Sunday, 26 February 2017

Cooking the trade-account books

One of the madder recent ideas to come out of the Trump administration in the U.S. is  a plan to change the way the U.S. calculates trade deficits. The administration suggests not counting re-exports in the U.S. trade balance. That is, the administration wish to exclude from U.S. exports any goods first imported into the country, e.g. cars, and then transferred to a third country, e.g. Canada or Mexico, unchanged. This would make the country's trade gap appear larger than it now. Data on trade balances and surpluses are at the center of a political battle in the U.S. over whether existing trade agreements the U.S. has with other countries should be retained, renegotiated or tossed out altogether. Should the change be implemented, it would have a large effect on the data involving countries that have free trade deals with the U.S. In some cases this new methodology would even change a trade surplus into a trade deficit.

Professor Mark J. Perry makes four points with regard to the the administration's idea,
  1. This proposal is apparently based 100% on politics and 0% on any economic theory or on standard, well-established double-entry national income accounting practices.
  2. The proposal’s main (and possibly only) motivation is to manipulate and artificially exaggerate America’s trade balance for goods, mostly (exclusively?) for political purposes – to re-negotiate trade deals or provide reasons to impose import tariffs.
  3. The proposal is a departure from well-established double-entry national income accounting procedures that consider imports and exports without regard to the economic concept of “value-added.” That is, the proposal would switch from double-entry accounting for the cross-border movement of goods to a new “single-entry accounting” methodology that would count all goods entering the U.S. as imports, but would fail to count some U.S. exports if they are defined as “re-exports.” This would represent a significant departure from the way imports and exports have been calculated by the Department of Commerce for nearly 100 years.
  4. Most of what gets exported from the U.S. contains some amount of imported content, so why only change the way “re-exports” are calculated? For example, many Ford and GM cars contain more than 50% non-U.S. content. If those automakers export cars assembled domestically, the value of those exports count 100% as U.S. exports, even though some “domestic” cars could contain 60% or more foreign content. And yet, if Ford or GM imports a car from Mexico and re-exports those vehicle to Canada, those exports would not count at all for U.S. export? Further, it’s possible that GM and Ford cars assembled in Mexico could contain parts and content imported from the U.S., which further makes the new manipulated recalculation questionable.
Perry continues by making the point this idea is being proposed purely for political reasons,
This proposal for recalculating trade balances is a manipulative single-entry accounting scam that is being proposed for political reasons only. A single-entry accounting approach to calculating trade balances serves only one political purpose/outcome – to artificially inflate the trade deficit for goods — and is not supported by any economic or national income accounting theory or standard practice.
All this is just one more reason to worry about the Trump administration's views on international trade.

No comments: