chapter 1 summary

Chapter 1

Summary

.

CONTENTS

Page

Principal Findings . . . . . . . * . ! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5S e r v i c e s a n d t h e U . S . E c o n o m y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5The U.S. Competitive Position . . . . . . . . . . . . . . . ....... . . . . . ....... 6Negotiations on Trade in Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Trade and Competition by Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Domestic and Labor Market Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Federal Policies . . . . . . . . . . . . . . . . . . . . . . . . . . ....... . . . . . . . . . . . . . . . . . 22Evolving Industrial Structure: Services and Goods . . . . . . . . . . . . . . . . .... 31

The Services and Manufacturing: Synergies and Interdependencies . . . . . 32Multinational Expansion and Integration . . . . . . ........ .......... 34Thinking About the Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...... 35Using Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............. 37

BoxesBox Page

A. Services in the New Trade Round. . . . . . . . . . ........ . . . . . . . . . . . . . . . 4B. The Technology/Science Base for the Services . . . . . . . . . . . . . . . . . . . . . . . 38C. Computer Applications in the Services . ............ . . . . . . . . . . . . . . 40

FiguresFigure No. Page

l. U.S. Service Exports.. . . . . . . . . . . . . . . . . . . . . . ............... . 5Z. U.S. Trade Balance According to Official Government Figures . . . . . . . . . 63. U.S. Trade Balance by Region, 1985 . . . . . . . . . . . . . . . . . . . . . . . ........ 84. International Assets of Major Banks by Country . . . . . . . . . . . . . . . . . . . . . . 115. Construction Contracts Won by Foreign Firms in the United States... . . 156 . Character is t ics of F irms and Industr ies . . . . . . . . . . . . . . . . . . . . . . . . . 41

TablesTable No. Page

l. Business-Funded R&D as a Percentage of Gross Domestic Product . . . . . . 192. Summary Guide to Policy Options . . . . . . . . . . . . . . . . . . . . . . ........ . . 243. issues and Options for Congressional Consideration . . . . . . . . . . . . . . . . . . 254, Classification of Service Providers by Markets . . . . . . . . . . . . . . . . . . . . . . . 365. Characteristics of Knowledge-Based Compared to Tertiary Services . . . . . 376. Examples of Knowledge-Based and Tertiary Service Industries . . . . . . . . . 37

Chapter 1

Summary

Domestically as well as internationally, serv-ices and manufacturing depend on one another.Given the size and diversity of the U.S. econ-omy, any view of the future that sees the serv-ices taking the place of manufacturing haspushed the distinctions between them too far.As this assessment shows, there is no choiceto be made between a manufacturing economyand a service economy. The choices concernthe pace of change and the kinds of skills thatAmericans will need to work productively inemerging industries. They also concern Fed-eral policies to aid and assist the adjustmentsinvolved, and an international trade regime thatwill permit the synergies between domestic andforeign production, goods and services, Amer-ican know-how and foreign know-how, to mul-tiply. Among the most critical policy choiceswill be those affecting Americans who lack theskills for full participation in the kind of econ-omy that will emerge over the next 30 years.

The international infrastructure for serviceshas become critical for the long-term competi-tiveness of U.S. firms in many industries. Morethan 70 percent of all Americans work in theservice sector of the economy (table 32, ch. 7).In nations otherwise as different as the UnitedStates, Japan and the United Kingdom, morepeople find jobs in service industries than inmanufacturing, and services account for morethan half of gross domestic product. Many gov-ernments have instituted policies, often includ-ing trade protection, to encourage growth inthe intermediate or business services that forma primary subject of this assessment.

Still, while the services make a significantcontribution to the U.S. balance of payments,direct trade in manufacturing remains muchlarger. The share of services in total world tradehas remained more-or-less constant at 17 to 18percent over the past 15 years. Thus the domi-nance of services domestically—in terms of em-ployment and share of gross output—does notcarry over to the international trade arena. Evenso, beginning in 1982, the U.S. Government

made reductions of trade barriers in servicesthe centerpiece of its proposals for a new roundof multilateral trade negotiations (box A). Theseproposals were opposed in parts of the devel-oping world. As preparations continued, theemphasis on services receded only slightly; theUruguay Round, initiated in September 1986,gives them a prominent place. Why did theUnited States raise the negotiating stakes sohigh? Why did other nations react as they have?Does it make sense to press for internationalagreements on services at a time of deteriorat-ing trade relations generally? As this report willshow, the answers to such questions dependas much on the interrelationships of the serv-ices and manufacturing as on the magnitudeof service exports themselves.

This assessment, requested by the SenateCommittees on Governmental Affairs and For-eign Relations, and by the House Committeeon Small Business, looks with particular careat four services:

banking (ch. 3);engineering and construction (E&C, ch. 4);information technology (IT) services, in-cluding most services related to data proc-essing and communications, but not equip-ment (ch. 5); andtechnical licensing (a source of revenuesfor manufacturing firms almost exclusively,ch. 6).

Beyond specific expressions of interest by therequesting Committees, the reasons for choos-ing these four sectors included dependence ontechnology and its significance for internationalcompetition, and dollar value of transactionsas recorded in the U.S. balance of payments.All four have strategic importance, in part be-cause they are intermediate services providedmostly to other businesses. This means thatcompetitive strength can create a powerful ifindirect stimulus for other parts of the U.S.economy—as when multinational manufactur-ing companies make use of international com-

3

4 ● International Competition in Services

Box A.-Services in the New TradeRound

In September 1986, trade offidab from most of the QO#us membe~ ofth~ General Agreementcm Tariffs and Trade {GATT, the principal mg~zation within which ~mrnmmts negotiate the rubsfor world trade] agreed on plana far a naw round of multilatmd trad~ negbtiatioas (MTN)-to beknown as the Uruguay Round. Since 1$!M, the United States had ken prewing for an MTN roundthat would address barriers to services trad~ [ch. $]. Other “xww Mm” r- in promimmce SS pre-liminary discussions continued. Respite ~soing opposition from a group af developing naticms, ledby Brazil and Iqdia, must of the new imwes raisad by th~ United $tptas will ba put of tho UruguayRound negotiations, akhough nut nec~ssarfiy as prominent as the t.Mt.ed Mates might hava wished.In admtion to $ervic~, tlmse include restrictions on foreign direct immtnmnt tit m@Y di*o~ badeflows (most simply, performance requiqmmnte that make txporting a cxmdition far inward invest-ment) and protection fo~ intellectual property (strengthening of patents md copyrights, stiffer en-forcement of laws prohibiting ~ountetfkiting of goods).

To begin the process of liberalizing tzwie in services, the United States has sought the foiiowing:

● Agreement that “natbmd troatrnent” should, in general, govern services trade. For most ofthe services, this principle-that foreign firms should be treated the s~me as domestic (national)firms-implies the right of establishment.

● “Transparency” in regulations and barriers that affact services trade--i.e., explicit rather thanhidden rules.

● GATT procedures for resolving disputes concerning trad~ in services.

Given a satisfactory umbrella agreement incorporating such provisions, GATT parties might (or mightnot) lnove on to negotiations dealing with particular service industria during the Uruguay Round.

While the United States got most of what it wanted in the 1986 Ministerial Statement, servicesnegotiations will take place in parallel wi~, rather than as part of, n$gotiatitms on goods trade. Thisconcession to the developing countries—which argue that services do not belong in GATT at d, butshould be discussed in other international bodies--may make it nwre diffiqdt to eventually integratewhatever agreements are reached into the structure of GATT codes end adjudication rnechani$ms.on the other hand, theze ae good reasons, as discussed later in tMs repro% for pur$~i~ negotia~on$on services in other multilateral forums as a supplement to the GATT talks, and also for biiateraldiscussions on services.

The Uruguay Round is scheduled to run though %990, but it seems quite possible, given the com-plexity of the issues to he negotiated, th@ 4 years wfll not be enough to reach meaningful agreements;this set of trade talks could easily continue well into th~ 19$0s. The prdmss of bringing services tradeunder GATT discipline wiil be a difficult one, for ~0 C~Q~lY m~~ P-W” Fir~tt many Of the *rv-ices in many countries have been heavily regulatad far years (examples include bankinq sind insur-ance). State ownership has also been common [air travel, telacomrntmication$). Second, almost allthe trade and inve@ment restrictions are non~ariffin nature. M~y govmnments design their regula-tory and supervisory policies to exclude fordgn firms or ftwor domestic firms. The preceding TokyoRound took up non-tariff barriers affadt.ing trade in goods; progwss proved painf@y slow. Whenit comes to many of the services, sensitivities will be wan higher, if only kxmse openness to tradeimplies rights of establishment and hence inward investment.

Ch. 1—Summary • 5

munications networks to manage global oper- terests of other groups or the Nation as a whole,ations. Because this assessment deals with sometimes not, But it is business organizationsinternational competitiveness, most of the anal- that compete internationally—not governments,ysis centers on businesses, Sometimes the in- not people (as consumers, as workers), not en-terests of U.S. companies correspond to the in- tire economies.

PRINCIPAL FINDINGSServices and the U.S. Economy

1. OTA’s estimates show that services makea greater contribution to the U.S. balance ofpayments than the official figures imply—a sur-plus of perhaps $14 billion in 1984, rather thanonly $2.3 billion. Services account for aboutone-quarter of U.S. exports, substantially morethan the 17 percent indicated by official gov-ernment statistics (figure 1).l But while serv-ices help the U.S. trade position more than hadbeen realized, OTA finds no reason to expectthat exports of services will grow more rapidlythan exports of goods; the ratio of service ex-ports to total exports will probably not changevery much over the next decade or two, Tradein services will remain considerably smallerthan trade in goods; services may have a domi-nant place in domestic employment and pro-duction, but not in international trade (figure 2).

2. Relatively few American jobs depend di-rectly on trade in services, Not only does do-mestic production of services greatly exceedexports and imports of services, but U. S.-basedservice firms do more overseas business throughforeign affiliates than through direct exporting,Investment abroad means jobs in foreign coun-tries. (And foreign investment in the UnitedStates means jobs here,) Almost certainly, serv-ices embodied in U.S. goods exports contrib-

IThe $14 billion figure corresponds to the middle of the rangeof OTA’S estimates. For 1984, OTA places U.S. exports of serv-ices, excluding banking, at $69 billion to $9 I billion. Mercban-clise exports that year came to $220 billion, The ratio of themidrange figure for ser~’ices to all exports equals 0,27. Basedon the official Federal Government figure for 1984 service ex-ports, $43.8 billion, services come to only 17 percent of all ex-ports. See Trade in Services: Exports and Foreign Revenues(Washington, DC: Office of Technology Assessment, September1986), p, 38.

100

10

Figure 1 .—U.S. Service Exports

65

01982

42—

.1983

91

84

67

42

J

69

44

—1984

Year

OTA high OTA low

estimate estimate D BEA estimatea

aBureau of Economic Analysis, Department of Commerce

SOURCES: Trade In Serwces” Exports and Fore/gn Revenues (Washington, DCOff Ice of Technology Assessment, September 1988), p 39, R C Krue-ger, “U S International Transactions First Quarter 1986, ” Survey ofCurrent Business, June 1986, pp 3670

ute more to U.S. employment than do exportsof services,

The need to produce services at the point ofconsumption limits growth prospects for exports,in contrast to goods, which can be shipped andstored. Although advances in communicationsand transportation have made it easier andcheaper to supply services at a distance, thechanges are incremental, with no real prospectof radical transformation. In general, whenU.S.-based firms establish overseas affiliates inthe services, these affiliates are staffed by lo-cal people and purchase in the local market,

6 • International Competition in Services

Figure 2.— U.S. Trade Balance According toOfficial Government Figures

Investment

/ - ’ ” w

YearSOURCE R.C. Krueger, ‘W S International Transactions, First Quarter 1986, ” Sur-

vey of Current Business, June 1986, pp 42-43

3. While overseas investments may not con-tribute very directly to U.S. jobs, exports, orinternational competitiveness, the indirect andstrategic benefits to the Nation economy canbe substantial.

American multinationals—whether they pro-duce services, goods, or both–stand to benefitfrom further opening of trade and investment op-portunities in the services. These benefits willcome in part from a better developed global in-frastructure for supporting their business activ-ities: deeper and more integrated capital mar-kets; well-established and comfortable workingrelationships with the overseas affiliates of theaccounting firms, advertising agencies, insur-ance companies, and law firms that they dealwith at home; cheap and reliable communica-tions networks. The synergies and strategic ben-efits flowing from such an infrastructure canaid U.S. economic growth and competitiveness,and create new domestic jobs, even though im-pacts within the United States may be hard totrace.

4. International competitiveness in high-value-added manufactured goods (e.g., computers orcommercial aircraft) depends on knowledge-based services—computer software, engineer-ing, banking and finance, business services ofall kinds, To maintain a society with high liv-ing standards and large numbers of well-payingjobs, the United States must remain competi-tive in both high-value-added goods and knowl-edge-based services; this, in turn, requires awell-educated and highly skilled labor force,one that can adapt to changing competitive con-ditions.

5. Government policies, particularly regula-tory policies, have greater impacts on manyservice industries than on goods-producing in-dustries. Sometimes these policies help the in-ternational competitiveness of American firms,sometimes they hurt. But impacts on competi-tiveness seldom get much attention from pol-icymakers. Given the increasing integration ofthe U.S. and world economies, Federal agen-cies with regulatory or supervisory authorityover the services will have to begin paying con-sistent attention to international competitive-ness. If they do not, the competitive ability ofAmerican service firms may begin to suffer. IfU.S. service industries suffer the same kindsof competitive declines as U.S. manufacturingindustries, the Nation’s living standards willbe in even greater danger,

The U.S. Competitive Position

1. Internationally, the United States main-tains a position of competitive advantage inmost services—although U.S. competitivenessvaries a good deal among these industries. Some—e. g., engineering and construction—have beenslipping. Others, notably the information-re-lated services, remain highly competitive. (In-dustry-specific findings appear later in thischapter.)

Figure 3 compares the U.S. balance of pay-ments in services, according to the officialfigures, with that in goods, The chart showsthat the United States ran large deficits in goods

Ch. 1—Summary ● 7—

Phofo credlit: Lufthansa

American jetliners, part of Lufthansa’s fleet, at Frankfort airport

trade with almost all regions of the world in1985, coupled with surpluses in services—albeitsmall—everywhere but Latin America (wheretourist travel by Americans pushes the balanceto the deficit side). The official figures under-estimate U.S. exports and imports of services,but are the only source of comprehensive geo-graphic detail; more accurate data would dis-close somewhat larger surpluses with mostregions.

2. The U.S. surplus on services trade hasfallen–according to OTA’s midrange estimates,from about $20 billion in 1982 to $14 billionin 1984. As for trade in goods, some of this de-

cline reflects the strength of the dollar, but inmany of the service industries, as in manufac-turing, continuing economic growth and devel-opment have helped other countries narrow thegap with the United States. For example, E&Cfirms in both the newly industrializing and lessdeveloped countries (NICs and LDCs) havemade substantial strides in their technologicaland managerial capability over the past 15years.

