Don't Trust the "Trade Deficit"

I've long been suspicious of fears for America's trade deficit. In an important sense, there's no "deficit" at all--importers and exporters normally are paid no later than product delivery. So it's not like a budget deficit, where we "owe" something. This makes the official term "balance of payments" (about minus $380 billion in 2009) less meaningful.

Nor is there good evidence that free trade subtracts total jobs (some workers gain while others may lose; the "net" is what's important). Free trade also benefits consumers by reducing producer prices--as econ prof Mark Perry recently reported, over 55 percent of U.S. imports are industrial supplies or capital goods, used in a job-creating domestic production process. For these reasons, policies that might balance imports and exports would impoverish America.

But there's another flaw in the "anti-globalization" argument--measurement. Aside from the underestimate of trade in services (artificially inflating the supposed deficit), the term "import" also is badly skewed. The Census Bureau defines imports as:

All goods physically brought into the United States, including: (1) Goods of foreign origin, and (2) Goods of domestic origin returned to the United States without substantial transformation affecting a change in tariff classification under an applicable rule of origin.

Thus, products assembled in China and exported to America count as imports, valued at the wholesale price paid.

But that substantially overstates the dollar sum of imports, as a recent Wall Street Journal article explained:

[R]esearchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

"A distorted picture" is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step--assembling and shipping the phones.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month. . .

Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices.

"What we call 'Made in China' is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries," Pascal Lamy, the director-general of the World Trade Organization, said in a speech in October. "The concept of country of origin for manufactured goods has gradually become obsolete."

Mr. Lamy said if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China--$226.88 billion, according to U.S. figures--would be cut in half.

Conclusion: Don't believe the hype about the terrible trade deficit. Much of it is a product of outmoded measurements, not underlying reality. Trade isn't a zero-sum game; it remains a win-win.

(via Carpe Diem)