Global Trade Imbalances as a Statistical Artifact
by Brenda Rosser
cross posted from Econospeak with permission of author.
Global Trade Imbalances as a Statistical Artifact:
Today, the latest spin that purports to describe the still unfolding global economic crisis is that of ‘global trade imbalance’, with particular attention being focused on the US and China.
The US, we are told, has a huge trade deficit and China is conveniently blamed for this. “They say China’s currency manipulation hurts the U.S. economy” [1] making China’s goods much too cheap relative to those produced in America.
This tale does not reflect the contemporary reality and it is all the stranger because, on the other hand, it’s never been a secret about the manner in which the large global corporation has evolved its operations over the last 4 decades. These huge networked businesses now have production systems that most often span a large number of countries at the one time. That means, in effect, that world trade is now mostly defined by the nature and extent of the global corporation and its networks. The nation is no longer the core economic entity.
In 2006 Samuel J. Palmisano, Chair of the Board, President, and Chief
Executive Officer of IBM described the evolution that has occurred in the nature and function of the international corporation.[2]Since the early 1970s economic nationalism has abated, Palmisano says. Trade and investment barriers consequently receded. A revolution in information technology also occurred and this development improved the quality and cut the cost of global communications and business operations “by several orders of magnitude”. The large transnational corporation was then much more able to standardise technologies as well as its business operations all over the world. This, in turn, led to the interlinking and facilitation of work both within and among companies.
“New perceptions emerged as to what was possible and permissible…. The focus shifted from products to production.” State borders defined less and less “the boundaries in corporate thinking and practice….”
More ominously, as we now see with the global fad for deregulation, Palmisano eulogises
“the growth of horizontal, intergovernmental networks among the world’s regulators and legislators [that are] built on shared professional standards and relationships among cross-national communities of experts.”
Almost anyone with more than a fleeting interest in economics understands this new reality. The most dominant global enterprises have embedded themselves in one nation after another and most of those businesses are US and European in origin. The economic reasons for these entities doing so appear quite obvious. Labour is cheaper in Asia. Corporations find it much easier to avoid tax and engage in transfer pricing to maximise profits, and so forth.
So, it’s not surprising, and somewhat belated, to find a 2007 paper published by the Asian Shadow Financial Regulatory Committee that finally raises the very serious issue of false accounting in international trade by governments around the globe. Quote:
“MNC affiliate sales within their host countries are not included in trade balances, but are counted in host country GDP. MNC affiliate sales from the host country to other countries are counted as exports of the host country. This accounting practice overstates the current account surplus of a country like China with heavy inward foreign direct investment (FDI). This surplus would be reduced if sales outside China by affiliates of foreign-owned MNCs were excluded from its exports and sales within China by affiliates of foreign-owned MNCs were included in its imports. The trade accounting system overstates the current account deficit of a country like the US, with heavy outward FDI. This deficit would be greatly reduced if sales outside the US of overseas affiliates of US MNCs were included in US exports and sales back to the US of overseas affiliates of US MNCs were excluded from US imports.” [3]
For all the huge trade surplus that China is purportedly ‘enjoying’ it turns out that little benefit is being derived from it. Over 50% of China’s exports are produced by foreign corporations. Walmart, for instance, has 700 factories in China. And ‘China’ (whatever accounting entity this word constitutes) has ‘trade deficits’ with “the rest of Asia”.
“In effect, China aggregates the trade surplus of East Asia with the U.S. and Western Europe, takes the political heat, but captures relatively little of the value that it adds to final products.”
We need to know more than just the fragments of data that government bureaucracies, mainstream professions and the media serve out. A true understanding of the nature of the crises now confronting us is absolutely essential, and yet deliberate obfuscation is occuring as to the cause and nature of our collective dilemma.
“Were it part of our everyday education and comment that the corporation is an instrument for the exercise of power, that it belongs to the process by which we are governed, there would then be debate on how that power is used and how it might be made subordinate to the public will and need. This debate is avoided by propagating the myth that the power does not exist.”
John Kenneth Galbraith, The Age of Uncertainty, 1977
[1] Q&A: How China’s Currency Policy Affects You
by Adam Davidson
text sizeAAA
April 20, 2006
http://www.npr.org/templates/story/story.php?storyId=5353313
[2] “The Globally integrated Enterprise” Samuel Palmisano, ceo and chair of the board of ibm, Foreign Affairs
http://www.ibm.com/ibm/governmentalprograms/samforeignaffairs.pdf
[3] Asian Shadow Financial Regulatory Committee
A New Perspective on Global Imbalances: the Role of MNCs
Statement No. 8
Hong Kong, July 5, 2007
www2.hawaii.edu/~fima/ASFRC/HK_Statement.pdf
Posted by Brenda Rosser
“For all the huge trade surplus that China is purportedly ‘enjoying’ it turns out that little benefit is being derived from it. Over 50% of China’s exports are produced by foreign corporations.”
Sorry, but statements like that reveal a rather weak understanding of concepts like “benefit”. The fact that Wal-Mart has its headquarters somewhere outside China doesn’t necessarily mean there is “little benefit” to China’s residents from Wal-Mart’s sourcing of goods in China. Employment, industrialization and tech transfer are all benefits and all grow directly out of Wal-Mart’s presence. Drawing quotes around “enjoying” may feel all pointed and sarcastic, but it doesn’t serve to further the argument.
