value chains

Another Take on Trade Deficits or Why Imports Are Not Automatically Bad

Neil Irwin had an interesting article this week in the New York Times about trade deficits.  The piece was triggered by comments on the dangers of deficits by both Donald Trump and Bernie Sanders. 

Trump has been arguing that the fact that the United States buys more goods from other countries than it sells overseas means that the US has become a loser while others, like China and Mexico, have been winners.  Sanders has been claiming that trade deficits prove that trade agreements are bad for American workers.

Irwin nicely argues that deficits, on their own, are neither automatically good nor bad.  Getting rid of a deficit, moreover, also involves important tradeoffs and consequences that may be much worse.

New analysis prepared by Moody's Analytics, at the request of the Washington Post, shows that Trump's plans to raise tariffs on China and Mexico would drive both countries into recession as both countries would likely retaliate.  The US would also fall into recession, with millions of American workers at risk of new job losses.   

There are, of course, additional problems with raising tariffs, such as getting Congress to agree to raise tariffs (since the President cannot do this alone); as well as the minor obstacle of such tariff increases being a clear violation of American commitments at WTO.  Nor, of course, would higher tariffs somehow bring jobs back to the United States.  In fact, the net result of jacking up tariffs as Trump suggests would be mostly to raise prices for consumers least likely to be able to afford them and to cause a lot of needless economic damage.  It would be an "own goal" of epic proportions.

The stakes would be high then, on a proper assessment of whether or not the country actually has a trade deficit and whether or not such a deficit matters.

Depending on what statistics are used, many people often focus only on merchandise trade figures.  This ignores trade in services completely.  For a country like the United States, services trade is usually in strongly in surplus.

Services are also embedded in manufactured goods.  For many supply chains, services make up 30-70 percent of the total value of the final product.  These services could be logistics, retail, research and development, cleaning, legal services, customer support and so forth. 

Many of these services may not show up at all in current trade statistics. 

Officials at the OECD and the WTO, as well as their counterparts in many countries, have been hard at work to revise the way that trade is recorded, partly to better reflect the importance of services in manufacturing. 

Better measurement is also critically important to handle some of the claims about trade “deficits.”  Trade is no longer so much about “exporting” a finished item from one country into another where it is recorded as an “import.”  Instead, in a world of increasingly complex supply or value chains, items are rarely created entirely in any one country nor do they move across a border only once.  Instead, they may include hundreds or thousands of parts from multiple locations managed by globally or regionally dispersed teams with the final items crossing borders many, many times before reaching the final customer.

The classic example, used everywhere now, is the iPhone.  Traditional statistics may record the full price of the phone as an export from China to the United States.  Hence this would show the full amount of the phone as an American import from China and another example of “how China is eating our lunch,” as Trump would say.

But a careful unbundling of the phone shows clearly that this simple story is just not true.  The bulk of the value of the phone remains in the United States, contained in the profit, research and development, intellectual property and marketing owned by Apple.  The rest is distributed elsewhere, including to Korean companies that make critical, high-value components for the phone and Taiwanese companies that manage most of the manufacturing.  Very little of the actual value of the phone resides with Chinese companies.

Depending on which Apple product is being described, the figures basically show that of a $300 product, about $3-6 should be properly attributed to China.  The rest goes somewhere else and most is American.  Hence what looks like a -$300 deficit for the US and +$300 surplus for China, is actually a sizable surplus for the US and a very small surplus for China.

It’s not just high-tech products that fit this description.  Even fairly simple food products are made up of items shipped around the globe.  The Financial Times has just run a fascinating (if deeply disturbing) piece.  The point of the article is about food fraud, but highlighted at the bottom of the article is a bit about the global travel of fish, caught in waters off Scotland, shipped to China for filleting, sent to South Korea for storage in massive freezers, and eventually sold back in Europe. 

Think a bit about the statistics for such fish sticks (hopefully not adulterated with unmentionable items along the way).  The logistics, filleting, warehousing, shipping, distribution and retail sales are all services.   Tracing the supply and value chains attached to a fish stick would likely also result in shifting patterns of imports and exports from all of the countries involved as well, moving some from “deficit” to “surplus” for fish sticks, for fish, for trade in goods or maybe even for overall trade. 

It is a rare company that can obtain all the raw materials, components, parts, and services it needs from purely domestic sources.  In order to create products, most companies have to import.  This is true even for firms that will export components, parts or final products. 

Changing the statistics dramatically alters the trade “deficit” story.  It does not eliminate a “deficit” somewhere, of course, but it does shift the magnitude of a deficit with some countries.

Of course, it is also important to remember that country accounts do not work like personal bank accounts.  It’s normal for people to assume that negative account numbers must mean bad things.  After all, after balancing a checkbook, a negative number is not normally a good sign.

But trade figures do not work the same way.  Imports are not automatically a bad deal. 

In short, whenever politicians promise solutions to “fix” problems related to trade deficits, citizens ought to be extremely concerned.  Most likely, the remedy will be much, much worse than anticipated.

--Please join us for the next Asian Trade Centre course on Understanding Trade Agreements in Asia, April 11, 9:00-1:00, 41A Ann Siang Road, Singapore.  To register, please click here.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***

Bargaining Over Services in TiSA

This week, President Tabare Vazquez agreed to withdraw his country from ongoing negotiations over services.  Uruguay will now notify the other 24 members[1] of the Trade in Services (TiSA).

