Value-Added Trade: New Tracking Tool Reevaluates U.S. Trade Deficits

value_added_tradeA new database developed by the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) goes beyond traditional trade measurements by analyzing the value added by different countries during production to get a more accurate estimate of global trade balances.

According to the OECD, “traditional measures of trade, that record gross flows of goods and services each and every time they cross borders, may not accurately reflect modern trade patterns and could, if taken alone, lead to ill-informed policy decisions.” The conventional gross-value approach to measuring trade does not take into account the value of intermediate goods into the finished products. For example, while an iPad is “Made in China,” according to a study by the Personal Computing Industry Centre, the U.S. adds $275 to the total production cost, while China only adds $10. Using these figures, the Economist estimates that while iPads accounted for around $4 billion of America’s reported trade deficit with China in 2011, the deficit was only $150 million if China’s exports were measured on a value-added basis. These kinds of misleading estimates apply to more than just iPads. The database statistics show that the trade deficit with China has been drastically overstated in traditional measurements and is actually 25% lower when evaluated in value-added terms.

With modern supply chains becoming increasingly interdependent, the value-added approach better represents today’s interconnected world.  Hopefully U.S. policy-makers will take this new database seriously and use it to more accurately assess the magnitude of U.S. trade deficits, while also recognizing the benefits that the U.S. receives from international trade.

Posted by: Matthew Goldberg

Sources: The Economist, OECD, Bloomberg

Photo Credit: made in china courtesy of flickr user twicepix

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