There’s a way President-elect Donald Trump can help promote U.S. manufacturing exports, and it doesn’t involve imposing new tariffs.
The answer? Implement so-called Mode 5 services. These are services that are embedded in goods. Think AI in cars.
Current trade rules don’t explicitly account for Mode 5-related concerns. Trump should push to change this globally, and like the European Union, prepare to place Mode 5 in U.S. bilateral trade deals.
Roughly 80 percent of Americans are employed in the service sector. Most of these services aren’t traded directly across borders. But with the “servicification” of manufacturing, a trend dating back to the 1970s, services are increasingly exported indirectly as inputs in goods, and in the processes used to build and maintain them.
Moreover, technologies like AI are also blurring the line between services and goods. It’s time for policy to catch up.
This is where Mode 5 comes in.
Consider, for example, a robot that uses AI. Much of the value is in the AI, but current trade rules focus on the robot, not the service, subjecting it to the relevant tariff and nontariff measures.
Mode 5 would correct for this. Yet, at present, Mode 5 is more an idea than real. The global economy continues to cling to the World Trade Organization’s four modes of service delivery: Mode 1 on cross-border trade (telemedicine); Mode 2 on consumption abroad (tourism); Mode 3 on a commercial presence abroad (a foreign affiliate) and Mode 4 on “natural persons” from abroad providing a service domestically (temporary business travel).
What makes Mode 5 qualitatively different is that it’s neither a good nor a service. It’s both. As such, it presents new opportunities to demand better market access abroad.
Proponents of Mode 5 point to several possibilities in this regard. One is customs valuation. The WTO’s agreement on customs valuation already allows some Mode 5-type considerations, as in cases where a good imported by a country includes a service it had exported. EU customs rules follow suit. The U.S. should go further still.
Second, new tariff codes could be created for what are called “Mode 5 goods.” Software-intensive engines are an example, the idea being that they defy standard classifications. Moreover, with AI, some goods could end up learning new tasks, and thus outgrow their original classification.
The point is that Mode 5 presents something of a blank-slate opportunity to press for tariff cuts on many of the most innovative American goods.
These proposals involve opening markets for goods by emphasizing the contribution of the bundled services. The reverse is also true: When bundled in a good, services may avoid restrictions.
Trade in services has always been politically charged and subject to many legal restrictions, from curbs on market access to limits on national treatment. This is particularly true with respect to Modes 3, which covers most U.S. exports, and Mode 4. Mode 5 can help here too.
The U.S. International Trade Commission explains that restrictions on Mode 4, for example, can lead U.S. service providers to engage in “Mode switching,” meaning they’ll sell remotely instead of in person. But with AI, this isn’t quite the retreat it once was, since the possibilities for engaging with foreign customers under Mode 1 are qualitatively different today than in the late 1980s when the WTO’s four modes were defined.
This isn’t to say give up on Mode 4. On the contrary, it’s tempting to ask really big questions about Mode 4. For example, given the pace of developments in AI, what does it mean to talk about “natural persons” delivering services abroad? And with Mode 5 goods, is this even a services question?
Here’s the point: Because Mode 5 isn’t a good or service, it can help open markets for both. Best of all, Mode 5 plays to all of the competitive strengths and innovativeness of the U.S. economy.
Trump should insist on formalizing Mode 5 in U.S. bilateral trade deals. Unlike tariffs, Mode 5 would deliver on his pledge to spur U.S. manufacturing and do so without triggering a trade war.
Marc L. Busch is the Karl F. Landegger Professor of International Business Diplomacy at the Walsh School of Foreign Service, Georgetown University, and a Global Fellow at the Wilson Center’s Wahba Institute for Strategic Competition. Follow him on X @marclbusch.
