The first thing you need to know about the latest controversy involving President Trump’s alleged attempt to manipulate economic data for political purposes is that Bernie Sanders probably would have done the same thing, and quite possibly Hillary Clinton, too.
Mainstream economists recoiled at a Wall Street Journal report Tuesday that said Trump appointees at the Office of the U.S. Trade Representative want official trade balances between the United States and various countries rejiggered to make bilateral trade deficits seem larger — and, by implication, Trump’s protectionist policies more necessary.
On his blog, Harvard University’s Greg Mankiw, a former adviser to President George W. Bush and author of a leading economics textbook, responded simply: “You’ve got to be kidding me.”
Per long-standing international economic practice, the headline figure for the balance of trade between the United States and any other nation has been expressed as the difference between two numbers: the value of U.S. imports from that trading partner and the value of U.S. exports to it.
For years, however, left-wing critics of NAFTA and other trade agreements have said that this data point distorts the deals’ actual impact. In 2014, 14 Democratic members of the House — including current party-chair candidate and 2016 Sanders supporter Rep. Keith Ellison (Minn.) — wrote to President Barack Obama’s trade representative demanding that he adopt the same math that Trump is reportedly contemplating. One of the first to defend Trump this week was Lori Wallach, a left-wing anti-NAFTA activist at Public Citizen.
Do they have a point? Well, kinda sorta. The headline numbers lump together made-in-the-USA exports with goods produced in third countries that enter the United States on their way elsewhere. Example: Samsung TVs from South Korea land at Long Beach, Calif., and get trucked to Tijuana, perhaps after a little repackaging.
Since these “re-exports” by definition aren’t made by American workers, critics argue that it’s more accurate, in terms of trade’s impact on U.S. jobs, to focus on the difference between purely made-in-the-USA exports and imports that remain in the United States.
This would dramatically alter reported trade balances with Mexico and Canada, to which nearly half of all U.S. re-exports go — since those nations border us and don’t have tariffs, thanks to NAFTA. The 2016 U.S. trade deficit with Mexico would have been not $63.1 billion but $115.4 billion, the Journal noted.
The problem is that, no matter how you count it, a bilateral trade deficit (or surplus) per se is neither good nor bad — unfashionable though it may be to restate that basic tenet of economic theory amid the current left-right protectionist convergence.
NAFTA undoubtedly displaced American workers in certain sectors, just as it also created new job opportunities elsewhere — including in the vast logistical chain through which re-exports flow. And it enabled U.S. consumers to access various desirable goods at lower prices than they could have otherwise.
The benefits are diffuse and the job losses concentrated and acutely felt, of course — a fact of politics, not economics, that Trump’s data massage seems designed to exploit. (No final decision has been made, the administration told the Journal.)
There’s no legitimate full-disclosure issue here, since the data Trump and his progressive bedfellows prefer is already available from the U.S. International Trade Commission. What they want is the trade representative’s imprimatur on their ideology.
Meanwhile, the rigid distinction between U.S.-made goods — which “create jobs” — and all others is breaking down due to global supply chains. Economist Lee Ohanian of UCLA has reported that the production process for certain goods takes them back and forth over the U.S.-Mexico border 14 times before they’re ready for market.
Many imports from China are assembled from inputs made in other countries. Example: the iPhone, whose components come from Japan, Korea, Germany and, indeed, the United States.
Ideally, trade figures would take the iPhone apart, so to speak, awarding each country in the chain credit for the value its workers added. Analysts at the World Trade Organization and Organization for Economic Cooperation and Development are working on just such a “trade-in-value-added” concept.
Their results are tentative, and not fully up to date, but still suggestive: The United States’ value-added trade deficit with Japan in recent years was larger than the conventionally measured one; by contrast, U.S. deficits with China, Mexico and Canada are actually smaller in value-added terms.
Economist Yingying Xu of the Arlington-based Manufacturers Alliance for Productivity and Innovation calculates that the United States actually ran 2009 surpluses in manufactured goods trade with Canada and Mexico, in value-added terms.
If free-trade critics inside and outside the Trump administration want information-rich, consistent measures of 21st-century trade flows, they should support innovations such as trade-in-value-added — instead of perpetuating the same old political numbers games. Obviously, that’s a big if.
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