Monday, February 8, 2010

Global Trade Imbalances as a Statistical Artifact

Today, the latest spin that purports to describe the still unfolding global economic crisis is that of 'global trade imbalance', with particular attention being focussed on the US and China.

The US, we are told, has a huge trade deficit and China is conveniently blamed for this. "They say China's currency manipulation hurts the U.S. economy" [1] making China's goods much too cheap relative to those produced in America.

This tale does not reflect the contemporary reality and it is all the stranger because, on the other hand, it's never been a secret about the manner in which the large global corporation has evolved its operations over the last 4 decades. These huge networked businesses now have production systems that most often span a large number of countries at the one time. That means, in effect, that world trade is now mostly defined by the nature and extent of the global corporation and its networks. The nation is no longer the core economic entity.

In 2006 Samuel J. Palmisano, Chair of the Board, President, and Chief
Executive Officer of IBM described the evolution that has occurred in the nature and function of the international corporation.[2]Since the early 1970s economic nationalism has abated, Palmisano says. Trade and investment barriers consequently receded. A revolution in information technology also occurred and this development improved the quality and cut the cost of global communications and business operations "by several orders of magnitude". The large transnational corporation was then much more able to standardise technologies as well as its business operations all over the world. This, in turn, led to the interlinking and facilitation of work both within and among companies.
"New perceptions emerged as to what was possible and permissible.... The focus shifted from products to production." State borders defined less and less "the boundaries in corporate thinking and practice…."
More ominously, as we now see with the global fad for deregulation, Palmisano eulogises
"the growth of horizontal, intergovernmental networks among the world’s regulators and legislators [that are] built on shared professional standards and relationships among cross-national communities of experts."
Almost anyone with more than a fleeting interest in economics understands this new reality. The most dominant global enterprises have embedded themselves in one nation after another and most of those businesses are US and European in origin. The economic reasons for these entities doing so appear quite obvious. Labour is cheaper in Asia. Corporations find it much easier to avoid tax and engage in transfer pricing to maximise profits, and so forth.

So, it's not surprising, and somewhat belated, to find a 2007 paper published by the Asian Shadow Financial Regulatory Committee that finally raises the very serious issue of false accounting in international trade by governments around the globe. Quote:
"MNC affiliate sales within their host countries are not included in trade balances, but are counted in host country GDP. MNC affiliate sales from the host country to other countries are counted as exports of the host country. This accounting practice overstates the current account surplus of a country like China with heavy inward foreign direct investment (FDI). This surplus would be reduced if sales outside China by affiliates of foreign-owned MNCs were excluded from its exports and sales within China by affiliates of foreign-owned MNCs were included in its imports. The trade accounting system overstates the current account deficit of a country like the US, with heavy outward FDI. This deficit would be greatly reduced if sales outside the US of overseas affiliates of US MNCs were included in US exports and sales back to the US of overseas affiliates of US MNCs were excluded from US imports." [3]
For all the huge trade surplus that China is purportedly 'enjoying' it turns out that little benefit is being derived from it. Over 50% of China's exports are produced by foreign corporations. Walmart, for instance, has 700 factories in China. And 'China' (whatever accounting entity this word constitutes) has 'trade deficits' with "the rest of Asia".
"In effect, China aggregates the trade surplus of East Asia with the U.S. and Western Europe, takes the political heat, but captures relatively little of the value that it adds to final products."
We need to know more than just the fragments of data that government bureaucracies, mainstream professions and the media serve out. A true understanding of the nature of the crises now confronting us is absolutely essential, and yet deliberate obfuscation is occuring as to the cause and nature of our collective dilemma.
"Were it part of our everyday education and comment that the corporation is an instrument for the exercise of power, that it belongs to the process by which we are governed, there would then be debate on how that power is used and how it might be made subordinate to the public will and need. This debate is avoided by propagating the myth that the power does not exist."
John Kenneth Galbraith, The Age of Uncertainty, 1977

[1] Q&A: How China's Currency Policy Affects You
by Adam Davidson
text sizeAAA
April 20, 2006

[2] "The Globally integrated Enterprise" Samuel Palmisano, ceo and chair of the board of ibm, Foreign Affairs

[3] Asian Shadow Financial Regulatory Committee
A New Perspective on Global Imbalances: the Role of MNCs
Statement No. 8
Hong Kong, July 5, 2007


Charley said...

