China trade surplus with US could be 25-percent smaller

The new estimate is one of the key findings of an ambitious project by the OECD think tank and the World Trade Organization (WTO) to present a truer picture of underlying trade flows in an age of global supply chains when intermediate inputs can cross borders several times during the manufacturing process.

The political purpose of the exercise is to reduce protectionist pressure by demonstrating that governments are shooting themselves in the foot if they raise barriers to imports because, in doing so, they are also hurting their own exporters and competitiveness.

Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development (OECD), said the value-added approach challenged the conventional wisdom regarding trade.

“Today, we have to think about goods and services as 'made in the world,'” Gurria said.

The findings are likely to add nuance to the heated debate about whether China should accelerate the rise of the yuan to reduce its trade surplus, especially its bilateral surplus with the United States.

“It's less important and less relevant,” Gurria said of the dollar/yuan exchange rate.

Gurria launched the initial set of data with Pascal Lamy, the director-general of the WTO, who said the new database showed it was “senseless” to focus on bilateral trade balances.

The notion that an exporting country can calculate how much competitiveness it would lose by letting its currency rise was simply not true in a world of complex trade chains, Lamy said.

“What these numbers change is the ingredients of the judgment you have to make,” he said. “You have to look at how this is distributed. It makes things much more complex.”

Apple Example

The example of an Apple smartphone exported by China illustrates the impact of breaking down the value built into the gadget according to the countries that provided the components or services.

The factory-gate price of the phone — US$187.51 in 2010 — will have shown up in full in China's gross export figures.

In fact, according to estimates provided by research firms iSuppli and Chipworks, Taiwan was the origin of US$20.75 of the value; Germany, US$16.08; South Korea, US$80.05; the United States, US$22.88; and others, including Japan, US$47.75.

And that does not tell the whole story. To trace the origin of the value-added, information is needed on the whole chain of suppliers and their suppliers.

Putting the figures together in what the OECD and WTO said was a first analytical stab, America's 2009 trade deficit with China shrinks 25 percent to US$131 billion from the US$176 billion shown in the gross data.

The flip side is that the U.S. deficit with South Korea, Japan and other Asian countries supplying intermediate inputs to China is bigger.

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