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‘Made in the world’ notion no answer to U.S. prayers

by Kevin Rafferty

HONG KONG — Pascal Lamy, director general of the World Trade Organization, recently made an interesting and thoughtful plea for a new approach to trade, with the idea that “Made in the world” could often be a more accurate description than one that put a purely national label on a product.

He cited an iPod “imported from China” as a good example of how the country of final assembly belies the international locations where the product was developed and its components were manufactured.

However, Lamy’s suggestion of recalculating the value of exports and imports would not get to grips with some of the most pressing and interlinked issues of modern global economic life: the persistence of high unemployment levels in the old industrialized countries, the continuing massive government deficits and the badly advised drift in much of the Western world to service economies dominated by mega-financial institutions.

Many of the things Lamy said make sense. He pointed out that the original idea behind official statistics was “to draw up an inventory of the prince’s wealth in an essentially agrarian economy.” Societies and economies have greatly evolved since those days and gone through the vicissitudes of the Industrial Revolution and the coming of truly global trade.

Even in the 19th century, as the Industrial Revolution got into full swing and the economist Ricardo developed his theories of international trade, an entrepreneur in, say Portugal, importing a steam engine from England would know that the whole product — from the steel going into the wheels to the boiler pressure gauge — had come from England.

Likewise, an English club importing port wine for its members could be sure that it was genuinely a Portuguese product. These days, thanks to progress on registered designations, especially on wines, a British importer of port can be certain of its Portuguese origins.

On the other hand, noted Lamy: “The concept of country of origin for manufactured goods has gradually become obsolete as the various operations, from the design of the product to the manufacture of the components, assembly and marketing have spread across the world, creating international production chains.

“Nowadays, more and more products are ‘Made in the World’ rather than ‘Made in the U.K.’ or ‘Made in France.’ . . . Most likely ‘Made in China,’ you might add.”

The WTO director general used the iPod as a good example. Every time an iPod is imported into the United States, its total declared customs value of about $150 is ascribed as if it were an import from China. However, the modern economic reality is that the U.S. itself, Japan, Korea and China all contribute to the making of an iPod.

Lamy cited American researchers as calculating that “less than $10 out of the $150″ of the value of the iPod are created in China, and the rest consists of re-exportation from other countries.

In the iPod’s global economy, China is merely the final assembly line in a global value chain starting with the origin and design of the product, to manufacture of the different components and organization of the logistic support to the assembly, and finally to shipment of the finished iPod to the U.S. or Europe or Asia.

Recalculation of a product as multi- located rather than as coming from the single country tied to its label clearly has implications for trade statistics. If only 10 percent of the iPod’s value can truly be counted as made in China — and the same goes for other products to a greater or lesser degree — then the size of China’s trade surplus with the U.S. should also be written down significantly.

The same economists who broke down the iPod’s value chain also calculated that global manufacture of the iPod created 41,000 jobs in 2006, of which 14,000 were in the U.S. and about 6,000 were professional posts. Given the widely differing pay scales and better pay of American workers, they earned more than $750 million, while workers abroad earned only $320 million.

Doing a series of similar recalculations might help to calm some of the aggressive passions that are still threatening to upset the global economy. Lamy also noted that if the U.S. trade deficit with Asia is examined, rather than merely that with China, it has been remarkably stable at 2 to 3 percent of U.S. gross domestic product over the past 25 years.

If the calculations were based on the final retail value of goods sold in the U.S., then the American stake in products would be seen to be much higher than their foreign labels suggest. Big American companies, including Wal-Mart and other retailers, have pioneered the outsourcing of production lines to China and other developing countries, and would be the first to be squeezed by any major revaluation of the renminbi. Eight out of the top 10 U.S. importers from China are retail giants.

A Lamy-style recalculation of the true values of a product by origin might quiet the loud noises coming from the U.S. Congress and other legislatures, but it would do little to get to the underlying economic weakness of the old industrialized countries.

Unemployment in the U.S. rose to 9.8 percent in November — “unacceptably high” — said Austan Goolsbee, who chairs the U.S. president’s Council of Economic Advisers. The underlying figures show that job losses in the U.S. are deeper and have gone on for longer than in any other recession since the end of the Second World War.

Job losses in the current recession hit “minus 6 percent” 11 months ago and have improved only slightly to “minus 5.5 percent.” The steepest previous fall in the 11 postwar recessions was to “minus 5 percent” in the 1948 recession, but then there was a sharp recovery, so that the whole recession lasted 20 months. The current recession has been going on for 35 months. Hourly earnings and the average workweek were flat last month, showing that there is little optimism.

On the corporate front, profits are better than ever. U.S. Commerce Department figures last month showed profits rising at an annual rate of $1.66 trillion in the third quarter, the highest figure since records started 60 years ago. Corporate profits have grown for seven consecutive quarters and now account for 11.2 percent of total U.S. output.

The lesson is that for big and powerful companies, the whole world has become their oyster. Those who have fallen off the economic production chain can expect very thin gruel.

Kevin Rafferty, formerly in charge of the Financial Times’ coverage of Asia, is editor in chief of PlainWords Media.