A new statistical method recently introduced by international organizations is likely to help China rid itself of the major surplus country label. The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) jointly launched a new initiative of measuring value added trade on January 16. Based on this initiative, China's trade surplus with the United States will shrink 25 percent.

Global industrial chain

The new method was proposed in light of international trade conditions in an era of globalization. Today, many products are produced in different countries, rather than in a single country, as they have to undergo various processes on the global industrial chain. Taking into account this reality, the new approach seeks to analyze the value added by a country in the production of any good or service that is then exported. In contrast, the traditional method looks at only the book value of different economies' imports and exports.

Take an electronic product made in China and exported to the United States, which sells at $150 with most of its parts imported from South Korea at $130, for instance. Under the traditional statistical method, it contributes to $150 in China's trade surplus with the United States. If calculated with the new method, most of the trade surplus with the United States is attributable to South Korea, while China takes up only a small proportion.

The current statistical system implies the assumption that the value of exports is created by the exporter country alone, said Song Hong, Director of the International Trade Research Office of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. As a matter of fact, this method can no longer reflect the reality of globalized production and needs change.

Experts point out the traditional method, which records gross trade flows, cannot give an accurate picture of the global industrial chain because the country of origin is misunderstood. In addition, since it does not acknowledge other countries' contributions to the production of goods, it overestimates the trade volume of the exporter country. The new approach, however, examines the import and export of value added, thus offering a fuller picture of commercial relations between nations and helping develop a deeper understanding of the international industrial chain.

OECD Secretary General Angel Gurria and WTO Director General Pascal Lamy have made a joint appeal for all countries to support the new method of assessing value added trade. They believe the new method will help governments make their trade policies more conducive to national interests. The two organizations will also take follow-up measures.

Reduced surplus

China currently posts a huge trade surplus according to the traditional statistical method. Its trade surplus with the United States will shrink by 25 percent on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports, said Gurria.

Before being exported to the global market, Chinese goods have brought added value to many countries, said Lamy. He added that goods in international trade are neither made in China nor in the United States, but in the whole world.

An Asian Development Bank report shows China exported $2 billion in iPhones to the United States in 2009. On a value-added basis, the export value should be only $73 million. In the same year, China imported $121.5 million in iPhone parts. Under the new statistical method, China ran a deficit of more than $48 million in iPhone trade with the United States, instead of a trade surplus.

China is falsely labeled a major surplus country under the flawed traditional statistical method, a pretext that some countries frequently use to create trade barriers and blame the country for its currency exchange rate policy. In fact, companies in which foreign investors hold a majority stake are responsible for 60 percent of China's exports. In 2009, the country posted a more than $140 billion surplus with the United States, some 76 percent of which was generated by companies with foreign investment, mostly investment from the United States. Under the new method, earnings of foreign investors will be deducted from China's large trade surplus.

Removing trade barriers

The new initiative reminds people that countries are so interdependent in international trade that it is meaningless to pay excessive attention to gains and losses in bilateral trade. At the same time, attempts by some countries to pose trade barriers against others and intentionally create trade frictions to protect their own interests are harmful to other countries while bringing no real benefit to themselves.

Sebastien Miroudot, a trade policy analyst with the OECD Trade and Agriculture Directorate, said the new statistical method underlines the importance of free trade. A country's trade and domestic economic policies will not only affect its direct trade partners; their impact will also spread to the international market through the global industrial chain. Trade barriers are not only detrimental to a country's competitiveness but may also disturb or break the chain. These new facts should be taken into account in international trade negotiations. Governments should also take measures to help exporter companies better manage their status in the international value chain.

Lamy said business issues have far transcended trade imbalances in the new global trade pattern. In other words, when China's exports to the United States contain nearly 50 percent of Chinese added value and U.S. exports to China contain 80-90 percent of U.S. added value, it is pointless to discuss bilateral trade imbalances. He called on countries to be open toward trade cooperation and resist protectionism and regional restrictions.