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Current Trade Deficit:    
The WTO's Ideological New Trade Measurement Study
Alan Tonelson
Thursday, February 07, 2013
Photo of Alan Tonelson
Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).
Let’s give a big Bronx cheer for the World Trade Organization and the Organization for Economic Cooperation and Development.  These two international bodies, both of which the United States belongs to, are now not only issuing blatantly politicized “research.”  They’re doing it incompetently.

Last month, the two organizations released a study purporting to show that a new method for measuring international trade flows would dramatically change the picture of which countries are winning and losing economically from international trade and its expansion. (http://www.oecd.org/sti/industryandglobalisation/49894138.pdf)  

No problem there in principle – investigating the world economy on an ongoing basis is and should be part of these organizations’ mandates.

But conducting research with a preconceived agenda in mind?  That’s entirely different – even for the WTO, whose mission statement includes “reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development.”  Yet that’s exactly what the two organizations have just told us they’ve done.

Their new report argues that focusing on “gross trade flows” among countries can’t capture the explosion of worldwide intra- and inter-company supply chains that fatally undermine the notion that various products and services are made entirely or predominantly in one country.  

Better, they insist, to measure trade in terms of where the value is added for traded items – which as they correctly note,  for decades have tended to include inputs from many different countries.

Where the WTO and OECD go badly astray is in pursuing this research as part of a WTO-inspired campaign to push the idea that most traded goods and services are now “Made in the World,” and that therefore national trade balances (specifically deficits)– and efforts to moderate them – are dangerously obsolete.

To quote the study:  “As pressure for rebalancing increases in the context of persistent deficits, there is a risk of protectionist responses that target countries at the end of global value chains on the basis of an inaccurate perception of the origin of trade imbalances.”  In plain English – trade deficits (at least conventionally measured) don’t matter, and politicians shouldn’t try to reduce them with new barriers.

Just three problems with this newest version of free trade extremism.  First, when the conventionally measured imbalances – which the authors admit remain valid analytical tools – got historically and grotesquely out of whack during the last decade, they helped inflate the bubble whose disastrous bursting nearly melted down the entire global economy.  

Second, when predatory practices like subsidies, currency manipulation, and trade barriers are pervasive around the world, an obsession with maintaining and expanding trade openness for their own sakes inevitably results in reduced global efficiency and growth over the long term.  For production and employment aren’t being allocated mainly by market forces, but by government fiat.  

Finally, it might ideally be best to negotiate away these all-to-common predatory practices and barriers WTO-style.  But in practice, such efforts have been thoroughly inadequate – as the last decade’s imbalances-fueled bubble should have taught.  So unilateralism by deficit countries – especially the United States – is undoubtedly needed to avoid repeating the latest crisis and recession.  

But then weirdly, the OECD and WTO researchers then proceed to present data showing that theirs is a distinction without a difference.  For their new methodology “does not change the overall balance of trade of a country with the rest of the world – it redistributes the surpluses and deficits across partner countries.“

Translated into America’s circumstances, the authors contend that their methodology reduces the high profile U.S. merchandise deficit with China by fully 25 percent for 2009.  But they also acknowledge that that portion of the U.S. global deficit is simply shifted to Germany, Japan, and South Korea – countries that can be just as mercantilist as China.  So economic problems like imbalances, their inarguable dangers, and global efficiency remain essentially the same.

Research to promote specific agendas rarely helps anyone but special interests that reap outsized benefits from cooked or misleadingly reported results.  And when it comes to global imbalances, even the multinational companies and global finance companies that have been the biggest short term winners both took tremendous hits during the last crisis and its immediate aftermath.  The latter, of course, needed gargantuan bailouts to stay viable.

Such pseudo-scholarship is already far too commonplace among the U.S. think tanks and even genuine academic departments funded overwhelmingly by outsourcing interests.  The biggest takeaway from the new WTO-OECD research is that such intellectual dishonesty is now showing up in international economic organizations, too.  Such rigged work products have helped destroy the credibility and effectiveness of the UN.  Do the WTO and OECD really want to go down this road?  



Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press).