New Economic Measures Take 'Made in the World' Into Account

Former US Labor Department Secretary Robert Reich used to joke that following his hip replacement surgery he was no longer certain that he met the domestic content requirements for senior government officials.

While the comment was made in jest, it cleverly highlighted an increasingly contentious issue: how to determine where and how value is added in a global economy.The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have developed a new method for calculating content and value. The new approach uses a methodology based on value-added - and the impact may be profound.

Intermediate inputs may account for 60 percent of global trade. For instance, mobile phones are frequently made by nine different enterprises in five different countries. How to accurately assess contribution in that context can be both inaccurate and misleading.

Initial calculations based on the new approach could reduce China's trade surplus with the US by as much as 25 percent.

This may also cause a reassessment of what it means to add value, whether global sourcing is really as cost-efficient as some US, European - and Asian - corporations have argued. It may also challenge traditional assumptions about who adds value and why.

The net effect of this measurement system is promising and positive. There will certainly be critics - and questions about the methodology are sure to be raised. But simply providing an alternative will stimulate discussion, debate and re-calculation, leading to more accurate and productive strategies for an increasingly global economy. JL

Yu Hairong reports in Caixin:

The OECD and WTO rethink traditional ways of calculating trade figures to adjust for the involvement of various countries in a single product
A new statistical approach to measuring international trade is changing the traditional view of economies' status in global trade and is believed by some to present a truer picture of trade flows.

The Organization for Economic Cooperation and Development (OECD) and World Trade Organization (WTO) are using an approach that estimates trade in value-added terms. The first batch of information was released in Paris in mid-January and covered 18 major industries in 40 countries.

Angel Gurria, secretary-general of the OECD, said the value-added approach challenged the conventional view of global trade. "Today, we have to think about goods and services as 'made in the world,'" he said.

Based on the new estimates, which take into consideration which countries provide the parts and services that go into its exports and imports, China's trade surplus with the United States shrinks by a quarter.

China's exports are highly dependent on foreign countries. Under the new calculation, in 2009, 30 percent of the value of its exports was generated outside the country. This offers a different perspective on China's trade imbalance with other countries.

In this view, China's trade surplus with the United States, which stood at around US$ 176 billion in 2009, would be slashed by 25 percent.

Song Hong, an international trade expert at the China Academy of Social Sciences, said the country's status in global trade has long been inflated because it remains at the lower end of the production line. The new statistics reduce the inflation by considering value added, but were still in an experimental stage, Song said.

Traditional Method

Amid continuing globalization, current methods for figuring international trade statistics that are based on the country of origin of a product are increasingly seen as limited.

"Traditional statistics failed to give a clear picture of today's way of trading in manufactured products," said Pascal Lamy, WTO director-general. "They also failed in fully capturing the huge role played by services in manufacturing."

The WTO says intermediate inputs account for a whopping 60 percent of global trade in goods. A frequently used example is the production of iPhones, which involves nine enterprises in five countries.

Research found that in 2009, US$ 172.46 out of the total US$ 178 generated by an iPhone went to parts suppliers in Japan, Germany, South Korea and the United States, while only US$ 6.5 was earned by the Chinese assemblers. However, traditional trade statistics include all of the profits into China's trade figure.

Therefore, iPhone production generated US$ 2 billion in export revenue for China, according to traditional methods of calculation. But, by considering value added, the figure falls to only US$ 73 million.

Similarly, a calculation using the OECD-WTO approach shows that 27 percent of the value of China's computer exports goes to Japan and other Asian counties, and 8.5 percent goes to the European Union. Gross trade figures had suggested that services account for only 20 percent of global trade. But the value-added breakdown shows that the average for OECD countries was around 50 percent.

In an earlier interview with Caixin, the country's commerce minister, Chen Deming, said traditional trade figures do not reflect the actual interest shared by economies in global trade because few products create more than 50 percent value added in a single country.

A New Picture

The value-added method is changing the picture of global trade. According to the new statistics, not only does China's 2009 trade surplus with the United States shrink, but Japan's surplus with America rose 60 percent. Also, Germany's deficit with the United States became a surplus.

The situation in East Asia also changed. China's trade surplus with Japan fell from US$ 14.5 billion to US$ 2 billion, while Japan's surplus with South Korea also fell to US$ 360 million from US$ 8.6 billion.

In the new statistics, the United States replaces China as the largest importer of Japanese goods, accounting for 19 percent of the total. China accounts for 15 percent of Japan's total exports, dropping from 24 percent.

Qu Hongbin, chief China economist of HSBC, said that the new approach reduced China's trade-to-GDP ratio to 18 percent in 2007, down from previous 36 percent, which means that foreign value added accounted for 50 percent of China's export that year.

This has interesting implications for calls for China to address its trade surplus with trade partners and let the yuan appreciate.

Hong Pingfan, director of the Global Economic Monitoring Center at the United Nations Department of Economic and Social Affairs, said that the value-added statistics changed the balance of bilateral trade. They partly alleviate pressure on the yuan to appreciate against the U.S. dollar, but increased pressures on other Asian currencies.

Just a Supplement

Analysts expect the new statistical approach to provide a more accurate reference for economic and trade policy-makers.

The new data more accurately reflected the trade relationships of different counties, said Hong, something he said could help provide a better understanding of the spillover effects of each country's policies.

But the new method is still in its early stages. The OECD said it was a supplement to traditional statistics, not a replacement.

Song said that the new approach needed to be refined.

"There is still a long way to go to establish a widely accepted statistical system with little deviation," he said. "The traditional international trade statistics will remain in its place for quite a long time."