As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy. But, times have become very different.
Manufacturing is now driven by global supply chains, where most imports should be stamped “made globally”, not “made inChina”, or something similar. This is not an academic distinction. With trade imbalance causing friction between leading economies, the measures we use can gravely exacerbate geo-political tensions, at a time when cooperation is more vital than ever.
International trade is currently measured in what is known as gross value. The total commercial value of an import is assigned to a single country of origin, as the product reaches customs.
This worked fine when economist David Ricardo was alive – 200 years ago, Portugal was trading wine “made in Portugal” for English textile “made in England”. But, today the concept of ‘country of origin’ is obsolete.
What we call “made inChina” is indeed assembled inChina, but its commercial value comes from those numerous countries that partake in its assembly. It no longer makes sense to think of trade in terms of “them” and “us.”
This is not to suggest that all international trade tensions will vanish overnight if we change the way it is measured. But, if we are to debate something as important as trade imbalances, we should do it on the basis of numbers that reflect reality.
A distorted trade picture can inflame bilateral relations, whilst raising anti-trade sentiment at a time when protectionist pressures are already rising. Economists have long abandoned the view that trade is a zero sum game, but the day-to-day worlds of politics and markets still seem to work on old mercantilist beliefs. The latest financial crisis has naturally exacerbated this feeling, even at a time when global manufacturing has made distinctions between “us” and “them” ever less relevant.
Apple’s iPhone illustrates this clearly. It is assembled inChinaand then exported to theUnited Statesand elsewhere. Yet, the components come from numerous countries.
It contributed 1.9 billion dollars to theUnited Statestrade deficit withChina, using the traditional country of origin concept, according to a recent Asian Development Bank Institute study. But, ifChina’s iPhone exports to theUnited Stateswere measured in value added – meaning the value added byChinato the components – those exports would come to only 73.5 million dollars.
It is not just phones; automobiles, aircraft, electronics, even clothing, are increasingly made in numerous countries.
No car or commercial jet could now be built with inputs from just one country. Business leaders also know that new trade frictions are especially damaging in an era of global supply chains. Import duties, red tape or other delays and costs in the delivery of inputs means higher overall costs. And our traditional trade statistics make such frictions much more likely.
The statistical bias, created by attributing commercial value to the last country of origin, perverts the true economic dimension of the bilateral trade imbalances. This affects the political debate and leads to misguided perceptions. Take the bilateral deficit between China and the United States – a series of estimates, based on true domestic content can cut the overall deficit, which was 252 billion dollars in November 2010, by half, if not more.
The measures we use also change the way trade affects jobs. Research on Apple’s iPod shows that out of the 41,000 jobs its manufacture created in 2006, 14,000 were located in theUnited States; some 6,000 were professional posts. Yet, since American workers are better paid, they earned 750 million dollars, whilst only 320 million dollars went to workers abroad.
Indeed, the iPod may have never existed if Apple had not known that Asian companies could supply components, whilst both Asian workers and Asian consumers would manufacture and buy it. Statistics that measure value added can provide a more reliable way of seeing how trade affects employment.
Different means of calculating trade is relevant well beyond theUnited StatesandChina. Thinking about trade in value-added terms can take us beyond the politics of bilateral trade balances.
Seen this way, trade shifts from a one-to-one balance into a network of value-added chains, where interdependence dominates and everyone can win. Most importantly, it will help policymakers, and their populations, see the need for stronger multilateral trade cooperation, and the global growth and jobs they can bring.
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