Bilateral trade balances skewed by not counting domestic content in imports.
By Eric Kulisch
Trade statistics about a nation’s imports and exports may not accurately reflect the true value of inputs because of the fragmented nature of global production and supply chains, according to new analysis by the Organization for Economic Cooperation and Development.
Technology has enabled manufacturers to increase productivity and disaggregate production to locations where optimal profit margins can be achieved. But the intermediate exchange of goods and services is not always captured in traditional measures of cross-border trade, which can lead to policy mistakes, the intergovernmental body said.
The U.S. trade deficit, for example, might be lower if it accounted for the intellectual property and other contributions of the country’s workers, Karen Laney, who directs the Office of Industries at the U.S. International Trade Commission, said during a mid-January panel discussion at the Transportation Research Board’s annual meeting in Washington.
The iPhone is assembled in China and imported at a value of $179 per unit and sold at $500, she said. But the value of Chinese work done to the phone is worth $6.50, compared to $11 worth of research, design, logistics and marketing inputs from the United States. The rest of the iPhone’s value is supplied by vendors in Germany, Korea, Japan and other parts of the world.
The import value in the United States of the Apple product would be about 6 percent less if it reflected the U.S. value added, Laney said.
For U.S. auto imports, about a third of the total value comes from Asia, 21 percent from Europe and 17 percent from Canada. But 15 percent of the source of import value is from the United States, she added.
Trade statistics also tend to hide the fact that services — transportation, distribution, storage, finance, repair, and software — play a large role in imports and exports of physical goods. The service component represents more than 30 percent of the total value of manufactured goods, according to the OECD.
Traditionally, about a quarter of global trade involves service, but if the value of services to produce goods is counted it would account for 45 percent of international trade, according to a separate study by the OECD and the World Trade Organization.
Last year, the OECD and WTO launched an initiative to develop a database of Trade in Value-Added Indicators. The first release of the TiVA database includes statistics estimating the source of value by country and industry for imports and exports of 40 countries: all OECD members, Brazil, China, India, Indonesia, Russia, and South Africa. Each entry shows gross exports in 18 industries split into domestic and foreign content, service content, and trade balances based on holistic measures of value and intermediate inputs.
The goal is to demonstrate how much of a country’s exports depend on intermediate components imported from other countries. The TiVA approach traces the value added by each industry and country in the production chain and allocates it to the original industry and country.
Having a clear picture of the entire trade flow and understanding the interdependencies within supply chains can help people and policymakers understand the benefits of trade for job creation, even in areas where trade is negatively perceived as a threat to domestic jobs, according to the OECD.
“Conventional measures therefore may create a risk of protectionist responses that target those countries at the end of global value chains, on the basis of an inaccurate perception of the origin of trade imbalances,” the OECD said on its Website. Japan, hypothetically, could harm itself if it erected trade barriers to slow down imports from Germany without realizing many of its raw materials and parts get exported to Indonesia to make goods sold to Germany, which then uses those goods to create additional value and sell finished products to Japan. By attacking imports, Japan would harm its own export industry.
The interdependence of supply chains means that trade is no longer a zero-sum game, the OECD paper said. “Domestic firms can of course benefit from export opportunities,” it said, “but they also depend on reliable access to imports of world-class goods and services inputs in order to improve their productivity and competitiveness.”
Tariffs are relatively low in the developed world and on a downward trajectory among developing countries, but the cumulative impact of tariffs on the price of a final product can add up when intermediate inputs are traded multiple times across borders, the OECD said in a research note.
Production costs are higher than generally understood in countries with large export sectors that import a large share of foreign content, such as China and Vietnam, according to the OECD.
“Success in international markets today depends as much on the capacity to import world-class inputs as on the capacity to export. Protectionist measures against imports of intermediate products increase costs of production and reduce a country’s ability to compete in export markets” and discourage firms from investing in production facilities and technology, the note said.
Companies are attracted to countries that have efficient customs administrations and ports so that they can count on a predictable flow of supplies for their production lines. Reducing bureaucratic and physical bottlenecks in the supply chain is one of the main priorities for international businesses.
Trade advocates are optimistic that the WTO will finalize a multilateral agreement on trade facilitation by the end of the year, potentially unlocking hundreds of billions of dollars in trade that went ignored because of the complexity of international logistics and customs processes.
The best ways to streamline administrative procedures, trade experts say, are through common portals for filing documents, pre-arrival processing through sharing of advance shipping information, provision of advance rulings on goods classification and applicable duties, transparent and consistent customs fees, cooperation between border agencies to align processes, and electronic submission and processing of customs declarations. Those types of reforms are especially important in a world of globally integrated supply chains and multi-country sourcing. The OECD, which includes 34 members, estimates that trade facilitation measures could reduce trade costs by 10 percent in member nations. Developing nations could achieve even larger gains, it said.
Businesses and regulators are also targeting convergence of product standards as a way to boost trade. Concern about the quality and traceability of products from overseas sources has led to a plethora of documentation and verification standards surrounding health, safety, consumer protection and the environment. Many advanced countries have created layers of complex regulatory requirements that differ from each other, forcing companies to duplicate production processes to comply with conflicting standards, or to undergo burdensome certification procedures multiple times for the same product.
One of the primary goals of the United States and European Union, when officials get together to talk about a free trade agreement this summer, is to integrate their regulatory structures so companies don’t have to comply with procedures to get their products approved twice. Both trading blocs have relatively high standards for many goods and services, but often have different ways of achieving them. The expectation is that if standards and implementing rules can be compatible, if not identical, then EU regulators could mutually recognize the certifications in the United States, and vice versa.
The OECD paper said the interconnected nature of trade makes multilateral trade agreements much more effective than bilateral ones.
Multilateral trade pacts are extremely hard to pull off, as the failed Doha round of talks in the WTO demonstrates. Instead, many countries have taken the middle step of building regional trade agreements, such as a dozen countries are now doing in the Trans-Pacific Partnership talks. The OECD recommended that more liberal rules of origin would make regional trade agreements more beneficial for international supply chains and increase their impact on firms’ productivity.
Consolidating regional trade pacts “would help turn the ‘spaghetti’ of preferential agreements into a clearer and more efficient trading regime” for multinational companies, the research note said.