During the presidential campaign that just concluded, not a day went by without Mitt Romney trotting out the Chinese bogeyman, a looming red specter racking up a tremendous trade surplus and sapping Americans of their confidence. "It's pretty clear who doesn't want a trade war. And there's one going on right now, which we don't know about. It's a silent one. And they're winning," Romney declared during the third and final debate. The point was a politically useful one for the Republican challenger, but did he really know how big the trade deficit with China is and what it implies?
Such statistics play an extraordinarily important role in the analysis and formulation of government policy. But even when they are not used as political fodder, they are often misleading, and once they become the established way of measuring things, special interests latch on to them and make it almost impossible to change the metrics used. Greater discrimination should be used with statistics, and voters should insist that political leaders use and invest in statistics that accurately reflect what they are intended to measure.
Take exports, which have traditionally been reported on a gross basis -- simply the dollar value of what is exported. Such data is of limited economic consequence because nowadays, recorded exports very often consist of large amounts of imported inputs, ranging from petroleum to sophisticated machine tools, as distinct from value added domestically, such as the design and assembly of a jet fighter or an earth-moving machine.
Responding to this criticism, the Organization for Economic Cooperation and Development and World Trade Organization have just released a new dataset based on the domestic value added of exports that transforms the way trade is viewed. They show that China's bilateral trade surplus with the United States is about 25 percent smaller than previously reported because so much of China's exports consist of the assembly of parts produced elsewhere, including in the United States. Moreover, the statistics illustrate more clearly than ever before how interconnected economies around the world have become, and how attempts to restrict imports -- such as those Romney was effectively advocating -- are likely to backfire not only because other countries will retaliate but also because domestic production will quickly become uncompetitive or even grind to a halt due to lack of parts or raw materials.
The new data also indicates that, contrary to general belief, the United States' service exports are about as large as its manufactured exports. Because domestically produced services such as transport and financial and legal services are exported both directly and indirectly as part of the domestic value-added of manufactured exports, traditional ways of measuring exports underestimate the importance of services as generators of foreign exchange. For example, much of what is reported as export of a Boeing aircraft actually includes a large proportion of services Boeing has purchased from U.S. service providers -- everything from janitors to lawyers to local government officials.
But while these statistics shed new light on how to measure economic output, do not expect textile or steel producers to adopt them any time soon. Given their interest in playing up the importance of manufacturing, these groups have a vested interest in maintaining the outdated economic statistics. The same applies to China-bashers interested in playing up the size of the bilateral trade deficit.
And trade is just one of many instances where standard economic statistics present a misleading picture of reality. Take the government budget deficit -- the difference between the government's total expenditures in a given year and its revenues from taxes, fees, and other miscellaneous revenue sources. This method of calculating the budget deficit is useful to understand how much the government needs to borrow each year, but the deficit fails to capture far more important dynamics in government spending and future obligations.