24 October 2017

Trade statistics aren’t fit for purpose

By Brian Sturgess

Politicians focus on trade deficits and surpluses between countries, and threaten trade wars and retaliatory actions based on these numbers. But the international trade statistics used by many commentators are inaccurate, and the way trade is measured is no longer fit for purpose.

Even when well collected, it has become increasingly obvious that merchandise and services trade data collated on a nation state basis ignore many economic realities. The development of global value chains (GVCs) means that goods and services can cross borders many times, but conventional trade statistics assigning imports and exports on a dual basis do not reflect this complex reality and ignore the contribution of producers in many countries, often including the importing nation to final value.

This problem has been popularised as the Apple “Made in China” question. Conventional trade statistics consider the iPhone a Chinese export to the US, but the product is entirely designed and owned by a US 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. It has been estimated for the iPhone-5s, which retailed in the US at around $749, the net value of the work performed in China was around $8, a small proportion of the total.

This matters because international trade statistics are used as evidence of global trade imbalances and form the basis of potentially misguided policies aimed at their correction. That something is wrong with how we measure international trade is evidenced by the fact that, according to the IMF’s Direction of Trade Statistics database, the world imported $339 billion more than it exported in 2016. This is clearly economic nonsense and the lack of a net zero balance is all attributable to a number of serious measurement issues.

For years, the study of merchandise trade statistics was considered a “mature” subject, but there has been a paradigm shift caused by the globalisation of production networks. This has blurred both official country borders and the traditional distinction between industrialised and developing economies.

In effect the contribution of countries participating earlier in supply chains will be counted in trade flows multiple times so a new measurement of international trade focusing on the value-added content – or domestic content – of trade flows is required. The World Trade Organisation (WTO) and the Organisation for Economic Cooperation and Development (OECD) have for some years been working on a project for Measuring Trade in Value Added as one objective of the Made in the World Initiative, launched in 2011 to provide support for a better understanding of the relationship between international trade and job creation.

There are a number of concurrent research initiatives working on improving global trade statistics, particularly the understanding of the role of GVCs in improving productivity and promoting development. A 2017 study by the WTO has considered the factors that determine how deeply a country participates in GVCs and has concluded that non-tariff trade costs, such as freight, insurance, fees, regulations, bureaucracy, or weak transportation links, are a significant determinant of GVC participation.

According to the WTO’s Global Value Chain Development Report, in some complex value chains, such as motor vehicles, computers or machinery, non-tariff trade costs are more than four times higher than tariffs. The findings reinforce the conclusions of David Ricardo on the importance of free trade, but despite the many initiatives and the insights that are coming out of research in value-added analysis, it is unlikely that there will be a major improvement in trade statistics anytime soon.

After 200 years of the demonstrable benefits of free trade the most reasonable response to the talk of trade deficit and surplus figures in any debate is to question both their accuracy and their validity. Distorted, one-sided trade data should not be used as a justification for mercantilist ideas. These are best relegated to the dustbin of history.

This article was originally published by the Institute for Free Trade.

Brian Sturgess is Managing Editor and Chief Economist at World Economics, and worked as a consultant to the Competition Directorate of the European Commission