In justifying his latest tariffs announcement, President Donald Trump complains of unfair trade deficits, saying the US has been “looted, pillaged, raped, plundered” by other countries for decades.
He has blamed China for exploiting the United States through unfair trade agreements, condemned Canada’s high tariffs on American dairy as unacceptable, and criticized Cambodia for imposing excessive tariffs and benefiting at the US’s expense for years.
What he has left out in his repeated criticisms is the trade surplus the US benefits from when it comes to his country’s service industry.
Services make up about 70 percent of the US economy. That includes a wide range of businesses, including education, healthcare, travel and hotels, financial services, as well as media and entertainment, insurance, maintenance and repair, and charging for the use of intellectual property, among others.
Exports of these services contribute approximately 25 percent of the US economy, economists say.
“The US has a strong comparative advantage in several major service industries: education, health, finance, law, accounting, entertainment. That explains the trade surplus,” said Gary Huffbauer, nonresident senior fellow at the Peterson Institute for International Economics.
In 2023, the US exported services worth $1.02 trillion, up 8 percent from a year earlier, and imported services for $748.2bn, up 5 percent. That left it with a trade surplus of $278bn, a trend stretching back at least two decades.
“Trump may be ignorant of the services trade surplus, but more likely he thinks he can get more popular approval by talking about deficits in manufactured goods,” Huffbauer added, pointing to the auto worker who Trump brought during his tariff announcement on Wednesday as an example of support for tariffs among the US working class.
Rachel Ziemba, an economist and adjunct senior fellow at the Center for a New American Security, agreed that it was “a puzzlement” that Trump never referred to this metric.
“He was the same way in his first term, underemphasising services, despite the fact that he spent his career in services,” said Ziemba, referring to Trump’s real estate, tourism and entertainment ventures, all of which come under services.
Trump’s focus on goods reflects the fact that manufacturing is important to the industrial base, including the defence sector, and it would be problematic if too much manufacturing capacity erodes as it hits productivity, said Ziemba.
“But it is surprising he doesn’t look at the whole picture and at the ways in which his policies put services at risk. Plus, cutting research undermines advanced manufacturing. His whole team underestimates services,” Ziemba said.
Vulnerable to retaliation
There is the reality that a lot of Trump’s voters are in the manufacturing belt, where jobs and lifestyles have been eroded as many plants shut down as the work was relocated to cheaper destinations overseas – one reason Trump has given for his focus on trade imbalances.
That lack of domestic manufacturing and supply chains was also felt during the COVID pandemic when trade came to a screeching halt and resumed initially at a snail’s pace when international borders started to reopen.
But none of that takes away from the reality that Trump’s latest harsh tariff policies will leave the US services sector vulnerable to retaliation.
Foreign countries can deny operating permits for US business firms and can tax digital services, Hufbauer said. They can also temporarily suspend copyright, trademark and patent rights or prohibit the payment of royalties.
For decades, the US has worked to secure foreign market access and intellectual property protection for US service firms.
“Some countries have tried limiting the reach of Hollywood entertainment through screen quotas and other devices. On the whole, those have not been successful. But this time they could invoke stricter measures,” Hufbauer said.
“US service and tech companies could lose a lot of market access, and share market value, as a consequence of Trump’s tariff war,” he added.
While there may not necessarily be alternatives at scale for US software, countries have imposed taxes like digital service taxes and data localisation requirements, albeit those are more driven by privacy needs than as a source of revenue.
There are already some “buy local” – and boycott US – trends in parts of the world which could be formalised by government policies.
However, warned Ziemba, for any country that plans to apply taxes on these US services, there is always the danger that the move could backfire as it would increase the costs for the domestic market and prompt further retaliation from Trump.
By focusing on manufacturing over services, Trump is using “his judgement as to where he can marshal political support”, Hufbauer said.
