Trade deficits seen in new lighttrade deficit

An alternative way to measure trade flows shows that the China-US trade imbalance is smaller than previously thought, and proves, according to the chief executive of the Asia Pacific Foundation of Canada, that politicians and analysts "shouldn't get hung up" over trade deficits.

"We certainly should not be alarmed by an imbalanced trade deficit per se," Yuen Pau Woo told China Daily in an interview on Tuesday. "The deficit by itself may not be problematic, as long as the overall balance can be financed."

The new data follow the launch early this year of a joint project by the Organization for Economic Cooperation and Development and the World Trade Organization aimed at providing a more telling picture of underlying trade flows in an age of global supply chains. The group seeks to demonstrate that governments hurt their own interests and their own exporters by raising barriers to imports, because, during the manufacturing process, "inputs" from a given country can cross borders several times.

"Today, companies divide their operations across the world, from the design of the product and manufacturing of components to assembly and marketing, creating international production chains," says a statement on the WTO's website. "More and more products are 'Made in the World', rather than 'Made in the UK' or 'Made in France'".

In January, the OECD calculated that on a value-added basis, the US trade deficit with China was 25 percent smaller than when measured in gross terms, because Chinese businesses use many inputs supplied by the US, directly or through third parties, to make goods eventually sold to American consumers. Data released on Tuesday also showed that the 2009 trade deficit was a third less in value-added terms than in gross terms.

Perry Wong, an economist and director of research at the Milken Institute, an economic think tank in California, says the project illustrates how, in the complex global supply chain, "it's very difficult to say to one nation, 'Your trade policy directly harms us'".

Using the China-assembled iPhone as an example, he said, China may directly account for just $10 to $15 of the device's $200-plus value. Besides the US, other countries adding value in its manufacture include Japan, South Korea, Germany and the Czech Republic, he noted.

The alternative approach to trade flow measurement reflects the US' global might as an exporter and manufacturer, Wong said.

"If you look at some key products, from the iPhone to any PDA to a lot of the high end electronic goods, the most expensive components are (almost always) manufactured by a US firm," he said. "If you look at the iPhone's content, probably more than 40 to 50 percent of its value originates from the United States."

But Wong said he doubts that a broad embrace of this alternative trade flow measurement method will reduce US-China trade tensions.

"There are still issues on the value of currency, how it impacts trade, and on labor policy," he said. "At the end of the day, countries still use the final aggregate number to say: 'China has a deficit of so many billions of dollars because of their currency value, because of their labor practice, because of their biased policy domestically'.

"But people can use the alternative to see that if you account for the import content of the deficit, then the deficit is less."

Yukon Hwang, a former World Bank director for China and a senior associate with the Carnegie Endowment for International Peace in Washington, a foreign-policy think tank, said the alternative measuring method drives home the realization that "so-called normal trade statistics don't give a very meaningful picture".

It says, "You shouldn't think of trade as bilateral, between one country and another country," Hwang said. "Trade is multilateral, involving many countries."