Pol Eco of Trade Stats: Value-Added, Anyone?

Can it be that a large part of economic conflict in the world is down to artifactual statistical considerations? That in fact could be the conclusion you would draw if the latest effort to change the way the world records trade comes true in due time. Everyone is by now aware of the fact that the United States is the world's largest net importer, and this fact has been lamented far and wide by Americans decrying their diminishing exporting prowess in recent decades. On the other hand, export-focused Asian nations alike China and before it the Asian tigers and Japan have routinely been accused of using unfair trade practices to gain an advantage on others, and their significant trade surpluses over the years have provided ammunition for this accusation.

The problem to many trade followers goes like this: the recorded trade balance ultimately boils down to the final international transaction--say, between China and the United States--while ignoring the intermediate steps in the process. Especially now when supply chains range far and wide, a computer labelled or recorded as "Made in China" by American customs officials may actually made up of components from different countries, perhaps Thailand for the hard disk and South Korea for the DRAM chips. Moreover, if the computer is a Dell, HP, or what else have you, the value-added contribution of the American firm is not really that well-recorded.

Hence, tucked in somewhere below a recent Reuters article is a mention of the OECD, WTO and UNCTAD working on a way of recording the value-added contribution of each nation in international trade. And, as I like to keep repeating, the value-added of trade is more in the branding and distribution, not simply in making the bits and bobs:

"For example between the United States and China, we are going to be able to present a new logic, a new way of appraising the benefits. We will see, we know, that mostly it is going to be knowledge that drives the benefit of international trade, rather than where you are producing the bits and pieces."

To that end, [OECD Secretary-General Angel] Gurria said a joint effort by the OECD, WTO and the United Nations' trade body, UNCTAD, to recalculate global trade in terms of value created at each stage of the production process as opposed to final sales terms, should help to defuse trade tensions when the data is published in December.

"We will make a very decisive change in the way we look at trade and in the way the benefits of trade and investment flows accumulate in different countries. We believe this is going to remove the edge on the protectionist tendencies that there are today," Gurria said.

So, taking the US-China trade debate as an example, perhaps US presidential contenders would not be competing to outdo each other in bashing China if the trade balance were not so hugely in favour of the PRC. Conversely, Chinese officials understand that the heat may be lessened on them by the ongoing effort and thus support it wholeheartedly. An earlier China Daily article expresses China's logic in doing so clearly by way of illustration:

"Worked out by conventional trade calculation methods, China has a huge trade surplus. But this does not reflect the real scenario of international trade and is often misused by foreign politicians to criticize China's policies on foreign trade and its exchange rate," Yu Jianhua, assistant minister of commerce, said on Tuesday at a forum on global value chains in Chengdu, Sichuan province...

With the past two decades of economic globalization, products are made in no single country but instead "Made in the World" through global value chains. Thus a transition has been made from trade in goods to trade in tasks "Traditional trade statistics based on customs data may not always give the picture needed for factual decision-making," Pascal Lamy, director-general of the WTO, said last year.

Under the traditional method of calculation, the value of an exported product is attributed to the country of origin, but very often that country accounts for only a small portion of the total added value created through the export. For example, an iPhone 3G assembled in the country is exported to the US at the price of $179, which is taken as China's export value. But in fact the country accounts only for $6.50 of the total added value, according to a calculation by Xing Yuqing, a professor of economics at the National Graduate Institute for Policy Studies in Tokyo.

Lamy said early this year that "the statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided and hence counterproductive decisions." Traditional trade statistics place China's trade surplus with the US in 2008 at $285 billion. "But if calculated by the value-added trade, the trade surplus was just $164 billion," Yu said.

It looks like a win-win situation all around, but there are other practicalities involved that we ought to consider:

1. Will value-added measures of trade better match actual capital account transactions than the current system?
2. Will developing countries in particular have the ability to modify their trade accounting systems to capture the value-added contributions in trade?

These are questions that require investigation as well as we anticipate the said December 2012 unveiling of the recalculated trade data . That is, would we need to change conventional balance of payments accounting and the system of national accounts to accommodate these changes introduced by value-added trade statistics? Also, can the many countries in the world actually record these value-added transactions accurately? What may look like arcane matters for bean counters to ponder actually has far-reaching political-economic implications.

Indeed, there is a political economy of statistics since the way we measure "the world" affects the way we perceive it.