PARIS – China's trade surplus with the United States shrinks by a quarter when calculated according to which countries provide the parts and services that go into its exports and imports.
The new estimate is one of the key findings of an ambitious project by the OECD and the WTO to present a truer picture of underlying trade flows in an age of global supply chains when intermediate inputs can cross borders several times during the manufacturing process.
The political purpose of the exercise is to reduce protectionist pressure by demonstrating that governments are shooting themselves in the foot if they raise barriers to imports because, in doing so, they are also hurting their own exporters and competitiveness.
"Today, we have to think about goods and services as ���made in the world', forcing a radical change in how we need to look at trade flows," Angel Gurria, secretary-general of the Organisation for Economic Cooperation and Development, said in prepared remarks.
"This growing process of international fragmentation, driven by technological progress and trade policy reforms, challenges our convention wisdom on how we look at and interpret trade policies," he said.
The findings are likely to add nuance to the heated debate about whether China should accelerate the rise of the yuan to reduce its trade surplus, especially its bilateral surplus with the United States.
Gurria launched the initial set of data alongside Pascal Lamy, the director-general of the World Trade Organisation; European Trade Commissioner Karel de Gucht; and New Zealand Trade Minister Tim Groser.
The example of an Apple smartphone exported by China illustrates the impact of breaking down the value built into the gadget according to the countries that provided the components or services.
The factory-gate price of the phone, $187.51 in 2010, will have shown up in full in China's gross export figures. In fact, according to estimates provided by research firms iSuppli and Chipworks, Taiwan was the origin of $20.75 of the value; Germany, $16.08; South Korea, $80.05; the United States, $22.88; and other, including Japan, $47.75.
And that does not tell the whole story. To trace the origin of the value-added, information is needed on the whole chain of suppliers and their suppliers.
Putting the figures together in what the OECD and WTO said was a first analytical stab, America's 2009 trade deficit with China shrinks 25 percent to $131 billion from the $176 billion shown in the gross data.
The flipside is that the U.S. deficit with South Korea, Japan and other Asian countries supplying intermediate inputs to China is bigger.
For the same reason, Japan's trade surpluses with South Korea and China almost disappear when looking at value-added flows because Japanese exports of chips and components do not end up in those countries' final consumption.
Among the other findings:
-- The United States supplants Germany as France's largest trading partner, both for exports and imports, in value-added terms.
-- Germany's trade deficit with the United States is transformed into a surplus in value-added terms. A third of the total value of German vehicle exports comes from abroad.
-- Brazil's trade surplus with China drops by 45 percent because 60 percent of the country's exports are primary commodities that partly end up in final goods exported to the United States and Europe.
-- Forty percent of the value of China's electronics exports come from abroad.
With intermediate inputs accounting for a whopping 60 percent of global trade in goods and 70 percent of services, the OECD and WTO hope the new database will breathe life into efforts to cut red tape for exporters and importers.
Simplifying customs and border procedures can reduce trade costs by 10 percent, the OECD has estimated.
Gross trade figures had suggested that services account for only 20 percent of global trade. But the value-added breakdown shows that the average for OECD countries is around 50 percent, with multiple services such as software and design increasingly embedded in manufactured goods.
OECD officials said they were startled by this finding.
Gross trade flows show how much a country is spending relative to its savings and so remain critical. But officials say measuring trade by value, by providing a better picture of the supply side of trade, should help policymakers to better identify which sectors of the economy are generating jobs and income.
(Editing by Mike Peacock)