3. As in so many manufacturing industries,many of the future competitive threats in theservices will come from Japanese firms, Japanhas already proven its competitive ability in


Japan

Latin America

Canada

Western Europe

Rest of world

Other developedcountries

Figure 3.–U.S. Trade Balance by Region, 1985

t

/

-

daI 1 I I I I

–50 –40 –30 –20 –10 o 10

Current account balance (billions of dollars)

❑ Goods ■ Services

asewlce~ balance with “otfler developed countries” = $026 billion

NOTE The sum of the balances In the figure does not equal the 1985 current account deflc ”+ because the current accountIncludes other Items not I n the chart (investment income, government transactions, and unilateral transfers)

SOURCE: R.C Krueger, ‘(international TransactIons, First Quarter 1986, ” Survey of Current f3uslness, June 1986, pp. 36-70.

computer hardware and in telecommunicationsequipment. Improvements in services rangingfrom software products to computer and com-munications networks will follow, if at first onlyto meet Japan’s own needs and to take advan-tage of the country’s expanding hardware base.This coming thrust into information-based serv-ices promises to boost Japan’s internationalcompetitiveness still further in manufacturing.

Japanese E&C firms have long since demon-strated their competitive ability. The banks, asdiscussed below, have been following Japanesemanufacturers into international markets, aidedby the capital reserves accumulating as a re-sult of huge trade surpluses; if Japanese banks

succeed in taking competitive advantage of theirasset base, they could quickly take on still moreprominent roles in world financial markets.

Finally, Japan’s policymaking system seemsmore attuned than those of Western govern-ments to the needs and consequences of theshift toward an information-centered economy.To this point, policy makers and bureaucrats inJapan have tended to view competitiveness inservices as flowing from competitiveness inmanufacturing, But they also recognize that theJapanese economy faces an eventual transitionfrom mass production of consumer durablesto a structure centered on information technol-ogies. Government officials in Japan are doing

Ch. 1—Summary . 9

their best to lay the groundwork for a competi-tive set of industries in the future, as their econ-omy emerges from this transition.

Negotiations on Trade in Services

1. The United States has made reductions inbarriers to services trade a primary goal in theUruguay Round trade talks, Although imme-diate payoffs in terms of U.S. jobs and U.S. ex-ports will be small, the long-run strategic im-portance of services makes the goal a vital one.The negotiations promise to be lengthy and dif-ficult: far more often than in manufacturing,trade (and investment) barriers in the services—almost always non-tariff in nature—have do-mestic policy rationales.

Governments regulate banking and insuranceto protect consumers; many countries viewtelecommunications as having elements of nat-ural monopoly. Such factors raise sensitivitiesseveral notches above those associated withnon-tariff barriers (NTBs) affecting trade ingoods. It is easy for governments to tilt the reg-ulatory and supervisory policies that affect serv-ice industries to make life difficult for foreignfirms. Past GATT negotiations aimed at reduc-ing NTBs affecting goods have proved less suc-cessful than hoped. With a great deal of roomfor maneuver and for ambiguity, it will take pa-tience and persistence to reach meaningfulagreements on barriers to services trade, insideor outside of GATT.

2. No matter the perspective from which theservice industries are viewed, differences seemto outweigh similarities, even among the knowl-edge-based intermediate services that form theprimary subject of this assessment. Generali-zations concerning the international competi-tiveness of U.S. service industries cannot bepushed too far. Government policies, here andoverseas, affect them in different ways; meas-ures that help one may hurt another. Liberali-zation would benefit some U.S. industries morethan others. The lists of those helped and thoseharmed will differ among countries.

Any negotiating strategy for the service in-dustries, in either a bilateral or a multilateralframework, must be based on a well-founded

analytical grasp of the differences among them.Lacking such a grasp risks outcomes that, onbalance, would do more harm than good to U.S.interests. Even given such an understanding—difficult to develop, if for no other reason thanthe gaps in the data from which analysis mustbegin—a multilateral trade agreement embrac-ing the services will almost certainly meandiminished competitive prospects for some U.S.service industries, along with brighter pros-pects for others.

3. U.S. policy makers will be faced with deci-sions on which topics will be most appropri-ate for GATT and which for other venues (e.g.,the Organization for Economic Cooperationand Development, bilateral negotiations, spe-cialized organizations). Longstanding interna-tional arrangements exist for services includingshipping, air travel, and telecommunications.Bodies like the World Intellectual PropertyOrganization will continue to provide a forumfor negotiations on intellectual property pro-tection, Decisions on international technicalstandards could have considerable impact ontrade and investment in the decades ahead,Choosing the right mix of topics in the rightmix of forums would be a major step towarda trade policy that is forward-looking ratherthan reactive.

The process entails more than monitoring for-eign government actions (and seeking to learnfrom foreign experience). The United Statesalso needs to monitor and adjust its own pol-icies, As chapters 9 and 10 make plain, the listof policy issues that affect trade and competi-tion in the services is a long one. The issuesrange from very general—the ability of the Fed-eral Government, as currently organized, tocope with economic interdependence, new pat-terns of international business, and continu-ing pressures for domestic adjustment—to quitespecific, such as illegal copying of computersoft ware.

4. Other governments, particularly in the de-veloping world, have often viewed the U.S.push on services as forcing them into a battlethey will probably lose. They will seek conces-


sions on trade in goods in return for liberaliza-tion in services.

Given a massive U. S. deficit in goods trade,which a falling dollar will help but not elimi-nate, policy makers and trade negotiators willhave to balance priorities, not only among theservices, but between services and goods. Tradeagreements always lead to winners and losers,if for no other reason than that some nationsand some industries benefit more than others;in a very real sense, services and goods com-pete with one another. To get agreements thatit wants in services, the United States will un-doubtedly have to make concessions elsewhere.

U.S. negotiators will need to seek advice andguidance from a wide range of potentially af-fected interests, particularly if the UruguayRound negotiations go beyond an umbrellaagreement to sector-specific issues. New advi-sory mechanisms may be needed to bring serv-ices-related negotiations to a satisfactory con-clusion. Government agencies charged withconducting the negotiations, notably the Officeof the U.S. Trade Representative (USTR), maywell require added resources.

5. OTA finds no compelling reason, at thistime, to give either bilateral or multilateralnegotiations in particular service sectors un-usually high priority. Of those services withclear strategic importance for leveraging U.S.exports and spurring economic growth, tele-communications services and computer soft-ware come closest to meriting special consid-eration.

In some contrast, international banking, aloneamong the services, seems to carry the poten-tial for severe disruptive impacts, and hencefor economic dislocations potentially compara-ble, say, to the oil shocks of the 1970s. Here,however, continuing steps aimed at preserv-ing stability are likely to take place quite inde-pendent of GATT.

6. In part because more nations have beenevading the intent and sometimes the letter ofGATT codes, the ability of the system to man-age trade in goods has deteriorated. The strainswill probably continue to build. Countries with

heavy debt burdens need to find foreign mar-kets for their goods, but face new restrictionsin many industrial nations, including the UnitedStates. At the same time, many of these devel-oping countries see their relatively small serv-ice sectors as vulnerable to foreign competi-tion and in need of protection. They may feelthere is little to be gained from agreements onservices trade, unless accompanied by an open-ing of markets for their goods,

With the United States and other industrial-ized nations, as well as the developing coun-tries, more heavily dependent on trade in goodsthan services—and with the United States al-ready having large shares of many servicemarkets—aggressive pursuit of services agree-ments could harm prospects for improving theability of the trading system to cope with strainsover trade in goods. U.S. negotiating objectivesmay have to adapt to this reality as the Uru-guay Round continues. Unless GATT as an in-stitution can be substantially strengthened, itsdisciplinary force will continue to wane; GATTcould become irrelevant.

Trade and Competition

Banking and Financial Services

International banking (ch.similar to the retail financial

by Sector

3)—only looselyservices familiar

to most Americans—has been growing rapidly,fueled by deregulation and new products, manyof them possible only because of developmentsin computer and telecommunications technol-ogies. Examples range from 24-hour securitiestrading to the lightly regulated offshore mar-kets for products like Eurobonds. With lend-ing less profitable in recent years, banks haveturned to new and largely unregulated prod-ucts in part to earn fees for services. The off-shore markets—in essence, operating outsidethe regulatory reach of national governments—have been expanding at literally explosive rates.Growth in securitization means that almost anyfinancial instrument—e.g., commercial paper,bundles of mortgages–can now be traded.Larger corporations can market their own secu-

Ch. 1—Summary ● 1 1

Photo credit: Steven Weissman, NYT Pictures

Stock exchange in India

rities, manage their own short-term assets.When they do so, they are in effect competingwith their banks, Taken together, these devel-opments raise new questions concerning thesafety and stability of the international bank-ing system.

Figure 4.— International Assets

1984

United Kingdom8.00/0 —

WestGermany

6.20/o -

France A8.70/o

Total: $2,236 billionNOTE Figures are for September of each year

Deregulation means more competition, driv-ing down profits. Banks seek new products andnew international markets in part to maintaintheir profit margins. Deregulation becomes con-tagious. When one nation relaxes its supervi-sory authority, others must follow, else risk los-ing business. But deregulation cannot go toofar without threatening the stability of thesystem,

In the United States, regulatory and supervi-sory authorities find that more of their deci-sions have international ramifications. Impactson international competitiveness must be builtinto decisonmaking processes.

This is an industry, then, with intense com-petition among financial institutions in manycountries, one where substantial advantages arehard to come by. American banks have donewell, in part because of their accumulated ex-perience in a relatively open market. Only Jap-anese banks, with their rapidly growing finan-cial muscle—in large part a legacy of Japan’svast trade surplus in manufactured products—have mounted a real challenge (figure 4),

1. Internationally, a great deal of momentumdrives the technology that leads to innovations

of Major Banks by Country

1986

United Kingdom6.6 ”/0

WestGermany

7,80/o -

France J8.20/o

Total: $3,238 billion

SOURCE A NICOII Japanese Bank Lending Surges Ahead F/nanc/a/ T(rnes, Jan 20, 1987 p 22 Orlglnal source Bank for International Settlements


in financial service products, to market growth,and to pressures for deregulation. The changestaking place raise new concerns for the safetyof the international banking system. Electronicnetworks move huge sums of money aroundthe world almost instantaneously. Where onceregulatory authorities could expect to see warn-ing signs days or weeks before a bank failed,now the process could be over before the au-thorities charged with safeguarding the systemare able to react. Innovation in financial serv-ices will continue, in rather unpredictabledirections. Regulatory and supervisory bodieswill have to cope with dynamic, rapidly chang-ing conditions, nationally and internationally,for the foreseeable future.

2. Despite the bad loans they have made in-ternationally, U.S. financial services firms, asa group, remain highly competitive. Banks inother countries have their share of problemloans, while American firms have been leadersin new financial services and innovative ap-plications of technology—many of the latterhelping them escape the regulatory thrusts ofnational governments. As other countries de-regulate, American banks will continue to takeadvantage of their learning and experience hereto penetrate foreign markets. Nonetheless,some U.S. financial services firms will makemistakes and find themselves in competitivedifficulty; some may fail or be purchased bymore successful rivals.

3. Among national banking industries, onlythe Japanese have mounted a real threat to theUnited States in financial services. Japanesebanks followed Japanese manufacturing firmsonto the world stage. Japan now can claim mostof the biggest banks in the world, as measuredby assets. The speed with which Japanese fi-nancial institutions turn new opportunities intocompetitive reality—and the magnitude of thecompetitive threat to U.S. banks—depends firstof all on the speed of deregulation in Japan’sdomestic financial markets. The faster Japan’sGovernment liberalizes at home, the freer Jap-anese banks will be to compete overseas.

4. While U.S. financial services firms havebeen moving into overseas markets, foreignbanks have moved into the United States. Inboth retail and commercial banking, some for-eign banks will be quite successful in the UnitedStates, but this in itself should not be taken asa sign of flagging U.S. competitiveness. It is,rather, a natural consequence of an open andattractive market, with fewer regulatory restric-tions than in the past. Foreign banks come herein part because of the size of U.S. markets, inpart because their corporate clients have in-vested in the United States, in part because theyseek experience in a deregulated and highlycompetitive environment.

5. To considerable extent, U.S. banking reg-ulations have been overtaken by events. Manyof the regulatory barriers—e. g., those separat-ing commercial from investment banking—seem bound to crumble further. While regula-tions will continue to have significant effectson competitive outcomes internationally, mostof these are secondary and indirect—hard totrace and hard to predict. This real but less thanobvious influence is precisely the reason thatpolicymakers and regulators in the UnitedStates will have to take far greater account ofthe ramifications of their decisions for inter-national competitiveness in banking. Financialservices is plainly an industry that, in its do-mestic as well as its international dimensions,will challenge the creativity of regulators as wellas bankers.

Sometimes U.S. regulations give foreign banksadvantages, and in other cases American bankscome out ahead, but there are few cases of ma-jor asymmetries and little cause for wholesalereassessment of U.S. banking policy becauseof international competition. Rather, given theexpansion and growing integration of worldfinancial markets, U.S. policy makers need tobuild international considerations into theirroutine processes.

6. Governments and banks have special rela-tionships all over the world. Regulatory and su-

pervisory policies aim at ensuring stability andprotecting depositors. Governments implementmonetary policy through the banking system,and, in some countries, use it to allocate creditand guide economic development.

With new technologies and new productsmaking it easier for banks to circumvent theregulations that remain, and with competitioninducing financial institutions to take greaterrisks in order to maintain their profit margins,continued movement toward internationalcoordination of banking regulations seemsnecessary to ensure stability. The competitivetrends analyzed in chapter 3 point to a needfor ongoing discussions aimed at harmoniza-tion and coordination of regulatory and super-visory policies among major banking nations.The international regime for banking looksmarkedly underdeveloped compared with thatfor service industries like telecommunications.Indeed, despite the sensitivities raised by thespecial relationships between banks and na-tional governments, it maybe time to considersupranational regulation of financial services,rather than simply coordinated national policies.

Engineering and Construction

While international banking has been grow-ing, the international E&C market has beenshrinking (ch. 4). Falling oil prices and ThirdWorld debt burdens marked the end of a periodof vast international projects, one that broughtabundant opportunities for both American andforeign E&C firms. Today, foreign contractorsoften have technology as good as—in somecases, better than—American firms, Europeanand Japanese contractors have pioneered newapproaches to tunneling and reinforced con-crete construction. South Korean constructioncompanies learned their trade in Vietnam andthe Middle East during the 1960s and 1970s,often working alongside American firms.

The result? More competition for fewer proj-ects, and a difficult environment for U.S. con-tractors, who no longer have outstanding tech-nological advantages to set against their highlabor costs. Foreign government subsidies—

notably tied aid credits—aggravate the situa-tion. Major international contracts often turnon financing packages. Many foreign govern-ments participate in assembling these packages;by and large, the U.S. Government does not.For the E&C industry, the competitive futureresembles that for the Nation’s smokestackmanufacturing industries more than that formost other traded services.

1. Since the 1970s, U.S. E&C firms have beenlosing ground steadily in international markets;they will probably continue to suffer from grad-ually declining competitiveness.

During the Middle East construction boomof the 1970s, U.S. firms did well, but nonethe-less saw their share of international projectsfall. Other countries took growing shares, andcontinue to do so. Third World debt meansfewer of the large and complex projects forwhich American companies have had competi-tive advantages. Growing technical capabilitiesin the Third World mean fewer jobs for out-siders. E&C firms with headquarters in theLDCs and NICs as well as other industrial na-tions offer stiffer competition for projects thatdo come onto the international market. As aresult, U.S. market share has declined fasterin the 1980s. Indeed, foreign firms have begunto make startling inroads into the U.S. E&C mar-ket; figure 5 shows the rise in new U.S. con-tracts of foreign construction firms—a rise thathas taken place during a period when the valueof new construction in the United States hasdeclined somewhat.

2. As in many manufacturing industries whereU.S. competitiveness has slipped, the reasonsbegin with economic growth elsewhere, cou-pled with improvements in overseas technol-ogy and managerial ability. That is not to saythe U.S. industry is problem-free; in general,U.S. E&C firms—and construction companiesmore than engineering and design firms—haveyet to come to grips with their shifting com-petitive circumstances, Adjustments to newrealities have been slow, responses more reac-tive than proactive; differences in attitude andoutlook between managements in American


Photo credit: Bechtel Power Corp.

Construction on the $1 billion Ok Tedi Gold and Copper project in Papua New Guinea

E&C firms and those in banks or data process- computer and communications technologies—ing companies have been striking. these skills no longer suffice for competitive

3. Better utilization of existing technologies,and aggressive development of new technicalknow-how, could help American E&C firmsmaintain their competitive standing. The UnitedStates is no longer a leader in a surprising num-ber of technologies relevant for large-scale con-struction projects. While many U.S. firms re-tain a deserved reputation for skills in designand in the management of complex projects—aided by the broad U.S. lead in applications of

advantage in bidding on many internationalprojects.

Given high labor costs (which U. S.-based con-tractors try to reduce by hiring foreign nationalswhenever possible), and limited assistance fromthe U.S. Government in arranging financing,American E&C firms appear to have little choicebut to move aggressively in rebuilding their in-dustry on a base of high technology. Thus far,however, few firms have taken decisive steps

— .

Ch. 1—Summary .—

Figure 5.—Construction Contracts Won by Foreign Firms in the United States

1980

❑ All others

1981

❑ British

SOURCE Engineering NewsRecord, various issues

1982

in this direction. The Federal Governmentcould help by encouraging cooperative andjoint R&D to strengthen the technology base forthe construction industry, as well seeking moreeffective methods for transferring the resultsof government-sponsored R&D to industry.Cost-sharing by Federal agencies would helpextend time horizons for R&D projects.

Construction remains craft-based and labor-intensive, with vast scope for productivity im-provement through better technology, Given thesize of the domestic industry, better produc-tivity would have far-reaching impacts withinthe United States as well as internationally.

1983

Year

1984 1985

French ❑ J a p a n e s e ❑ G e r m a n

15

4. Project financing has always been an im-portant element in international E&C projects.Many foreign governments help arrange financ-ing packages, not only to assist their E&C firmsbut to attract follow-on export business, Fa-vored techniques include tied aid and mixedcredit subsidies, which the United States nor-mally avoids. U.S. efforts to limit subsidies haveincluded negotiations in the Organization for Eco-nomic Cooperation and Development (OECD),along with new mechanisms intended to helpFederal agencies match foreign financing in aneffort to keep other governments at the bargain-ing table, To the extent such efforts bear fruit,as they appear to be, U.S. firms will be on a

16 . International Competition in Services

more even competitive footing. But, while a sig-nificant step toward equalizing the terms ofcompetition, this by itself will not be sufficientto revive U.S. competitiveness in the E&C in-dustry.

Other policy initiatives at the Federal levelcan also help U.S. firms—e. g., set-aside pro-grams for U.S.-funded projects overseas (mili-tary construction, as well as construction forembassies and consulates). But the shifts incompetitiveness visible in the internationalE&C industry are deeply rooted in technologi-cal change and international economic cur-rents. Federal policies can, at best, providesupport for new strategic thrusts by the U.S.industry—thrusts that have yet to take shape—they cannot reverse the forces leading to changein international E&C markets.

Information Technology Services

Along with banking, the cluster of sectors in-cluding telecommunications, data processing(DP), information services, and computer soft-ware—the IT services—has the greatest impactson competitive prospects of other U.S. indus-tries (ch. 5). Cheap and reliable internationalcommunications mean that an American engi-neer on site in a foreign country can tap intothe piping design layout for a petroleum refin-ery, change a hanger, and calculate the seis-mic response in a few minutes, One set of com-puter programs manages the functions of thecommunications hardware; other software car-ries out the calculations. Some applications ofIT services cut costs, as when a DP service bu-reau handles another company’s health insur-ance claims, Strategic applications of IT serv-ices help firms create new products and enternew markets—for instance, a chemical manu-facturer may tie customers into its computernetwork so they can place their own orders.

1. Of the IT services, telecommunications andcomputer software are most important for U.S.competitiveness in other industries. Multina-tional integration depends on global commu-nications. Computer software helps firms in allindustries control costs and develop new busi-

ness strategies; software tools will be particu-larly vital in building a high-technology basefor U.S. manufacturing. Today, engineers inmany industries rely on software aids for de-sign and development of new products; soft-ware then controls the factory equipment thatmakes these products.

Both the telecommunications and softwaresectors are growing rapidly. So is informationservices (e.g., electronic databases)—a relativelysmall and specialized sector today, but one thatwill take on much greater importance in thefuture. In contrast, the DP services industry hasalready matured; growth has slowed, in partbecause many companies that once purchasedDP services now take care of much of their owncomputing.

2. Currently, American firms are highly com-petitive internationally in all four IT sectors,Their positions appear generally secure overthe short to medium term, particularly in DPand information services, Telecommunicationsand software, for differing reasons, will be agood deal more volatile, and may demand theattention of policy makers.

Value-added data communications networks(VANs–including the computer networks thatlink banks together, and that tie airlines andtravel agents) will grow rapidly. CommercialVAN services will become important tools forbusinesses both domestically and internation-ally, particularly smaller companies that can-not afford their own networks, Larger U.S. com-panies will want their own VANS, but will useservices supplied by independent vendors forsome purposes as well. Development paths willdepend in part on regulations here and over-seas. To the extent that policymakers can shaperegulatory environments that will speed the ex-pansion of VANS, ensure the availability ofVAN services to small businesses as well aslarge, and guarantee U.S. firms access to over-seas VAN markets as both suppliers and users,American businesses of all types will be in abetter position to compete internationally.

U.S.-based software firms remain undisputedleaders in world markets. Indeed, other gov-


ernments have viewed the U.S. lead in softwarewith a good deal of concern. Nations like WestGermany have shifted government supportfrom hardware (e.g., microelectronics) to soft-ware. Developing countries like Singapore andTaiwan emphasize software in their programsfor catching up technologically. And of courseJapan, with its heavily publicized fifth-genera-tion computer project, seeks software that willhelp its computer manufacturers penetrateworld markets more deeply. Why the focus onsoftware? First, because of the cost-cutting andstrategic applications for users almost any-where in an economy, Second, because produc-tivity in the generation of software itself hasbeen nearly stagnant, Raising software produc-tivity y holds enormous promise for multiplyingthe productivity increments in other industries.Moreover, U.S. competitiveness in computerhardware, and indeed in all high-technologyindustries, increasingly depends on software.Today, software needs and availability oftenshape the design of hardware; indeed, softwareis often integrated into hardware (e.g., throughfunctions embedded in semiconductor chips).

Rapid progress in automated software devel-opment could lead to shifts in internationalcompetitive standing. So could unexpected suc-cess in foreign projects such as Japan’s fifth-generation effort. But the more likely outcomesof future competition will be gradual slippagein the U.S. position, particularly as foreign soft-ware firms move away from custom program-ming. Specially tailored software is expensive,and no longer a good solution to many customerneeds. Cost pressures will drive countries likeJapan toward the standardized applicationspackages pioneered by American suppliers. Asforeign software companies begin producingstandardized products, they will be able to com-pete more effectively with American suppliers.The Japanese, in particular, will become morecompetitive, if only because their rapid progressin hardware will force them to do better in soft-ware. A narrowing gap between U.S. and for-eign industries could prefigure a challenge incomputer software not unlike past challengesin microelectronics. Furthermore, better soft-ware in Japan—and in particular, programs that

can deal efficiently with the complex charac-ter set of the Japanese language—will lead tomajor productivity increases throughoutJapan’s economy. Office automation is only themost obvious example.

3. Neither the fragmentation of responsibil-ity for U.S. international telecommunicationspolicy, nor foreign government policies—in-cluding the much-discussed possibility of re-strictions on transborder data flows (TBDFs)—have, as yet, had major competitive impactson U.S. businesses operating internationally,But with American firms of all kinds increas-ingly dependent on telecommunications, Fed-eral agencies with both domestic and interna-tional responsibilities will have to make impactson competitiveness a normal and routine,rather than extraordinary, element in the pol-icy process.

As more American companies do businessin more parts of the world, negative impactsof NTBs affecting telecommunications and re-lated IT services become a more serious pros-pect. TBDF restrictions, onerous rate structureswithin particular countries, discriminatory ac-cess to network facilities—any of these couldharm U.S. competitiveness in a broad range ofindustries. That the impacts have not been ma-jor ones in the past does not mean they couldnot become so in the future.

4. The next generation of telecommunica-tions technologies—Integrated Services Digi-tal Networks, or ISDN—will provide end-to-enddigital communications for voice, data, and insome cases video signals. New services—e. g.,computer networks—will be cheaper; eventu-ally, any home or office that now has a tele-phone should be able to tap an information util-ity with a very broad array of available services.ISDN as an information infrastructure couldparallel the Interstate Highway System in itsimpacts on the Nation’s economy,

The capital costs of ISDN, however, will beenormous—hundreds of billions of dollars bythe time, well into the next century, when in-ternational ISDN coverage becomes widespread.Technical standards will influence the costs,


as well as the outcomes of competition involv-ing equipment manufacturers, service suppliers,and users. The stakes are very high. Vast ex-penditures, and commensurate rewards to suc-cessful suppliers of equipment and services,will generate a great deal of conflict, both withinand among the nations that design and buildISDN networks.

With different firms and different govern-ments beginning to implement ISDN, the U.S.Government will face continuing decisions ininternational forums concerning technical stand-ards, as well as questions of domestic regula-tory policy. Given the tight control exercisedby PTTs (post, telegraph, and telephone author-ities, generally functioning as government mo-nopolies) in many countries, negotiations overissues such as TBDFs and the international im-plementation of ISDN will probably go on foryears. The costs of incompatibility in ISDNstandards could be high, while the interests ofequipment suppliers and user groups may dif-fer substantially. As the U.S. position evolves,Congress may wish to review procedures forcoordination among the many Federal agenciesinvolved, and the specific preparations for stand-ards-setting and related negotiations interna-tionally. Regulatory decisions in telecommu-nications, as in banking, have seldom reflectedconsiderations of international competitiveness;in the future, they will need to do so.

Before the AT&T breakup, many of these mat-ters could be left to technical experts; today,with numerous companies competing to findan edge in the marketplace, matters of commo-nality, harmonization among systems, andstandards demand high-level policy attention.The next several years could well be critical,with discussions planned within the Interna-tional Telecommunication Union (ITU) thatmay have substantial implications for trade intelecommunications services as well as equip-ment. Congress, at several junctures, may wishto review efforts to develop and coordinate theU.S. position at these meetings and in GATTamong the agencies involved (which includethe Department of State, the Federal Commu-nications Commission, USTR, and others).

5. The United States might learn a good dealfrom close observation of foreign governmentpolicies affecting the IT services, Both France’sTeletel/Minitel system (which has put simplecomputer terminals in more than 2½ millionhomes and offices), and Japan’s very ambitiousplans for ISDN, hold considerable promise forstimulating development of new business activ-ities—among both service suppliers and equip-ment manufacturers. Even if the U.S. Govern-ment continues to leave developments such asvideotex totally to the private sector, insight intopolicies and outcomes overseas could help in-form the regulatory decisions that will alwaysbe necessary here.

Technical Licensing

For years, the United States has been a sourceof technology for the rest of the world. ManyAmerican companies, mostly manufacturers,license not only patents, but knowledge and ex-pertise (ch. 6), By value, most of these licensesgo to affiliates—foreign joint ventures as wellas the overseas divisions of U.S. multinationals—where control of proprietary know-how iseasier than with an independent foreign firm.

In years past, many U.S. companies took theiremerging Japanese rivals too lightly. Few woulddo so today; there is little evidence that Amer-ican companies license their technology toocheaply—that is, that they continue to under-estimate the risks of future competition fromtheir licensees, But just because firms look outfor their own interests does not mean they lookout for their competitors’ interests (or their sup-pliers’ or customers’ interests, or the nationalinterest).

Today, the United States can also learn fromthe rest of the world. With overseas technol-ogy often as good as American, many more U.S.companies could benefit from seeking out andlicensing foreign technologies. A more bal-anced two-way flow would be a positive signfor future U.S. competitiveness. Indeed, growthin U.S. licensing revenues has slowed since thebeginning of the 1980s, This is one of manysymptoms indicating that the vast base of tech-nology underlying the Nation’s commercial

Ch. 1—Summary ● 1 9—

industries—particularly sectors well removedfrom defense needs—no longer adequately sup-ports an economy as large and diverse as thatof the United States. Coupled with indicationsof declining productivity in U.S. R&D, OTA’sanalysis suggests a real need for overhaulingthe Nation’s technology policy.

1. U.S. companies license their technicalknowledge primarily when other opportunitiesfor exploiting it–exporting goods from theUnited States, direct investment in overseasmanufacturing plants—have been cut off. Today,foreign governments use policies such as im-port barriers, investment incentives, and per-formance requirements more effectively thanin the past to encourage transfers of technol-ogy to their own firms. American companieshave increasingly been forced into licensingagreements and joint ventures as substitutes forexporting or wholly owned foreign plants.

U.S.-based multinational corporations (MNCs)have responded, in part, with integrated world-wide strategies in which licensing becomes anoption to be bargained over from the beginning.The multinational may, for example, try to lockforeign partners into its proprietary technol-ogy through licensing, so that it will have atleast a piece of the market, even though it can-not sell its exports. Or it may seek arrangementsin which licensees will depend on purchasesof components from the United States (e.g., ad-vanced microprocessor chips). This is one ofmany examples of shifts in the internationalbusiness strategies of U.S.-based firms wherea sound analytical grasp by Federal agencieswould aid in the development of negotiatingpositions during the Uruguay Round.