Are you making the argument that there are no global imbalances - or, just that the problem is overstated?

If there are no global imbalances, how did China become the largest holder of US reserves? Are they simply holding them for US companies operating in China?

Brenda Rosser said...

Charley asks: If there are no global imbalances, how did China become the largest holder of US reserves? Are they simply holding them for US companies operating in China?

Charley, this article was referring to 'trade' imbalances between 'nations' (with particular reference to the US and China). I have altered the title of the article to try and reflect this qualification.

Of course there are imbalances everwhere one cares to look. Two of the most striking are (i) the relationship between the global corporations 'economy' versus that of individual nations (ii) the global monetary imbalance.

It is now taken for granted that 'surplus' 'nations' have rushed to buy up the treasuries of the US (a nation that has a huge trade and current account deficit). Why?

Clearly the US does not benefit from a profitable investment environment. [This is a point I raised here.

In March 2005 Bernanke stated that the US current account deficit was, by definition, “the excess of U.S. payments to foreigners over payments received in a given period.” But the definition of what is 'foreign' relates to where the commercial entity was "created or organised, ie NOT who owns that entity.

See: CFIUS Review of Foreign Investment: U.S. Treasury Department Proposes New Regulations to Govern National Security Review of Foreign Investment in the United States
Sullivan & Cromwell LLP - May 8, 2008

As yet I'm not clear as to whether the 'nation' of China is a major holder of US Treasuries. Is the Chinese central bank a purchaser? If so, is it simply printing money in order to purchase them (in this time of central bank manipulation of foreign exchanges)? If so, is this being done with the cooperation of the US Government? Further, is the entity 'China' in these stats mostly or in large part foreign corporations trading from China?

Anonymous said...

(ray l love aka the not anonymous, Anonymous)

Stiglitz: " ... the export of T-bills is different from the export of cars or computers or almost anything else: it does not create jobs. That is why countries whose currency is being used as a reserve, and exporting T-bills rather than goods, often face an insufficiency of aggregate demand."
Stiglitz again:"...note that the world's economies hold more than 4.5 trillion of reserves,increasing at a rate of about 17% a year. In other words, every year some $750 billion dollars of purchasing power is removed from the global economy, money that is effectively buried in the ground."
It is odd that Stiglitz would use the term 'buried' here because of course the 4.5T is in use, albeit in a rich nation as opposed to less rich nations. But considering that global aggregate demand is weak, and combined with excessive savings rates in at least Japan, and liquidity traps in Japan and the US, the problem seems to be a global wealth distribution problem. My take on this is that global upward mobility rates are far too sluggish to support the necessary pace of lending in the developed economies. This sluggish upward mobility also of course explains the weak aggregate demand (global). ~ray l love

Brenda, yet another excellent piece.


run75441 said...


"Labour is cheaper in Asia. Corporations find it much easier to avoid tax and engage in transfer pricing to maximise profits, and so forth."

In order of magnitude, Labor is the smallest of the cost differentials coming after burden and materials. To base a move to China, Asia, or India solely on direct labor cost or that labor cost used to manufacture a product would result in little profit and probably would not cancel out the length of the supply chain of the cost of shipping.

Materials is the largest cost of manufacturing and the same percentage and pricing exists in both Asia and other places in the world dependent upon where the material is made. It would not be in this arena that China would be securing a competitive advantage.

Burden in China as compared to the US is extremely low. That burden being the legislated infrastructural costs and customary costs associated with working in the US and associated with operations and labor that does not exist in China. This variance is three times that of Labor and it is here that China surpasses the US.

Charley said...

Here is my confusion:

Peter Dorman (in his paper from last year) points out that the United States worked very hard to turn low wage nations into "export platform".

Assume China is completely passive in all of this: it simply makes available some space in an industrial park for the American company, and its local companies supply electricity, etc., and the local population is the labor force. This means, at least so far as I can figure, that

1. an American company working in China might very well sell into the US and receive dollars, but it would then have to convert some of those dollars into yuan to pay wages, electricity, raw materials, rent, taxes, etc. (You know, stuff! I am not an industrialist.)

2. The PBOC takes those dollars from the MNC and gives the company yuan to purchase raw materials and wages locally.

So what now happens with the dollars the PBOC receives?

I understand your point that much of this activity occurs within a MNC, and, therefore, really represents the economic activity of its host country, but, in reality, at least some portion of revenue generated from this activity has to result in accumulation of dollars in the PBOC.

Am I right in thinking this?

Charley said...

PS: The imbalance in this example would be that there is no corresponding accumulation of yuan at the Federal Reserve.

r l love said...
This comment has been removed by the author.
TheTrucker said...

Malthus was right and sovereignty was the only thing that protected the people of the less populated nations from the disaster of overpopulation in the backwards sovereignties. In attempting to help these overpopulated nations The middle class of the developed nations has allowed the MNCs to displace elected governments with governments owned by the MNCs. It may be possible to reclaim our sovereignty. But the economics profession has turned a blind eye to the realities. I see in the blogosphere that Moody's may downgrade the rating of US T-Bills from current AAA. This is the MNC (primarily the financial sector) displacing the United States elected government. They had already bought and paid for the US Senate with the latest Supreme Court ruling adding to the their power. Yet the economics profession continues to suck on that "comparative advantage" crack pipe.

Brenda Rosser said...

Ray, thanks for your comments. I agree that it seems logical to conclude that the world suffers from a lack of aggregate demand in the context of the extreme inequality that now presents itself globally.

But there's a lot more to an economy than 'demand' and 'consumption'. I think that there's a shortage of genuinely productive activity overall and the thought of treating one community after another - as many economists do - as merely a conglomeration of potential consumption in a world of limited resources I find unappealing and dangerous.

Stiglitz: " ... the export of T-bills is different from the export of cars or computers or almost anything else..."

The Triffin Dilemma

“Briefly, the use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: to maintain all desired goals, dollars must both overall flow out of the United States, but must also flow in to the United States, which cannot both happen at once.”
Triffin dilemma
From Wikipedia, 2nd February 2010

Economist Robert Triffin said that if the United States stopped running balance of payments deficits and supplying reserves, the resulting shortage of liquidity would pull the global economy into a contractionary spiral. "But Triffin warned that if the deficits continued, excess global liquidity risked fueling inflation..."

The US is printing money at present (quantitative easing)and it has caused inflation in the housing and commodity markets.

Global imbalances and the Triffin dilemma
Jan 13, 2009 16:05 EST
John Kemp Great Debate

Run75441, you claim that China's competitive advantage lies in the lack of 'burden' to corporations. Do you have any links you could direct me to in this regard?

Lack of regulation may very well create the most profitable business environment but who would want to live in a place so affected?

Charlie, like you I'm not really sure of the fine details of the monetary situation within China. It appears to be changing rapidly. In September 2009, for instance, it was reported that China was "authorizing its principal, coastal exporting cities to begin conducting most or all of their trade using renminbi" with many other measures to protect China against the devaluing currency of the US (whose government has turned on the printing presses).

China Urges Citizens to Buy Gold and Silver
by: Jeff Nielson September 04, 2009

Charlie said: "I understand your point that much of this activity occurs within a MNC, and, therefore, really represents the economic activity of its host country, but, in reality, at least some portion of revenue generated from this activity has to result in accumulation of dollars in the PBOC."

As you say, Charlie, most of the economic activity goes on within the MNC. Non-trade, in effect. It could be argued that because the MNC originates and is owned by Americans (for example) that therefore this 'economic activity' should be accounted for as American trade.

However, as you say, some of the transactions benefit China. Workers still have to be paid wages. Fixed costs of running a businesss still need to be met. So, yes, to that extent there is a benefit to China. Whether it is a 'net' benefit after all the unaccounted for costs are taken into consideration is another matter. There are strong arguments that China's economic growth is really negative growth (resource depletion, pollution, hyper exploitation of workers, fraud in accounting etc).

Trucker, what we're seeing is active censorship of the economics profession.

r l love said...



r l love said...

My little log furniture business relied heavily on our gathering 'materials' in the Tahoe Basin (dead-fall). So, our material costs were about 90% due to labor costs, that though, in your comment, would not be counted as 'direct' labor costs. Although, these 'not labor' costs were in fact our largest single cost. Not to say that this is at all normal, but instead to point out that things are far more complicated than what your comment suggests.
So, is it not more apt to say that producers weigh all of the factors and locate accordingly. There are labor costs embedded in the 'burden' and 'material' and 'all of' the shipping costs and therefore your comment, while probably correct in certain contexts, when applied to the post here, it seems naive and disingenuous. However, I know that you are not person who fits these assumptions, you are instead perhaps just a little too meticulous and somewhat too convinced that macro-methods tell a satisfactory story when they so often do not. Yet, when someone uses the term 'labour costs', the embedded costs are implied and so I think a 'direct labor costs' argument needs some careful qualifying in regards to relevance and decorum. This is not of course a big-deal; and Brenda does not need me to defend her, but a 'water is not wet' argument is not so easy as your comment suggests. ~ ray

Charley said...


I agree. I just don't want it seem like the leaders of China are stupid or naive. They have cleverly built a massive industrial park that allows US corporations to substitute low wage Chinese labor for high wage US labor. And, as a result of building these facilities, are able to leverage them to support domestic economic goals. A power plant, once built, can supply many different users.

At least that is how I read this.

The Americans certainly exploit low wage Chinese labor, but China can, because of this, exploit low wage Chinese labor in the rest of the economy to supply raw materials and ancillary goods to American manufacturers - it, therefore, grabs economies of scale for its own development.

That aside, I think it is okay to argue in principle that much of Chinese exports are actually American corporate activity, and to attempt to quantify this.

Thanks for causing me to think about this, Brenda.

r l love said...

Just so that I might seem less dumb, I wrote the following on the day before I wrote my initial comment on this thread:
"So, is the peg the problem, or could it be that we simply do not produce enough? We could invest less I suppose but that would require a solution involving actual work for those who know only how to invest. They could be administrators and managers perhaps, but we already have too many of those too"
In other words, I agree with your assertion about "genuinely productive activity". ~ray

Brenda Rosser said...

I've been wondering about the motive behind China's opening up to the West. It appears to have begun with the so-called 'ping-pong' diplomacy between Mao and Nixon/Kissinger in the late 1960s and early 1970s. During the Vietnam war, and I don't think that this is a coincidence. The true motive for this great crime was to open Asia up to capitalism.

Like you I have I tend to see method in this Chinese madness. but it is a drawn-out game that is vulnerable to planetary limitations.

RL Love,
I apologise if the tone of my words did not convey the respect that I have for the very apparent depth of your thought on this forum. I was actually reacting to the general thrust of neoliberal economics in its tendency to want to convert us all to passive corporate consumers. It 'gets to me'!

It seems to me that if we want genuine democratic input then we must take charge of as much economic activity as we possibly can. That may mean the re-establishment of home vegetable gardens, repairing and redyeing one's clothes, designing and construcing our houses etc.

It's interesting to view how the super-efficiency of the global corporation has brought the world economies to their 'knees'.

Run75441, if labor costs were such a minimal consideration why then do the western corporations in China campaign to suppress pay and working conditions of the workers there?

r l love said...

"No worries"

run75441 said...


Direct Labor cost in manufacturing, to which most people consider China the most adept at, is ~10% of the cost of manufacturing, followed by burden of ~30%, and then by materials of ~60%. There are always outlier companies to this equation; but, the overall macro is indeed as I write it. As a manufacturing consultant and a lean six sigma person, I can attest to this equation in the US. The phenomenon doesn’t change much in China for Direct Labor either except you see burden decrease dramatically. If you do not want to believe me, then find some of Drucker's works. I had posted my cost model on economist’s view for molding parts once, its long but it works.

The actual amount of labor in a product is minute . . . You are comparing an average of $14/hour for injection molded parts to $6.00/hour (chargeback) out of China, Thailand, Indonesia, Philippines, etc. or $1.40 versus 60 cents across hundred of parts per hour dependent upon mold size and machine cycle time. Yes there is money to be made there; but not to the magnitude many believe.

What do I mean by Burden? Brenda, look at what it costs to operate in the US. Employer's Social Security withholding, Unemployment Compensation, Workman’s Compensation, OSHA law, EPA laws, Child Labor Laws, healthcare insurance, paid time off, vacation time, etc. etc. Those are costs to Manufacturing and make up a large portion of that 30%. What have I experienced as Burden in the countries I have mentioned and worked in? A bus ride back and forth to work, breakfast and lunch, a doctor or nurse on staff, and a snack if you work overtime. Of course, you could believe Delphi's Miller that union autoworkers make $75/hour. I had to laugh while listening to the automakers and Gettelfinger testify in front of Congress and the Senator from Toyota - Corker, Gettelfinger had it right when he said labor cost (he included bennies) was 10%. Gettelfinger got it right while the rest of them didn’t know, much less Corker.

