When an iPhone 5 is sold in the U.S., trade statistics count it as $400 credit to China's side of the ledger. Is this right?
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.
What do you think?