Thursday, January 13, 2011

Trade Wars & Economic Statistics

Tuesday's Wall Street Journal's lead staff editorial revealed some very troubling information regarding international trade data.

Labeling the current flap over China's currency "a distraction the economy can't afford," the editorial continues,

"How much of a distraction is suggested by a paper out last month from the Asian Development Bank Institute. Economists Yuqing Xing and Neal Detert examined the supply chain of the iPhone to reach a surprising conclusion: Technically, the iPhone contributes to America's trade deficit with China.

The basic explanation is that data on bilateral trade are calculated assuming that the entire value of a traded good is created in the exporting country. If that ever made sense, it certainly doesn't in a global economy marked by increasingly complex supply chains.
In the case of the iPhone, Messrs. Xing and Detert note that the device was invented in America by an American company, Apple. The components are manufactured, either inside or out of China, by companies based in several other countries. The only part of the process that is unambiguously "Chinese" is the final assembly—a process that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the $178.96 wholesale value of an iPhone.
Yet that entire $178.96 value ends up attributed to China in official trade statistics. As a consequence, the iPhone contributed nearly $1 billion to China's bilateral trade surplus with America in 2008, and nearly $2 billion in 2009, the authors conclude. If the trade data had been based solely on the $6.50 cost of assembling each unit, the iPhone would have added only $34 million and $73 million in those years to China's surplus.

The ADBI study ought to be required reading on Capitol Hill. Most importantly, it raises the question of how much anyone really knows about what America's trade with China is. Critics of trade data, including us, have long argued that bilateral statistics are misleading. As the bilateral deficit with China grew, deficits with South Korea, Taiwan and Singapore declined, confirming that China's comparative advantage lies in the assembly into finished products of components manufactured around the region, due to its low-wage, low-skilled labor."

How about that last paragraph? Is that not insane?

For years we've been wringing our hands over trade imbalances with other nations, only to now learn that, sorry, ooops.....we don't actually account for specific value-addeds on an incremental basis.

So we really have no idea what any country's bilateral trade is with any other country? Why, because keeping track at the component or assembly level is too much trouble?

How can we realistically conduct trade policy or even correctly model the US economy if our fundamental data on international trade flows is basically wrong?

For me, this puts a huge hole in the econometric models predicting quarterly GDP growth. Back when I was in college and grad school, international trade wasn't a major component of GDP. Now, it is. Or so we think. Maybe we really don't know exactly how big it is, if we are crediting other countries with the entire cost basis of an assembled product which passes through that nation for one stage of production.

This valuable information buried in the Journal's editorial provides a big wake-up call regarding the quality of international economic trade data, does it not?

No comments: