Short Article, Big Lessons

From Colombia Reports comes a great article that, on its face, seems to be just a short piece about foreign investment, but actually provides several great lessons about the global economy:

Colombia's largest cement company Argos has bought several cement plants in Alabama, Georgia and South Carolina for $760 million, reported local media Thursday.

Argos Cements bought the plants from the French company Lafarge. Argos entered the US market in 2005 and says it plans to become the fourth largest ready mix producer in the U.S.

Chief Executive Jose Velez said in an interview as reported by Dow Jones "We are conservative in our outlook but we do expect more activity in 2010." Velez also said that he is not worried by the weak dollar or the strong peso.

"Because of the weakness of the dollar most of our inputs are cheaper now ... The net impact of the appreciation [of the peso] is zero at this time."

The purchase, which is still subject to approval from U.S. regulators, is part of an long term expansion strategy aimed at consolidating Argos' presence in the U.S. market.

So what kind of lessons can we draw from these few paragraphs?  Here's what I came up with:

• The obvious benefits of foreign investment in the US economy.  But for Argos' investment, these French-owned cement plants in Alabama, Georgia and South Carolina may have gone out of business, eliminating hundreds of American manufacturing jobs in the process.  Now, let's just hope that those "US regulators" don't foul things up.

• Where all that great foreign investment wants to go.  All of Argos' $760 million investment is going to Right to Work States. i.e., states with laws prohibiting compulsory union membership.  Of course, as I've often noted here, foreign investment in these states - particularly those in the South - is part of a growing trend.  In fact, the empirical evidence shows that RTW states attract more FDI than their forced-unionization counterparts.  Of course, the economic dominance of RTW states isn't isolated to attracting foreign investment.  As Steve Moore and Art Laffer recently noted in a great WSJ op-ed: "As of today there are 22 right-to-work states and 28 union-shop states. Over the past decade (2000-09) the right-to-work states grew faster in nearly every respect than their union-shop counterparts: 54.6% versus 41.1% in gross state product, 53.3% versus 40.6% in personal income, 11.9% versus 6.1% in population, and 4.1% versus -0.6% in payrolls."

• How global supply chains erode the conventional wisdom on trade and currency and make import liberalization increasingly important.  Velez states: "Because of the weakness of the dollar most of our inputs are cheaper now ... The net impact of the appreciation [of the peso] is zero at this time."  This means that his company is importing raw materials from the United States or from countries whose currencies are pegged to the dollar.  Either way, it's a great example of how global supply chains have made old school currency dogma irrelevant, and why a strong currency and the elimination of import barriers are important for intermediate/downstream producers like, oh I don't know, the United States.  Now, if only there were a way for the United States and Colombia to instantly lower the vast majority of their bilateral trade barriers.  Oh, wait.

• The origins of that Colombian investment capital - the US-Colombia trade deficit.  One of the constant refrains here is that trade deficits are not "bad things" because, among other things, they necessarily lead to foreign investment in the United States.  As Cafe Hayek's Don Boudreaux put it, "another name for 'U.S. trade deficit' is 'U.S. capital-account surplus' – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America."  (Mark Perry adds more here.)  In 2010, the United States had a $3.6 billion bilateral trade deficit with Colombia, and now $760 million is coming back to the U.S. as investment in domestic cement plants.  In short, Americans gave Argos and other Colombian firms our dollars, and now they're re-investing those dollars in the US economy.  Suddenly, those trade deficits aren't so scary anymore, eh?

I'm sure I missed something.  Feel free to add your lessons in the comments.

(h/t Monica Showalter)

The Unbearable Asininity and Immorality of Donald Trump's China "Policy"

I was really hoping to stay out of the whole "Donald Trump is Running for President" thing, because I truly believed (and pretty much still do) that (a) the spectacle was just a really good, and slightly depressing, publicity stunt for the reality TV star; and (b) anything I said would just give the guy another free commercial (albeit for an extremely limited market).  Thus, any discussion of this unserious "candidate's" completely unserious "trade policy" - which is literally nothing more than the immediate imposition of tariffs on all Chinese imports - was really just a waste of my and, by extension, your time.  

But then I saw the (admittedly early and utterly unpredictive) polls, and then I read that he's deathly serious about running for President, and then I went on the Laura Ingraham Show and found that smart conservatives like Laura (and a lot of her listeners) actually sympathized with Trump's "get tough on China" plan.

So here I am wasting a quiet Easter Weekend screaming into the interwebs about Donald Trump's - Donald Freaking Trump's - China trade policy.  I hate to say it, but this really does need to be done.  So let's just hold our collective noses and get this over with.

As noted above, Trump's entire trade policy boils down to slapping unilateral tariffs on all Chinese imports as soon as he gets into office.  Here's the man himself describing his big plan to NBC News:

"I would tell China, very nicely, fellows, you are my friend, I like you very much. I've made a lot of money on China by the way, a lot of money with China. I would say we are going to put a 25 percent tax on all your products coming in, and that's going to do a number of things," Trump said.

"Number one: as soon as they believe it's going to happen, they will behave so nicely, because it would destroy their economy,” said Trump in an interview with NBC’s Today show on Tuesday.

Playing up to voter fears on the loss of jobs to China, Trump said the transfer of cash to the Chinese was down to Beijing’s controversial currency peg.

"When you see what China is doing to us, what we're going to lose this year, $300 billion to China. And they are taking all of our jobs, and they are doing it through manipulation of their currency," Trump said.

Trump's China policy is wrong on just about every possible level: factually, legally, economically, strategically, morally and even politically.  Let's systematically address each of these now.

1. Trump gets his basic facts wrong. 

Before we get to Trump's tariff policy itself, it's important to understand the serial fallacy of Trump's basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.

As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump and others claim them to be.  First, Trump erroneously focuses on the nominal US-China exchange rate (what the government says the currency is worth), rather than the real exchange rate (what the currency is actually worth).  It's the real rate that matters, as any "businessman" like Trump should know,  because it measures what tradeable goods and services actually cost.  And, as I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005.  Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased.  So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).

Next, Trump's assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance.  First, there's actually a strong correlation between US economic growth and an expanding US trade deficit.  As Cato's Dan Griswold recently wrote in a must-read paper on the subject:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

And if fixating on the overall US trade balance weren't dumb enough, Trump goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance.  As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric.  Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows.  The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment.  Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).

Even the idea that China is totally dominating the United States is absurd.  Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive.  Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving China's the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.  Always the empiricist, Trump once "proved" how China was "eating our lunch" by noting how big and shiny China's cities are.  Well, on that, he's right, but that's because no one is actually living in them.  I mean, it's so easy to keep a city clean without the, you know, citizens.

There are several other factual problems with Trump's assertions, but let's just forget about these big flaws and examine Trump's actual policy - unilateral tariffs on Chinese imports to counteract Chinese currency "manipulation" (aka the "Trump Tariff").  As you'll see, it's just as wrong.

2.  The Trump Tariff has major legal problems. 

First and most obviously, the President can't just slap a tariff on Chinese goods.  The US Constitution (Article I, Section 8) gives Congress the sole authority to impose tariffs on foreign-made goods (i.e., "to regulate Commerce with foreign Nations"), so Trump would have to get congressional approval for his big China plan.   But considering that the most protectionist Congress in the last 20 years couldn't even pass legislation making currency undervaluation an illegal subsidy (and fretted for months over the WTO-consistency of the bill), does Trump really think that this new Congress - and its gaggle of free trade-supporting freshman - would agree to his plan?  Highly unlikely.

Second, there are several US laws that govern the imposition of remedial tariffs on Chinese (and other) imports, and these laws have strict procedural, evidentiary and substantive requirements that can't just be ignored.  Illegally subsidized imports from China (and other countries) are governed by the US countervailing duty law, while market-distorting surges in Chinese imports may be addressed under Section 421 (a China-specific safeguard).  President's Trump's remedial tariff would totally (and unlawfully) circumvent these laws.

Finally, the Trump Tariff would be inconsistent with two of the United States' most fundamental obligations under the WTO agreements: (i) Most Favored Nation (GATT Article I - the principle that a WTO Member must treat imports from all other Members equally) and (ii) the United States' tariff bindings (GATT Article II - the rule that a WTO Member cannot impose tariffs above the "bound rate" set forth in its tariff schedule).  Such a blatant violation of WTO rules would have serious consequences for the United States, as we'll discuss next.

3.  The Trump Tariff is economically ignorant.

Even assuming that Trump somehow convinced Congress to impose the Trump Tariff, its effects wouldn't be anything like Trump hoped or planned.  In fact, the tariff would end up causing a lot of pain (for both China and the US) for little or no economic gain.   First, as noted above, the Trump Tariff is blatantly WTO-inconsistent, so China would go straight to the WTO and easily win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariff.  Based on 2010 stats, the retaliation would be something like 25% (the proposed tariff level) of about $365 billion (total Chinese imports), or about $91 billion.  Considering that US exports to China totaled only about $100 billion in 2010, this WTO-legal retaliation would effectively close the United States' third largest export market - a devastating result for one of American exporters' fastest-growing markets (US exports to China have more than doubled since 2005).

Second, the economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China.  Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers.  This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China."  However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard.  Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive.  These higher costs, of course, also mean fewer employees, if not outright bankruptcy.  Awesome.

Third, it's highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing.  Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico.  This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.

Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness.  As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China."  As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.

In sum, the Trump Tariff would cause massive pain for very, very little gain.

4.  The Trump Tariff is strategically unsound.

Even if the Trump Tariff weren't legally and economically dubious, it's still an awful strategic play.  The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump's big, macho tariff is absurd.  First, Trump fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

But, you know, other than that, it's a fine plan.

5.  The Trump Tariff is immoral.

Leaving aside the Trump Tariff's legal, economic and strategic problems, perhaps most offensive is its immorality.  As noted above, one of the most obvious effects of the Trump Tariff would be higher prices for American consumers. Trump even seems to recognize this obvious fact, and when asked about it he calmly explained:

But that's a risk Trump is willing to take. He says his son can live with fewer toys, as long as jobs come back to the United States.

"I have a son, and he loves little airplanes ... Most of them are made in China ... He has so many of 'em," Trump told CNBC's Larry Kudlow last month. "If he had half of 'em, and if they were made in this country, I'd be very happy ... and he'd be just as happy."

Other than the fact that those jobs wouldn't come "back to the United States," this kind of statement is mind-blowingly insulting, even for someone like Trump.  As I've repeatedly explained on this blog, tariffs are regressive taxes that harm poor Americans far more than wealthy ones like Donald Trump because they force the former to pay a bigger share of their (much smaller) paychecks for basic necessities like food, clothing and shelter.  Tariffs on Chinese products are even more problematic because lower income Americans buy a lot more Chinese stuff than rich Americans.  In short, when prices at Walmart go up, Donald Trump doesn't notice, but a working mom sure does.  And the only ones who benefit from those higher prices are a few well-connected American manufacturers and their workers.  Nice.

And this gets back to the brazenness of Trump's "toys" statement: sure, he can tolerate his son only having 10 higher-priced toys instead of 20 Chinese-made toys, but what about the dad who can currently afford only one toy for his son?  Last time I checked, he can't buy half a toy (or tire or shirt or TV or whatever), so for many lower income American families, the Trump Tariff doesn't mean ten fewer toys, it means no toys (or tires or shirts or TVs or whatever).

