Modelling U.S. services trade flows: a cointegration-ECM approach

The U.S. service surplus soared from near zero in 1985 to about $60 billion in 1992, offsetting about two thirds of the goods trade deficit. Could this merely reflect improvement in data collection? Or does this mean U.S. services industries are more competitive internationally than goods industries? Is the services surplus likely to continue to rise? This paper estimates a forecastable model of U.S. services trade to address the above questions. We find that data improvement actually had a negative net impact on the services surplus, since it affected imports more than exports. Instead, the surge in the services surplus was mainly due to strong foreign growth and, to a lesser extent, dollar depreciation. An increase in either outward or inward foreign direct investment asset (FDIA) has a significant and positive impact on both exports and imports of other private services, but has only a modest net effect on the U.S. services balance. Thus, the outlook for the U.S. services balance largely depends on the growth prospect of foreign economies.