2. Given shrinkage or loss in the technologi-cal leads that so many American industries en-joyed a decade or two ago, some U.S.-basedcompanies have become notably more aggres-sive in locating and acquiring foreign know-how through exchanges, joint ventures, or out-right licensing agreements. Many others haveyet to take such steps. Federal policies—e.g.,evaluation of foreign technical capability, crit-ical reviews [as well as translations) of foreigntechnical literature, support for personnel ex-

changes—that encouraged inflows of foreigntechnology could help support the long-termcompetitiveness of many U.S. industries. Socould continued efforts by the Federal Govern-ment to ensure that the overseas affiliates ofAmerican firms have the right to participatein government-supported R&D programs, andequitable access to results.

3. Rough parity among major industrializednations has become the norm in many indus-tries and many fields of technology. Increasedinward licensing paints much the same pictureas other indicators: U.S. technology is no longerbroadly superior to foreign know-how. Indeed,American firms have fallen behind in a surpris-ing variety of cases (as ch. 4 outlines for theE&C industry). Attributable as much to im-proved technical abilities in other parts of theworld as to slow-down in the United States, thisrelative shift is most evident in industries well-removed from military needs and defense fund-ing—in steel rather than computers, autos notaerospace. Many of the indicators, indeed,point to priorities for the development of com-mercial (i.e., non-military) technologies that aremarkedly higher in countries like Japan andWest Germany than in the United States; table1, for example, shows that both Japanese andGerman companies spend relatively more onR&D than American firms.

Given the breadth of the technology base thatsupports commercial industries, the servicesas well as manufacturing, Congress may wishto consider major changes in U.S. technology

Table 1 .—Business-Funded R&D as a Percentage ofGross Domestic Product

1972 1981 1983 1985 1986a

United States . .0.99 °/0 1.22°/0 1.32°/0 1.39°/0 1.42°/0Japan . . . . . .....1.15 1.73 1.99 2.09 2.14Federal Republic

of Germany . . .1.08 1.46 1.56 1.64 1,69aEstlmatedSOURCES’ 1972: Science and Technology Indicators Basfc Sfatisf/ca/ Ser/es —

Volume B Gross MWmal Ex’pendlture on R&D GEF?D 79697982(Paris Organ! zat!on for Econom!c Cooperation and Development,1985), table 16, 1981-1988: “FRG Institute Compares German, U S ,Japan Research Expend itures, ” Europe f?eport-Scfence and Tech-nology, Joint Publlcatlons Research SewIce JPRS-EST@&033 Nov6, 1966. pp 25, 28, 31 Translated from Techrrolog/e Nachnchfen, May15 1986 Orlglnal source, Battelle Institute, Frankfort


policy. Such a reassessment might begin withthe recent turn toward Federal support for basicresearch almost exclusively. In the past, gov-ernment agencies provided a mixture of sup-port for basic and applied research. But the pathfrom basic research to the marketplace is longand tortuous; Federal support, if restricted tobasic work (and particularly to research in sci-ence rather than engineering), may not aid U.S.competitiveness for many years, perhaps dec-ades. Policy initiatives such as support forgeneric technologies (those that can help allfirms in an industry), and better mechanismsfor diffusing commercial technologies to thevast majority of American companies that arenot technologically self-sufficient, could makea significant difference. The costs would besmall relative to total Federal R&D expend-itures.

4. Although Japan has licensed U.S. technol-ogies extensively in the past, and NICs likeSouth Korea are currently seeking U.S. know-how as part of their development strategies,OTA has found little evidence that licensingby American firms has, in recent years, beencounterproductive from the perspective of in-dividual firms—i.e., that license fees have beentoo low. Nor does it appear that U.S. compa-nies have, with rare exceptions, licensed at anyprice technologies critical for their own longerterm competitiveness. But firms look out fortheir own interests, not those of their competi-tors; moreover, in earlier years, many Amer-ican companies plainly underestimated the ca-pabilities of Japanese manufacturers.

Finally, when foreign governments combinerestrictions on imports and investment to pres-sure U.S.-based MNCs into licenses either atarms-length or with joint venture partners, theymay be able to help local companies buy tech-nology more cheaply than would otherwise bepossible. Regulating technology outflows holdsscant promise as a U.S. policy alternative. Itis corporations, not governments, that developand control proprietary technologies. But gov-ernment policies aimed at helping American

companies learn from foreign know-how couldaid in bringing inflows and outflows into bet-ter balance.

Domestic and Labor Market Implications

Despite the many differences among the serv-ices examined in this assessment, internationalcompetitiveness in all of them depends heav-ily on human capital. Production of knowledge-based services (and goods) requires skills andabilities, know-how and judgment, that will besupplemented but not replaced by emergingcomputer and telecommunications technologies(ch. 8).

Automation and productivity improvementcut into job opportunities in industries that uti-lize computer and telecommunications systemsintensively. Nonetheless, to the extent that firmsin industries ranging from shoes to chemicals,insurance to modular housing, can apply suchtools effectively, “dematuration” processes willhelp preserve job opportunities for Americansover the medium term and beyond. Both do-mestic employment in better paying, morehighly skilled jobs, and the position of U.S. firmsin world markets, depend on the maintenanceof a comparative advantage in the productionof knowledge-based goods and services.

1. To the extent that the U.S. labor force re-mains a source of well-educated employeeswith skills needed by service firms, the Nationis likely to remain internationally competitivein most of the knowledge-based services. This,in turn, will help U.S. manufacturing industriesmaintain their competitiveness. It will also helpsupport a tertiary service sector that can con-tinue to create jobs for Americans who are badlyeducated or lack specialized skills—jobs thatwill, however, pay little and provide no morethan limited opportunities for advancement,

To maintain their international competitive-ness, American firms in many of the serviceindustries, as in much of manufacturing, mustbe able to respond quickly and effectively tochanging market needs (in terms of output levelor product mix), new technological opportuni-


ties, the twists and turns of foreign governmentpolicies. Flexibility can come from new tech-nologies, mostly computer-based. But it ulti-mately rests on a work force with broad anddeep skills. Both new technologies and a morehighly skilled labor force will be needed ifknowledge-based service industries are to adaptsuccessfully to new competitive realities,

2. In most of the service industries, exportsand imports remain small compared to domes-tic consumption (or sales through foreign af-filiates). Employment levels in the services,therefore, do not depend very directly on trade.Nonetheless, indirect effects can be important—e. g., employment created in service firms thatsell to exporters (of goods or services). Thereare no good estimates for the value of servicesembodied in goods exports, or the numbers ofjobs created. But it is possible to state that suchjobs will, on the average, be relatively highlyskilled and well paid—particularly for high-technology manufactured products, with theirheavy inputs of knowledge (regardless of whethermanufacturers produce these knowledge inputsinternally or purchase them from service com-panies). Likewise, most of the direct employ-ment benefits of foreign investment in theservices accrue to the host country; thus invest-ments in the United States by foreign servicefirms–e.g., Japanese or French banks withoffices in New York or San Francisco—createjobs for Americans.

3. In searching for low costs and flexibility,American firms are increasingly turning to tem-porary and/or part-time workers. By supple-menting a core staff with contingent employ-ees, companies can adjust quickly to shifts indemand. (Temporary help services has beenone of the fastest growing U.S. industries.) Part-time employees help firms with labor require-ments that vary predictably to minimize costs—e.g., banks that need more tellers on Mondaysand Fridays, or retail stores open evenings andweekends.

The steady rise in people taking part-time jobsinvoluntarily—because that is the only workthey can get—suggests that underemployment

is joining unemployment as a persistent U.S.economic problem. But greater numbers ofAmericans are also working voluntarily in part-time or temporary positions. This reflects,among other things, a labor force with increas-ing levels of education and skill and a greaternumber of largely autonomous people who canpick and choose their work (graphic artists,computer programmers, auto mechanics). WithAmericans starting as many as a million newbusinesses each year (including those that areunincorporated), self-employment and newsmall-business startups have become morepopular choices, So has work in the under-ground economy.

4. As the rise in involuntary part-time worksuggests, together with the growing numbersof jobs that require credentials such as a col-lege degree for entry, stratification in terms ofincome and career prospects will continue toincrease within the U.S. labor market. Restruc-turing and applications of new technologies inmany service firms have knocked the rungs outof internal promotion ladders. No longer canhigh school graduates enter an insurance com-pany or a chain retailer and hope to move stead-ily upward in pay and responsibility. At leastsome college will be required for entry intomany positions with prospects for upward mo-bility. Despite the rise of higher education overthe last 25 years, then, many Americans willfind themselves stuck in low-paying service jobswith limited chances for advancement. Thereseems little prospect that low-skilled, entry-levelservice jobs will ever lead to the long-term ca-reer earnings patterns characteristic of blue--collar manufacturing employment in the earlierpostwar period.

5. Many recent immigrants into the UnitedStates, especially those entering illegally, takelow-paying jobs in the tertiary services. But im-migrants also cluster in skilled occupationssuch as nursing and engineering (service func-tions even if in manufacturing companies). U.S.industry has come to depend on a suppIy offoreign-born employees—notably, engineersand scientists who choose to stay after com-


pleting their education at an American univer-sity. To some extent, foreign nationals withtechnical training—who generally cannot qual-ify for security clearances—help balance theflow of U.S. citizens into defense-related in-dustries.

Capable, well-trained people—regardless offield—will always be in demand. To the extentthat immigrants add to the pool, they help U.S.industries compete.

6. Will the U.S. economy be able to draw onthe human capital–the knowledge and skills–needed to create good jobs and support highliving standards in the future? New technol-ogies and new ways of doing business demandhigh-level skills—not only reasoning, problem-solving, and creativity, but interpersonal and

FEDERAL

In the services even more than in manufac-turing, government policy makers have seldompaid much attention to international competi-tiveness (ch. 10). This is changing, slowly. Con-gress has called for better coordination amongthe dozens of Federal agencies whose policiesand regulations affect the services, and theAdministration has begun to respond. Antitrustenforcement reflects the realities of interna-tional competition more strongly today than 10years ago. U.S. persistence in GATT demon-strates that the highest levels of governmenthave endorsed the goal of liberalizing trade inservices,

Still, the United States has a long way to goto put its own house in order. Many of the im-pacts of regulatory and supervisory policies oninternational competitiveness occur indirectly;service industries ranging from insurance toair travel will remain more heavily regulatedthan typical manufacturing industries. Giventhe deregulatory fervor of the past dozen years,the policy shifts affecting competitiveness insectors like banking or telecommunicationshave emerged from confused and confusingdebates (such as that over non-bank banks, orderegulation/re-regulation of the telephone sys-

social skills. And learning itself is a skill. In theemerging knowledge-based economy, peoplewill need to learn to work effectively in fluidand ambiguous environments, to accept respon-sibility individually and in groups—in manyrespects to behave more like managers eventhough they may not have jobs that are explicitlymanagerial.

Higher-order problem-solving, good judgment,learning from experience–schools often paylip service to these skills, but seldom try system-atically to develop them. OTA’s analysis sug-gests that preparation for work in the 21st cen-tury may demand a fundamental rethinking ofthe Nation’s education and training system, De-spite the attention focused on education overthe past several years, there is little indicationthat such a reexamination has begun.

POLICIES

tern). The complexity of technology and busi-ness practices in such industries makes it dif-ficult for policy makers to grasp the issues;indeed, deregulation, falling back on the magicof the marketplace, has sometimes been littlemore than an admission of this failure. But with-drawal as well as intervention has competitiveconsequences, and good policy choices demandinsight into these consequences. Americanbusiness, with some exceptions, has adaptedrelatively quickly to immersion in a world econ-omy rather than a national economy. Americangovernment, which remains primarily attunedto domestic needs and domestic interests, hasnot.

Other governments face the same problems:linking domestic policies and foreign economicpolicies; linking the problems and needs of serv-ice industries and manufacturing industries.Some have responded better than the U.S. Gov-ernment, some worse, The more successfulgovernments—and particularly those that havelearned to shape market outcomes with someeffectiveness—pose yet another test for theUnited States. When other countries take thistack, the stakes go up in trade negotiations. Yetthe lack of planning capability and institutional


Photo credit: Walt Disney ProductIons

U.S. travel and tourism exports came to$13 billion in 1986.

memory in Federal agencies mean that some-times U.S. policy makers may not even realizewhat is at issue.

Tables 2 and 3 summarize the policy optionsdiscussed in chapter 10, with table 2 provid-ing an abbreviated guide to the 33 options andtable 3 treating them in more detail. (Both ap-pear in chapter 10 as well. Table 2 is the sameas table 55, while table 3 condenses materialfound in tables 56, 57, 59, 60, and 61.) Whilemany of the options deal with the specifics ofparticular government programs, the overall fo-cus is on the capability and effectiveness of thepolicymaking system as a whole.

The first group of options (l-11) are concernedwith U.S. trade policy. The subjects range fromnegotiating approach and objectives during theUruguay Round, including the resource needs

of the agencies involved, to the United Statesand Foreign Commercial Service (which looksunderstaffed alongside export promotion ef-forts by competing nations). In this group ofpolicy options, OTA stresses the need to ade-quately support the Uruguay Round negotia-tions, which promise to be more involved andcomplex than previous MTNs, and beyond thisto build better analytical capability into thestructure of U.S. policymaking. Deeper engage-ment in world trade brings greater needs forcoordination and planning among agencies, forclear thinking about U.S. interests and U.S. ne-gotiating objectives.

The analysis underlying the next set of op-tions (12-17) draws on the banking and telecom-munications industries to illustrate the need forlinking domestic policies—particularly regula-tory decisions—with international competitive-ness. Many agency policies affect the competi-tiveness of U.S. firms, but the system containsfew mechanisms for taking account of poten-tial impacts. Specific options here range fromnew Industry Sector Advisory Committees (forproviding input to U.S. trade negotiators) to anoffice on banking competitiveness in the Treas-ury Department (or in another Federal agencywith responsibilities for financial services).

OTA’s analysis of competitiveness in the serv-ices, like past analyses of manufacturing, showsthat international competitiveness has deep do-mestic roots, and that domestic policies—forexample, dealing with education and training—have a great deal of influence over competi-tive outcomes. The human resources policy op-tions (18-24) focus on adult education and train-ing—covering questions such as educationaltechnologies that might help build a more flex-ible and better-skilled work force. OTA alsostresses the need to seek answers to questionssuch as: Will tinkering with the education andtraining system do the trick? Or must the UnitedStates seek fundamental changes in its educa-tional practices to maintain competitiveness inhigh-value-added services and goods during thenext century?

When it comes to technology development,policy choices spread well beyond the service


Table 2.—Summary Guide to Policy Options

Issue Area Option Relevant service sector

1. The Services and U.S. Trade PolicyA. NEGOTIATING OBJECTIVES

—Congressional guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B. COORDINATION OF SERVICES POLICY

—Oversight on coordination of trade negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .C. TRADE ANALYSIS AND DATA

—Long-term analysis for trade policy and planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .–Oversight on collection of services trade data (also see Option 12) . . . . . . . . . . . . . . . .—Improving the data on trade in services and on technical licensing . . . . . . . . . . . . . . . .

D. SUPPORT FOR THE NEGOTIATIONS PROCESS—Staff and budget for USTR and other agencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Service sector advisory committees (also see Option 16) ... , . . . . . . . . . . . . . . . . . . . . .—Continuing evaluation of U.S. and foreign regulations that act as non-tariff barriers . . . . .

