By Jeff Ferry, CPA Research Director
Today the CPA published a new article on the U.S.’s Top Ten Bilateral Deficit Nation Trading Partners featuring the latest data for last year. You can read it here. In a nutshell, our trade deficit in goods has increased twenty-fold in the last 25 years to total $956 billion last year—almost a trillion dollars of deficit on merchandise trade. As expected, China heads the table, with the U.S. running a deficit of $355 billion. The US-China trade imbalance is not dominated by duffel bags and socks, but instead by electronics and machinery, where we ran a $209 billion deficit. Electronics is a sector where labor cost, China’s most significant comparative advantage, does not make a big difference. Leadership in the design and development of most electronics technology, like microchips or electronic systems (such as smartphones or PCs) belongs to the U.S., Japan, or the Asian tigers. China’s real “comparative advantage” (to use the free traders’ favorite phrase) is in its mercantilist policies like massive state subsidies to capture dominant positions in the global markets for targeted products and technologies.
However, the latest controversy surrounding the 2016 trade data does not focus on the continuing deterioration in the U.S. trading position. Instead, it’s focused on a dispute how to improve measures of our exports and imports. The Wall Street Journal published a lead editorial (a slot normally reserved for wars, bankruptcies and national elections) on the merits of different forms of statistics. Sadly, the Journal is getting irate and ill-tempered about a subject that scarcely warrants it.
Foreign Exports and Imports for Consumption
The Commerce Department has two measures to count exports and imports. One set of data uses Total Exports and General Imports (which are really total imports). Those measures count all goods that cross our border, going in or out, including the increasing volume of goods that merely pass through our country to another destination. But the Commerce Department also publishes data on Domestic Exports (exports of goods made in the U.S) and Imports for Consumption (goods imported for consumption in the U.S.) Those measures exclude those “pass-through” goods, merchandise that enters the U.S. and leaves unchanged. With the growth of international supply chains, pass-through goods have become a larger phenomenon in international trade.
So for example, if an auto engine comes from Germany to a port in the U.S., and is then immediately shipped to Mexico for assembly into a vehicle, the value of that engine should not figure in either Domestic Exports nor Imports for Consumption. Since that engine has not undergone any value-added nor created any work for U.S. workers, it does not contribute to the U.S. economy in any way. Last year, Foreign Exports (i.e. pass-through goods) accounted for $224 billion or 15% of our total exports of $1.45 trillion.
These conceptually more accurate measures do change certain bilateral trade figures. For example, our bilateral deficit with Mexico last year was $63 billion under the “total” measures, but by excluding pass-through goods, it increases to a deficit of $109 billion. Similarly for Canada, the U.S. deficit rises from $11 billion to $58 billion under the measure designed to show only genuine US exports and imports. The narrower measures are more relevant for assessing the impact of our trade on U.S. employment, domestic production, and the incomes of U.S. companies and employees. The sad story these statistics tell is that in the last 25 years, our trade position with our two NAFTA partners has changed from rough balance in 1992 to a whopping huge deficit of $160 billion last year. The fundamental cause of this deterioration is, of course, a U.S. economic system that is heavily weighted against manufacturing. Under NAFTA, Mexico benefits strongly from its low wages, its more lax environmental standards, and other features making it an attractive place for a multinational to do business. Canada doesn’t have dramatically cheaper wages than the U.S., but in other ways, its costs are lower. At least one auto multinational has said it chose to build a plant in Canada because it could save some $1300 per vehicle on health care costs: north of the border, the Canadian taxpayer pays for health care while in the U.S. our (highly costly) health care is paid for by the employer and employee.
In an editorial entitled “A Statistical Trade Trick,” the Journal editorial writer raged against what he called the “fuzzy math” and “cooking the books on re-exports.” Instead, the change remedies the prior “fuzzy math” in which re-exports inaccurately diminish the true trade balance picture. But the government has long used these very measures. For example, the U.S. International Trade Commission (ITC) used the narrower measures in their statutorily required reports to Congress, such as a 2007 report on the projected results of the South Korea-US Trade Agreement. There is an asymmetry in the measures, in that the Imports for Consumption measure is not as restrictive as the Domestic Exports measure. The Commerce Department and Customs need to work on improving that measure through more thorough reporting by business.
A few years ago, free traders like Obama Administration’s USTR official Michael Froman pushed the US ITC to include the pass-through goods in the totals to diminish the size of the bilateral deficits. Their goal was to wrongly claim that trade agreements have benefited the economy. When you strip away the sleight of hand, it’s abundantly clear that the FTAs have been a disaster for the U.S. economy. And it’s not just NAFTA. After the Korean-US trade agreement was approved in 2011, our trade deficit with Korea more than doubled to $32 billion on the narrower measure last year–or $28 billion on the wider measure. Whichever measure you look at, the story is the same. Many of our trading partners are skilled at keeping the lid on their imports from the U.S., whatever it says in these agreements. One of the most contentious issues in the Korean negotiations was on the auto industry, where Korea supposedly made big concessions to our allegedly hard-as-nails U.S. negotiators. According to last year’s figures, our motor vehicle exports to Korea were $2.6 billion. Their motor vehicle exports to the U.S. were $25 billion, nearly ten times our figure!
Cross-Border Beemers and Other Urban Myths
In his hyperventilating rage, the Journal editorial writer offered a hypothetical example of a BMW car dealer in Buffalo, New York that imports 50 BMWs for shipment to Canadian customers, and its imaginary impact on the trade statistics. This is an imaginary example and we strongly recommend the Journal writer consider purchasing some Ritalin from a Canadian pharmacy to soothe his hyperactive imagination. The German car giants do not allow their dealers to ship cars across borders. I spoke to a director at a local German car dealership to confirm this fact, and got some interesting insight. Not only do the German companies specifically forbid their U.S. dealers from selling cars to customers outside the U.S., they penalize them with fines and reductions in quota if they are caught doing so. This man then went on to explain to me that car companies have quite a bit of leeway in defining the origin of their products. He cited the example that occurred several years ago, when Mercedes found it had a big hit on its hand with its C-Class automobile. Germany could not keep up with production, so Mercedes had its plant in South Africa begin producing them too. But U.S. consumers didn’t find “Made in South Africa” as comforting on the sticker as “Made in Germany.” The solution was for Mercedes to do QA (Quality Assurance) in Germany on the C-Class parts before they were sent to South Africa. Mercedes uses the QA process as the key step to decide where a part is “made”. So even though QA is a small proportion of the total value-added or labor content in an automobile, Mercedes was able to make more C-Class cars appear to be Made in Germany than an economist might view it after analyzing the production process. No doubt other car companies do the same thing, and no doubt they use the country of origin rules to favor the U.S. when that helps their marketing.
No export or import measures are perfect. But including goods merely passing through the U.S. to another destination, as the Wall Street Journal wants, makes no sense. That data is conceptually and factually wrong. The energy should be directed at making sure the import/export data are accurate in distinguishing pass through exports from real exports and imports.
But the bottom line is, however you look at it, we have a half a trillion-dollar hole in our trade accounts and that represents a significant loss of U.S. jobs, production and income. We need to a national goal to fix it.