More Thinking about Trade as Pence and Ross Head to Tokyo

US Vice President Pence and Commerce Secretary Ross will go to Japan this
In addition to regional security issues, trade relations will
likely be featured.  Earlier this year, US President Trump and Japan’s
Prime Minister Abe agreed to hold bilateral trade talks, led by Pence and
Japan’s Finance Minister Aso.  Ross, charged with reducing the US trade
deficit, will join in some Tokyo talks.  

After withdrawing from the Trans-Pacific Partnership negotiations, the US
is exploring the possibility of a bilateral trade agreement with Japan.
This possibility has long been suggested,
but it is not clear the priority the Trump Administration will give it.  It
had seemed that renegotiating NAFTA was given top priority.  Earlier this
month, China and the US agreed in principle to begin “cabinet-level”
trade talks.    Ross apparently is seeking additional
concessions from Japan in addition to what was
under TPP.  Ross characterized those concessions as
“minor gains” for US agriculture and intellectual property rights.

Ross, like many others in the Trump Administration,
view the Bretton Woods system apparently building a multilateral system, as flawed.
  They seem to think that
the WTO and IMF have contributed to the US trade deficit.  The rolling
12-month average of the US trade deficit peaked nearly 11 years ago.  In
August 2006, the 12-month average shortfall hit $67.82 bln.  As of February,
it stood at $41.95 bln.  

We are struck by the naivete of the understanding of trade implied. 
Below the claims, seems to be the belief that 1) if exchange rates are truly
floating and 2) if there is truly free trade, then there should be no sustained trade imbalances.  That the US runs a chronic deficit is
evidence of some malfeasance in either the first or second part or

To be sure, there is clearly room to more
robustly enforce existing trade agreements
.  The conflict
resolution mechanisms are as important a component of free-trade agreements as
the rules themselves.   The US does not have free-trade agreements with
the EU, Japan or China.  As of the end of  2015, the US recorded a small trade surplus
(goods and services) with the 20 countries with whom it had free-trade

Ross argues that the US is far less protectionist than Europe and Japan. 
While this may sound intuitively true, the reality is far more complicated. Is
Europe, for example, really being more protectionist if they shun genetically
modified foodstuffs?   What about domestic content provisions? 
The shift of Japanese auto and auto parts production to the US was spurred by
“voluntary export restrictions,” which passed GATT’s (predecessor of
the WTO) muster, and weren’t regarded as
protectionist.  The same is true of orderly market agreements, and the
textile quota system.  It is generally
that non-tariff barriers to trade are now of greater significance that tariff barriers. 

Moreover, trade does not simply take
place between two separate firms in two different countries.
  It is
estimated, for example, that intra-firm trade (movement of good between
different parts of the same company) account for nearly a third of
trans-Atlantic trade.   Intra-firm trade may be less vulnerable to
short-run swings in foreign exchange prices. 

In recent years, trade experts have developed more sophisticated tools
that compliment the 19th century understanding of the balance of payments.
  The traditional approach was simply
interested in goods crossing national frontiers.  However, more modern
approaches have looked at ownership and value-added aspects of trade.  The former has been presented for
over a decade by the Bureau of Economic Analysis in the Survey of Current

In the January issue, preliminary 2015 figures were released US companies by
service foreign demand by exports (the traditional way) or by local product by
affiliates of US companies.  Taking into account the net receipts of these
foreign sales generates a different picture of trade.  For example, the
traditional measure of exports and imports shows the US with a $500 bln trade
deficit in 2015.  However, when the receipts of the local sales are taken into account, the deficit is cut in
half ($235 bln).  

The fragmentation of production and the global supply chains prompted the
OECD and the WTO to introduce a trade in value-added
(TiVA) database in 2013.
covers 18 industries in 57 countries.  Rather than focus on the movement of goods over borders or the ownership
of the goods, TiVA is interested the
value being added at different stages of
production.  Current practices do not recognize a distinction between
intermediate goods and final goods, which often leads to double

The iPhone is to TiVA when the Big
Mac is to purchasing power parity; a simple example that illustrates the forces at work. 
Consider that the
manufacturing of the iPhone (4) took place in China and the cost was $187.51 at
the factory gate.  When it exports that phone to the US,
conventional accounts will show the US deficit with China grew by that amount
for each phone.  What the TiVA
approach shows to make the iPhone, China imported $80.05 parts from South
Korea, $22.86 from the US, $20.75 from Taiwan, and $16.08 from Germany. 
The list goes on and China, among others is at the bottom of the list. 
China’s contribution:  $6.50.  

A study by the Asian Development Bank found that the iPhone swelled the
US trade deficit with China by $1.9 bln. 
However, when the
value-added is adjusted for, the
bilateral deficit widened by a meager $73.5 mln.  Attributing the origin
of the final good to its last port of call has become increasingly misleading
as production has become more fragmented and trade is not simply conducted in final goods.  

If US negotiators do not make incorporate these new sophisticated
understandings of trade into their worldviews, they may find as President Trump
has about health care, trade is indeed complicated.  
They may
find that they are regarded as the
ancient Rome tax farmers trying to wring extra tribute from the empire.  The ownership framework for the
current account and the trade in value-added are not mere sophistry but suggest trade is not as worrisome as Ross and others
suggest.     Poor little America is not being taken
advantage of to the extent some claim relying on arcane statistics and
approaches.  As numerous studies have shown, technological advancement is
a bigger threat to employment than Europe, Japan, or China.  


study by the Asian Development Bank estimated that the iPhone deepened
the US trade deficit with China by $1.9 billion–that is, until the real
“value-added” is measured, in which case the deficit evaporated to $73.5
million. – See more at:

study by the Asian Development Bank estimated that the iPhone deepened
the US trade deficit with China by $1.9 billion–that is, until the real
“value-added” is measured, in which case the deficit evaporated to $73.5
million. – See more at:

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