E. OTHER TRADE-RELATED ISSUES—Overseas promotion of exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Tied aid and mixed credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Trade and Development Program (TDP) ... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Il. Linkages Between Domestic Policies and International CompetitivenessA. EXAMPLES FROM BANKING AND FINANCIAL SERVICES

—Data on international trade in banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Office on international impacts of banking policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—International coordination of regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. EXAMPLES FROM TELECOMMUNICATIONS—Negotiating objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Advisory committee on telecommunications negotiations . . . . . . . . . . . . . . . . . . . . . . . .—Institutional mechanisms for addressing impacts of domestic policies on

competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ill. Human ResourcesA. EVALUATION

—Fundamental reexamination of human resources policies as they affectcompetitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

B. ADULT EDUCATION AND TRAINING—Demonstration projects for training/retraining of the active work force . . . . . . . . . . . . .—Increasing the national commitment to education and training of active workers . . . .—Postsecondary vocational/technical curricula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

C. INSTRUCTIONAL TECHNOLOGY—Inventory of federally developed training materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Transfer of federally developed training methods, procedures, and course materials . . . .—Funding for research, development, evaluation, and dissemination of instructional

technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IV. Technology DevelopmentA. R&D IN THE SERVICES

—Improving Federal Government data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B. THE U.S. TECHNOLOGY BASE

—Federal support for commercial R&D ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Technology diffusion to industry . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Implementation of Japanese Technical Literature Act. . . . . . . . . . . . . . . . . . . . . . . . . . . .—International exchanges of technical personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Equitable access to foreign technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .—Analysis of impacts of defense-related R&D on U.S. competitiveness . . . . . . . . . . . . . .

C. TECHNICAL STANDARDS—Federal testing and demonstration facility for ISDN . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—Preparation for upcoming meetings of the International Telecommunication Union . . . . .

1

2

345

678

91011

121314

1516

17

18

192021

2223

24

25

262728293031

32

33

all

all

al Iallall; licensing

allallall

primarily E&Cprimarily E&Cprimarily E&C

bankingbankingbanking

telecommunicationstelecommunications

telecommunications

al I

allallall

potentially allpotentially all

all

all

all; E&Callallallallall

information andtelecommunications;indirectly allinformation andtelecommunications;indirectly all

SOURCE Office of Technology Assessment, 1987


Table 3. —Issues and Options for Congressional Consideration

This table (which condenses material from tables 56.57, 59, 60, and 61 in ch. 10) presents the 33 policy options in self. contained form Ch.10 discusses them in detail

Issue Opt ions for Congress

ISSUE AREA i—THE SERVICES AND U.S. TRADE POLICYA. Negotiating ObjectivesWhile negotiators need flexibility, close con- OPTION 1: While the Uruguay Round is in

tinuing contact with Congress IS essential its early stages, Congress could provideif the Administation IS to secure a trade specific guidance to the Administrationagreement acceptable to the Iegislativewe on the outcomes it views as most criticalbranch to U S interests This could take forms in-

cludlng:● informal congressional consultations

with USTR;● requiring formal consultation and

reporting at several junctures before theAdministration seeks congressional ap-proval of new GATT agreements;

● legislative statements of U.S. negotiat-ing objectives, possibly including objec-tives for specific service sectors. Thiscould involve amending the relevantportions of the Trade Act of 1974 (e.g.,Sec. 104A, added in 1984 to definebroad goals dealing with services trade,foreign direct Investment, and trade inhigh-technology goods).

B. Coordination of Services PolicyDeveloping trade policies for services will

require effective coordination among morethan 30 Federal agencies (includingnumerous regulatory bodies) with respon-sibilities for services

C. Trade Analysis and DataBetter analytical support would make for

better U S trade policy Long-term policyplanning is a particular need

The current database on trade in services isseriously deficient

Many of the needed Improvements in serv-ices data would entail changes in proce-dures of the Bureau of Economic Analysis(BEA), the Commerce Department unitthat compiles trade statistics The Ad-ministration has failed to approve someBEA proposals Without a congressionaldirective, delays may continue

OPTION 2: Also at an early point during theUruguay Round, Congress could conductoversight (and provide guidance and direc-tion where needed) on executive branchcoordination of services trade policy, un-der Title Ill of Public Law 98-573 In partic-ular, Congress might use the oversightprocess to determine whether coordina-tion is adequate for ensuring consistentU.S. positions in GATT and the other in-ternational forums where sector-specificand specialized issues (e.g., Intellectualproperty protection) will be discussed.

OPTION 3: Establish a new office for tradepolicy analysis, to provide continuing ana-lytical support and institutional memoryfor executive branch decisionmaking. Theoffice could focus on support for day-to-day decisions, on longer term policy de-velopment, or both.

OPTION 4: Conduct oversight on implemen-tation Of the International Investment andTrade in Services Survey Act (as amendedin 1984) to determine whether some of thediscretionary provisions for data collec-tion should be made mandatory.

OPTION 5: Direct the Commerce Departmentto take specific action to Improve data ontrade in services. Possible steps include:● surveying service transactions between

unaffiliated firms (by proceeding withthe BE-20 survey or a modified version);

● expanding the Census of Service In-dustries,

• altering BEA procedures for presentingroyalties and license fee data to distin-guish technology from other categoriesof Intangible property, and to providedata on numbers of Iicense agreementsby year, and on receipts and paymentson new Iicense agreements in a givenyear

Comments

The new GATT round raises fundamentalquestions concerning the U S role in theworld trading system—matters going farbeyond possible GATT coverage of theservices:● I n what ways would a stronger GATT

serve U.S. interests?● Will U.S. Initiatives in services trade

and other new Issues—and in agricul-tural trade—serve to strengthen GATTas an institution? Will some of themand not others?

● Other nations will inevitably seek con-cessions in exchange for agreementsthat U.S. policy makers view as impor-tant. What sorts of trade-offs IS theUnited States likely to face as we moveinto the Uruguay Round?

● How will U.S. negotiators assign rela-tive priorities to goods and to serviceswhen conflicts between the two ariseduring the discussions?

Title III of Public Law 98-573 gave USTRresponsibility for developing and coor-dinating services trade policy, using theinteragency Trade Policy Committee

Negotiations affecting trade in services maytake place in other forums as supple-ments to or in parallel with GATT. Exam-ples include OECD, the World IntellectualProperty Organization, and the Internation-al Telecommunication Union

The primary reason for creating a new tradepolicy analysis unit, rather than simplyproviding more resources to an existingoffice, would be to place the new groupclose to policymakers —and to staff andstructure it accordingly

In Sec. 306 of Public Law 98-573, Congressamended prior law to give clear authoriza-tion to the President to collect data ontrade in services However, Congress leftcollection of services data discretionary

OTA discusses further steps for Improvingthe database on services trade in its spe-cial report, Trade in Services Exports a n dForeign Revenues Also see Option 12 onfinancial services


Table 3.—issues and Options for Congressional Consideration —(Continued).

Issue

D. Support for the Negotiations ProcessDespite the growing number of issues on

the Nation’s trade agenda, budget andstaff resources for negotiations remainmodest.

If discussions on services trade move be-yond the umbrella stage to sector-specifictopics—and for such talks elsewhere —U.S negotiators will need more inputfrom service industries and their em-ployees, and from users of services

Regulatory policies lie behind many of thebarriers to services trade and investment,lncluding regulations that serve Importantpublic purposes. Progress in reducing bar-riers will depend on willingness by coun-tries to acknowledge and identifyregulations that unnecessarily dis-criminate against foreign firms.

E. Other Trade-Related IssuesCompared to many of its trading partners

and competitors, the United States de-votes only modest resources to exportpromotion abroad

For years, the United States has sought totighten a loophole in OECD guidelines onexport credits that permits tied aid subsi-dies. In 1986, Congress authorized a tied-aid war chest as part of the Export-ImportBank Act Amendments (Public Law99-472) Substantially tighter OECD guide-Iines followed in 1987

The Trade and Development Program (TDP)finances feasibility studies and planningservices by U.S. firms for projects inLDCs Some of these studies lead to fur.ther work for U S firms, or to exports ofgoods

Options for Congress

OPTION 6: Expand USTR’s budget and staffto meet not only the heavy continuingwork load expected over the course of theUruguay Round, but also to carry on plan-ning and preparations for subsequentnegotiations, including those in other in-ternational forums.

OPTION 7: Direct the Administration to es-tablish several more Industry Sector Advi-sory Committees (I SACS) to speak forparticular service Industries, and severaladditional labor subcommittees to speakfor their employees, To prepare for sector-specific talks—indeed, to help determinewhether these would be desirable fromthe U.S. point of view—Congress coulddirect the Administration to establish andconsult with the new advisory groups atan early date.

OPTION 8: Direct USTR (in cooperation withother agencies) to give high priority toevaluating both U.S. and foreign regula-tions that act, intentionally or incidentally,as non-tariff barriers to trade and invest-ment in the services By taking the initia-tive, the United States could encourageother major trading nations to examinetheir own regulatory barriers.

OPTION 9: Increase support for the over-seas activities of the United States andForeign Commercial Service (US&FCS),which is responsible for most of the over-seas export promotion undertaken by theFederal Government, Raising the numberof US&FCS officers overseas from currentlevels—about 200—to a complement of300 or more would aid U.S. exporting ingeneral Congress could also direct theService to provide training for its em-ployees in the special needs andproblems of the service industries.

OPTION 10: Since other governments can al-ways find ways to subsidize exports thatthey judge Important for national in-terests, Congress could make plain U Sresolve to keep such practices under con-trol by continuing the authorization forthe tied-aid war chest—and by funding Itto match foreign subsidies, if this seemsneeded to get other OECD members tohold to the new agreement

OPTION 11 Increase TDP support from itscurrent level of about $20 million annually—much smaller than similar programs inseveral other nations. Congress couldalso direct TDP to raise the number offeasibility studies conducted by U.S. firmson a reimbursable or cost-sharing basis

As part of this process, Congress coulddirect the Administration to compile andannually update a statement listing thecontributions of all Federal agencies toU S. trade negotiations.

The trade advisory committee systemauthorized by Sec. 135 of the Trade Act of1974 provides a mechanism for privatesector input into trade negotiations. Whilean overall Services Policy Advisory Com.mittee exists, only one ISAC (or two,counting that for wholesaling and retail-ing) represents the services at the sector-al level, compared with 14 for goods (SeeOpt Ion 16 for discussion of telecommuni-cations )

USTR reports annually to Congress on for-eign trade barriers The agency made astart on Identifying U S regulations af-fecting trade in services when it preparedthe U.S. national study on services, sub-mitted to GATT in 1983 To reach agree-ments on reducing barriers to servicestrade, nations will first have to decidewhat topics are appropriate for discussion.

Japan has about 5,000 overseas commercialofficers, the United Kingdom and Franceeach have 400 or more

TDP has particular relevance for the E&C in-dustry.

Ch.

Table 3. —Issues and Options for Congressional Consideration—( Continued)

Issue Options for Congress C o m m e n t s -

ISSUE AREA II–LINKAGES BETWEEN DOMESTIC POLICIES AND INTERNATIONAL COMPETITIVENESSA. Examples from Banking and Financial ServicesCurrent data collection procedures fall to

provide a clear picture of banking exportsand imports

Decisions made by the many Federal andState agencies that supervise and regu-late banking can affect International com-petitiveness, creating a need to buildcons! deration of these impacts intopolicymaking processes

Domestic authorities, here and in othercountries, have been hard pressed tokeep up with rapid changes in internation-al banking and financial services. Greaterinternational coordination of bank supervi-sion and regulation may be needed, alongwith an expansion to cover securitiesmarkets

B. Examples from TelecommunicationsRestrictions on trade in both telecommuni-

cations equipment and services have hin-dered or halted the efforts of U S. firmsseeking to enter foreign markets

To prepare for sector-s specific negotiationson telecommunications. policymakers willneed input from the fulll range of stake-holders

Because telecommunications IS a vital por-tion of the infrastructure for the worldeconomy, government policies have com-petitive Impacts not only for equipmentmanufacturers and service providers, butalso for users (including many U S -basedfirms)

ISSUE AREA III–HUMAN RESOURCESA. EvaluationDespite numerous commissions and task

force reports, no consensus has emergedon adapting education. training, and otherhuman resources policies to the new cir-cumstances resulting from U.S. immer-sion in the international economy

OPTION 12 Direct the Commerce Depart-ment’s Bureau of Economic Analysis toimprove its database on internationalbanking and financial services, in consul-tation with the Federal Financial institu-tions Examination Council, and itsmember agencies (e g , the FederalReserve Board)

OPTION 13: Direct the Administration to pro-vide an explicit mandate for an office ofInternational competitiveness in bankingto serve as a focal point for such issues,in particular the International ramifica-tions of domestic policies

OPTION 14: Use oversight and reporting re-quirements to begin evaluating alterna-tives for greater International coordinationof banking policies One possibility wouldbe to direct U S. agencies that serve onthe Basel Committee to explore ways ofexpanding the Committee’s present ac-tivities

OPTION 15: Congress could establish formalU.S. negotiating objectives for GATT andother forums dealing with telecommunica-tions services and equipment

OPTION 16 Direct USTR and Commerce (incooperation with other Federal agenciesinvolved in telecommunications policy) toestablish an Industry Sector AdvisoryCommittee on telecommunications TheISAC should include representation forusers of telecommunications services andemployees of telecommunications firms,as well as service providers and equip-ment manufacturers

OPTION 17” Direct all Federal agencies withresponsibilities for telecommunications totake into account in their regulatory andother decisions the Interests of U S. firmswhich are users of international telecom-munications services, as well as suppliersof equipment and services. If Congressrestructures the Nation’s regulatory ap-paratus (e.g., by returning more authorityto the FCC), it could take that opportunityto provide such directions

OPTION 18: Call for a fundamental reexami-nation of human resources policies, andan evaluation of specific steps to enhancethe ability of Americans to adjust toshifts in labor market and workplace con-ditions resulting from International com-petition.

1—Summary . 27—

Congress could direct the Administration toestablish a new group, or to expandTreasury’s existing Office of InternationalBanking and Port follow Investment

Congress could also direct Federal agenciesto examine and report on the desirabilityof creating a new international body foraddressing issues of International coordi-nation and harmonization of regulatoryand supervisory policies.

Examples of possible objectives include:that U.S. firms be allowed to compete onan equal basis with host-country firmswhere foreign governments permit compe-tition in telecommunications services,that, as users of foreign telecommunica-tions services, U S -based firms not besubject to discriminatory terms, rates, andconditions

Because the Interests of equipmentproducers, suppliers of services. andusers often diverge, it might be desirableto create three subcommittees reportingto a telecommunications ISAC

It will be up to Conqress, in the end, toredefine the roles- of Federal agencies I ntelecommunications policy Whatever thechoices, it will be critical that the newstructure give questions of Internationalcompetitiveness high priority Congress,for example, might give particular atten-tion to the prospective role of the FCC.as an Independent agency, in dealing withforeign governments and Internationalbodies concerned with telecommuni-cations

Congress could charter an Independentcouncil or Institute to report and makespecific policy recommendations. Or itcould ensure that human capital issuesget a prominent place in the mandate ofany council or other body established byCongress to examine and make policyrecommendations on International com-petitiveness


Table 3.—issues and Options for Congressional Consideration —(Continued)

Issue

B. Adult Education and TrainingA work force with good skills IS essential

for maintaining U.S. competitivenessWhile some companies provide broad-based education and training for their em-ployees, others do little or nothing.

