Friday, August 12, 2011

Using Value-Added Trade Estimates, We Have a +$32.25B Trade SURPLUS with China for 2011

According to research at the San Francisco Federal Reserve, 36% of the value of imported goods goes to U.S. companies and workers, and for Chinese imports it's much higher: the U.S. content of “Made in China” is close to 55%.  Reason? The SF Fed explains:

"The fact that the U.S. content of Chinese goods is much higher than for imports as a whole is mainly due to higher retail and wholesale margins on consumer electronics and clothing than on most other goods and services." 

The iPhones imported from China help illustrate this - of the $600 retail price of an iPhone that is imported and "assembled in China," more than 60% goes directly to Apple and other American companies. From a CD post about this:

"A new reasearch paper calculates that because of the way trade statistics are calculated - the full value of an iPhone is considered an export to the U.S. from China by both countries, even though only about 1% of the value was created during the final assembly process in China -  just the iPhone alone added almost $2 billion to America's trade deficit with China in 2009. The authors find that if a "value-added approach" was used to calculate trade statistics, the iPhone would have instead generated a $48 million trade surplus for the U.S. in 2009, instead of the $1.9 billion trade deficit reported using the conventional methodology."

Using the percentages provided by the S.F. Federal Reserve, we can re-estimate our current trade position with China as follows:

According to the BEA, we currently have a $133 billion trade deficit with China for 2011, based on imports of $183 billion and exports of about $50 billion.  But of the $183 billion of Chinese imports, about 55%, or $100.65 billion, represents the contributions of U.S. content that goes to American companies and workers.  The balance of $82.4 billion would represent the value-added by China to its exports to the U.S.

On the other hand, we have to account for the Chinese content (or "value-added") of U.S. exports, which we could estimate at 36% using the S.F. Fed estimate for U.S. imports (and it's possible that this could be high for the Chinese-contribution of our exports to China).  In that case, the U.S. value-added for exports to China would be 64% of $50 billion, or $32 billion, and the Chinese content would be $18 billion. 

Summing up, we would have $100.65 billion in U.S. value-added for the "Made in China" imports, and $32 billion in U.S. content, or value-added, for our exports to China, for a total U.S. value-added of $132.65 billion for 2011. 

For China, it would have $82.4 billion in value-added to its exports to the U.S. (our imports) and it would get credit for $18 billion of Chinese-content in the total of $50 billion worth of  "Made in the U.S.A." products it purchased this year.  The total value-added for China would be $100.4 billion.   

Bottom Line: Using the San Francisco Federal Reserve estimates of the foreign and domestic content of imports, we would have a $32.25 billion "value-added" trade surplus with China for 2011 ($132.65 billion - $100.4 billion), instead of the officially reported trade deficit of -$133 billion.  

29 Comments:

At 8/12/2011 4:11 PM, Blogger Junkyard_hawg1985 said...

Great Post! This post explains why the U.S. has had a cumulative $8 trillion trade deficit since 1960, while net income from foreign sources reached a record $188B for the U.S. in 2010.

 
At 8/12/2011 7:46 PM, Blogger Buddy R Pacifico said...

Extrpolating small Chinese content in IPhones to all value-added imports from China seems brave. Wal-Mart watches and Costco couches are probably 99.9% Chinese content. The new bridge sections of the San Francisco Bay Bridge are made in Shanghai. Was the steel imported from France and assembled in China? I don't think so. Again, probably 99.9% China made (ex. design)

 
At 8/12/2011 7:50 PM, Blogger PeakTrader said...

The article needed to explain the global network or supply chain in more detail, and left out the normative economics.

 
At 8/12/2011 8:11 PM, Blogger PeakTrader said...

I wouldn't consider the article a "new research paper."

The hidden downside of Santa's little helpers
The Irish Times
December 21, 2002

An investigation into the price of a Mattel Barbie doll, half of which is made in China, found that of the $10 retail price, $8 goes to transportation, marketing, retailing, wholesale and profit for Mattel.

