Economists say US-China trade imbalance figures are distorted

A new study by the Asian Development Bank Institute emphasizes the fact that current trade balance figures deliver a distorted picture. It argues that the iPhone, for example, has actually added $1.9 billion to the US trade balance.

The study that was conducted from Tokyo takes a closer look at an earlier study by the University of California on value added in a value chain. Its authors examined how misleading trade statistics can be by closely following the production of one popular modern consumer gadget - the iPod.

Chinese exports with little value added for China

The innovation comes from the US, most of the components are either from Japan, South Korea or Taiwan, and everything is put together in China. Therefore, iPods are statistically counted as Chinese exports: For every $299 sold in the US, the trade deficit with China increases by about $150. But the value added to the product in China is very low – a few dollars at most.

One of the authors, Jason Dedrick, argues that the complexity of many of today’s products poses a real challenge for compiling trade statistics. He points out that when it comes to products like the iPhone innovation is what counts and the country where this took place reaps the profits.

"A lot of value really comes to the US not just in profits, but in wages and jobs," he explained to Deutsche Welle. "Although there are a lot of low wage jobs for manufacturing these products, a lot of the wages, the better jobs and the financial profits tend to go towards the home country of the company."

Trade data compiled in a 'questionable' way

Nicholas Lardi from the Peterson Institute for International Economics also criticized the way trade balance statistics were compiled and the fact that Americans placed so much emphasis on them.

"The trade data that everyone has used for centuries on the country of origin are, at a minimum, very questionable," he said. "And particularly for China, which has a very high share of what is referred to as ‘processed exports’, that is, they import all the parts and components and assemble them in China, and then sell them to North America and Europe and so forth."

Lardi added that the data on bilateral trade was not substantial enough and did not take into account the fact that for many consumer electronic products the value added in China is extremely low - in some cases only around 3 percent.

Domenico Lombardi of the Brookings Institution in Washington agreed that trade balance figures are not very reliable. He said it was inappropriate to focus only on trade imbalance figures as a reflection of fundamental imbalances in advanced economies.

"What the advanced economies ought to focus on," he suggested, "is the balance of their savings with their consumption. China ought to consume more and save less and the United States ought to save more and consume less."

Trade balance statistics still do not take into account complex value added chains, mostly because it is a difficult and expensive process to calculate. Maybe when there is an iPhone app for that, trade will become more transparent.

Author: Sarah Berning
Editor: Thomas Baerthlein