Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Defining Away the Trade Deficit?
Tradereform.org flags a counter-intuitive change in regulations that seems on its face to make no sense. The reclassification of products produced abroad by U.S. multi-national companies so that these products are counted as U.S. manufacturing production and not imports.
China has been urging this kind of reclassification for years, arguing that if goods produced in China by offshoring US companies were counted as US production, then there is little trade deficit.
The fundamental question is whether this production IS American production. It’s produced by Chinese workers, in factories located in China. The factories are under Chinese law, and can be seized by China if it’s government determines such seizure to be lawful. It doesn’t seem to be American production to me, in fact I cannot come up with any way to define it as American production that doesn't do violence to the geographical facts.
Some examples from a BLS report (http://www.upjohn.org/MEG/papers/Doherty_Reflecting%20Factoryless%20GoodsProduction.pdf).
"The value of products that have remained in a foreign MSP’s country or were shipped via a foreign MSP to another country will be added to exports."
What this seems to mean is that a corporation that is defined as "American" leases the design for a toy from a designer in Tokyo, and then contracts with a company in China to produce the toy, while providing some direction to them about what imputs to purchase, and then sell the toy in India, it is a U.S. manufacturing export (after the costs paid to the Chinese manufacturer are netted out).
In addition to the simple oddity of a product with almost no connection with the US being tabulated as a U.S. export, there are other difficult aspects. One tricky factor is how one is to define a corporation as American in this context. What if it has no U.S. operations beyond a shell corporation that has leased rights to the design and is nominally charged with distribution even though nearly all employees are operating in other countries? The boundaries are tricky here. Also, since the good that is 'exported' never crosses US borders, it seems to me that it may be rather hard to get any reliable accounting of it.
Given these difficulties I'm not surprised that implementation delays have resulted in a delayed roll out of the new definition. Indeed, it seems rife with loopholes that could be used to create fictitious U.S. exports and obscure the volume of U.S. imports.
Another odd aspect is the treatment of goods that are manufactured in the U.S. for a foreign company. These now become imports.
"The full value of the products that they transformed that remain in the U.S. are included in imports."
So when an American company affiliated with Toyota expands manufacturing in West Virginia or Tennessee (http://www.miamiherald.com/2013/08/30/3596215/toyota-to-boost-transmission-production.html) they are probably adding to the U.S. trade deficit under this new definition!
This seems fantastical. Unfortunately, it doesn't appear that it is.
Journal of Economic Literature:
Atlantic Economic Journal: