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Is America a winner in the global value chain?

Jing Zhao Mar 21, 2012

Is America a winner in the global value chain?

Jing Zhao Mar 21, 2012

As a share of the U.S. GDP, trade has increased from 9.2 percent in 1965 to almost 30 percent in 2010. In recent years, because of the big trade deficit with China, there is widespread frustration among Americans.

However, some economists hold a different view. According to these economists, trade flows between nations are now measured purely by export and import statistics. But they only tell part of the story. A lot of a product’s value, created by American workers, isn’t captured in traditional export and import numbers.

In a panel discussion held by Washington International Trade Association, Associated Professor Jason Dedrick from Syracuse University, WTO Chief Statistician Hubert Escaith, U.S. ITC Chief Economist Dr. Robert Koopman and OECD Senior Trade Policy Analyst Sebastien Miroudot introduced their rethinking of measuring trade. They prefer to look at the global value chain and analyze where the value is actually added.

Take Apple products as an example.

iPod products are designed in California, and assembled in China. Here is the question: When Americans innovate, but send most of the assembling and manufacturing work overseas, who is capturing the value?

According to Dedrick, a $299 iPod is imported at the price of $144.  That contributes to the trade deficit with China. But China only captures about $5 for the value of the labor.

Koopman pointed out that for a $500 iPhone exported from China for $179, only $6.50 is captured in Chinese assembly. The rest of the overseas value goes to component suppliers, like companies in Japan, Korea and so on.  Apple and other U.S. retailers capture a value of $321. Some of that value (about $10 per iPhone) goes to U.S. companies that provide key components. 

From the above analysis, it’s clear that import and export statistics showing severe trade deficits can be misleading.

Other than profits, America benefits more in terms of high quality jobs and wages.

Two-thirds of the worldwide iPod-related jobs are outside the US. President Obama once said to Steve Jobs, “What would it take to move those manufacturing jobs back to the U.S.?”

True, most of the assembling and manufacturing jobs are outside the U.S. But Professor Dedrick said most of the engineering and professional jobs are in the U.S. As a result, the U.S. is actually getting about 70 percent of the total wages.

The whole picture of what America wins in the global economy isn’t reflected by the current trade statistics. Why?

As Escaith pointed out, trade statistics still follow 19th century concepts: the full value of the traded goods is assigned to the last step in the supply chain. In today’s world, the last step — manufacturing and assembling — often captures little value. Instead, by examining the global value chain, the value-added measurement of international trade better reflects who benefits, which might in turn help the government make better policies to promote more innovation.

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