The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization’s (WTO) new measures of value-added accounting significantly and inaccurately underestimate China’s trade surplus with the United States, a new EPI report finds. In Value-added analysis of trade with China could weaken fair trade enforcement and increase job loss, Robert Scott, EPI director of trade and manufacturing policy research, assesses the OECD-WTO’s attempt to account for the origin and destination of goods and services trade by using a new value-added accounting system, which adjusts bilateral trade flows by netting out intermediate trade with other countries. Relative to conventional measures, the OECD-WTO VA estimates would incorrectly reduce the gross U.S. goods and services trade deficit with China by as much as 25 percent. Further, these new measures could weaken the enforcement of fair trade rules and standards.

“Value-added trade accounting is not ready for prime time. The OECD and WTO claim based on their value-added accounting estimates that the U.S. trade deficit with China is overestimated,” said Scott.  “However, the best available statistics indicate that it is significantly underestimated, and that China’s global trade deficits have been massively underestimated. This has allowed China to maintain an undervalued currency, which subsidizes all of its exports and acts like a tax on U.S. exports to China and the rest of the world.  In addition, the OECD-WTO value-added analysis is fundamentally flawed and should not be used, for example, in anti-dumping or other types of fair trade enforcement cases.”

The report identifies three critical flaws in the OECD-WTO VA accounting proposal:

• The OECD-WTO analytical framework 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, leading it to underestimate the value-added in Chinese trade: In 2009, for example, adjusting the OECD-WTO estimate to account for the increased domestic content of Chinese exports increased China’s VA trade balance by $19 billion, a 14.3 percent increase.
• Although China consistently under-reports its exports and over-reports its imports, the VA analysis does not correct for the resulting distorted picture of China’s overall trade balance. Estimates developed in this report show that China’s global trade surplus was 117 percent to 250 percent (i.e., over two to three and one-half times) larger than reported by China in the 2005–2009 period.
• The OECD-WTO analysis does not accurately reflect how much of the goods coming into the United States from other countries actually originate in China. 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 U.S. absorbed $54.2 billion to $77.9 billion in additional, indirect imports originating in China from the rest of the world between 2005 and 2009 that were not reflected in the OECD-WTO estimates. When indirect imports are included, U.S. VA trade with China exceeds conventional measures of the gross bilateral trade deficit in each year of the study.

The OECD value-added estimates could inflict real damage on the U.S. economy if they become the basis for policymaking. For one, the estimates could lead policymakers to lower the targeted exchange rate adjustments needed to rebalance global trade flows and inappropriately reduce antidumping and countervailing duty penalties imposed in response to measured import surcharges. Further, relatively large changes in China’s past and projected current account surpluses have enormous implications for the amount by which China’s currency needs to adjust. In fact, studies show China needs an additional, one-time Renminbi revaluation of at least 30 to 40 percent to eliminate its very large and rapidly growing global trade surpluses with the next few years.

“China is cooking the books and suppressing estimates of its massive trade surpluses,” added Scott. “This relieves pressure on China to revalue the renminbi and provides cover to the United States and other government and international institutions, which have consistently refused to identify China as a currency manipulator.”