The U.S. trade deficit with China may be much smaller than thought, according to new trade measurements that capture the flow of raw materials and intermediate goods as they work their way around the world into final products.
In a significant revision to economic record keeping, the Organization for Economic Cooperation and Development and the World Trade Organization have patched together international databases that show more than just the value of final goods trading hands between countries — the traditional method of measuring imports and exports.
Rather, they have tried to track each step that goods take through what has become an increasingly fragmented global system — with raw materials from one country becoming steel in another, a car part in a third and a finished auto in a fourth that is then exported to yet another country.
The full cost of the auto is registered as an export from the fourth country to the fifth, though there is value added by each nation along the way. Measuring trade on that basis can better reflect the state of the global economy and trade patterns, the organizations argue.
“Traditional statistics do not give a clear picture of today’s ways of trading,” WTO Director General Pascal Lamy said at a news briefing. “The obsession, which has always been that exports are great and imports are bad, is wrong. . . . If you want to build your competitive advantage, the first question you need to ask is where do I need to import more” to benefit from globalized production systems.
He said the data made the traditional focus on bilateral trade balances between countries “senseless” because of how the value embodied in many products is spread across several nations.
One headline finding: The U.S. trade deficit with China would fall by as much as 25 percent when measured on a value-added basis — from $176 billion in 2009 to $131 billion.
Offsetting that decrease are trade deficits with South Korea, Japan and Germany — countries that funnel intermediate goods to China for final assembly — which would be larger because some of the value of U.S. imports that arrive from China comes from the microchips or other high-end inputs produced in those nations.
While the U.S. trade deficit doesn’t change overall, its redistribution from China to a group of allies does hold geopolitical importance — and could shape perceptions of the U.S.-China trade relationship and the response to it.
It could affect analysis of how China’s currency policy affects U.S. jobs — perhaps shifting emphasis toward Japan, a more direct economic competitor in the types of goods the United States produces and a country that also has intervened in its currency markets.
It could also prompt a closer look at how anti-dumping and other trade actions are evaluated — and whether penalties sought against a final producer should be applied instead to other countries that provided unfairly priced component parts.
“This is a game changer in some respects,” that should have wide influence on how national officials set trade rules, their level of concern over things such as exchange rates, and their interest in imposing import tariffs, said New Zealand trade Minister Tim Groser. The fact that China imports much of what it assembles for export, for example, means changes in the country’s currency rates are a double-edged sword: a rising Chinese currency makes its exports comparatively more expensive, but it also means imported components are relatively cheaper, helping hold down the final cost of the exported product.
Tariffs may also find less favor as countries understand how much of what they import is reworked into exported goods.