Of the remaining $2, $1 is shared by the management and transportation in Hong Kong, and 65 cents is shared by the raw materials from Taiwan, Japan, the US and Saudi Arabia. The remaining 35 cents is earned by producers in China for providing factory sites, labour and electricity.

China now makes 70 per cent of the world's toys, and its exports have doubled in just eight years. In addition, it exported nearly a billion dollars' worth of Christmas-related goods, half of it to the United States.

Toy factories hire the least-skilled workers...Sixty per cent are young women between 17 and 23 years old who live cramped in company dormitories, 15 to a room, earning just 30 cents an hour and often inhaling spray paints, glue fumes and toxic dust.

 
At 8/12/2011 8:32 PM, Blogger PeakTrader said...

Instead of "value-added trade" how about value-subtracted trade?:

People will not pay $2 for something worth $1 at the store.

Yet, those same people will happily pay $2 for $1 in government services.

Or, they'll force someone else to pay without realizing they'll end up paying anyway, e.g. through higher prices or fewer goods.

 
At 8/12/2011 10:30 PM, Blogger Benjamin said...

So, what is it? Are trade deficits good or bad?

Perry hints they are bad by quoting right-winger Alan Meltzer a few days back:

"The central issue facing the U.S. is whether we turn away from unsustainable budget and trade deficits toward an economy that grows at historic rates with low inflation. More redistribution now won't do that. More investment and productivity growth now will, and it will also provide more resources to pay for a greater share of future health-care costs at lower tax rates."

~Alan Meltzer in today's WSJ

So Metzler is lumping in trade deficits with budget deficits and calling them "unsustainable."

But Perry often hails budget deficits or cites evidence we hardly have deficits.

Me? I am just a banana man, come tally my bananas.

 
At 8/12/2011 11:26 PM, Blogger VangelV said...

Bottom Line: Using the San Francisco Federal Reserve estimates of the foreign and domestic content of imports, we would have a $32.25 billion "value-added" trade surplus with China for 2011 ($132.65 billion - $100.4 billion), instead of the officially reported trade deficit of -$133 billion.

It helps to look at the reality.

American companies are using Chinese workers to make products that they sell around the world. The Chinese workers benefit because they get better jobs and accumulate capital. The investors in those companies benefit because they get higher profits. Consumers benefit because they pay lower prices.

So is there a problem or is this a win-win-win situation? Here is where the problem comes in. The benefits are all real but come with a cost. The Chinese workers trade their labour for wages and the ability to accumulate capital. (This is a clear win.) The investors risk their own capital in the hope of getting rich as they hope that their foreign competitors will remain a few steps behind. (The evidence here is not as clear as in the case of the workers. Yes, the profits did come for a while. But in many cases the foreign competitors hired away knowledgeable and high skilled workers and closed the gap on the American companies. There is a risk of much lower margins and losses of market share.) Consumers did get cheaper products and were able to afford a higher standard of living. (The problem here is that many financed that higher standard of living with capital transfers as they ran down savings and with the accumulation of debt that restricted their choices in the future.)

I would argue that the Fed needs to broaden the scope of their study and look at all of the factors. Things are not exactly as their conclusions would have us believe.

 
At 8/13/2011 1:22 AM, Blogger PeakTrader said...

VangelV, when all factors are taken into account, U.S. absolute gains-in-trade are certainty large, while China's relative gains-in-trade are uncertainty large (because of social costs).

So, it's possible, the U.S. captures almost all the gains-in-trade.

 
At 8/13/2011 3:21 AM, Blogger Ron H. said...

Wait. Who are you, and what have you done with VangelV?

These don't sound like your normal arguments.

"Yes, the profits did come for a while. But in many cases the foreign competitors hired away knowledgeable and high skilled workers and closed the gap on the American companies. There is a risk of much lower margins and losses of market share.)"

Competition is a constant, and is always to be expected, unless you can afford to buy government protection. There is always a risk of lower margins and loss of market share. Any advantage gained by hiring lower priced workers can only ever be temporary.

"Consumers did get cheaper products and were able to afford a higher standard of living. (The problem here is that many financed that higher standard of living with capital transfers as they ran down savings and with the accumulation of debt that restricted their choices in the future.)"

Using savings and borrowing to maintain a higher standard of living is a problem no matter what else is going on. I don't see what the connection is to the ability to purchase cheaper goods.

 
At 8/13/2011 8:19 AM, Blogger PeakTrader said...

The benefits of U.S. international trade are much greater than the costs. Some benefits:

1. Social benefits (instead of social costs).
2. Lower prices.
3. Lower interest rates.
4. Higher profits.
5. Freeing-up limited resources.
6. Shifting resources into more profitable goods and higher paying jobs.

International trade generates a virtuous U.S. cycle of consumption-investment, because foreigners sell their goods too cheaply and lend their dollars too cheaply to maintain employment and buy commodities, e.g. oil.

 
At 8/13/2011 9:19 AM, Blogger PeakTrader said...

The U.S. government failed, because up to $800 billion annual U.S. trade deficits were dollars shifted from the U.S. private sector to the U.S. government (into Treasury bonds) that weren't refunded to the U.S. private sector (e.g. in tax cuts).

 
At 8/13/2011 9:30 AM, Blogger morganovich said...

buddy-

Wal-Mart watches and Costco couches are probably 99.9% Chinese content.

actually, there are likely nothing like that. just the design content of them (and most are designed here) significantly exceed that.

the chinese are not making all the components either and certainly not producing the raw materials.

i doubt their content % exceeds 50% on those items.

 
At 8/13/2011 9:36 AM, Blogger morganovich said...

bunny-

you know full well that mark does not believe trade deficits matter.

you are just being obstreperous.

that quote came from his piece about federal deficits.

mark has never, ever backed the concept that trade deficits matter.

they don't.

so please tell me:

how can you be worse off by trading $1 for something you value more than $1?

that's why you trade with anyone, be they domestic or foreign.

are you worse off for buying groceries here?

why would buying chinese tupperware to keep them in be any different?

you'll run a trade deficit with he grocery store your whole life.

please explain to me why that is in any way unsustainable or undesirable.

 
At 8/13/2011 10:45 AM, Blogger VangelV said...

VangelV, when all factors are taken into account, U.S. absolute gains-in-trade are certainty large, while China's relative gains-in-trade are uncertainty large (because of social costs).

What social costs? The Chinese workers get jobs that cause their incomes to rise and wealth to increase substantially. The government and private companies build new roads, bridges, schools, sewers, water treatment plants, etc. The standard of living has increased at a faster rate than ever.

Yes, US investors gain from the profits. But Americans in general spend more than they earn and are in deeper debt than ever before. American infrastructure is in bad shape and there isn't enough capital for new investment that exceeds depreciation. The average American student is looking at bleak prospects after graduation and at a lower standard of living than his parents.

So, it's possible, the U.S. captures almost all the gains-in-trade.

That is not what the observations have shown.

 
At 8/13/2011 10:57 AM, Blogger VangelV said...

Competition is a constant, and is always to be expected, unless you can afford to buy government protection. There is always a risk of lower margins and loss of market share. Any advantage gained by hiring lower priced workers can only ever be temporary.

I agree totally. But I am merely pointing out the fact, after a long vacation and a long drive, that the regulatory environment in the US is likely to allow foreign companies to close the gap. As their workers gain more skills and as more foreign engineering students cannot get visas to work in the US the foreign competitors will cut into margins and there will be less profit for the industry as a whole.

Perhaps I was not clear. Do you really think that the "US" gains more from Apple's activities abroad than all of the people who are employed by Apple to make those products abroad? Or do you think, as I do, that the biggest winners are the investors in Apple, their customers, and their workers?

Using savings and borrowing to maintain a higher standard of living is a problem no matter what else is going on. I don't see what the connection is to the ability to purchase cheaper goods.

Sorry that I was tot clear. I am responding to the conclusions in the Fed paper. I am merely pointing out that the biggest winners have been the workers and investors. And while consumers have been major winners as they always are in a competitive market, we have the case where American consumers have used debt even as foreign workers were accumulating capital. That gain in debt has been a negative for the average American.

 
At 8/13/2011 11:01 AM, Blogger VangelV said...

International trade generates a virtuous U.S. cycle of consumption-investment, because foreigners sell their goods too cheaply and lend their dollars too cheaply to maintain employment and buy commodities, e.g. oil.

I agree. But I do not agree with the Fed paper, which is what is being discussed here. The idea that the US has some kind of major surplus when trading with other nations is silly. As I said, the US is adding massive amounts of debt to finance its consumption at personal, local, state, and federal levels and there is no accumulation of capital.

 
At 8/13/2011 11:05 AM, Blogger VangelV said...

the chinese are not making all the components either and certainly not producing the raw materials.

i doubt their content % exceeds 50% on those items.


I agree. But you have to look at the effects. China gains decent jobs that allow poor rural workers to migrate to cities where they have a much better life. Those workers increase their own standard of living even as they accumulate capital. Yes, American investors gain but margins for most goods are small and the gains come after tax in a depreciating currency. (The depreciation is a problem for the Chinese as well.) American consumers get cheap goods that make them better off. But they purchase many of their consumer goods by using liberal amounts of credit that make them more vulnerable in the future.

 
At 8/13/2011 11:10 AM, Blogger PeakTrader said...

This comment has been removed by the author.

 
At 8/13/2011 11:26 AM, Blogger PeakTrader said...

VangelV, you use to talk about "malinvestment." I doubt you know what it means.

China's growth-at-any-cost policy is a most inefficient system.

A country can double its real GDP and yet raise its overall standard of living by a much smaller amount, while adding much more to its trading partners standard of living.

 
At 8/13/2011 12:42 PM, Blogger morganovich said...

vang-

yes, but you also have to look at the magnitude.

assembling iphones at foxcomm opays a great deal less than flipping burgers at a Detroit mcdonalds.

china's growth policies are severely problematic and in many cases, unsustainable.

they are focusing on revenue and employment, not profit.

foxocmm gets $5 per phone for reinvestment and apple gets $200. one design job at apple pays as much as several entire lines of assemblers in china. i'd guess they make 20 times as much at a bare minimum.

without massive sterilization of trade dollars, they would be experiencing hyperinflation.

it's easy to find better job than being a rural hand farmer, but as they hit a lewis point, the imbalances is their top down system will become increasingly apparent.

the issue of US credit is a separate one from trade.

clearly, we cannot spend more than we earn for long, but i don't see what that has to do with trade.

seems like our negative real interest rate are more culpable there.

i agree with you on the dollar.

seems we have a one trick pony fed that is just looking for excuses to print money.

i keep most of my cash savings in swiss francs for precisely that reason.

 
At 8/13/2011 2:47 PM, Blogger Ron H. said...

"Perhaps I was not clear. Do you really think that the "US" gains more from Apple's activities abroad than all of the people who are employed by Apple to make those products abroad? Or do you think, as I do, that the biggest winners are the investors in Apple, their customers, and their workers?"

I chose answer 'b'. As the "US" is a term used for convenience in writing or speaking, it cannot actually gain or lose anything. It is the people involved who have that capacity.

You once again sound like yourself. :)

 
At 8/14/2011 9:57 AM, Blogger VangelV said...

VangelV, you use to talk about "malinvestment." I doubt you know what it means.

A malinvestment is an allocation of capital that makes no economic sense. Everyone knows that.

China's growth-at-any-cost policy is a most inefficient system.

I agree that a growth-at-any-cost policy is unwise. And I expect that many Chinese investments to do very poorly. But that does not change the argument or invalidate the Fed's conclusions.

A country can double it's real GDP and yet raise its overall standard of living by a much smaller amount, while adding much more to a trading partner's standard of living.

That is possible. But from what I have observed after having travelled to both countries it is easy for me to conclude that the Chinese standard of living has risen much faster than the American standard of living.

