Full Text: Copyright Dow Jones & Company Inc Dec 4, 2000 MEXICO CITY -- NetLink Transaction Services LLC's contribution to the U.S.-Mexico trade balance is barely a drop in a river of bilateral transactions now rushing by at a rate of over $200 billion a year. But those dollars are part of an emerging trend that some economists say signals a tidal shift: a U.S. trade surplus. Netlink, Rochester, N.Y., which calls itself a "virtual banking-services provider," maintains the books for 6,000 Mexican factory workers in the border city of Reynosa. Essentially, Netlink "exports" its ability to monitor offshore payrolls from databanks in New York. To add 100,000 workers next year, Netlink in June sold equity stakes to raise the $7.5 million it needs to add capacity in Rochester. Payroll services are one small example of how growing imports from Mexico lead directly to growing exports of U.S. expertise. Simply put, as Mexico increases its exports of merchandise, it needs more imported brainpower to grease the flow. That's the silver lining behind a swelling trade deficit with Mexico, which through the first nine months of this year ran to $18.6 billion. World-wide, the U.S. trade deficit is set to surpass $450 billion. But while the gap in merchandise trade keeps growing, some economists see indications that the trend won't last the decade. The reason: the growing U.S. trade in services, which now tops $250 billion annually and runs a surplus of $80 billion. And both numbers, say economists, are poised to explode over the next 10 years. "Services trade is the unsung hero of our trade balance," says Robert Litan, director, economic studies, at Washington's Brookings Institution. According to a University of Michigan forecast, U.S. service exports will hit $650 billion by 2010 -- about the same volume of current U.S. exports of farm and factory goods. World-wide, cross-border sales of services are around $1.3 trillion, most booked by U.S. providers. Services sold by the No. 2 exporter, Britain, total just $100 billion. To be sure, predictions of services-as-saviors aren't new; in the early 1990s, an opening of the world's financial markets was expected to usher U.S. firms into a world of profits formerly locked behind national borders. Today, that seems naive. They merely may have been premature. A proliferation of free-trade agreements around the globe has blurred the boundaries between economies, so much so that economists now wonder whether the strength of the service trade is not so much untapped as uncounted. "Accounting for service-sector transactions is difficult enough at home, it's even more challenging when services cross borders," says Catherine Mann of the Institute for International Economics in Washington. Take packaged software, she says, whose delivery can be via CD-ROM in a box, loaded onto a computer, or downloaded via the Internet. As such, while overseas sales of software by U.S. companies topped $13 billion as long ago as 1995, the most recent data in the U.S. balance of payments, for 1998, show software exports of just $3 billion. Another accounting anomaly: The more demand grows, the faster exports disappear. That's because as service providers increase sales abroad, they advance beyond the export stage to establish subsidiaries in-country. Consequently, sales to foreign customers are booked as domestic transactions between a branch of a U.S. multinational and a local buyer. Last year, more than $300 billion in such intracompany service exports went unreported in the U.S. trade balance, slightly more than the $250 billion in services officially exported from the U.S. Combined, the two figures very nearly match all U.S. exports of merchandise. Electronic Data Systems Corp., Plano, Texas, booked revenue of $18.5 billion in 1999, 42% of that amount -- more than $7 billion -- derived from overseas transactions. Yet barely 2% of EDS's sales are considered "exports" since sales of services that originate in the U.S. pass through an overseas EDS vendor. For example, EDS's $200 million in sales to Mexico include operations in Charlotte, N.C., where EDS employees run information systems for Aeromexico and Mexicana airlines. Besides running programs for reservations and flight planning, they process frequent-flier miles and run the systems that print tickets, boarding passes and baggage tags. Although EDS charges the Mexican airlines millions of dollars each year, company officials say none of that is counted as an export. That experience suggests much of what is exported is not being counted, particularly with larger trading partners. Just since 1990, over a dozen countries joined the ranks of importers buying $1 billion or more worth of U.S. services annually. Among the newcomers: Venezuela, Chile, Indonesia, Thailand, Israel, Malaysia and South Africa. Meanwhile, Brazil, South Korea and Australia have already cracked the $5 billion threshold, as Mexico, Britain and Germany each topped annual service imports of $10 billion. Those ranks will grow, thanks to the World Trade Organization's General Agreement on Trade in Services negotiations. The latest round began last week in Geneva, where knocking down trade barriers for telecommunications, data processing, energy and financial services is on the agenda. ___________________________________
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