Friday, 4 June 2010

The WTO Speaks (in Double Speak)

In a keynote speech to the World Input-Output Database Conference in Vienna on 26 May 2010, DDG Alejandro Jara spoke in defense of China. Here are a few punch lines from his interesting speech:

Nowadays, in international trade of manufactures, what you see is no longer what you get: the label "made in ... " can be misleading. Let's take for example the new gadget launched by Apple, the iPad. According to a recent report, the imported cost of a mid-range iPad imported from China into the US is about US$ 290. But the Chinese content is only 5 per cent of the commercial value registered by customs, while most of the electronic content actually comes from South Korea, Japan and the US while batteries are manufactured in Honk Kong, China, by a Japanese company.

Trade in tasks calls for a new measurement of international trade: The Value Added Content, or domestic content of trade. To take one of my examples, if we want to assign to each country of origin the value added imbedded in an iPad imported by the U.S. we must be able to measure how much comes from China, Japan or Korea, and, of course, from the US.


To illustrate the usefulness of the new global statistics that can be derived from interconnecting national productive and financial accounts, let me mention one of the most heated debated issues among economists nowadays: the rebalancing of the global economy.

The large imbalances accumulated during the 2000s are often blamed for the 2008-2009 crisis. And most analysts highlight the large bilateral imbalance between the existing super-power, the US, and the new world manufacturer, China.

But relying on conventional trade statistics gives a distorted picture of trade imbalances between countries. As we saw when looking at the Chinese content of the iPad, what counts is not the imbalances as measured by gross values of exports and imports, but how much valued added is embedded in these flows. The WTO estimate, based on IDE-Jetro data, estimates that 80 per cent of the value of the goods exported by the US had a domestic content. The comparable figure was 77 per cent in the case of Japan, 56 per cent for Korea. It was about 50 per cent for Malaysia and Chinese Taipei, meaning that half the value exported by these countries originated from other countries.

Using conventional trade statistics would overestimate the US bilateral deficit vis-à-vis China by around 30 per cent as compared to measuring in value added content based on input-out matrices. The official figures for the bilateral deficit would be cut by 50 per cent when the activity of export processing zones in China and Hong Kong, China, re-exports are fully taken into account. By the same token, measured in domestic value added content, the bilateral deficit of the US with Korea or Japan, the main providers of electronic parts in our iPad example, would increase in proportion to the reduction of the US — China deficit.
This implies also that traditional exchange rate policies won't fully help in rebalancing apparent bilateral imbalances. If the Chinese value added in US imports from China is just half its commercial value, a revaluation of the Chinese Yuan will increase the costs of Chinese goods by only half the rate of the revaluation. In the case of consumer electronics, the impact will be even less than that, and only 20 per cent of the variation in the exchange rate will pass through the price paid by importers.

This shows that, as DG Pascal Lamy said recently at the Paris School of Economics, it is time to start measuring trade in value added rather than on gross value as is the case today!

I guess DDG Jara must be holding a copy of the joint US-China Report on Statistical Discrepancy during the speech. At the same time, in its TPR Report issued on Monday, the Secretariat criticized China for its export restrictions on raw materials, an extremely rare move as the Secretariat has in general avoided commenting on on-going DS cases before the WTO.  

Which one is the true voice of the WTO?