Stay classy, Donald.


6.  The Trump Tariff is the exact opposite of fiscally conservative, libertarian or "Republican."

A lot of people have dismantled Trump's born again conservativism by noting how he until very recently supported things like universal health care and eminent domain abuse, but his protectionism is just as bad or worse.  Indeed, it's the height of statist redistributionism.  Trump forgets that American consumers are buying Chinese goods voluntarily - last time I checked China wasn't loading missiles with TVs and launching them into the US (although that would be kinda awesome).  And he freely admits that the goal of his policy is to force American businesses and families to subsidize (by paying higher prices) that small minority of American manufacturers who directly compete with China.  So not only is Trump saying that he knows better than us about what we should be consuming, but Trump's also saying that because we just can't help ourselves but buy cheap Chinese goods ("ooh, they're so cheap and pastic-y"), he has no choice but to enlist the full force of the US government to stop us from harming ourselves.  President Trump will tell us to pay more for less in order to line the pockets of a select few because we're just too dumb and helpless, and we can't be trusted to make the decisions that he, and he alone, deems "right."

It's for our own good, you see.  Now please someone, anyone, explain to me how this is the policy of a fiscal conservative?

(Answer: it's not.)

Look, the truth is that China presents some real challenges for American businesses and the US government, and they should both continue to smartly and lawfully pressure China to reform its troublesome policies (while getting the United States' own messy house in order).  But it's absurd to think that the Great Red Menace is coming to steal our jobs and eat our lunches.  In reality, China's economy is at a very precarious point, and if the Chinese government doesn't find a way to change course, the country's headed for a Japan-style collapse, as this recent article made clear.  But, hey, maybe that fact explains why Trump, while (fake) contemplating the presidency back in 1990, said the exact same things about Japan that he's saying about China today.

Then again, maybe just like 1990, Trump's once again pulling a fast one on all of us and is just sopping up some free publicity in order to hawk his ties board game cologne TV show.  Unfortunately, even if Trump's candidacy is a joke (and I still think it probably is), his China "policy" has gained real traction among the American public and some influential conservative pundits.

And that's far more disturbing than Trump's current poll numbers.

ECIPE: Umm, Yeah, About that Scary "China Trade Surplus"

The free market European Centre for International Political Economy (ECIPE) has just published a new report which reinforces a lot of the things I've been saying here about China's currency, those "dangerous" global imbalances, and the effects of multinational supply chains on the global economy (and conventional trade statistics):

Alarmed by the persistent and large US trade deficit vis-à-vis China and the rapidly swelling Chinese foreign exchange reserves, influential US policymakers are urging the Chinese authorities to allow a substantial appreciation of the Renminbi (RMB).  This paper establishes that the arguments advanced to this effect are quite weak, as they overlook salient features of the present international economy and of China’s financial system.  Indeed, the record growth of China’s exports to the US stems largely from joint ventures and affiliates of multinational enterprises; exports attributed to China usually contain a large percentage of imported components with modest value-added attributed to China itself and – indeed, the Chinese export portfolio is in the process of being significantly upgraded.  Neither are the gigantic foreign exchange reserves primarily linked to the modest surpluses of exports over imports of China, but they are fed by these large net inward direct investments; and, in recent years, by ‘hot money’ which sneaks into China, notwithstanding the non-convertibility of capital flows. Thus, a moderate appreciation of the RMB would not equilibrate the bilateral trade flows or remedy current account imbalances. On the other hand, the shift in China’s growth strategy – away from export maximisation towards strengthening consumption in the vast interior – is likely to gradually bring about more balance, while appreciating the RMB in the process.  There are also recent signs of easing of Chinese restrictions on international financial transactions.

Good stuff.  Be sure to read the whole thing here.  It provides another much-needed counterweight to the seemingly endless supply of misinformation and misunderstanding out there about China and trade deficits.

Speaking of which, today's news that the US-China trade deficit reached an all-time high in 2010 was met with the usual (and ridiculous) media and politico frothing.  As I've noted here innumerable times, all of that froth relies on the same old - and repeatedly debunked - conventional wisdom that a trade deficit is some sort of harbinger of economic doom, and that bilateral trade balances are accurate barometers of national and international trade policies.  (Dan Griswold adds a little more commentary on these points today.)  And, of course, it doesn't take a brilliant economist - or even a dumb trade lawyer like me - to notice that the significant expansion of the US trade deficit between 2009 and 2010 coincided quite nicely with - hey, look at that! - the significant increase in annual GDP growth between those same years (2009 at 0.2% vs. 2010 at 2.8%).

So here's a crazy idea.  Maybe it's time for media frothers to drop the obviously-wrong conventional wisdom and open their eyes for a change.  Heck, maybe they could, oh I don't know, read stuff like the new ECIPE study - or any of the myriad others like it - and actually learn something about our fascinating 21st century global economy and the silly politicians who can't - or choose not to - comprehend it.

Monday Quick Hits

There have been several interesting developments over the last few days, so let's get right to them:

• Eight weeks after the 2010 mid-term elections, the Obama administration, ahem, boldly announces that it has begun the process of looking into whether it will maybe start letting Mexican trucks onto US roads again.  The Transportation Department proposal is here.  The Teamsters are "deeply disappointed," and Mexico sounds pleased, so this is looking pretty good.  But let's be very clear here: nothing has changed yet.  Mexican trucks are still banned from US roads, and $2.4 billion worth of US exports will continue to face retaliatory Mexican tariffs - as they have since 2009 - until this agreement is finalized.  Today, USTR Ron Kirk and his Mexican counterpart Bruno Ferrari optimistically announced that it could be at least 4-6 months before the program begins (it apparently needs congressional approval), and Mexico will stop adding or removing products from its retaliation list.  Nevertheless, the tariffs will remain: "Once we have dates, time frames and the manner in which this Nafta mandate will be met, we'll present and discuss the process to lift the retaliatory tariffs," Ferrari said.

• Are things looking up for the US-Colombia FTA's prospects in the 112th Congress?  According to Inside US Trade, ranking member of the House Ways & Means Committee Sander Levin (D-MI) and Senate Finance Committee Chair Max Baucus (D-MT) separately have announced trips to Colombia over the next few weeks.  These visits will definitely give both top Democrats (and any others joining them in body or spirit) a new excuse to support the FTA, despite strong resistance from US labor unions and many, if not most, of their fellow Dems.  As you may recall, similar trips to Peru back in 2007 gave Levin and former Ways & Means chairman Rangel cover to support the US-Peru FTA.  On the other hand, supporters of the US-Colombia FTA shouldn't get too excited - the FTA remains organized labor's most-hated pending agreement; the White House still hasn't gotten behind the agreement (although the Daley Chief-of-Staff pick is a reason for optimism); and Levin and Baucus are some of the Democratic Party's more reasonable folks on trade, especially trade agreements that would boost automobile and beef exports.  Nevertheless, the Levin/Baucus trips are a good thing, and maybe, just maybe, they're a sign that the Democrats' absurd resistance to the Colombia FTA is fading.

• Martin Feldstein, former chair of Reagan's Council of Economic Advisors recently predicted that the US-China current account deficit should disappear in the next few years.  Today, China announced its 2010 trade balance, and its surplus is dramatically smaller than anyone was expecting.  "Chinese exports increased 31.3 percent last year as global demand recovered, but the extent of China's outperformance was underlined by a 38.7 percent jump in imports, fueled by its voracious appetite for oil, iron ore and other commodities." As a result, "China's full-year [2010] trade surplus was 38 percent lower than its pre-crisis peak of nearly $300 billion in 2008."  I've repeatedly cautioned that global supply chains now limit the predictive value of these trade stats.  Nevertheless, it appears - on the surface at least - that some changes are afoot.

• The Daily Caller reports that the United States is missing out on being a big exporter of, wait for it, horse meat.  But because of a 2007 USDA rule that effectively banned the slaughter of horses, the 1 billion global consumers of horse meat get their food elsewhere.  Oh, and here's a real shock: the "saved" American horses apparently suffer far worse fates than the slaughterhouse, and they're causing serious environmental problems in several Western states.  And the Law of Unintended Consequences wins again.

• Politico: "Leaders of 1,655 companies and associations sent letters this week to ever member of Congress pressing for passage of all three pending free trade agreements (Korea, Colombia, Panama). House letter: http://politi.co/gGKSkb Senate: http://politi.co/gsIam3."  Me: please note the letters' typical overemphasis on exports.  Sigh.

• New research shows that bank deregulation had a significant, beneficial effect on income inequality.  Says Cato's Mark Calabria: "[W]e need to examine banking regulation/deregulation as it actually occurs and is implemented, and not how we believe some all knowing, benevolent government would impose it. The odds seem to me that the more extensive is banking regulation, the more likely it is to be captured by economic elites and narrow interests."

That's all for now.  Happy reading.  (And Go Ducks.)

Politicians' Misguided Reliance on Conventional Trade Statistics, part 47

One of this blog's many non-monkey-related themes has been the realization that 21st century global supply chains have rendered conventional trade statistics like the trade balance wholly unreliable indicators of the efficacy of current trade policy.  Economist Mark Perry points us to yet further proof of this fact from a fascinating article in yesterday's WSJ about a new study on the origins of the iPhone and its impact on the US-China trade deficit.  The WSJ story also hits on the political implications of this important research (emphasis mine):

One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves.

Yet two academic researchers estimate that Apple Inc.'s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

"A distorted picture" is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step—assembling and shipping the phones.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month....

The result is that according to official statistics, "even high-tech products invented by U.S. companies will not increase U.S. exports," write Yuqing Xing and Neal Detert, two researchers at the Asian Development Bank Institute, a think tank in Tokyo, in their report.

This isn't a problem with high-tech products, but with how exports and imports are measured, they say.

The research adds to a growing debate about traditional trade statistics that could have real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices....

 

Breaking down imports and exports in terms of the value-added from different countries can lead to some controversial conclusions. Some U.S. lawmakers, for instance, argue China needs to let its currency rise significantly against the U.S. dollar in order to reduce the trade gap between the two nations. 

The value-added approach, in fact, shows that sales of the iPhone are adding to the U.S. economy—rather than subtracting from it, as the traditional approach would imply.

Based on U.S. sales of 11.3 million iPhones in 2009, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for parts produced by U.S. firms such as chip maker Broadcom Corp., they arrive at the figure of the $1.9 billion Chinese trade surplus—and U.S. trade deficit—in iPhones.

If China was credited with producing only its portion of the value of an iPhone, its exports to the U.S. for the same amount of iPhones would be a U.S. trade surplus of $48.1 million, after accounting for the parts U.S. firms contribute....

The latest results are broadly similar to analyses made by the Personal Computing Industry Center at the University of California, Irvine, of the trade and manufacture of another Apple product, the iPod. That research also found that Chinese labor accounted for only a few dollars of the iPod's value, even though trade statistics credited China with producing its full value....

Awesome.  The new study is available here, and it adds to a growing number of studies which show, as I've chronicled extensively over the last two years, that globalization - in particular global supply chains, multinational specialization, cross-border investment and realtime logistics - has rendered old school trade stats increasingly worthless for everything except raw materials/foodstuffs and the most basic industrial goods.  This latest work is especially cool because it shows that the United States derives almost twice as much as China from the actual manufacturing of the iPhone - a little tidbit that should quell some (misguided) criticisms of an earlier iPhone study which showed that, of the iPhone's $600 retail price, the United States derived $360 "only" from services (design, engineering, marketing) and profit, as opposed to manufacturing. (China got only $6.54 for assembly.)

Unfortunately, as the WSJ article mentions, many American politicians and so-called "experts" still rely on these obsolete data, in particular bilateral trade balances, to justify their trade policy demands, whether it be for Chinese currency appreciation or solving global "imbalances" or any other policy prescription that could have massive ramifications for the global economy and, in many cases, create serious new conflicts with some of our largest trading partners.  For example, on the same day that the WSJ published this story, Sen. Ron Wyden (D-OR) released a new "report" breathlessly complaining about evil Chinese "green" protectionism and demanding that the Obama administration take action to "combat" China's policies.  And Wyden's only proof of foul play?  Yep, the US-China trade deficit in green goods:

“It has become clear to me that China’s aggressive and targeted industrial policies are giving its producers and exporters of green goods an unfair leg up on the competition, so much so that our green good trade deficit with China grew even while our overall trade deficit in these products shrank,” Wyden said, Chair of the Senate Finance Committee’s Subcommittee in International Trade. “Even in a good year, American workers and producers in Europe and Japan are falling prey to what appear to be unfair practices employed by China. A unified approach is needed to combat these challenges and I urge Ambassador Kirk and Secretary Locke to make clear to China that the U.S. places a high premium on a fair market for green goods.”

The report shows that the U.S. trade deficit with China in green goods grew by almost 60 percent, to $954 million in 2010, even as the U.S. green goods trade deficit with other countries shrank. The report also shows that the U.S. exported more green goods in 2010 than at any time in the previous five years. Despite this growth, U.S. exporters continue to lose market share to the Chinese in the biggest and fastest growing markets.

So to recap: on the same day that the nation's most-read newspaper published a big story about how global supply chains have (i) completely ruined conventional statistics on trade in high-tech goods and (ii) seriously undermined policies based on said data, Sen. Wyden released a new report advocating a fight with America's second-biggest trading partner based solely on the very trade stats that the WSJ article has just debunked.

You simply cannot make this stuff up.  And it's just further proof that in the 21st century, using the trade deficit to plan US trade policy makes about as much sense as using astrology to plan your retirement.  It might've been what they did in the old'n days, and it might've even worked for a few people, but it sure as heck ain't the best way to ensure a reasonable return on your investment.

All humor aside, this little coincidence also raises a very serious point.  Since the original 2007 UC-Irvine study on the iPod and global supply chains, there have been many scholarly analyses revealing the obsolescence of conventional trade statistics like the US-China trade balance.  Cato's Dan Ikenson has written several very good policy papers on this issue (including one we co-authored back in 2009); smart, widely-read bloggers like Mark Perry (and, to a much lesser extent, your humble correspondent) have repeatedly highlighted this important work; and newspapers like the WSJ and NYT have reported on the issue several times over the last few years.  So, while the ADB's new iPhone study is certainly interesting and worth noting, it's not like it's really groundbreaking stuff.  These issues have been widely-known, even in the mainstream press, for several years now.

Yet politicians like Sen. Wyden (and trust me, he's not alone) still rely on the trade deficit as some sort of accurate barometer for US and global trade policy.  Indeed, the statistic is often the only basis for their calls for greater protectionism or more aggressive unilateral/multilateral trade "enforcement" actions - things that would dramatically alter, if not implode, the global economy.  At some point, mustn't we ask whether our duly-elected representatives are acting not out of somewhat-humorous ignorance, but instead out of willful and pernicious blindness to the realities of globalization and the dangerous implications of their mind-numbingly absurd plans?  I mean, at some point, don't we have to stop giving Wyden and his cohorts the benefit of the doubt and start demanding that they immediately cease and desist with the silly, dangerous trade deficit demagoguery? 

Seems like a no-brainer to me.

"Dangerous" Global Imbalances, Bad Trade Data, ctd.

Last night I discussed a new McKinsey study on China's export statistics which undermined many of the desperate pleas of many pundits and politicians for an immediate "rebalancing" of the global economy (most notably through a rapid and significant appreciation of China's currency).  Tonight, we get more proof - this time from economists Yan Chen, Chunding Li and John Whalley - that maybe, just maybe, those "dangerous imbalances" aren't nearly as dangerous as Paul Krugman, Tim Geithner and the rest of the "imbalance crowd" would have us believe (emphasis mine):

The debate over global imbalances rages on.  But could the debate be based on faulty data and missing the real problems?

As integration of the global economy deepens, it is widely recognised that traditional cross-border trade statistics do not fully capture all of the forms of trade involved. In the services sector, this is acknowledged to be the case for commercial presence service activities, such as banking services provided by a US-owned bank in a foreign country to residents of that country. It can also be the case for goods-related activities. For example, McDonalds may sell hamburgers in Germany using German meat and buns, but it uses US knowhow, branding, and organisation.

In recent years, some international organisations such as the WTO and the IMF and developed countries such as the US and Japan have begun to focus on foreign affiliate service activities. They regularly collect and issue service-related statistics capturing these activities called foreign affiliate trade statistics (FATS). The FATS makes it possible to obtain a reasonably accurate picture of the commercial presence component of trade in services. But one can argue that trade in goods should also include a portion of foreign affiliate sales (FAS), as it also forms a part of goods trade similar to that of commercial presence in services. It would therefore seem to be that accounting for commercial presence in services data but excluding it from goods trade only reflects the difference between the GATT (1994) for goods and the GATS for services, rather than any meaningful economic logic....

We have used data for a subset of countries (US, Japan, Germany, Finland, and the Czech Republic) to produce initial estimates of more consistent goods and services trade data. For these countries, the underlying information needed is available for their cross-border trade in both services and FAS, while for others it is not, but we report more consistent data. In addition, we are able to use these data to assess how perceptions of the role and size of trade in the world economy might be affected by such adjustments. We focus on the size of country total trade in goods and services, the growth rate of trade, trade imbalances and the relative size of trade in goods and services....

Several striking features emerge from our adjustments.

First, total trade in goods and services by country changes substantially if we use different statistical bases....

We also find that measures of annual growth rates of total trade in goods and services in different countries under different statistical bases may all be higher than a GATT/GATS basis would suggest....

These features of the recalculated goods and services trade data all reflect the deepening international division of labour which has prompted US and other OECD firms to invest and operate abroad in recent years. The Japanese, German and Finnish average trade balance from 2003 to 2007 increases respectively by more than 20 times, 4.8 times and 11.9 times when we add FAS to cross-border trade since these three countries have large foreign direct investments and large foreign affiliate sales. The Czech Republic is a special case since its average trade balance is a surplus of $2.2 billion on a FAS-exclusive basis, but after adding FAS the trade situation changes to a deficit of -$150.6 billion if we use sales as FAS. The reason is the substantial inflow of foreign investment into the Czech Republic from 2000 following its accession to the EU....

This statistical issue is far from trivial. The ongoing global trade imbalances and the surrounding debate are directly affected. Many of the G20 countries including the US, China, and Japan, seek to reduce trade imbalances, but if we take account of the FAS, the imbalance situation changes sharply. Presently measured global imbalances in cross-border trade may thus misrepresent the real situation and raises the issue of whether global G20 efforts are only stabilising inaccurate statistics, not the real global economy. According to our calculations, the US may actually have a trade surplus or a small deficit and Japan, Germany and Finland may have much larger trade surpluses than at present. It may thus be useful for G20 countries to be aware of these measurement issues.


The pace of change in global trade over the last few decades has been unprecedented and few would expect this trend to reverse or even slow down. Our findings show that the statistical recording of international trade needs to respond.

Did you get that?  If you use stats like foreign affiliate sales (which better reflect our modern, specialized global economy) instead of traditional trade stats (which clearly don't), the United States "may actually have a trade surplus or a small deficit."  And yet our politicians and pundits rely on the old school stats to push their intense "rebalancing" agenda and thereby provoke international conflict.

How is this a good idea?

McKinsey: Umm, Yeah, About China's "Dangerous" Imbalances

Many, if not all, critics of Chinese trade and monetary policy point to China's massive trade surplus as a clear sign that the Chinese economy is too dependent on export led growth and is preying on the rest of the world through rampant mercantilism, particularly its "artificially low" currency.   For example, here's former free trader Paul Krugman on the subject:

The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different.

And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else.

Krugman is certainly not alone in this line of thought - one that we can call the "It's the trade surplus, stupid" (or "ITTSS") school.  Indeed, one of the biggest reasons that much of the punditocracy (and our glorious Treasury Secretary) believes that a revaluation of China's currency is absolutely essential for future global prosperity is the widely-held belief that the RMB's artificially low value has created huge global trade and investment imbalances.  Most notable among these imbalances, say the critics, are the United States' huge trade deficit and China's massive trade surplus.

Now, look, I'd never argue that the Chinese aren't pursuing some mercantilist policies - they certainly are (see, e.g., their awful "indigenous innovation" plans that hurt foreign market access and infringe on intellectual property rights).  But what if China's dastardly trade surpluses weren't nearly as big-and-scary as the ITTSS crowd thinks?  What if, as some folks (hint hint) have argued for a while now, old school trade statistics do a horrible job of capturing what's really going on in today's global economy, mostly because they don't/can't account for modern global supply chains and specialization?  Wouldn't that really put a big dent in folks' breathless/certain claims about the dire need for a significant and rapid "global rebalancing" through, among other things, a significant and rapid appreciation of China's horribly undervalued currency?

I think (hope?) most sane, non-political folks would say that revelations about the overstated magnitude of China's trade surplus should slow the intelligencia's mad dash to force a global rebalancing and a large appreciation of the RMB.  Several recent studies have provided such revelations, and a new study from McKinsey provides even more of them (emphasis mine):

[W]e developed a new way of measuring the role of export growth in China’s overall economic expansion. We found that exports have been a major driver, but not one as dominant as commonly believed. Indeed, there are clear signs that a shift toward domestically driven economic growth is well under way. The picture that emerges of the Chinese economy has implications for the growth and supply chain strategies of businesses in China and elsewhere....

Arguments over the true nature of China’s economic reliance on exports have been rooted in the difficulty of appropriately measuring the export sector. The traditional measure governments and most analysts use is the growth of total exports as a share of GDP growth. This measure indicates that export growth has accounted, on average, for almost 40 percent of the total growth in real GDP since 1990—rising to almost 60 percent since 2000. 

Yet these numbers, portraying a dominant and growing role of exports, are at odds with the fact that China was one of the few countries that escaped the great 2008–09 global downturn without a major economic slowdown—suggesting that internal growth played an important role.... 

Using total exports neglects the fact that many of China’s export shipments include a fair number of imported goods that are reassembled, combined with domestic content, or otherwise modified before being exported. Failing to remove these imports from the total export figure overstates how much value exports contribute to GDP.... 