Demonstration projects alone will not leadto major increases in training for em-ployed adults

General vocational curricula that would pro-vide a foundation for continuing (restrain-ing could help people in theknowledge-based Industries adapt to fu-ture workplace changes,

C. Instructional TechnologyThe Federal Government has developed a

great deal of technology and instructionalmaterial for training, Some of this couldbe useful to the private sector and theschools, but only limited Information hasbeen easily available to educators and pri-vate sector trainers,

Transfer of training technology from thegovernment to schools and to the privatesector may involve several agencies, aswell as requiring modifications to coursematerials.

Realizing the long-term potential of instruc-tional technology will require continuingresearch on teaching and learning, Be-yond R&D and the development of newteaching and training materials, dissemi-nation of new methods—includingcomputer-based training—will require on-going Federal support.

Options for Congress

OPTION 19: Direct the Administration to un-dertake pilot and demonstration projects,in cooperation with business and indus-try, on new approaches to training andretraining of active workers. Involvementby organized labor would also be desira-ble. Such programs would not require newauthorization.

OPTION 20: Consider alternatives to in-crease the national commitment for train-ing and retraining of the adult work force,Including incentives for employer-providededucation and training and new sourcesof funding.

OPTION 21: Direct the Department of Educa-tion, in cooperation with the Departmentof Labor, to fund demonstration projectsfor broad-based vocational curricula,focusing on generic skill development forthe knowledge-based services. Grantscould be made available to both publicvocational-techntcal schools andproprietary (trade) schools.

OPTION 22: Direct the Administration togive priority to timely completion of thefeasibility study for an inventory of feder-ally funded training software called for bythe Federal Technology Transfer Act of1986. Should it seem appropriate once thefeasibility study has been completed,direct the Administration to proceed withthe inventory.

OPTION 23: Instruct Federal agencies toplace more emphasis on transfer of train-ing technology and course materials topublic institutions and corporations, ini-tially through technology transfer mechan-isms as authorized in Public Law 96-480Congress could follow with oversight todetermine whether new mechanismsshould be created specifically for diffu-sion of training technologies.

OPTION 24: Increase funding for research,development, evaluation, and dissemina-tion of instructional technologies—including adult education and training,One approach would be to direct theDepartment of Education to establish andprovide partial funding for a researchcenter concerned specifically with adult

Comments

In its 1986 amendments to JTPA (Public Law99-496), Congress authorized the Secre-tary of Labor to fund pilot projects fortraining, while the Carl D. Perkins Voca-tional Education Act of 1984 (Public Law98-524) provides for a special State grantprogram for adult education andretraining.

Proposed alternative funding mechanismshave included tax credits for firms thatprovide certain kinds of training, and apayroll-based tax to fund retraining serv-ices for workers,

Business and industry should be actively in-volved in any such experimental anddemonstration projects. The Carl D. Per-kins Vocational Education Act of 1984provides a suitable vehicle for this option

Congress called for the feasibility study inthe Federal Technology Transfer Act (Pub-lic Law 99-502), which amended theStevenson-Wydler Technology InnovationAct of 1980 (Public Law 98-480).

Examples of executive branch efforts totransfer training technology include acomputer-assisted reading program deve-loped by the Navy and transferred tosome libraries.

Federal funding for such a program couldbe kept modest by requiring matchinggrants from foundations and the privatesector, which stands to benefit substan-tially. Congress, in the Higher EducationAmendments of 1986 (Public Law 99-498),called for a national program of researchon adult learning—without, however,

Iearning, and including R&D on instruc- authorizing fundingtional technologies,

ISSUE AREA IV–TECHNOLOGY DEVELOPMENTA. R&D in the ServicesOTA finds U.S. R&D related to services to OPTION 25: Direct Federal agencies— Services R&D has been underreported for

be much greater than reported in the specifically, the National Science reasons similar to those for the under-usual Federal Government data series. Foundation—to develop new criteria for reporting of services trade in the U.S. cur-

identifying and collecting information on rent account—outdated and unexaminedR&D and technology development related procedures, many of which simply omitto the services, service activities.

Issue

Ch. 1—Summary ● 2 9— -—

Table 3.— Issues and Options for Congressional Consideration—( Continued)

B. The U.S. Technology BaseThe services depend on much the same

technology base as manufacturing Leav-ing aside national defense, the FederalGovernment provides relatively little fund-ing for technology development

Congress has called for more emphasis ondiffusion of technology to American in-dustry through such laws as theStevenson-Wydler Act (Public Law 96-480)The Administration, however, has only im-plemented parts of the legislation

The United States, no longer the unques-tioned leader in technical knowledge, willneed to do a better job of Iearning fromforeign technology in years to come

Policy adjustments may be needed tocapitalize on the potential of defensespending for enhancing the competitive-ness of commercial Industries

C. Technical StandardsBefore the AT&T breakup, a single company

dominated the process of setting techni-cal standards. Today, the process involvesmany firms in competition with oneano the r

Opt Ions for Congress

OPTION 26: Increase Federal R&D supportfor commercial (i e., non-defense) technol-ogies by expanding initiatives such asNSF’S Engineering Research Centers, andensuring continued funding for existingprograms such as the Center for BuildingTechnology at the National Bureau ofStandards

OPTION 27 Alternatively or in addition tothe steps in Opt Ion 26, Congress could,under the 1986 Federal Technology Trans-fer Act (the 1986 amendments to PublicLaw 96-480), authorize, provide fundingfor, and direct the Administration to offergrants for Centers for CooperativeResearch For greatest effectiveness,these centers should be charged withtechnology diffusion as well as de-velopment.

OPTION 28 Emphasize congressional com-mitment to implementation of theJapanese Technical Literature Act of 1986(Public Law 99-382) through early over-sight and full funding If Congress wishesto place more emphasis on screening andevaluation, or to direct the Administrationto fund translations of Interest touniversity-based researchers. it coulddirect the Commerce Department to shareresponsibility with agencies having moreexperience in technology and science—e g the National Science Foundation

OPTION 29 Increase support for exchangesof U.S. technical personnel with those ofother nations Congress could fund fel-lowships that would send graduate stu-dents in engineerlng to countries IikeJapan, as well as considering programsthat would provide partial support. in con-junction with employers, for Industrial en-gineers and scientists working abroadtemporarily (in industry or in universities)

OPTION 30: Make equitable access to for-eign technology a formal U S negotiatingobjective, and calI for reductions in res-trictions on access for U S citizens topublicly supported R&D projects in othercountries

OPTION 31 Investigate and evaluate poli-cies for maximizing the positive impactsof defense-related R&D and procurementon the international competitiveness ofAmerican industries.

OPTION 32: Direct the National Bureau ofStandards (in cooperation with the Nation.al Telecommunications and InformationAdministration) to set up an ISDN testingand demonstration laboratory to helpgovernment agencies make purchasingdecisions and take advantage of emergingtechnical capabilities. and to help pavethe way for a smooth transition to ISDNin the United States

Comments

Should Congress choose to create an Ad-vanced Civilian Technology Agency or Na-tional Technology Foundation—as hasbeen proposed in a number of bills in-troduced in recent years —cooperativetechnology centers would fit naturally intoits role and function Technology diffu-sion programs could be cost-shared be-tween the States and the FederalGovernment

Sending more engineers and scientists towork temporarily abroad could helpchange corporate attitudes in the UnitedStates, and would give American industrymore rapid access to foreign technologiesas they emerge

Pursuit of this objective (included in H.R. 3as passed by the House in May 1987)would need to be consistent with U Spolicies on foreign access to results fromgovernment-supported R&D projects here.

Analysis of the linkages between the mili-tary and civilian sides of the economymight also lead to policy changes makingit easier to adapt commercial technolo-gies to military systems

NBS’s Institute for Computer Sciences andTechnology already has related work un-derway. An ISDN laboratory could provideindependent assessments to support Fed-eral procurement decisions, and also dis-seminate information to private sectorusers of telecommunications services


Table 3.—issues and Options for Congressional Consideration—( Continued)

Developing U.S. positions at the ITU has be- OPTION 33: Congress could anticipate the The State Department coordinates andcome far more complex since the AT&T possibility that incompatible standards for presents U.S. positions at the ITU. Thebreakup Future ITU deliberations may ISDN will be proposed both internationally Department relies heavily on the private sec-well define a global framework for ISDN, and within the United States, and begin to tor, through committees, for advice on U.S.with Impacts on equipment sales as well take preparatory steps to address such is- recommendations concerned with standardsas services sues. Specific actions might include:

● oversight to review U.S. preparationsand negotiating positions for upcomingITU meetings (e.g., WATTC-88), and theImplications for U.S. positions at GATTand in other trade negotiations dealingwith telecommunications;

• requesting a comprehensive study toreview prospective ISDN standards andimplementation, with a view to Iaylnggroundwork for future policy decisions(e. g., if it appears that U.S. telecommu-nications carriers might adopt dissimi-lar approaches that would be costly forusers).

SOURCE Off Ice of Technology Assessment, 1987

industries (Options 25-3 1). Competitiveness inthe services springs from a technology/sciencebase much the same as that for manufacturing.This fact alone—which has not been widelyrecognized—means that strengthening the in-frastructure for development and diffusion ofa wide range of technologies could help bothsides of the economy. Higher priorities for com-mercial technologies seem needed, Govern-ments in countries like Japan pay much moreattention to pre-competitive technologies thatcan help all firms in an industry, Indeed, Fed-eral policies aimed at encouraging inflows oftechnical know-how from countries like Japancould help U.S. competitiveness.

Achieving a better balance between scienceand technology, and finding ways to maximizethe benefits of military R&D and Federal pro-curement for commercial technology develop-ment would also help American companies inmany industries maintain and strengthen theircompetitive ability. Among the services, theneed for better technology is most obvious inE&C firms, but certainly not limited to them.The last two options (32 and 33) reflect the sig-nificance of technical standards for interna-tional competition. The standards set in inter-national bodies sometimes shape competitiveoutcomes quite directly, Other governments fre-

quently try to influence these decisions. ISDNstandards, for example, could have far-reachingimplications for future competition in both serv-ices and in sales of computer and telecommu-nications equipment.

Standards-setting activities provide one ofmany examples of issues that often become lostin the fragmented structure of U.S. policymak-ing, Of course, dispersal of authority has beenintentionally built into the U.S. system. The im-mediate problem is whether the system as cur-rently structured can respond to the new needsof the U.S. economy, These needs are plainenough, Over two decades, even less, a broadarray of American industries has lost competi-tiveness internationally. With continued move-ment toward an interdependent world eco-nomic system, the pressures on U.S. industrywill continue to build. Firms and industries ad-just, because they must. Some companies havefailed, Others have moved abroad. Many haveadopted new technologies, reduced their em-ployment levels. But will the policymaking sys-tem adjust? The stakes are high: U.S. livingstandards have already begun to decline.

Certainly there are signs of change in Fed-eral agencies. Deregulation has been one re-sponse, the services initiative in GATT another.

Have the policy adjustments been fast enough?Has the system changed in the right direction?Will our rather disorderly apparatus, with manyagencies sharing overlapping responsibilities,continue to prove adequate? If other nationsfollow the U.S. lead, deregulating more thanregulating, opening more markets than theyclose, then the answer is probably yes. If, onthe other hand, other nations rely more heav-ily on national industrial policies to guide de-velopment, learn to use these policy tools withsome effectiveness (as the Japanese have al-ready done), and pay only lip service to GATTdiscipline, the answer will probably be no, Inthe latter case, the U.S. system—where struc-tural adjustment as a policy goal has never beenlegitimated, and trade policy remains an appen-dage—will be a grave handicap.

If other nations do take the route of greatergovernment involvement in economic affairs,then the United States may have little choicebut to follow. If we do not, many of our remain-ing advantages-for example, in the informa-tion technology services-may slowly dissipate,Other governments will continue to extract con-cessions from U.S. businesses, and help theirown firms chip away at U.S. markets. Telecom-munications services and equipment illustratemany of the problems. Trade friction has beenhigh for years. Repeated efforts to reach agree-ments on subsidies and ‘‘targeting” have cometo little. Disputes will certainly continue. TheEuropean nations—where government owner-ship of PTTs is the rule—have embarked onextraordinary measures to promote technologi-cal development in computing and communi-cations systems, while simultaneously tryingto limit competition and protect jobs. Trade fric-tion with Japan over telecommunications willcontinue as well, with the difference that Japa-nese policies have been more far-sighted thanthose in Europe–easier, given low unemploy-ment rates, a single dominant political party,

Ch. 1—Sufnfnary • 31

and a huge trade surplus. Meanwhile, the stakeshave been going up, as the next generation oftelecommunications technology—ISDN—beginsto materialize. Thus far, some of the Europeannations, as well as Japan, have taken at leasttentative steps toward deregulation, followingthe U.S. lead. Yet this primary difference re-mains: the United States has deregulated fordomestic reasons; other countries have madetheir choices for reasons including interna-tional trade and competition. Leading exporterslike West Germany and Japan have built con-sideration of impacts on trade and competitioninto their policymaking structures. They havemany years of experience, often painful, inlearning to use government policies to aid theircountry’s businesses internationally. The UnitedStates has never had such a trade (or competi-tiveness) policy. Through most of the 1970s, atleast, there seemed no need.

Over the postwar period, the United Statessought, in many ways, to help other nations de-velop economically. By and large, these effortshave been successful. U.S. leadership helpedensure open international markets for trade andinvestment. Seven rounds of multilateral tradenegotiations have left tariffs at low levels; al-though NTBs have replaced many tariffs, theworld economy is more open today than everbefore, Technology has diffused widely; manynations have moved steadily up the ladder ofdevelopment. The United States has achievedmuch of what it sought over the past 40 years.Unfortunately, many American industries arehaving trouble competing in the world U.S.leadership created.

* * *The following section, the last in the chap-

ter, expands on the introductory paragraphsof this summary, and prefigures portions of theanalysis in the body of the report.

EVOLVING INDUSTRIAL STRUCTURE: SERVICES AND GOODS

To some, the service economy is an informa- pervasive electronically based media. Other im-tion economy, symbolized by communications ages center on more personalized service prod-satellites, computerized financial transactions, ucts—psychotherapy, schooling, fast foods.


Looking at the U.S. economy in 1987, some ob-servers would predict a de-industrialized fu-ture, in which too many Americans will takein each others’ laundry, while U.S. manufac-turing industries continue to decline interna-tionally. Others, looking at the same picture,see a high-technology, post-industrial future—afuture filled with smart machines helping pro-duce knowledge-based services as well as thefamiliar tertiary and personal services, and withother smart machines revitalizing the manu-facturing side of the economy.

