, auditing and bookkeeping services (SIC 893).3 As shown in the last column of Table 1, these services experienced phenome- nal growth during the 1970s and early 1980s, with compound an- nual rates of growth in some sectors at least twice as high as the corresponding rates for the GNP. The growth of these sectors has wrought havoc with our na- tional income and product account system, designed originally to U.S. Office of Management and Budget, U.S. Standard Industrial Classification Man- ual 301-02, 304-08, 324, 333-34 (1972). MARKET FOR BUSINESS SERVICES record changes in manufacturing or in such traditional service sec- tors as retailing or finance, not in the newer services. Thus, mea- surement of changes in the service sectors is hampered signifi- cantly by the fact that data are either incomplete or have been gathered only in the very recent past.