Saturday, December 18, 2010

We don't have a trade deficit with China anymore!! So why all the protectionist talk?

Well, it has not been entirely eliminated, but is it nearly as bad as it is portrayed? As with many (most?) economic statistics, Gross Domestic Product (GDP) accounting is very imperfect and often misleading measure of a country production of goods and services.  Finished goods are called "outputs" and all the components that go into making the finished good are called "inputs". GDP does not count the market value of inputs because they are not in their "final end-use condition"--they are just on their way into making a final good.  This is not really a problem if all the inputs are produced in the same country they are assembled.  The problem arises when the supply chain becomes globalized and the component parts come from multiple countries. Under traditional GDP measure, the country at the end of the production chain gets full "credit" for the market value of the good, even if they contribute very little to the overall value of the good.  The point of the article below is that this distorts the trade situation with China, which in large part is the final assembly point for lots of high-value inputs produced elsewhere.  The i-Phone is used as an example of how GDP accounting affects the trade balance with China.  The inputs are high-value production and the assembly is low-value.  However, the countries that produced the high value items get no GDP accounting credit for what they produce, ONLY the GDP debit for importing it and consuming it...Perhaps a new measure of GDP is in order to keep up with globalization???

WSJ: Not Really 'Made in China'

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. 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.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month.

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