NCPA - National Center for Policy Analysis


April 2, 2010

Trade in finished products -- the things consumers actually buy, such as cars, computers and iPods -- declined by much less than 12.2 percent last year, according to some economists.  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 "value-added effect."  If the value of imported parts were stripped out, however, global trade would have declined by between 4 percent and 8 percent 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, says the Wall Street Journal: 

  • 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 United States, all the pieces count as Chinese exports, inflating the U.S. trade imbalance with its most polarizing trade partner.
  • A study by the Sloan Foundation in 2007 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 percent lower than last year's gap of $226.8 billion.
  • At the same time, the U.S. trade deficit with Japan would have been 25 percent higher than the $44.8 billion reported last year, because many goods that China and others export to the United States contain parts purchased in Japan. 

The current method of calculating trade data is a headache for senior trade officials, making everything seem more volatile.  But 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 material and intermediate parts, says the Journal. 

Source: John W. Miller, "Some Say Trade Numbers Don't Deliver the Goods," Wall Street Journal, March 27, 2010. 

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