New measurement may reshape China-U.S. trade ties

A new method for calculating global trade flows may not change an overall trade imbalance between the world's two largest economies, but it will likely help reshape the trade relationship between them.

In a joint study, the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) break with conventional measurements of trade, which record gross flows of goods and services each time they cross borders. It seeks instead to analyze the value added by a country in the production of any good or service that is then exported.

The OECD-WTO initiative, as WTO director general Pascal Lamy has put it, is designed to "ensure that trade statistics do not lie," or "lie as little as possible."

One headline finding suggests that the much-discussed U.S. trade deficit with China would be much smaller than people thought when measured on a value-added basis.

The novel trade-flow calculation method is mostly a technical issue, but has real-world consequences as trade figures always guide policy formulation.

Traditional measures of trade flows fail to reflect the complexities of global commerce, and the result is a distorted picture, one that leads to ill-informed policy decisions if viewed in isolation.

Take the most illustrated iPhone case. The traditional measures classify the iPhone as an wholly "Chinese" export to the United States, even though it is entirely designed and owned by a U.S. company and nearly all the component parts have been produced in several Asian and European countries. China's contribution is the final step -- assembling and shipping the handsets.

When the cost of an iPhone is factored into China's trade surplus with the United States, it is highly misleading as only about 4 percent of the full value was retained in China, according to an Asian Development Bank Institute report.

Under the flawed measures, the United States has a big trade deficit with China. This assumption has been the basis for some U.S. politicians' anti-China sentiment and responses to China's currency policies and its allegedly unfair trade practices.

Under the new count, however, the U.S. trade deficit with China would shrink by 25 percent in 2009. On the other hand, the U.S. deficit with Japan, the Republic of Korea and other nations supplying intermediate goods to China is bigger.

The revision is certainly a significant fact that U.S. policymakers should have beaten into their heads before they are allowed to discuss China-U.S. trade imbalances.

Although this would not be enough to eliminate trade disputes between the two countries, it offers a complementary view and may shed a different light on trade measures imposed against China.