 
At 8/14/2011 12:03 PM, Blogger Ron H. said...

"A country can double it's real GDP and yet raise its overall standard of living by a much smaller amount, while adding much more to a trading partner's standard of living."

GDP alone may not be a very good indicator for standard of living.

For example, during WW2, US GDP nearly doubled, while the standard of living dropped, and those countries receiving the bulk of US exports saw their standard of living drop dramatically.

 
At 8/14/2011 12:16 PM, Blogger VangelV said...

yes, but you also have to look at the magnitude.

assembling iphones at foxcomm opays a great deal less than flipping burgers at a Detroit mcdonalds.


I think that you are very confused. The TOTAL COMPENSATION level for assembling iPhones is much higher in REAL TERMS than the compensation level for flipping burgers in Detroit. Foxcomm provides free accommodations, shuttle busses from non-campus residences, health care plans, laundry services, athletic facilities, etc., that are not counted as part of the reported pay. It also offers employees further training and subsidies to increase their technical skills or obtain technical degrees that are needed by the company.

Note that this is a specific example that has no bearing on the argument being made. (But as I pointed out, the data does not support your claims and conclusions.)

china's growth policies are severely problematic and in many cases, unsustainable.

I fully agree that central planning does not work. But when we are talking about privately owned factories and private businesses we are looking at the decentralisation that has gone on since Deng liberalised the Chinese economy. It is this liberalisation that is responsible for the huge gains in the standard of living, not the government's meddling.

they are focusing on revenue and employment, not profit.

foxocmm gets $5 per phone for reinvestment and apple gets $200. one design job at apple pays as much as several entire lines of assemblers in china. i'd guess they make 20 times as much at a bare minimum.


First of all, I have already said that many investors will do very well. What I am pointing out is that the workers who assemble the products do very well too. (Let me be clear that the consumer does the best of all because the economy only exists to meet the consumer's demands and competition is very good for consumers.)

You are also forgetting that China designs consumer products as well. Not long ago you would have made the same argument as above for Cisco, RCA, GM, Maytag, IBM, and many other companies. But all the products that those companies sold now have Chinese designed competitors that are doing very well. Eventually the same will happen with Apple's products.

And Apple's high paying design jobs may be a great benefit to the employees that do the work, workers who implement the designs, investors, and consumers. But the idea that there is some great benefit to the US that exceeds the benefit of its trading partners is not supportable.

 
At 8/14/2011 12:19 PM, Blogger VangelV said...

For example, during WW2, US GDP nearly doubled, while the standard of living dropped, and those countries receiving the bulk of US exports saw their standard of living drop dramatically.

Robert Higgs shows that the reported GDP increase during WWII did not mean that the country was out of the depression. In fact, the war effort reduced goods available to the general population so for many things got worse. The depression only ended after government spending was cut and private consumption and investments in the private economy began to boom.

 
At 8/14/2011 4:26 PM, Blogger Ron H. said...

"Robert Higgs shows that the reported GDP increase during WWII did not mean that the country was out of the depression. In fact, the war effort reduced goods available to the general population so for many things got worse. The depression only ended after government spending was cut and private consumption and investments in the private economy began to boom."

My point exactly. As long as government spending is a component of GDP, it isn't a good measure of how well off individuals are.

I'm glad to see Robert Higgs agrees with me. :)

 
At 8/15/2011 2:07 PM, Blogger philmon said...

Sadly, we still owe them about $11 Trillion in loans.

And that doesn't count the interest we'll pay.

 
At 8/16/2011 4:07 AM, Blogger Ron H. said...

"Sadly, we still owe them about $11 Trillion in loans."

If you mean China, you are off by almost an order of magnitude.

China holds 8% of US debt at $1.16tn.

 
At 12/23/2011 9:12 AM, Blogger David Bau said...

Just not true. See the actual numbers in

http://www.eiit.org/WorkingPapers/Papers/TradePatterns/FREIT063.pdf

Figure 9 near the end summarizes. After adjustment still a large deficit with China and an even larger one with Japan.

 

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