Despite the examples of satellites or cheaperoverseas air fares, most of the images have adomestic context. Few people know muchabout markets for Eurobonds, or the technicallicensing transactions through which U.S. cor-porations exploit their know-how overseas. In-ternationally, trade in goods gets far more at-tention than trade in services—no surprise,given the huge U.S. deficit in goods trade.

Much the same is true in other countries.Some countries opposed inclusion of the serv-ices in the Uruguay Round negotiations becausethey saw nothing to be gained. Others—includ-ing NICs like Brazil and India, the leaders ofthe group opposing the U.S. initiative—seemore clearly the importance of services for con-tinuing economic development, but think theywill lose if forced to open their markets. Somecountries have been more receptive, but theLDCs and NICs in general—most with relativelysmall service sectors—have been slow to rec-ognize ways in which liberalization might workin their interests.

The Services and Manufacturing:Synergies and Interdependencies

In 1986, the invisibles account—direct ex-ports of services plus income from U.S. invest-ments abroad—contributed 38 percent of totalU.S. exports. Within the invisibles account,however, investment income (e.g., remittancesfrom foreign affiliates of U.S. firms) outstripsexports of services (e. g., banking services pro-vided from the United States for customersabroad). The official U.S. balance of paymentslists direct exports of services at some $49 bil-

lion in 1986, compared with $91 billion for in-vestment income, and $222 billion for exportsof goods.

OTA’s own estimates, summarized in chap-ter 2, show that the official statistics seriouslyunderstate both imports and exports of serv-ices, While OTA’s estimates indicate a surpluson services trade substantially greater than theofficial figures—$14 billion compared to $2.3billion for 1984, the latest year for which dataare available—even this surplus looks smallcompared to the Nation’s deficit on trade ingoods, $113 billion in 1984 (and $148 billionin 1986).2 And sales by overseas affiliates of U.S.service firms exceed the Nation’s service ex-ports, probably approaching $100 billion in1984. A foreign presence will continue to bemore important for selling services than for sell-ing goods, for reasons that lie in the nature ofservice products—many of which must be pro-duced at or near the point of consumption. Eas-ier and cheaper global communications willchange this aspect of the services only slowly.Trade in goods, which can be shipped andstored, will remain much larger.

Still, many of the conventional distinctionsbetween goods-producing and service sectorsare breaking down, domestically and interna-tionally, While the national accounts may drawa line between goods and services, companiesneed not, Many produce both, and sell thembundled together (although distinctions by di-vision or line of business remain common). Thefirms that have emerged as major competitorsin world markets for computers have succeededlargely because of their skills in providing serv-ices to customers—services that include sys-tems integration, user training, and support andmaintenance for software as well as hardware.

20TA places 1984 service exports at about $80 billion, withimports of $66 billion—figures that exclude banking and repre-sent the midpoint of a relatively wide range. These estimates,like the official statistics, take no account of services embodiedin goods shipments, which cannot be approximated even roughly.See ch. 2, as well as Trade in Services: Exports and Foreign Re\’-enues, op. cit., p. 38. Service sales of foreign affiliates of U.S.firms for 1984 could not be estimated because the data were lack-ing, but OTA’S midrange estimates for 1982 and 1983 came to$97 billion and $92 billion, respectively (p. 41).


Software, arguably a service and now account-ing for the major share of user costs in largecomputer systems, also comes from a rapidlygrowing independent industry, And of coursethe computer itself produces nothing tangible;its function is service—whether helping proc-ess a company’s payroll or designing airplanewings.

Competitive ability in producing services hasthus become a powerful factor in determininginternational competitiveness in manufactur-ing. Service revenues may give a manufactur-ing firm a broader range of strategic options.The productivity of people within an organiza-tion who perform service functions helps de-termine the ability of a firm to compete in worldmarkets. General Motors’ competitiveness de-pends on its assembly line workers, and alsoon its engineers, accountants, and truck drivers.GM bought EDS because of the latter’s exper-tise in data processing services. Finally, GM—along with other U.S. automakers—gets sub-stantial profits from financing new car pur-chases. To take another example, RCA—oncebut no longer a computer manufacturer—ownsthe NBC television network, while also mak-ing TV sets and communications satellites (andmarketing the services of its satellites). GE,which likewise withdrew from computer mar-kets years ago, builds locomotives and also mar-kets information services to banks; GE boughtRCA more for its service businesses than itsmanufacturing capability. Other examples:large corporations raise their own funds on thecommercial paper market, bypassing theirbanks. Meanwhile, banks and accounting firmsdevelop and sell computer software. E&C firmsoccasionally take equity positions in facilitiesthey design and build. Multinational enterprisescompete in some realms, cooperate in others,through vehicles that include international jointventures, co-production agreements, licensesand technology sharing agreements; for years,RCA received some $50 million annually inlicensing revenues from Japanese manufac-turers of color televisions—a sum comparableto RCA’s profits from the manufacture of con-sumer electronic products.

Market linkages between services and man-ufacturing often drive expansion in both, Pro-duction and sales of video-cassette recorders(VCRs), almost all made in Japan, have ex-panded at high rates; much of the growth hasbeen fueled by U. S.-produced “software” in theform of pre-recorded tapes, As the time lag be-tween release of motion pictures in theaters andsales or rentals of cassettes has dropped, VCRshave become a more attractive purchase. Thussales of hardware and software, one imported,the other produced domestically, grow handin hand. Software likewise drives sales of per-sonal and home computers (ch. 5).

The lines separating service occupationsfrom manufacturing occupations blur just asdo those separating service firms from manu-facturing firms. Growing numbers of employ-ees in goods-producing industries perform serv-ice functions—nurses, company librarians,machine repairers, inventory clerks, computerprogrammers—in support of others in the par-ent organization or customers on the outside.


Almost by definition, high-technology goodsembody high service content in the sense ofknowledge and expertise (an integrated circuit,a jet engine, a newly invented biological organ-ism). Knowledge-based services (in contrast tothe traditional or tertiary services—a later sec-tion outlines the distinctions) provide a criti-cal part of the foundation and infrastructurefor the production of high-value-added manu-factured goods, where U.S. export strength hasbeen greatest.

In their domestic operations, manufacturingcompanies rely on service firms not only forfamiliar business services like advertising,accounting, contract engineering, and publicrelations, but to operate cafeterias and clinics,provide security guards for offices and facto-ries, and temporary employees to help meetsurges in demand. Downstream from the fac-tory, they depend on distributors and dealers.Japanese automobile manufacturers penetratedthe U.S. market so deeply in part because theybuilt up and nourished, over a considerableperiod, dealer networks which today are notonly extensive but highly profitable for theirAmerican owners. In the steel industry, too,growth in distribution through service centershas helped change the terms of competition;much of the foreign steel sold in the UnitedStates moves through these independent sup-pliers. Finally, service firms not only sell to themanufacturing sector, but the Nation’s manu-facturing base provides much of the necessarysupport for a standard of living that leads tohigh consumption of personal services (restaur-ants, entertainment, travel), thus creating ad-ditional service-related jobs.

Service exports also create new export op-portunities for goods: American E&C firmsoperating overseas often specify American cap-ital goods (power generating equipment, indus-trial process control systems). Likewise, exportsof goods lead to exports of services: contractsfor training and maintenance may accompanysales of Boeing jetliners (with engines made byGE or Pratt & Whitney). More subtly, for U. S.-based multinationals to take advantage of newopportunities on a global scale, they must havereasonably open access to foreign markets, not

only for sales of goods and services, but for di-rect investments. And to capitalize on the thingsthey do best, American firms need an infra-structure that can support globally integratedbusiness activities–an infrastructure supply-ing telecommunications services, financing, ad-vertising, insurance, and the host of other con-comitants of international business. This isequally true for multinationals that are primar-ily manufacturers (IBM, Caterpillar) and thosethat are primarily service providers (Citicorp,American Express). It is also true for those thatare both: given the forces operating in the worldeconomy, managers of many U.S.-based man-ufacturing companies are seeking to steer theirorganizations toward service activities (one ofthe factors behind the GE-RCA merger).

Multinational Expansion and Integration

At the end of 1985, U.S. direct investmentabroad stood at about $235 billion. Motives forforeign direct investment range widely. Smallmanufacturers seeking low labor costs estab-lish plants in Mexico or Malaysia. Global gi-ants like Citicorp and IBM seek new and grow-ing markets, Sometimes investment is reactive,as firms search for an accommodation to com-petitive pressures (e.g., rising imports at home);sometimes it is outward-looking and strategic,At one extreme, American manufacturers mayrespond to import competition by subcontract-ing production to local firms in low-wage coun-tries. Logistical problems—communications,coordination, transportation—often bedevil thesearms-length arrangements. At another extreme—multinational integration—companies canuse data processing and communications net-works to link farflung operations, solving manyof the logistical problems of dispersed businessoperations. Today, it remains easier for largecompanies than small to put together well-in-tegrated multinational organizations, but thiswill become more practical for smaller com-panies as the range of marketed services ex-pands, experience accumulates, and costs comedown. Already, many relatively small high-tech-nology firms—e.g., software suppliers—operateon a multinational basis, seeking to expand athome and abroad in parallel. When U.S. soft-

Ch. 1—Surnrnary • 35

ware firms carry out product development inthe United Kingdom, they do so not only to cutlabor costs, but to be close to overseas markets.Later chapters explore the meaning of integra-tion, and the implications for competition andcompetitiveness, in more detail.

Many U.S. Government policy makers, as wellas corporate executives, see substantial bene-fits for the United States in multinationalintegration—benefits to which internationalagreements on services trade (and foreign in-vestment) could make valuable contributions.In this view, such agreements, in GATT andelsewhere, emerge as highly desirable and per-haps essential for building U.S. competitive-ness. Whether the businesses involved exportfrom the United States or operate through over-seas affiliates, services such as internationaltelecommunications and data processing net-works, or the foreign operations of Americanbanks, seem vital. Indeed, some who take thisview would argue that multinational integrationprovides the only feasible path for a countrylike the United States in an era of intensifyinglow-wage competition and rapid internationaldiffusion of technology. OTA’s analysis, in anyevent, suggests that maintaining high livingstandards in such a world requires a leadingposition in knowledge-based industries, serv-ices as well as manufacturing.

Despite their strategic significance, U.S. ex-ports of services will continue to lag well be-hind goods exports (ch. 2). Continuing progresstoward cheaper and more reliable telecommu-nications systems will alter processes that re-quire production at the site of consumption onlyslowly. Nor can services, with few exceptions,be held in inventory, stored, or shipped over-seas. Two implications follow:

Employment in U.S. service industriesdoes not depend heavily or directly ontrade (either on exports, or on competitionfrom imports).Foreign investment and sales through af-filiates abroad will remain relatively moresignificant in the services than in manu-facturing.

Nonetheless, rising service content in U.S.goods exports will help create new jobs forAmericans, as will investment hereby foreignfirms seeking to sell services in the lucrativeU.S. market. And, if most of the direct benefits(e.g., employment) of foreign investment accrueto the host country, services provided by U.S.affiliates abroad lead to indirect sources ofadvantage for other American industries. More-over, many of the jobs created domestically insupport of overseas investments tend to be rela-tively skilled and well-paying (e. g., technologydevelopment, financial analysis), For such rea-sons, U.S. international competitiveness in theservices—and particularly in knowledge-based,high-value-added services–brings substantialbenefits to the U.S. economy, though these maybe indirect,

Thinking About the Services

In practice, lines are usually drawn so thatthe category labeled services includes nearlyall economic activities except production of tan-gible goods. Regardless of the sharpness of thelines, or just where they are drawn, the serviceindustries comprise a group at least as hetero-geneous as the goods-producing industries, andperhaps more so; certainly, production of le-gal services differs as much from tourism asproduction of paper differs from productionof computers. The categories in table 4 illus-trate something of this heterogeneity.

The services listed in table 4 demand a widerange of inputs. The competitive ability of agiven firm in a given country will depend onthose inputs and their costs (see app. B, at theend of the report). A country like Mexico, withample low-cost labor in addition to its beachesand sun, is well-placed to capitalize on touristtravel. Medical services, in some contrast, relyon highly skilled and highly paid workers, alongwith expensive capital equipment. Internation-ally, perhaps the most significant difference be-tween goods-producing and service industriesis this: goods can be exported, while servicefirms must generally maintain a foreign pres-ence to sell in foreign markets. Foreign direct


Table 4.—Classification of Service Providersby Markets

1. Intermediate markets (i.e., for services purchasedprimarily by business and industry)Financial services

● Banking (including investment banking and brokerage). Insurance● Leas ing

Shipping and distribution. Ocean● Rai l● Trucking. Air freight● Warehousing, distribution, wholesale trade

Professional and technical● Technical licensing and sales● Architecture, engineering, and construction (including

engineering design services, architectural design,construction management, and contracting)

. Management services

. Legal services

. Accounting

Other intermediate or business services• Information technology services (including software,

telecommunications, data processing, and informa-tion services)

● Franchising● Advertising● Other (commercial real estate, business travel, secu-

rity, postal and courier services, contract main-tenance, . . . )

Il. Services provided largely in final markets to privatecitizens

● Retail trade (including restaurants). Health care. Travel, recreation, entertainment● Education. Other social services, including government• Other Personal services

SOURCE Off Ice of Technology Assessment, 1987

investment may be desirable in manufacturing;it is essential in many of the services.

In this assessment, intermediate or businessservices (category I, services produced and soldto other businesses) get most of the attention.With some exceptions in “other” services, aswell as in shipping and distribution, most ofthe intermediate services in table 4 are knowl-edge-based and skill-intensive—i. e., they de-pend on technology. The second category (serv-ices provided largely in final markets to privatecitizens) also includes high-skill, high-wage, andtechnology-dependent industries such as healthcare, along with a variety of “low-technology”

Plainly, all such distinctions remain arbitrary,Banks employ many tellers with relatively lowskills and low pay. Familiar industries—retail-ing and advertising, tourism and transportion,architectural design—depend on a continuousstream of technology-intensive innovations[automated inventory and ordering systems,computerized reservations and ticketing, com-puter-aided drafting, database management sys-tems for engineering changes and bills of ma-terials). American banks move funds aroundthe country and around the world via electronicnetworks. Computer systems provide analyticsupport for decisions made by air traffic con-trollers and bank officers. In many of these ap-plications, computers enhance human skills(e.g., by helping people deal with complexityin rapidly changing environments). In other ap-plications, computer systems rationalize pro-duction in far more mechanistic ways–examplesinclude automated warehouses and the backoffices of banks, where huge volumes of checksmust be processed quickly and cheaply. Here,the systems tend to replace human skills, as wellas augmenting them in the sense of helping peo-ple do straightforward jobs faster.

Broadly speaking, technology is so pervasivein advanced economies that most foreign salesby U.S.-based companies, whether providedthrough exports or foreign affiliates, dependin some sense on technical expertise. Moreover,the services provided in conjunction with salesof goods such as commercial aircraft, or com-puter and telecommunications systems, followdirectly from the technology embodied in thegoods—e.g., training in servicing proceduresfor jet engines, or in maintaining systems soft-ware. At various points in this assessment, then,knowledge-based services are distinguishedfrom more traditional or “tertiary” services, thelatter including such industries as trade anddistribution. Table 5 summarizes the distinc-tions between knowledge-based and tertiaryservices, while table 6 reclassifies service in-dustries on this basis.

