The Organization for Economic Cooperation and Development and the World Trade Organization have created a new possibly more accurate system for analyzing trade between countries. The traditional method measures only imports and exports and is much simpler. However, the old model is considered; by many experts as too simple for an increasingly complex worldwide economy. The new systems looks into each step taken in the production of goods; from raw materials to finished product. Under the new system, the trade deficit between China and the United states falls about 25 percent from 176 billion to 131 billion. If this system becomes the new norm than the United States econmiy will become less dependent on Chinese currency.
The trade deficit between other countries like Germany and Korea would increase under the new system, but these countries are further allied with the United States. In the end the United States trade deficit in the global economy does not change but under this new system both organizations feel they can better understand the effects of tariffs.
http://www.washingtonpost.com/business/economy/us-china-deficit-may-be-lower-than-thought/2013/01/16/d474122a-5f5f-11e2-9940-6fc488f3fecd_story.html
I’m slightly uncomfortable with the conclusions being drawn here. While a differing system of measurement may bring up a differing number, it doesn’t actually change the scope of American reliance upon the China – if the production chain is missing even a single link, the net product still fails to materialize. By conceptualizing USA/PRC relations in a binary state, we prevent ourselves from understanding the full magnitude of interconnection in the globalized economy. While the trade deficit poses a theoretical issue, it has to be understood that its existence reflects continued Chinese belief in the American economy and its resilience.
Separately, what is the purpose of a given metric? If it’s to trace proximate financial flows, then standard metrics are what we want. But if it’s to look at the distribution of value added from trade, then we do need measures that net out the import of inputs (computer chips, displays) from the export of final products. One of our (supplemental? main?) readings later in the term will break down the iPhone value chain; China accounts for only a few dollars out of the rather larger ($400?) final price to cell phone companies, or only 2-3%. Apple’s profit margin is much, much bigger — to the point where Apple would still make money if it assembled the iPhone in the US. But to reiterate, that’s a different question than whether China is running a trade surplus and hence is a (net) purchaser of foreign assets (“foreign reserves”), such as US Treasuries.