Measuring a trade deficit can be a tricky business.
In a speech earlier this month, World Trade Organization Director-General Pascal Lamy said, "If we were to measure trade in value-added rather than gross statistical terms, bilateral trade balances would look very different." In fact, such a value-added measure would result in “China's surplus with the United States reduced by half."
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When I first read the speech in China Daily, I scratched my head. (The state-controlled newspaper ignored most of Lamy's speech and glammed onto the bit about China’s surplus with the United States being reduced to half.)
If, as I did, you read the entire speech, Lamy wasn’t being particularly soft on China. Rather, he was making a point about how drastically the nature of trade has changed. Trade is no longer bilateral, it's global.
“High-tech products used to be made in the U.S., Japan or Germany," said Lamy, stating the obvious. "Today, they are made [around] the world, with components and parts fabricated in many countries. The country where the final assembly takes place may contribute only a small fraction of the final value of the product.”
In Lamy's view, “Not everyone has fully understood this important shift, but the debate is evolving, starting with the way we measure trade.”
Lamy made his case using Apple’s iPhone as Exhibit A. “True, the iPhone is assembled in China, but the goods and services leading up to the final assembly came from 15 different companies in many different countries. The value added to the iPhone in China is around 4 percent, far less than the value added in the United States, Japan, Germany and South Korea.
“Yet, when a $400 iPhone is sold in the United States, standard trade accounting lists it as $400 credit to China’s side of the ledger and $400 debit for the United States."
WTO economists estimate that China’s $295 billion trade surplus with the U.S. could be reduced by nearly half if two-way trade were measured in value-added terms, the WTO boss concluded.
Lamy’s argument is valid. In the current economic environment and the U.S. presidential campaign, China is blamed for keeping the yuan's value artificially low to make Chinese exports cheaper. Lamy said there is “no clear-cut conclusion” that a revaluation of the yuan will affect China’s trade balance. Putting on his politician hat, he added: “The place where the exchange rate could be seen as overvalued or undervalued is not the WTO,” but the International Monetary Fund.
What’s the bottom line?
Given the critical importance of the U.S.-China relationship to those two countries and for the rest of the world, it’s time to cool the rhetoric and look at trade statistics from a different perspective -- starting with the value added to new products.
There have been several length analysis on this topic. Most of these use the iPhone as the example. The conclusion is that most of the profit goes to Apple even though from a trade deficit perspective most of the gain is counted in China. Here is one of the many articles I've seen on the topic that was in Forbes:
There was also an analysis in The Economist that came to a similar conclusion.
"Trade is no longer bilateral, it's global."
Lamy is right, but the implications are still making themselves felt. Consider the emerging discipline of supply chain management, which has evolved to deal with precisely the increasing decentralization of product manufacture. The parts that make up the finished product may come from all over the world, and sourcing them and insuring they are where they need to be when they need to be to *make* the finished product is a critical skill for anyone involved in that sort of manufacture.
The world is flat, the economy is global, and *everyone* is in the process of finding out what that means.
Don't all the parts flowing 'into' China before the iPhone is assembled get counted in the balance equations ??
Seems like if they did only the 4% assembly value add would be counted once all the flows are accounted for.
Maybe 50% (or ?) of the 'parts' in the phone are made in China so maybe they are just transfered from the chip vendor factory inside the country to foxcomm so not ever an import or export. That would make it more than 4% local value added in the example given, just not all in the apple manufacturing step.
The only possible long-term solution is a general synchronization of tax policy, particularly on corporations and the very wealthy. Anything else, and accountants and lawyers will find ways to route money through whatever tax havens exist.
The other possibility - everyone racing to the bottom and trying to BE the tax haven - can only lead to banana republics where the rich are essentially untaxed and control nearly the entire economy.
Well ... I don't buy this argument entirely, any more than I buy the argument that US corporations are taxed very little, *when that tax is compared with GDP*. That doesn't tell the whole story.
A company does not make hiring and manufacturing decisions based on any theoretical comparison of local and federal taxes with GDP. The company worries only about how much *it* will be taxed. And a country's economy does not depend solely on high value added content. As we've discussed on here in other articles, manufacturing brings with it all manner of support industries too.
The bottom line is always going to be the flow of real money. Put it this way. It would be difficult to support a country's economy with work only going to nuclear physicists and lawn care companies (a "slight" exaggeration to make the point).
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