“necessities” for producers; demand for some of these services is unrelated to the scale of production; and a larger part of services trade seems to involve long-term relationships (e.g. because of relationship-specific investments by buyers and sellers). There are also signs that the crisis is itself generating new tasks to be outsourced, such as legal process outsourcing or debt processing, as well as creating pressure generally to reduce costs through outsourcing.<sup>5</sup> The relative buoyancy of services trade cannot be taken for granted. Over it too hangs the Damocles sword of protectionism. But protection is taking a subtle form, perhaps in deference to the invisibility of services and the fact that they are increasingly delivered electronically. First, explicit discrimination through preferential procurement seems at this stage less damaging than the implicit social and political disapproval of outsourcing. Developing country service exporters argue that it is the latter that has had a chilling effect on demand for their services. Similarly, the few visible explicit restrictions on employing or contracting foreign services providers in specific areas (e.g. financial services) are not as costly for both host and source as the increasing social and political aversion to immigration. In the longer term, subsidies to banks are probably less damaging than financial protectionism. The former are temporarily necessary to ensure the stability of the financial system. The latter seriously erode the case for openness. Inducing national banks to lend domestically in a crisis deprives developing countries in particular of capital when they most need it and greatly strengthens the case for financial self-sufficiency.

Section II describes the trends revealed by the US services trade data, and compares it with developments in other OECD countries for which more limited data is available. Section III suggests reasons for the resilience of services trade, drawing upon evidence from India. Section IV assesses the significance of protectionist measures affecting services trade. Section V concludes.

# **II. SERVICES TRADE DURING THE CRISIS**

In this section, we consider in turn the impact on US imports - in the aggregate and from specific trading partners, on US exports, on US affiliates trade, and on the trade of other OECD countries.

# **II.1 US Imports of Services**

Imports of services have proved much more resilient than imports of goods (as we saw in Figure 1). The upper panel of Figure 2 presents year-on-year growth rates of goods and services imports, respectively, on a monthly basis between January 2006 and February 2009. From mid-2008 onwards, the growth of imports of both goods and services started to decelerate, yet the downturn in merchandise trade was sharper. In February 2009, goods

> 5 Combinations of these factors may also lead to dynamic effects.  Say, the pressure to reduce costs during the crisis induces outsourcing.  Once a firm incurs sunk costs in establishing the new arrangement and relationship, it does not make sense to reverse the arrangement even after the crisis has passed.  The temporary shock might thus permanently ratchet up outsourcing activity.

4