http://online.wsj.com/article/SB10001424052748703312504575141790705775672.htmlPascal Lamy, director-general of the World Trade Organization, carries in his briefcase a folder full of numbers he uses to brief audiences from Boston to Beijing on the state of global commerce.
They make for dramatic reading: The WTO says world trade fell 12.2% in 2009. On Friday, the organization predicted that trade would bounce back sharply this year, rising 9.5%.
But these figures don't tell the whole truth about trade.
According to some economists, trade in finished products—the things consumers actually buy, such as cars, computers and iPods—declined by much less than 12.2% last year. That is because as much as two-thirds of the value of goods that go into trade statistics represent intermediate parts, which are imported from other countries and used to make finished products that then get re-exported. Economists call this the "valued-added effect." If the value of imported parts were stripped out, however, global trade would have declined by between 4% and around 8% last year, economists say.
By ignoring the multinational composition of goods, conventional trade data also make trade imbalances between some trading partners seem larger than they really are.
China imports a huge quantity of parts from places like Japan and South Korea, but when those components are assembled into finished goods and shipped to the U.S., all the pieces count as Chinese exports, inflating the U.S. trade imbalance with its most polarizing trade partner.
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A study by the Sloan Foundation in 2007, for example, found that only $4 of an iPod that costs $150 to produce is made in China, even though the final assembly and export occurs in China. The remaining $146 represents parts imported to China. If only the value added by manufacturers in China were counted, the real U.S.-China trade deficit would be as much as 30% lower than last year's gap of at $226.8 billion, according to a number of economists.
At the same time, the U.S. trade deficit with Japan would have been 25% higher than the $44.8 billion reported last year, because many goods that China and others export to the U.S. contain parts purchased in Japan.
The current method of calculating trade data is a headache for senior trade officials like Mr. Lamy. "It makes everything appear more volatile," he said recently in Brussels. "That creates a political problem."
At a time of financial crisis, Mr. Lamy would prefer that politicians, civil servants and academics focus on finished products. Big swings in trade flows make commerce appear more volatile than it is, he says. Inflated trade deficits with China stoke fears in the U.S. about job losses.
The latest round of global trade talks, which began in 2001, has stalled because of political fears about trade in the U.S., India and other countries. More than 100 members of Congress recently urged the administration of President Barack Obama to label China as a "currency manipulator." At recent Senate conference, Sen. Arlen Specter (D., Pa.) said that "we have lost 2.3 million jobs as a result of the trade imbalance with China between 2001 and 2007."
Some economists say that whatever the political consequences, the current method of reporting trade figures more accurately captures the economic impact of trade. It shows "how much the amount of trade has now exceeded the overall value of finished products," says Simon Evenett, an economist at the University of St. Gallen in Switzerland. For economists, he says, "this is good because it shows how companies have been slicing up their value chains and producing parts" in many different countries.
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A ship is unloaded at the port of Auckland in New Zealand, earlier this month.
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The current approach has another advantage: It is easier to track the value of all products being exported and imported without attempting to determine which items are finished goods and which are merely parts. Individual nations' trade statistics are remarkably standardized around the world compared with other economic data, such as unemployment or inflation. National customs offices count imports and exports by tallying up the bills of lading that accompany all shipments. The WTO, World Bank and other institutions then obtain those numbers from every country.
Calculating what role the value-added effect plays is more complicated and potentially less precise, because manufacturers of products typically don't reveal the origin of their raw materials and intermediate parts. To distinguish between intermediate and finished goods crossing borders, economists often look at universal tariff codes used to label shipment contents and extrapolate from those data.
But it is a tough nut to crack. Economists can look up, for example, that China exported 52,176 metric tons of screws, bolts and nuts to South Korea in 2009, according to Global Trade Information Services, a consultancy based in Geneva. But they can't trace those pieces to figure out if they wound up in exported products.
Experts also don't agree on what should be considered an intermediate good. Should the imported fuel used to power the factory be counted? What about the consultant flown in from London?
"It's difficult to harmonize the data so it is comparable between countries," says Andreas Maurer, a WTO statistician.
In recent years, the value-added effect has become a hot topic in economic circles. WTO statisticians say they are preparing a paper that will be shared with the organization's 153 members by the end of the year that will suggest looking at the alternate way of counting trade.
The hard part is building a model that figures out the big picture. Ari van Assche, a Belgian economist at the HEC Montréal business school, is currently working on China. In his research, he says, "we try to know everything that happens to a good, and then connect the dots." The point, he says, "is that trade is as big at it seems, but countries often get credit for inputs that aren't theirs."
Topic: Some Say Trade Numbers Don't Deliver the Goods (Read 371 times)