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Global Manufacturing and Measurement Issues

Raisedby the iPhone

Robert E. YuskavageJennifer Ribarsky

May 6, 2011

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Globalization

▪ International fragmentation of production across borders

▪Vertical specialization trade Global sourcing of parts and materials Increased trade in intermediate

products

▪Much of this activity occurs within multinational companies but not all

▪ iPhone is often cited as an example

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U.S. Merchandise Trade with China

-400

-300

-200

-100

0

100

200

300

400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Exports of goods Imports of goods Balance on goods

3

U.S. Trade with China

$ in billions

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Key Facts from iPhone Study

▪Assembled in China using parts from around the world and U.S. technology

▪Materials imported by China from a variety of countries including the U.S.

▪Wholesale value included in U.S. import trade statistics; subtracted from GDP

▪Gross value assigned entirely to country of origin or destination; affects bilateral balances but GDP is properly measured

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iPhone Study

Value of inputs from U.S. shipped to China (included in U.S. exports)

$10.75

Value of inputs shipped to China from other countries

$161.71

Manufacturing costs to China $6.50

Wholesale value of iPhone shipped to U.S. (included in U.S. imports)

$179

Retail value of iPhone sold in U.S. stores (included in PCE)

$499

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Issues with Current Measures

▪Gross flows do not reflect value added from each country in the supply chain

▪Large deficits/surpluses misleading if Domestic factor content of imports high Foreign factor content of exports high

▪Distorts significance of bilateral balances▪Still provide useful direct trade measures

Well reported and consistently measured Provides accurate measures of net

exports/GDP

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Value Added (VA) Approach

▪Allocates gross flows to producing and supplying countries based on VA content

▪Measures often based on multipliers from inter-region world input-output tables

▪Linkages between countries are based on origin/destination data in trade statistics

▪Requires assumptions about import use Microdata research now underway can help to

improve import use tables

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Issues with Value Added Approach

▪Very difficult to directly measure due to limited information in company records Firms may not know sources of inputs

▪National Academy of Sciences (2006) Impractical to directly measure foreign and

domestic content of exports and imports Questioned the validity of the I-O approach

▪BEA will contact industry and supply chain experts to learn more about using bar codes and electronic tags

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VA Approach and the iPhone

▪VA approach for the iPhone would result in Smaller U.S. trade deficit with China Larger deficits with countries that supply

inputs to China such as Japan, Germany, and South Korea

▪VA approach could be useful as a supplementary or satellite system BEA has taken this approach before with

statistics on services by foreign affiliates Would require advances in the accuracy of

linked world input-output tables

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International Standards: SNA and BPM6

▪New treatment of “goods-for-processing” would address some of the concerns

▪When ownership does not change and goods are returned after processing Gross merchandise trade flows are excluded Value of the processing service included as

services trade measured by the processing fee No impact on overall trade balance but it shifts

the balance between goods and services

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Impact of Change in Treatment onChinese Trade Statistics

$ in billions, 2007 BPM5

Adjustment

BPM6

Exports of goods 1,220

-618 602

Imports of goods 905 -352 553

Balance on goods 315 -266 49

Exports of services 122 266 388

Imports of services 130 130

Balance on services -8 266 258

Balance on goods and services

307 307

Current account balance 372 372

Source: IMF, BOPCOM-08/11

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International Standards: SNA and BPM6

▪Major challenges for new treatment No indication of goods-for-processing in

customs data used for merchandise trade Companies have indicated they cannot

identify such transactions in their records

▪Other countries face similar issues▪BEA is working with Census to develop

measures based on matching trade data with enterprise information

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New Standards: Merchanting

▪Goods that are purchased and resold but do not cross the border (e.g., petroleum)

▪Currently the gross margin on these sales is recorded by BEA as trade in services

▪Under BPM6 goods sales will be recorded as positive goods exports and purchases will be recorded as negative goods exports

▪Some global manufacturing activities could be classified in this category

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Factoryless Manufacturer

▪Outsources all the manufacturing transformation activities

▪Arranges for all required capital, labor, and material inputs required to make a good

▪Controls the production process▪Owns and sells the final product

produced

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Industry Classification of Factoryless Manufacturing

▪No clear guidance in North American Industry Classification (NAICS) 2007

▪Can lead to inconsistent classification of establishments in official statistics Units may be classified to manufacturing

or wholesale

▪Recommend explicit guidance to classify in the manufacturing sector for NAICS 2012

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Implications of NAICS 2012 guidance

▪ Expands traditional definition of manufacturing beyond plants, factories, or mills

▪ Impacts source data used in BEA’s accounts such as: Value of industry and product shipments Material costs and other expenses for

manufacturing industries Value of sales for wholesale industries Price indexes

▪ Impacts productivity measures as well

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Factoryless Manufacturers and Offshoring

▪Under ‘Ideal’ scenario Shipments of factoryless

manufacturers are included in domestic shipments

Important to record the correct international trade flows

▪ Implementation of “goods-for-processing” would address some of the concerns Overseas contract manufacturer

providing a service and not a good17

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Process and Timeline for NAICS Implementation

▪ Interagency subcommittee made up of members from various program offices of the Census Bureau, the BLS, and the BEA to ensure consistent implementation

▪ Because of the complexity of the change and the long planning process involved implementation not expected until 2017

▪ Work has started Additional survey questions added as test

cases to identify contract manufacturing activities

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Questions for the Committee

▪Do the new international standards provide more relevant trade measures and should their implementation be a high BEA priority?

▪Do the new standards go far enough or should BEA also consider developing value-added input-output based trade measures?

▪Do you agree with the recommendations for classifying factoryless manufacturers and the resulting implications for statistics?