CHAPTER VI

TRADE IN INFORMATION TECHNOLOGY

GOODS AND SERVICES (101)

American IT companies are powerful competitors in markets around the world. Yet
the United States ran a trade deficit in information technology goods of almost
$66 billion in 1999. (Figure 6.1, and Appendix Table 6.1) The growing imbalance
in cross-border flows of IT goods overwhelms the small surpluses that the
United States has earned in recent years in IT services trade. (Figure 6.2,
below, and Appendix Table 6.2)

The paradox of large trade deficits in an area where U.S. firms are world
leaders is largely explained by the fact that America's leading IT firms are
global operations that service foreign customers through their overseas
affiliates, rather than by exporting goods made in this country. The most
recent published data show that in 1997, when the United States exported $121.4
billion of IT goods and services, foreign sales by overseas IT affiliates of
American companies totaled $196 billion. (102) In the same year, American-based
IT affiliates of foreign companies reported U.S. sales totaling $110.5 billion.
(Table 6.2) U.S. deficits in IT trade also reflect strong growth in the U.S.
economy compared to the slower pace virtually everywhere else and the boom in
IT investment by American firms.

TRADE IN IT GOODS

Both exports and imports of IT goods have exhibited strong growth in recent
years, with imports growing faster than exports. Through the 1990s, U.S.
exports of these goods, including pre-packaged software, rose at an average
annual rate of about 9.5 percent. Over the same period, U.S. imports of IT
goods increased at an average rate of 12.3 percent a year. As a result, the
U.S. trade deficit in IT goods jumped from $11.5 billion in 1990 to $65.9
billion in 1999. (Figure 6.1) In fact, the United States has run trade deficits
since 1983 in many categories of IT hardware, including semiconductors,
household audio and video equipment, and computer storage devices. (103) Trade
surpluses in computer peripheral equipment turned negative in 1994; and in 1999
the nation posted its first trade deficit in electronic computers. (Appendix
Table 6.1)

At the same time, the United States continues to run trade surpluses in some
high value-added IT products. The U.S. trade surplus in pre-packaged software
reached $2.8 billion in 1999, a record level. The trade surplus in scientific
instruments has also generally been on the rise. And following a long series of
trade deficits dating from 1983, telecommunications equipment manufacturers
enjoyed export surpluses in three of the five years after 1994.

TRADE IN IT SERVICES

The U.S. trade position in IT services strengthened throughout the 1990s.
Exports of IT services, including royalties from the licensing of U.S.
software, increased at an average annual rate of 13.2 percent from 1990 to
1998, while imports of IT services grew at a 6-percent rate. As a result, the
United States ran trade surpluses in IT services of $0.9 billion in 1997 and
$1.8 billion in 1998, the first such surpluses since BEA began collecting
comprehensive data on services trade in 1986. (Figure 6.2, and Appendix Table
6.2)

Within IT services, U.S. exports of computer and information services,
including software royalties, increased at a 23.7-percent average annual rate
in the 1990s. Even though imports of these services rose even more rapidly, by
33.1 percent per year, in 1998 they still remained just under $1 billion, or
less than one-seventh of the value of exports. In 1998, U.S. firms exported
$4.0 billion in computer and information services, compared to $0.5 billion in 
imports of such services. In addition, software royalties paid by foreign firms 
to U.S. producers surpassed $3.2 billion, compared to U.S. software-royalty 
payments to foreign producers of less than $0.5 billion.

By contrast, U.S. payments to other countries for telecommunications services
consistently outpace foreign payments to U.S. carriers. In 1998, the deficit
was $4.4 billion, down modestly from the record $5 billion in 1996. (Appendix
Table 6.2) The negative balance of payments on cross-border sales of
telecommunications services is a reflection of calling patterns and differences
in national telecommunications rates. More international calls originate here
than in other countries because of the strong U.S. economy, relatively high
U.S. income levels, and large immigrant populations in this country. In
addition, because American markets are more open and competitive, foreign
callers pay less to U.S. carriers to complete calls to the United States than
Americans pay to foreign carriers to complete calls going the other way.

TRADE BETWEEN U.S. IT FIRMS AND

AFFILIATED FIRMS ABROAD

Many U.S. IT firms, spurred by competition from low-cost foreign producers and
the liberalization by a growing number of countries of controls on direct
investment and capital flows, have moved lower value-added production overseas.
As a result, intra-firm trade, defined as cross-border sales between parents
and affiliates of U.S. and foreign multinational companies, accounts for a
significant portion of our trade in IT products. In 1997, for instance, U.S.
exports to affiliated firms in core IT hardware industries--computer and office
equipment; electronic components and accessories; and audio, video and
communications equipment--amounted to roughly 60 percent of U.S. exports of
goods in these classes of IT hardware. (Appendix Table 6.1)

Trade between U.S. parent companies and their overseas affiliates has
contributed to a reduction in the size of the U.S. trade deficit in information
technology products. Trade between foreign parents and their U.S. affiliates
has had the opposite effect. (Table 6.1) On balance, the combined impact of
intra-firm trade remains positive.  In 1997, exports by U.S. parents and U.S.
IT affiliates of foreign-owned companies to affiliated firms overseas exceeded
$65 billion, while imports from foreign parents or foreign affiliates of U.S.
parents totaled $52 billion, resulting in a net surplus of $13.2 billion.
(Table 6.1) In other words, the U.S. trade deficit in IT goods and services is
due to the imbalance in trade between unaffiliated companies.


SALES BY U.S. AND FOREIGN IT AFFILIATES

As a group, American companies that make IT products for sale outside the
United States are more likely to supply these markets with goods and services
produced by their overseas IT affiliates, than to export to these markets from
the United States. The global competitiveness of the U.S. IT industry is
apparent in the comparison of sales by U.S. IT affiliates abroad with sales by
foreign-owned IT affiliates stationed in the United States. In 1997, for
example, foreign sales by U.S.-owned overseas affiliates in the computer and
office equipment industry exceeded sales in this country by foreign-owned U.S.
affiliates in the same industry by $67 billion. Similarly, the balance of sales
in 1997 favored American-owned foreign providers of computer processing and
information retrieval services by $41 billion and U.S.-owned foreign producers
in the electronic components and accessories industry by $20 billion. In
contrast, the comparable balance in the audio, video,
and communications equipment industry was roughly zero, while U.S. sales by
American affiliates of foreign firms in the communications services industry
topped foreign sales by American-owned affiliates providing the same services
overseas by $35.8 billion. (Table 6.2)