Thursday, December 16, 2010

Politicians' Misguided Reliance on Conventional Trade Statistics, part 47

One of this blog's many non-monkey-related themes has been the realization that 21st century global supply chains have rendered conventional trade statistics like the trade balance wholly unreliable indicators of the efficacy of current trade policy.  Economist Mark Perry points us to yet further proof of this fact from a fascinating article in yesterday's WSJ about a new study on the origins of the iPhone and its impact on the US-China trade deficit.  The WSJ story also hits on the political implications of this important research (emphasis mine):
One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves.

Yet two academic researchers estimate that Apple Inc.'s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

"A distorted picture" is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step—assembling and shipping the phones.
So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month....

The result is that according to official statistics, "even high-tech products invented by U.S. companies will not increase U.S. exports," write Yuqing Xing and Neal Detert, two researchers at the Asian Development Bank Institute, a think tank in Tokyo, in their report.

This isn't a problem with high-tech products, but with how exports and imports are measured, they say.

The research adds to a growing debate about traditional trade statistics that could have real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices....

Breaking down imports and exports in terms of the value-added from different countries can lead to some controversial conclusions. Some U.S. lawmakers, for instance, argue China needs to let its currency rise significantly against the U.S. dollar in order to reduce the trade gap between the two nations. 
The value-added approach, in fact, shows that sales of the iPhone are adding to the U.S. economy—rather than subtracting from it, as the traditional approach would imply.
Based on U.S. sales of 11.3 million iPhones in 2009, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for parts produced by U.S. firms such as chip maker Broadcom Corp., they arrive at the figure of the $1.9 billion Chinese trade surplus—and U.S. trade deficit—in iPhones.

If China was credited with producing only its portion of the value of an iPhone, its exports to the U.S. for the same amount of iPhones would be a U.S. trade surplus of $48.1 million, after accounting for the parts U.S. firms contribute....
The latest results are broadly similar to analyses made by the Personal Computing Industry Center at the University of California, Irvine, of the trade and manufacture of another Apple product, the iPod. That research also found that Chinese labor accounted for only a few dollars of the iPod's value, even though trade statistics credited China with producing its full value....
Awesome.  The new study is available here, and it adds to a growing number of studies which show, as I've chronicled extensively over the last two years, that globalization - in particular global supply chains, multinational specialization, cross-border investment and realtime logistics - has rendered old school trade stats increasingly worthless for everything except raw materials/foodstuffs and the most basic industrial goods.  This latest work is especially cool because it shows that the United States derives almost twice as much as China from the actual manufacturing of the iPhone - a little tidbit that should quell some (misguided) criticisms of an earlier iPhone study which showed that, of the iPhone's $600 retail price, the United States derived $360 "only" from services (design, engineering, marketing) and profit, as opposed to manufacturing. (China got only $6.54 for assembly.)

Unfortunately, as the WSJ article mentions, many American politicians and so-called "experts" still rely on these obsolete data, in particular bilateral trade balances, to justify their trade policy demands, whether it be for Chinese currency appreciation or solving global "imbalances" or any other policy prescription that could have massive ramifications for the global economy and, in many cases, create serious new conflicts with some of our largest trading partners.  For example, on the same day that the WSJ published this story, Sen. Ron Wyden (D-OR) released a new "report" breathlessly complaining about evil Chinese "green" protectionism and demanding that the Obama administration take action to "combat" China's policies.  And Wyden's only proof of foul play?  Yep, the US-China trade deficit in green goods:
“It has become clear to me that China’s aggressive and targeted industrial policies are giving its producers and exporters of green goods an unfair leg up on the competition, so much so that our green good trade deficit with China grew even while our overall trade deficit in these products shrank,” Wyden said, Chair of the Senate Finance Committee’s Subcommittee in International Trade. “Even in a good year, American workers and producers in Europe and Japan are falling prey to what appear to be unfair practices employed by China. A unified approach is needed to combat these challenges and I urge Ambassador Kirk and Secretary Locke to make clear to China that the U.S. places a high premium on a fair market for green goods.”

The report shows that the U.S. trade deficit with China in green goods grew by almost 60 percent, to $954 million in 2010, even as the U.S. green goods trade deficit with other countries shrank. The report also shows that the U.S. exported more green goods in 2010 than at any time in the previous five years. Despite this growth, U.S. exporters continue to lose market share to the Chinese in the biggest and fastest growing markets.
So to recap: on the same day that the nation's most-read newspaper published a big story about how global supply chains have (i) completely ruined conventional statistics on trade in high-tech goods and (ii) seriously undermined policies based on said data, Sen. Wyden released a new report advocating a fight with America's second-biggest trading partner based solely on the very trade stats that the WSJ article has just debunked.

You simply cannot make this stuff up.  And it's just further proof that in the 21st century, using the trade deficit to plan US trade policy makes about as much sense as using astrology to plan your retirement.  It might've been what they did in the old'n days, and it might've even worked for a few people, but it sure as heck ain't the best way to ensure a reasonable return on your investment.

All humor aside, this little coincidence also raises a very serious point.  Since the original 2007 UC-Irvine study on the iPod and global supply chains, there have been many scholarly analyses revealing the obsolescence of conventional trade statistics like the US-China trade balance.  Cato's Dan Ikenson has written several very good policy papers on this issue (including one we co-authored back in 2009); smart, widely-read bloggers like Mark Perry (and, to a much lesser extent, your humble correspondent) have repeatedly highlighted this important work; and newspapers like the WSJ and NYT have reported on the issue several times over the last few years.  So, while the ADB's new iPhone study is certainly interesting and worth noting, it's not like it's really groundbreaking stuff.  These issues have been widely-known, even in the mainstream press, for several years now.

Yet politicians like Sen. Wyden (and trust me, he's not alone) still rely on the trade deficit as some sort of accurate barometer for US and global trade policy.  Indeed, the statistic is often the only basis for their calls for greater protectionism or more aggressive unilateral/multilateral trade "enforcement" actions - things that would dramatically alter, if not implode, the global economy.  At some point, mustn't we ask whether our duly-elected representatives are acting not out of somewhat-humorous ignorance, but instead out of willful and pernicious blindness to the realities of globalization and the dangerous implications of their mind-numbingly absurd plans?  I mean, at some point, don't we have to stop giving Wyden and his cohorts the benefit of the doubt and start demanding that they immediately cease and desist with the silly, dangerous trade deficit demagoguery? 

Seems like a no-brainer to me.

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