Excess Labor is the result of poor manufacturing practices and symptomatic of an underlying cause. When I go into a factory, I don't specifically look for labor to whack as there is little cost savings to doing such and management doesn't need me to do that for them as they can accomplish such by themselves. I look at the process and the throughput on the manufacturing floor. How long does it take to make one part, how much time is wasted between operations, what is the production flow, how much raw material is on hand, how much inventory is in finished goods, how much work is put on the shop floor at any one time, etc. Why would I do so? Raw materials, WIP, and finished goods are the big cost killers of business. I then look at the hourly Labor cost and drop out all of the legislated costs, benefits, etc as I can’t impact them. I also drop the capital allocation to labor typically done by classical accountants. Some things can be done with bennies; but, it is not my charge. The fallout to all of this is Labor; but, Labor is not the cause of the cost.

If you don't believe me, the cash for clunkers was done to relieve inventory more so than to get inefficient vehicles off the road. Even then with all of the old clunkers left on the road, the US still managed to cut gasoline/oil consumption ~5% with those old clunkers by driving less frequently, slower, by planning trips, and paying higher prices. And what is automotive doing now, building inventory to forecast once again rather than demand. Maybe a different approach to saving energy is needed also.

run75441 said...



To move materials to China, it takes approximately 5 weeks out of Chicago, one week to the west coast, 18-21 days by ocean, and one week from the time it hits port to delivery in Shantou, Tianjin or elsewhere for that matter. It can be done faster and it can also take longer. I have had ships diverted because of typhoons. My timing gave me a 95% confidence level, Cost going over was ~$3500 when thing were hopping. Costs coming back were ~$4400. It costs more to ship out of China then to ship to China. I was shipping one 40 foot HC container a week either.

NAFTA was a concerted effort to move manufacturing to Mexico. Most of the material content of the product was to be locally based. It was working pretty well until the Mexicans started looking for the bennies and also higher wages. The production moved to Asia. Corporations do not want to pay the bennies and the social costs that the US has in places at home in Mexico and Asia. One leads to another. When it becomes too expensive to operate in China because of a greater demand for social bennies, labor wages, etc. (and it will); companies will move to Vietnam, Haiti, Laos, Africa, etc.

Brenda, productivity gains from; where have they been going since the eighties? Spencer’s chart Labor’s share. The cost of labor wages has been decreasing instead of increasing. Household Median Income is down. Dr. Warren does a nice study in her “The Coming Collapse of the Middle Class” on wages also. So are wages the issue?

Sandwichman had the right idea on shorter work week hours as Labor is such a small component of manufacturing in most cases. There really is no reason to work OT. And with more automation and greater computing power, the need for Labor will decrease significantly over the next 20 years as it has since the sixties . . . just faster. I am a contributor at Angry Bear (Dan will vouch for me); I can talk off line, if you like, on hotmail.

Rdan said...

Hi Brenda. Can you e-mail me at about this one too?

r l love said...

Your argument is just a direct contradiction of itself if the embedded labor costs in your "burdens" are considered and if "bennies" are considered as compensation. And when someone uses the term 'labor' it is widely and forever accepted that all forms of compensation are included. Your saying that MNCs don't go to China for the cheap labor -- but they leave the US due to expensive labor as if these are exclusives. You also say when labor is too much in China that MNCs will go elsewhere. So here is your original contention:"In order of magnitude, Labor is the smallest of the cost differentials coming after burden and materials. To base a move to China, Asia, or India solely on direct labor cost or that labor cost used to manufacture a product would result in little profit and probably would not cancel out the length of the supply chain of the cost of shipping."

Disingenuous and rife with contradictions.

run75441 said...


Thank you for your comments.

Brenda Rosser said...

Run75441, thanks for your comments above. I've been offline for some days (trying to catch up with the real world around me). Your words are an interesting insight into the workings of the corporate mind.

could you let me know which other blog you're referring to? thanks