This presents a good opportunity to examine TiSA.  Negotiations got underway in 2013 out of a shared frustration with a lack of progress in global trade talks for services coupled with a desire to push forward new, better suited rules for today’s interconnected, globalized economy and to give services an improved platform for growth. 

Services are an increasingly vital part of international trade.  The Asian Trade Centre has been part of an ongoing research project to track how much of the content of manufactured items like auto parts, aircraft engines, printer dyes, outdoor jackets, watches, whiskey, or making a table comes from services.  The full project will be out soon, but what has been particularly striking from this case study research is how much value is tied up in services content.

We often think of goods as physical items only—something you can drop on your foot and have to transport across borders in trucks, trains or ships.  But it turns out that for many value or supply chains today, at least half and perhaps as much as 80 percent of the value of a good is actually derived from services.

Such services can include research and product development, managing human resources, cleaning, security, distribution, logistics, warehousing, retail, and even after sales service and repair. 

TiSA members together contribute more than 70% of global trade in services.  For most, services also constitute a significant portion of domestic output contributing substantial numbers of jobs and generating important revenue for companies both large and small.   

Despite the critical importance of services, global rules for services remain underdeveloped and often lacking.  In part this is because services are devilishly hard to see and measure. 

Take examples from the Asian Trade Centre.  Our brochure was designed by a graphic artist in Pakistan, connected to us through an Australian online platform (  Our website is hosted by an American company (Squarespace) and this blog is distributed by a different US company (MailChimp).  [All are receiving unsolicited endorsements.]  The blog content is written by me sitting in my lovely office today in Singapore and distributed to readers all across the globe. 

So how would available data capture all these services?  The short answer is not very well at all. 

In the mid-1980s when government officials were trying to design the first batch of global rules to govern trade in services,[2] most of what I just described would have been unimaginable.  Or, rather, some of the services might have been possible but the methods of delivery, the scale and the scope would not.

Consider Freelancer.  This company currently brings together more than 16 million people in 247 countries to provide a wide range of services from software writing and data development to engineering and accounting.  Connections can happen instantly and millions of files, pages, images, and data points are moving around and across borders daily.

At the time of the Uruguay Round negotiations, however, officials could mostly imagine delivering services via post, land line telephones or, perhaps, fax machines.  Otherwise, the primary methods of getting services to travel across borders meant the movement of people—I might travel to another country for medical treatment or to deliver a stakeholder workshop in Korea for the next RCEP round (currently planned for October 14 in Busan, by the way!  Stay tuned for details).  Or I might invest directly in a company, or travel temporarily as a business employee of a big firm to set up a project.

In short, officials were struggling with how to categorize services and to understand how they might be delivered across borders.  Hence the rules they created in the 1980s and early 1990s were rather crude.  Whenever I have to explain to businesses how services are broken up in the rulebook, I am usually met with blank stares.  In addition, services commitments suffered because governments were reluctant to commit to much, as no one was entirely certain about what might happen.

This is a long way round to explaining why services were part of the “built in” agenda for the start of a new round of global trade negotiations.  These talks started in Doha, Qatar, in November 2001, and have been moribund for a very long time.

Countries that are active in services trade became increasingly unsatisfied with old rules and limited market access commitments.  Unable to push forward the broader global negotiations, a handful of key countries decided to start parallel talks outside the WTO in Geneva.  These parallel talks, now called TiSA, might eventually be brought back into the WTO.

I don’t have room here to delve into trade geek obsessions with how TiSA can be reconnected with the WTO, but suffice to say that officials are trying to craft an agreement that unleashes more economic growth for services for the members while remaining conscious of likely issues and interests from the broader community. 

After 13 rounds of TiSA, the jury remains out on how successful officials are likely to be in meeting their ambitions.  The basic idea is to continue to build on existing commitments at the WTO but expand market access and to try to reduce domestic level regulations that make it hard for services to be competitive.  For example, one goal is to try to get foreign service providers to receive the same treatment as domestic service firms as much as possible.  Many similar rules do exist in various free trade agreements.

Yet TiSA talks are challenging.  Uruguay just became the first country to withdraw from negotiations, citing concerns about its ability to regulate sectors like financial services and telecommunications.  Frankly, this is likely to be overblown, as officials do not give up their right to regulate easily and these sectors are seen as highly sensitive in most countries.  TiSA will not violate a government's right to regulate for health, safety, and environmental outcomes, nor will it alter all qualifications for service providers or allow for unfettered access to job markets.

In a rapidly changing environment, designing appropriate services rules are both necessary and difficult to do well.  We will have to watch and see how successfully TiSA manages the task.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***       

[1] Remaining TiSA members include: Australia, Canada, Chile, Chinese Taipei (Taiwan), Colombia, Costa Rica, the European Union, Hong Kong, Iceland, Israel, Japan, Lichtenstein, Mauritius, Mexico, New Zealand, Norway, Pakistan, Panama, Paraguay, Peru, Republic of Korea, Switzerland, Turkey, and the United States.

[2] As part of the Uruguay Round negotiations in what was then the Global Agreement on Tariffs and Trade (GATT) and is now the World Trade Organization (WTO).