We calculated a measure we call domestic value-added exports (DVAE) to assess more accurately the role of exports in GDP growth.  DVAE is what you get after subtracting from total exports only those imports used in the production of goods and services that are subsequently exported. In automobiles, for example, finished imports are not subtracted from our measure of exports. But engine parts imported to manufacture motor bikes for export would be....

On average, our analysis suggests that imported goods accounted for 40 to 55 percent of the value of total exports from 2002 to 2008. Put another way, roughly half of China’s exports represent domestic value added. Concurrently, DVAE’s share of exports generally has risen over time, suggesting that China has become less of a pure assembler of imported goods—a publicly stated government policy goal.... 

We also applied our DVAE analysis to reassess the contribution of exports to GDP growth in the years for which we have overlapping data among our three metrics. We found that China’s export sector contributed 19 to 33 percent of total GDP growth between 2002 and 2008 (Exhibit 1). That’s only about half of the export contribution indicated by traditional total-exports measures.

In other words, DVAE analysis suggests that exports have been an important driver of China’s growth, but not the dominant one, and that most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth. Any Chinese or multinational company that currently manufactures goods in China and primarily exports them to other countries should ask itself whether it needs to scale up its domestic strategy to get a bigger piece of the pie. This involves developing a more granular understanding of the Chinese market, making products that appeal to the Chinese consumer, and finding ways to market and distribute them effectively—all while contending with increasingly formidable Chinese competitors....

A comparison between DVAE’s contribution to growth and that of other major macroeconomic components shows that DVAE topped private consumption, but was less important than investment, over the 2002–07 period (Exhibit 2). In the downturn years, 2008 and 2009,5 exports contributed much less to growth than other factors did, which explains why the Chinese economy could not fully match its GDP growth rates in the earlier part of the decade. However, the shift to a greater role for private consumption, investment, and finished imports explains how China could weather the downturn well and indicates movement toward a domestically focused economy, even though exports will probably continue to play an important role when the global economy picks up....

In short, McKinsey's analysis demonstrates that China's economy is not nearly as export-dependent and "imbalanced" (and China's trade surpluses not nearly as significant) as Krugman and his fellow trade surplus disciples would have us believe.  It also demonstrates that, as Dan Ikenson has often noted, the evolution of global supply chains means that RMB appreciation could make Chinese manufacturers more competitive (through access to relatively cheaper imported inputs), not less so.  

So here's my question to Dr. Krugman, over 300 members of the US House of Representatives, Secretary Geithner, and the rest of the ITTSS folks out there:  is it really wise to pursue aggressive unilateral (or multilateral) action against China based on obviously sketchy trade data?

I dunno about you, but that seems a tad stupid to me.

Thai Data Poke More Holes In Currency Hawks' Trade Deficit Claims

With everyone once again screaming and yelling about China's currency policies, it's another good time to take a deep breath and look at what's actually happening in global trade and currency markets to test whether any of the policies being proposed has any grounds in, you know, reality.  (Crazy thought, I know.)  For example, a bunch of American congressmen have supported their calls for aggressive (and highly controversial) unilateral action against China with economic projections that a significant appreciation in China's currency, the RMB, will magically decrease the US-China trade deficit.  Indeed, as I've previously noted this is probably the currency hawks' biggest reason for enacting their dangerous currency legislation, so it's probably a good idea to check their projections by looking at what other countries' currency moves have actually done to their respective bilateral trade balances with the United States, as well as their imports and exports more generally.

I originally tested the currency hawks' big theory by looking at how Japan's appreciation of the Yen in the 1970s and 80s versus the Dollar resulted in larger, not smaller bilateral trade deficits with the United States.  In that same blog post, I also noted how "the 20% RMB appreciation in 2006-2008 that resulted in an expanding US-China trade deficit."  Indeed, it was these historical facts - not fancy economic projections or models - that first caused me to be skeptical of the myriad congressional claims about the effects of RMB appreciation on bilateral trade flows.

A few months later, I revisited this issue when I examined India's recent appreciation of the rupee against the dollar, and I once again found reason for skepticism:

As the rupee strengthened against the dollar, the US-India trade deficit, and Indian imports to the US, did not steadily decline, as the currency hawks unequivocally assert should happen. And US exports to India didn't steadily increase either. Hmm.

Thus, the US-India currency and trade data strongly undermine the idea that anyone can accurately predict how changes in currency policies will affect bilateral trade flows in an increasingly globalized economy. There's just too much going on beyond currency for it to dictate trade. Indeed, as the correlations listed above show, there's actually a weak, positive correlation between a stronger rupee and both increased Indian imports and an increased bilateral trade deficit, and there's a weak negative correlation between a stronger rupee and increased US exports.

Ok, so that's historical evidence from Japan, China and India all arguing against the currency hawks' claims about currency appreciation and the US trade deficit.  And it appears that we can now add yet another country to my growing "skepticism list": Thailand.  As Bloomberg reports:

Thailand’s exports rose for the 10th consecutive month in August as the baht’s appreciation to a 13-year high failed to curb demand for the country’s automobile parts and electronics.

Shipments increased 23.9 percent last month from a year earlier to $16.5 billion, Commerce Minister Porntiva Nakasai said in Nonthaburi province on the outskirts of Bangkok today. The median estimate of 12 economists in a Bloomberg News survey was for a 23.5 percent gain....

The baht has gained 8.4 percent against the dollar this year, making it the second-best performer in Asia....

The commerce ministry still expects exports to grow 20 percent to $183 billion this year, even after the baht’s appreciation, Porntiva said.

