The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have reported that significant portions of China’s exports to the United States contain non-Chinese value added, including some small fraction of parts and materials originating in the United States. The OECD and WTO have proposed new estimates of trade in value-added (VA), a measure of trade that is net of foreign value-added. They claim that “China’s bilateral trade surplus with the United States shrinks by 25% on a value-added basis, reflecting the high level of foreign-sourced content in Chinese exports.” But, my new EPI report shows that the OECD-WTO analysis is “fundamentally flawed and should not be used in anti-dumping or other types of fair trade cases.”

The OECD-WTO analysis suffers from at least three critical flaws:

• The OECD-WTO analysis fails to account for rapid technological change and the fact that China is rapidly moving up the value chain and increasing the domestic content of its exports.
• The OECD relies, in part, on flawed Chinese data on its own trade flows. Estimates developed in the EPI report show that China’s global trade surplus was 117 percent to 250 percent (i.e., 2 to 3.5 times) larger than reported by China in the 2005-2009 period.
• The OECD-WTO estimates do not accurately reflect the flow of Chinese exports coming into the United States through third countries. China became the world’s largest exporter in 2006, and roughly half of its exports are intermediate products and transshipped goods. As a result, the United States absorbed $54.2 billion to $77.9 billion per year in additional, indirect imports originating in China and imported from the rest of the world between 2005 and 2009 that were not reflected in the OECD estimates. When indirect imports are included, U.S. VA trade with China exceeds conventional measures of the gross bilateral trade deficit in this period.

Despite these problems, the OECD-WTO data are being used by economists to argue against U.S. trade barriers. For example, in a recent Brookings report, Dervis, Meltzer and Foda (DMF) argue that U.S. trade barriers harm U.S. exporters. “To the extent that trade barriers would reduce demand for Chinese imports, they also reduce demand for the U.S. goods and services incorporated into China’s exports.” The authors provide no examples of trade barriers, but one of the most common would be anti-dumping and countervailing duties and other penalties for unfair trade.

The significance of DMF’s claim depends on what products the United States exports to China and on the potential impacts of tariffs or other duties on Chinese imports on demand for those particular U.S. exports. In goods trade, U.S. consumption imports from China exceeded U.S. domestic exports to China by a factor of more than 4 to 1 in 2011 and 2012, so relatively few exports could be affected by increasing duties on some products from China. In addition, three of the top five U.S. exports to China are commodity products including cash grains, petrochemicals and waste and scrap (the other two were transportation equipment and semiconductors and other electronic equipment).

If the U.S. were, for example, to impose additional anti-dumping tariffs on steel from China, for example (steel is one of the most frequently penalized products in anti-dumping cases), it is unlikely to significantly affect final demand for U.S. intermediate products. If new steel tariffs reduced U.S. imports of steel products from China, they would likely lead to increases in domestic steel production and in domestic demand for scrap steel. Thus, increasing tariffs on Chinese steel imports would have with little, if any net impact on overall demand for U.S. steel scrap. Likewise, China’s consumption of cash grains, transportation equipment and semiconductors are unrelated to steel production. Even if one includes services exports, U.S. imports from China exceeded exports to China by more than three to one in 2012. Thus, there is little evidence that higher tariffs on Chinese steel imports would harm U.S. producers of intermediate products. Any decline in export demand would likely be offset by increased domestic demand for those same intermediate goods.

Given the flaws in the data and methodology developed by the WTO, and the weak links between U.S. exports to and imports from China, the OECD-WTO trade in VA database should not be used in its present form for anti-dumping, countervailing duty or any other trade remedy proceedings. Furthermore, the mere existence of U.S. exports to China should not be used as an excuse to weaken U.S. trade remedy laws, nor to oppose other efforts to impose trade restrictions, especially on China and other countries that have dumped and subsidized many exports to the United States, and have practiced widespread and persistent currency manipulation, which has cost the United States between 2.2 million and 4.7 million jobs.

The OECD-WTO study does provide a unique window into the way in which the production of goods and services has been offshored and globalized. A significant share of the value added in the exports of China and other countries originates in Japan, Korea, Germany and many other exporting nations in both the developed and developing worlds. In addition, the U.S. is receiving substantial indirect imports of goods from China through third countries.  Some of these indirect imports are unfairly subsidized by currency manipulation, dumping and other illegal trade policies.

There are questions about whether or how the benefits of using dumped and subsidized inputs in such third-country production could be considered in antidumping or countervailing duty proceedings in the United States. The incorporation of dumped and subsidized intermediate inputs in finished goods imported from third countries is an important area for future consideration. Policymakers should consider whether it can be addressed under current law or whether international rules should be modified as needed to allow this problem to be addressed directly under antidumping and countervailing duty laws. The U.S. Department of Commerce should ensure that dumped or subsidized intermediate products from China and other subject countries are not allowed to gain unfair access to the U.S. market through transformation by third-party exporters in other countries.