Last year the U.S.-China trade deficit was $318 billion. The U.S. Department of Commerce calculates the deficit by subtracting the value of what we import from what we export, which accurately calculates the overall trade deficit. However, this method is misleading and potentially damaging to the U.S. economy.
The DOC assumes that when a product imported is from a particular country, such as an iPhone assembled in China, it is the country that makes the whole product. An American-made chip exported to China for iPhone assembly would be accurately recorded, as the current method accounts for the exchange.
However, if a German microphone is exported to China for iPhone assembly, the Census Bureau records the entire iPhone as a Chinese import, despite the microphone’s origin. Despite this flawed assumption, almost every report on the impact of trade between the U.S. and China uses this statistic.
To account for internationalization of production, the Organization for Economic Co-operation and Development is creating a “value-added” method to calculate trade deficits. Instead of counting the whole iPhone as a Chinese import, the OECD would account for what countries add to products, counting the microphone as a German import, for example.
Reuters and other news outlets reported how OECD officials were “startled” when the value-added method reduced the U.S.-China trade deficit figure by a fourth.
However, articles from Slate, Reuters and the U.S. Bureau of Labor Statistics blasting the new statistics forgot to mention that a comprehensive table of countries’ trade activity is needed to calculate accurate trade deficits.
So of course, the incomplete value-added statistic reduced our Chinese trade deficit, as the OECD officials’ correspondence with Reuters was premature. The OECD officials neglected to consider China’s exports to other countries that may enter the U.S.
Even the Brookings Institution, a reputable D.C. think tank, perpetuated lazy journalism by claiming that China contributes only 3.6 percent of the value of the iPhone. The writer assumed that non-Chinese companies did not have labor based in China, which isn’t always the case.
No institution has put forth an accepted estimate on our trade deficit using the new method, and thus, reports on the trade deficit, concerning bubbles, job losses and other factors associated with it are groundless.
Though it may seem somewhat pedantic and obscure, accurately calculating the U.S.-China trade deficit could play an important role in determining future economic policy.
If we’re importing more from China, we may need to crack down on Chinese currency manipulation at the expense of cordial relations. If we’re importing less, we may want to focus on reinforcing research and development to maintain our competitive edge. There’s no way to make an informed decision without knowing the truth.
Anhvinh Doanvo is a UF biology freshman.
[A version of this story ran on page 7 on 8/26/2014 under the headline "Current method of calculating trade deficit damages economy"]