Imports climbed 41.1 percent in August, the ninth consecutive month of gains, as the nation’s economic recovery raised demand for raw materials and consumer goods. Thailand had a trade surplus of $643 million last month, compared with a $940 million deficit reported in July....

Thailand’s exports to the U.S. grew 37 percent in August, up from a 24 percent gain a month earlier, and shipments to Europe rose 20 percent from 16 percent. Exports to China rose 22 percent compared with a 30 percent gain in the previous month, according to the ministry’s statement.

Interestingly, the analysts and government officials quoted in the Bloomberg article are adamant that, despite almost a year of hard data arguing to the contrary, further baht appreciation will soon put a dent in Thailand's booming export sector.  Maybe that'll indeed be the case, but it certainly hasn't happened so far.  And as the article implies, exports to the US in particular have consistently increased as the baht has strengthened against the Dollar.

Meanwhile, the US-Thailand trade deficit has also increased since the start of 2009: based on my quick calculations from the US Census data available here, the US-Thailand trade deficit has increased by about $1 billion ($997.093 million to be exact) in January-July 2010 over the same period in 2009.  That's an increase of about 15.7% (from about -6.35 billion to -7.35 billion) year-on-year.  Yet, as Bloomberg states, the baht has gained 8.4 percent against the Dollar since the beginning of the year and now sits at a 13-year high.  Other currency data (available here) also confirm that the baht has steadily appreciated versus the Dollar since the beginning of 2009.

Clearly, the baht's appreciation has not - I repeat, not - led to a magical reduction in the US-Thailand trade deficit, as the currency hawks' glorious economic models probably would have predicted.  Instead, just like in '06-'08 China, '70s-'80s Japan and (to a lesser extent) '09-'10 India, Thailand's trade surplus with the United States (and thus the US deficit with Thailand) actually increased as the baht steadily climbed in value versus the USD.  Pretty interesting, eh?

And please let me be clear here: just as I've said when pointing out other historical currency/trade relationships, I do not mean for a second to imply that the latest Thai data further prove that a nation's trade deficit with the United States will increase as its currency strengthens against the dollar.  Instead, I think the Thai data, just like the Japanese, Chinese and Indian data before them, provide just a little more evidence that (a) there are many economic forces beyond - and probably far more important than - currency levels that determine global trade flows; and (b) the steadfast claims of currency hawks that RMB appreciation will magically "cure" the US-China trade deficit should be treated with extreme skepticism.

(And, in this most political of seasons, maybe even a little suspicion.)

Exit question: if the congressional currency hawks' number one reason for taking aggressive unilateral action against Chinese imports is this questionable, then what does that say about all of their other steadfast assertions re: their legislation's impact on US jobs or its WTO-consistency or, well, just about anything?

Umm, Yeah, About Those Bilateral Trade Stats....

In his weekly column, the WSJ's "Numbers Guy" (John Miller) gets into the weeds on international trade statistics and echoes a lot of the stuff that I've been saying here for a while:

According to some economists, trade in finished products—the things consumers actually buy, such as cars, computers and iPods—declined by much less than 12.2% last year. That is because as much as two-thirds of the value of goods that go into trade statistics represent intermediate parts, which are imported from other countries and used to make finished products that then get re-exported. Economists call this the "valued-added effect." If the value of imported parts were stripped out, however, global trade would have declined by between 4% and around 8% last year, economists say.

By ignoring the multinational composition of goods, conventional trade data also make trade imbalances between some trading partners seem larger than they really are.

China imports a huge quantity of parts from places like Japan and South Korea, but when those components are assembled into finished goods and shipped to the U.S., all the pieces count as Chinese exports, inflating the U.S. trade imbalance with its most polarizing trade partner.

A study by the Sloan Foundation in 2007, for example, found that only $4 of an iPod that costs $150 to produce is made in China, even though the final assembly and export occurs in China. The remaining $146 represents parts imported to China. If only the value added by manufacturers in China were counted, the real U.S.-China trade deficit would be as much as 30% lower than last year's gap of at $226.8 billion, according to a number of economists.

At the same time, the U.S. trade deficit with Japan would have been 25% higher than the $44.8 billion reported last year, because many goods that China and others export to the U.S. contain parts purchased in Japan.

The current method of calculating trade data is a headache for senior trade officials like Mr. Lamy. "It makes everything appear more volatile," he said recently in Brussels. "That creates a political problem."

At a time of financial crisis, Mr. Lamy would prefer that politicians, civil servants and academics focus on finished products. Big swings in trade flows make commerce appear more volatile than it is, he says. Inflated trade deficits with China stoke fears in the U.S. about job losses.

The latest round of global trade talks, which began in 2001, has stalled because of political fears about trade in the U.S., India and other countries. More than 100 members of Congress recently urged the administration of President Barack Obama to label China as a "currency manipulator." At recent Senate conference, Sen. Arlen Specter (D., Pa.) said that "we have lost 2.3 million jobs as a result of the trade imbalance with China between 2001 and 2007."

Great graphic, huh?  Anyway, the article goes on to say that, despite how misleading the current trade stats are, many economists believe that they're the best possible data.  That may be true, and it's totally fine for economists to quibble about that and even to ultimately stay with the "old model" of tracking trade.  From a purely political and/or policy perspective, however, it's a totally different story.  The obvious fact that our current trade statistics really don't show what's going on out there - i.e., the actual effects of trade flows on nations, their exporters/importers, or their workers - should cause everyone to view the outraged assertions re: bilateral trade from protectionists like Arlen Specter with very serious skepticism.

Better yet, just ignore them altogether.  Because, as I've said many times now, today's protectionists are still playing Atari 2600, while the global economy's playing Wii (or PS3 or XBox 360 or... you get the idea).