Rethinking How We Value Global Trade

To grow America's economy and our middle class, we must capture more "value" from our global trade.

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MoneyHP -- Carousel -- Made in China with barcode

Ed Gerwin is a senior fellow for Trade and Global Economic Policy at Third Way.

In his most recent State of the Union, President Obama touted the fact that American companies like Apple, Ford, and Intel are bringing manufacturing operations back to the United States. This key trend will support good American jobs—while strengthening the manufacturing and innovation ecosystem that's a vital source of America's global competitiveness.

Where things are "made" is crucial. But as America pursues important new trade deals in Asia and Europe, it's also critical that we secure more "value" from our trade.

The iPhone in my pocket was "made" in China. When it was imported into the United States, it was treated by U.S. Customs as a 100 percent Chinese product, and it added somewhere around $230 to America's $315 billion trade deficit with China.

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But my iPhone is far from 100 percent Chinese. It was assembled by Chinese workers, but Chinese labor added only about $10 to the final cost. The iPhone's battery, chips, touchscreen, and other components came from an array of global suppliers in Europe, Asia, and the United States. My iPhone was also "Designed by Apple in California" and U.S. workers were responsible for most of the software development, product management, and marketing. Ultimately, Apple and its U.S. employees captured over half of the iPhone's value.

Increasingly, trade experts are looking at global trade flows from this "value-added" perspective. And this new vantage point isn't just for trade wonks. It also has significant potential to help U.S. policymakers make smarter decisions on trade, globalization, and economic development.

Standard customs data is based on rules that treat my iPhone—and every other traded product—as being "made" in a single country. The value-added approach, on the other hand, digs deeper, and estimates the value that each country adds in the parts, components, and services that are "embedded" into finished products. With some $20 trillion in global trade, it's impossible to estimate the value added for each and every globally traded product.  But experts are increasingly able to estimate the value that's embedded in overall trade flows between countries and industries—and these estimates can teach us a great deal about the reality of modern trade.

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A major new World Trade Organization/Organisation for Economic Co-operation and Development study, for example, shows that America's trade deficit with China is actually 25 percent lower on a value-added basis. America's overall trade balance stays the same, but the value of imported inputs used by Chinese producers is attributed to China's supplier countries, like Japan and Germany, rather than China. The same study also shows that services—like design, development, and logistics—are a very significant embedded component of U.S. exports of manufactured goods. For instance, services account for an astounding 40 percent of the overall content in U.S. exports of vehicles and transport equipment.

Viewing trade through this value-added lens can help America's policymakers in a variety of ways. For example:

  • It highlights areas where we should focus additional attention. Value-added data shows that America's neighbors in Canada and Mexico incorporate an extraordinarily high amount of American content in their exports to the world. (For instance, U.S. content makes up $1 of every $6 of Canada's global exports of transport equipment.) As a result, America can help our own producers and workers by making North American borders work more efficiently and by partnering with Canada and Mexico to open new foreign markets for all of our trade.
  • It breaks down silos. Traditionally, we've made trade policy in three separate silos: manufacturing, farm goods, and services. But value-added data shows that services are also key drivers of America's exports of farm and manufactured goods. As a result, we must fully appreciate that advancing trade in services is not only important for America's service sector, but is critical for all U.S. trade.
  • It underscores the value of imports. Overall, America's exports contain a lower level of foreign content than other major exporters. But, for key U.S. sectors like chemicals, the data shows that imported inputs are crucial for U.S. export success.
  • It helps America find global opportunity. Today, producing goods or services isn't an all-or-nothing proposition. The global, value-added economy presents tremendous opportunity for American producers, workers, and farmers to provide inputs for goods and services made by Mexican auto plants, Canadian food producers, or German chemical companies.     
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    In the State of the Union, President Obama also noted that Apple will again be making Macs in America. Where things are "made" can be vital, especially for hi tech manufacturing. But, as my Chinese-assembled iPhone shows, assembly operations alone shouldn't be the holy grail of international trade. To grow America's economy and our middle class, it's also crucial that we capture more "value" from our global trade.

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