What’s the biggest barrier to reaching a shared understanding of the true value of global trade to a given economy? Government? Special interest groups? Policy? Media?
Some experts believe the answer is simple: a lack of relevant statistics.
Here’s why: Trade today is defined by increasingly fragmented supply chains, complex international trade flows, and significant services-based inputs and outputs at every stage of production. And yet, most nations still measure trade in “gross trade” statistics, which measure only the gross value of products as they cross borders. The result: the value that goes into goods along international supply chains is not being effectively recognized.
A recent joint initiative by the Organisation for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) sheds light on this in the form of a new statistical estimate: Trade in Value Added (TiVA).
“This interconnected flow of trade is complicating the [global trade] picture,” says Nadim Ahmad, head of trade and competitiveness statistics at the OECD. “By looking at gross trade statistics, we’re not able to see, for example, whose consumers are actually driving output.”
Ahmad cites a common example: the iPhone, which undergoes final assembly in China. At a gross-trade level, that iPhone is measured to be flowing just one way: from China to the U.S. Yet, before final manufacturing, the device is constructed with a French accelerometer, a Korean touch-screen display, a Japanese memory chip, an American wireless chip, and American software and design. But the value of those inputs does not register as trade between these upstream countries and the U.S. in conventional trade data — despite the fact that it’s these upstream countries (including U.S. businesses) that benefit most from the trade.
Gross trade statistics are still vital to understanding global trade, says Ahmad. But he adds, “Our level of interpretation has to match the new complexity that drives global value chains. We need to recognize that we no longer live in a world where goods and services are produced almost entirely within national borders.”
When you look at global trade through the lens of TiVA estimates, some interesting things come to light:
- The U.S.-China trade deficit is one-third smaller, reflecting the importance of foreign-sourced inputs in Chinese exports.
- The services role in the global economy is twice as large, reflecting its importance in manufacturing inputs.
Another interesting result of the TiVA estimates is a better understanding of the degree to which international trade tariffs are being levied on the same product multiple times through its production chain. Going back to the iPhone example: assuming a trade tariff is assessed on each component as it crosses an international border, the finished device will have levied dozens of trade tariffs before reaching the end consumer.
“The greater the international fragmentation of production, the greater the multiplicative effect of trade tariffs,” Ahmad says. Countries that think they’re protecting a domestic industry by levying tariffs on intermediary goods or services may ultimately make that country less competitive by erecting barriers to larger global supply chains: first by increasing the costs to downstream manufacturers that require these intermediates; second because domestic manufacturers further upstream in the supply chain wind up paying the price.
As OECD Secretary General Angel Gurria said during the TiVA launch in Paris earlier this year, “Countries’ capacity to sell to the world depends on their ability and readiness to buy from the rest of the world.”