Like the classification by markets in table 4,ambiguities and exceptions can be found in ta-ble 6, but the distinction between knowledge-services,

Ch. 1—Summary ● 3 7— —

Table 5.—Characteristics of Knowledge-Based Compared to Tertiary Services

Knowledge-based services

High ski// levels (as measured, for example, by years ofeducation) and relatively high pay. Many professionaland paraprofessional jobs. Continuing learning often im-portant,

Either the product or the production process, or both, de-pends on relatively advanced technologies. In manycases, digital computers have become integral to theproduction of the service (data processing itself,computer-assisted architectural drafting). Typically, com-puters are used to enhance people’s skills. Control overthe system (and the production process) may be dis-tributed through the organization.

Often though not always an intermediate service, suppliedto other businesses.

Provision of the service often demands rapid response toshifting customer needs. (It may begin with the elicita-tion of those needs.) Flexibility (in volume of output, indesign of that output, hence in response to customerneeds) may become a major competitive weapon. Bothproduct and process can involve substantial customiza-tion to meet market requirements, implying high infor-mation/knowledge content.

Tertiary services

Low ski// levels and educational requirements; low pay. Up-ward mobility may be quite limited.

While advanced technologies may have a prominent role inthe product/process environment, in general neither thenature of the service nor the nature of the productionprocess is affected by the technology in a fundamentalway (electronic cash registers as direct replacements forelectro-mechanical; food preparation using pre-programmed equipment). Typically, the computer servesto rep/ace human skills, with control concentrated atmanagement levels.

Frequently a service provided in final markets to individu-als, sometimes to businesses (custodial services, privatesecurity guards).

The service tends to be standardized, the productionprocess more-or-less fixed and routine,

SOURCE Off Ice of Technology Assessment!, 1987

Table 6.— Examples of Knowledge-Based andTertiary Service Industries

Knowledge-based - Tertiary -

Banking Leasing - -

Insurance Shipping and distribution (all, in -Professional and technical (all) cluding wholesale trade)Information technology services Franchising

(all) Retail tradeAdvertising Travel, recreation, much enterMotion pictures tainmentHealth care Social services (some)Education Personal services (most)

based services and the traditional or tertiaryservices helps identify sectors where a high-wage, high-skill economy like that of the UnitedStates can expect to be competitive internation-ally. At the same time, given the heterogeneityof the services, it makes little sense to speakof an economy being competitive in the serv-ices as a whole. Over time, just as in manufac-turing, some service industries will gain inter-nationally, while others lose.

Using Technology

U.S.-based service companies have often hadtechnological advantages that translate intocompetitive advantages. Today, protectingthose advantages is harder than ever. Goods,services, people—all carrying technology—migrate with relative freedom through a worldeconomy that is largely open, with nationaleconomies interpenetrating one another, pri-marily through the activities of internationalbusinesses.

The technology and science base underlyingthe service industries, which centers on mod-eling of product designs and production proc-esses, overlaps that for manufacturing (box B).While products and processes differ greatly be-tween the services and manufacturing (andamong the services), many of the techniquesremain similar, Computer-based decision modelsfor buying and selling stocks, to take a widelypublicized example, find parallels in factoryautomation, as well as in management of tele-communications networks, When it comes toapplications of computers and communications


BOX B.—The Technology/Science Base for the Services

Narrowly defined, the technological foundation for the service industries begins with models,the more useful of them mathematical. These models abstract from systems, both simple and complex(the system could be a food store or an international currency market), helping people predict theirbehavior. For a simple example-which is not to say the modeling is simple--consider a retail clothingstore, whose owner might want to determine desirable inventory levels and reorder intervals, staffingneeds, whether it pays to open on Sunday. Seasonal selling patterns, predictions of local and nationaleconomic growth, even long-term weather predictions, might help him decide how many winter coatsto order, whether to hire and train new staff in expectation of booming business, and whether tonegotiate a 6-month bank loan to finance inventory or rely on a revolving line of credit. A relatedproblem might be to locate a new store within a growing urban area. Predictions of growth patternsand concentration of future shopping activity would help the owner decide where to put the store,and how much rent he could afford.

Only in the simplest cases could the store owner expect a full and immediately useful answerto his questions, yet imperfect information and heavily quaified results, provided he understood theirlimitations, would help him guide the business. Mathematical modeling based on knowledge of thephysical sciences normally gives more accurate results. When a manufacturing company relies onengineering models to predict the performance of a newly designed home air-conditioner-e. g., itsenergy consumption-the predictions will be close to actual performance. But they not be thesame, and critical decisions (whether the new design performs enough better than the old) will alwaysdepend on actual tests. Note that the air-conditioner manufacturer will also rely on models like thoseuseful to the retailer-consumer buying habits, the economic outlook, seasonal weather forecasts,optimal inventory levels.

Technology, then, in the services as in manufacturing (and mining and agriculture), begins witha science base, eclectically assembled to meet the needs of the industry. The science base under-lies the models. The next and critical steps consist in knowing which models use for a given pur-pose, how to use them defectively, when to accept their predictions and when to disregard them.

Thus there is much more tlm~ modeling to technology in Rs bro?dar dimensions: only in simplecases will the decisicm be autonmtie $he atom will rm out of cann~ peas n@ Saturday unless wereorder now]. People make decisions based on what th~y know and can articulate-which inchdesthe output of amdytical proced~ornbined with tacit knowledge instinct, and intuition, someof which theywillnot evenbe awareofcalling on. This is part ofteclinolo too, viewed as know-how

J?’and expertise. In this view, people mbody technology, both individu y and collectively.

In most of the servkxw, knowledge trmxmb~e to tho science base will be less reliable as a guidefor decisions than in goods-producing indus@es. What people “know” but cannot neceasariiy ex-plain becomes correspondingly more important. I!@reover, it is collective know-how and institutionaldecisionmaking that count in tbtmninin$ mrnpetitive outcomes-while a bade will depend moreheavily on the collective knowiedge, much of it intangible, of its staff than a con@ruction companyor a manufacturer of air-conditioners (which does not by any means make tacit know-how unimpor-tant for the lattar).

Many of thenmddsdeveloped inthapast fordealiti” @h@riescould be handled with ~pet+md-penqil rnathmimtics. &s w~@e$@@@ for a IX-3, owma nuclmlr powerplant; fxmlpk$x cdcdatiims” that can alify b e on di@taltmrnput@s bringr e f i n e m e n t s , b u t @rdy O@X@Ona@ ti techntctd’ .XrJthesel%kxis, mare Ofth$”inodelswili axceed the limits of papar a n d penkil M th@y ard &$ b4 @a#@. Many o f the to bemodeied-e.g., Peep!@’s behavior+nust h tr@4ted st@$tk@ly. ‘1’ypiwdiy , thts requihs processinga good deal of empirical data-mm of tha things compwtem do best.

Ch. 1—Summary •—

Computers excel at storing and manipulating large volumes of data and information—orders andinventory levels in a chain of retail stores, financial transactions in banks. They can also implementcomplex algorithms for recognizing print or simple spoken language. Beyond these transactional ap-plications, new analytical uses of computers, primarily for supporting managerial decisionmaking,are rapidly becoming important for competitiveness in the service industries (as discussed in boxC). Companies that utilize such techniques effectively-i.e., rely on them when appropriate, disregardthem when not—will come out ahead. As always, appropriate use of technology will depend on judg-ment and experience.

The Federal Government—for instance, in its compilations of R&D statistics, and in policies forR&D tax credits—has not fully recognized the technology/science base for the services. But that lackof recognition, and the perception that service companies do market research rather than R&D, shouldnot be allowed to hide the extent to which service industries depend on the tools of mathematicsand other sciences. Estimates in chapter 9 suggest that annual U.S. R&D spending related to the serv-ices totals perhaps $26 billion, more than 10 times the figure published by the National Science Foun-dation as representing U.S. nonmanufacturing

systems, the contrast between analytical appli-cations, such as computer-based stock trading,and transactional applications, in which thesystem does little more than keep track of largevolumes of information, yields further insightsinto the place of technology in the services. BoxC amplifies on this contrast.

As box C suggests, new technologies changethe ways in which firms organize work, Digi-tal data—sometimes information, sometimesmeaningless noise—already permeates firms inthe advanced industrial economies. Even quitesmall companies depend on electronic data-bases, automated production control systems,telecommunications services. Software itself,a service by some criteria, a good by others,symbolizes many of the ongoing shifts. Sittingbetween the system and the people who use it,software tells the computers what to do, con-trolling the interactions between people andmachines. Software and system designers helpshape corporate organizations, the contours ofjobs, the channels of power and influencewithin the firm. But software no longer con-sists exclusively of pre-determined programswith a fixed logical structure. With distributedcomputing and fourth-generation languages,software—and hence the system as a whole—becomes more fluid. As these new approachesevolve, computer-literate experts will lose someof their control over the configuration of the

R&D.

39

system; in principle, many people could gainat least limited ability to modify and customizethe software they work with.

Given this ability to use computer technol-ogy—either to enforce conformity with rigidlystructured work procedures, as in the back of-fice of a bank (analogous to an assembly line),or to enhance people’s independent problem-solving capabilities, as in the bank’s front of-fice or in a computer-aided design laboratory—a“new” manufacturing enterprise may lookmore like a knowledge-intensive service firmthan an “old” manufacturing enterprise. Amodern steel producer, utilizing ladle refine-ment, vacuum degassing, and argon gas stir-ring, followed by continuous casting, to producehigh-strength steels with lean alloy content, willbe heavily dependent on sophisticated controlmodels to regulate melt chemistry, mold levels,and rolling practice. In a sense, such a facilitymay have less in common with a steel manu-facturer still relying on 1960s-era technologythan with a hospital laboratory that uses auto-mated sensors, analytical instruments, andrecording devices to perform an individuallyspecified test series on blood samples. Twobasic dimensions to the use of computer tech-nologies in business organizations follow:

● information/knowledge content, the extentto which the firm depends, in its products


Box C.-Computer Applications in the Services

As noted in box B, the service industries use many of the same technological tools as manufactur-ing. Structural design for bridges, dams, and buildings-undertaken by E&C firms-does not differfundamentally from structural design for aircraft or for artificial hip joints. In both, the laws of physicsprovide the starting point for design methodologies that, today, often include finite element codesfor stress and deflection analysis-codes that can only be run on powerful computers. Designing anoffice building to minimize operating costs (e.g., for lighting, heat, and cooling), given constraintson floor area and construction costs, means calculations for heat transfer and thermal management.In the telecommunications industry, computers help find optimum solutions for network designproblems.

But what about services like banking and insurance, not to mention retailing and fast foods? Today,not only may the corner grocery do its bookkeeping on a personal computer, but supermarket chainsuse simulations to find the right number of check-out lines for a given store. An international con-struction company can manage an onsite inventory of piping, valves, and fittings worth millions ofdollars, with large savings in its costs. Of these three examples, the first and last can be consideredtransactional, meaning that the primary task for the computer system is to keep track of large volumesof data. While arithmetic and simple logic will be part of this—e.g., in bookkeeping—mostly the com-puter is managing information flows. The second example differs; it is an analytical application, mean-ing that the computer performs calculations using a mathematical model (box B). None of the simplifi-cations typical in such models are allowed in bookkeeping, although analytical applications mightwell be part of the software for managing onsite construction inventories (e.g., procedures for mini-mizing materials handling costs).

Transactional applications as part of ongoing business operations tend to be simple in principlebut demanding in practice, particularly when databases are large and rates of information flow high.Although originally developed to reduce costs and increase productivity by automating existing jobs,transactional applications also yield strategic advantages through better customer support and serv-ice. For example, some companies are beginning to locate terminals on the premises of their custom-ers. Not only can the customers place orders at their convenience, they can use the system to trackshipments and otherwise manage their inventory levels. Other examples include fundamentally newproducts such as the cash cards used in automated banking.

Analytical applications, which can be replete with empirical data representing human behaviorin at least some of its random messiness, stem more directly from the technology/science base under-lying the services. Drawing in some cases on social and behavioral sciences, the unifying elementonce again is mathematical modeling, Whether it is queuing theory (as in the supermarket example),linear or nonlinear programming (as in the well-known traveling salesperson and warehousing prob-lems), or economic modeling (e.g., business forecasts), the models run on computers, often some ofthe most powerful machines available.

Like transactional applications, analytical applications of computers open up strategic alterna-tives but may also simply cut costs. The supermarket can predict not only how many check-out linesit needs, but how many checkers to call in as a function of the day of the week and the time of day.In many service industries, future international competitiveness will depend on both transactionaland analytical applications of computer systems, and on telecommunications systems for linking thesecomputers.


●

and/or its production processes, on tech-nical expertise, know-how (whether well-codified, as in a computer program, ortacit, as in people with experience, well-honed skills, good judgment), and inputsof data and information (e. g., from proc-ess control sensors); andwork organization, ranging from rigidlyprogrammed or rule-based, as for telephoneoperators, to flexible and adaptive, as inthe groups of more-or-less autonomous pro-fessionals who work in investment banksor R&D laboratories. (Note that, today,computer technologies may be indispens-able at both ends of the work organizationspectrum, but they are used to regulateand/or replace human abilities at the oneend, to support and enhance people’s skillsat the other).

Figure 6 includes examples of both manufac-turing and service industries ordered on such

Adaptive,Flexible

IOrganization

ofwork

Rigid,Pre-programmed

dimensions. In essence, the horizontal axistakes the distinctions summarized earlier in ta-ble 5 between tertiary and knowledge-based in-dustries, spreads them along a continuum, andadds a similar distinction between “old” and“new” manufacturing. Information/knowledgecontent cannot be measured precisely, but isclosely related to customized production—whether of legal services, computer software,or a batch of low-sulfur, low-phosphorous steelwith high resistance to lamellar tearing. (Thesedistinctions are examined in more detail in ch.8, as are the work organization and computerutilization dimensions along the vertical axes.)

Moving from lower left to upper right in fig-ure 6 corresponds roughly to the direction ofchange in the U.S. economy since the close ofthe Second World War. These changes will con-tinue; indeed, as the figure suggests, an ongo-ing shift seems necessary if the United Statesis to remain competitive in high-skill, high-

Figure 6.— Characteristics of Firms and Industries

dynamiccomparatiadvantag

T e r t i a r y / Old New i Knowledge-

Enhancementof human

ski l Is

1Computerutilization

Replacementof human

skills

/( t r a d i t i o n a l ) manufacturing manufacturing

/based -

services servicesSOURCE Office of Technology Assessment, 1987

42 ● Infernational Competition in Services

wage, high-value-added industries—with the of internal attributes in each sector to another.higher living standards this implies, The move- The United States does not need to evolve to-ment is not so much from manufacturing toward ward a service economy. It does need to moveservices as from one set of manufacturing and toward a high-skill economy.service industries to another, and from one set

chapter 1 summary

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