There is also something of a false dichotomy is implying that corporations are “the core economic entity” means that nations and the trade between them is irrelevant.
This essay is peppered with “more ominously” and “anyone with more than a fleeting interest in economics understands” and other such salesmanship. When I taught writing to business majors, I sent papers back when the writer had relied on this sort of stuff. I told them that their notional reader – somebody in business whose cooperation they needed to win – would be smart enough to know they were being bludgeoned instead of informed, and would withdraw trust. Winning through language is a poor substitute for actually having the right argument. Sad, because about half of this argument seems right, if only Linda would bother to actually make the real argument, instead of beating us with words.
“For all the huge trade surplus that China is purportedly ‘enjoying’ it turns out that little benefit is being derived from it. Over 50% of China’s exports are produced by foreign corporations.”
Sorry, but statements like that reveal a rather weak understanding of concepts like “benefit”. The fact that Wal-Mart has its headquarters somewhere outside China doesn’t necessarily mean there is “little benefit” to China’s residents from Wal-Mart’s sourcing of goods in China. Employment, industrialization and tech transfer are all benefits and all grow directly out of Wal-Mart’s presence. Drawing quotes around “enjoying” may feel all pointed and sarcastic, but it doesn’t serve to further the argument.
There is also something of a false dichotomy is implying that corporations are “the core economic entity” means that nations and the trade between them is irrelevant.
This essay is peppered with “more ominously” and “anyone with more than a fleeting interest in economics understands” and other such salesmanship. When I taught writing to business majors, I sent papers back when the writer had relied on this sort of stuff. I told them that their notional reader – somebody in business whose cooperation they needed to win – would be smart enough to know they were being bludgeoned instead of informed, and would withdraw trust. Winning through language is a poor substitute for actually having the right argument. Sad, because about half of this argument seems right, if only Brenda would bother to actually make the real argument, instead of beating us with words.
Brenda,
My first point would be that you seem to be advocating a return to using Gross National Product as a metric of productivity rather than Gross Domestic Product. My understanding is that GNP was deprecated because it has the affect of, for example, counting Toyota cars produced in North America as Japanese production. And that seems even less realistic than counting them as US/Canadian production.
My second point would be to agree with KHarris that the trend of the future is diffuse ownership and management of MultiNational Corporations. Where their headquarters are is likely to become less and less relevant. The CEO of “Japanese” industrial giant Sony is named Howard Springer. He was born in Wales and is a naturalized US citizen. Expect more and more of that, and possibly the migration of nominal Corporate Headquarters to places where the laws are most convenient. Ownership also is becoming more diffuse as investors buy stock in companies outside their nation of residence. I think that right now equating companies with nationalities is not a huge error, but it probably will be increasingly misleading as time goes by.
And third, I would point out that when last I looked, China held something over a trillion dollars in US government and corporate obligations. Are you sure that they aren’t deriving just a bit of benefit from their trade surplus?
Brenda:
It is too bad “Stormy” isn’t around to add to this post of yours. Having been deeply involved in China manufacturing and transportation; I believe I understand the thrust of your message. The last article on your reference list spells it out nicely. http://www2.hawaii.edu/~fima/ASFRC/HK_Statement.pdf Asian Shadow Financial Regulatory Commission 2007
A few exerpts:
“Under current trade accounting practices, the entire value of the finished product is included in the exports of the nation of the final-stage producer, which might add the least value.Case in point: China, the last stop in a multi-stage pan-Asian production system that dominates global manufacturing.”
“The high and rising percentage of firms reporting losses over the period 1988-2000 invites skepticism, given the flood of FDI into China over the same period. We conjecture that one major attraction was the high profits that could be siphoned out untaxed via transfer pricing: China’s State Administration of Taxation has only 20 transfer pricing specialists to oversee 330,000 foreign invested enterprises (Chung (2007)).”
“While the above propositions would re-orient major debates in international economics and finance, the statistical basis for evaluating them is weak. US law now mandates the collection of relevant data by its Bureau of Economic Analysis (BEA), a unit of the US Department of Commerce. This has allowed the BEA to develop an ownership-based framework for the current
account, which indicated that the 2003 US trade deficit was overstated by $118.9 billion or 24 percent. Another finding was that in 2004, US MNCs earned $315 billion profits overseas, an increase of 24% over the previous year and about half the current account deficit of the US.”
China as I have seen it is mostly an assembly point for product and it still imports many of the components necessary to build the product it exports. Marshall Auerback notes the same here in a thread:
“Additionally, the reality is that China is still largely an assembly nation rather than the manufacturing hub – a point which is often misunderstood. They are clearly moving into the next phase of industrial development to become full-blown manufacturers but are facing a relative shortage of low-price labour given they have exhausted the coastal region which gave them transport economies.” http://www.nakedcapitalism.com/2010/02/thinking-the-unthinkable-what-if-china-devalues-the-renminbi.html#comment-88261 “Thinking the Unthinkable . . . “
Materials imported into China face duties which are then offset by tax credits when the final product is exported. In which case, any gains in manufacturing the raw materials or components used to make the final product it exports are lost to China. Materials/components make up the larger cost component of the product being assembled.
It’s hard to get people to focus where in the value chain taking raw materials to finished products so you find the higherst returns. Often it’s in retail and marketing more than manufacturing.
It’s hard to get people to focus where in the value chain taking raw materials to finished products so you find the higherst returns. Often it’s in retail and marketing more than manufacturing.