Tuesday, February 21, 2017

Trump Trade Deficit Accounting

Reuters reports:
U.S. President Donald Trump's administration is mulling changes to how it calculates U.S. trade deficits in a way that would likely help bolster political arguments to renegotiate key trade deals, the Wall Street Journal reported on Sunday, citing people involved in the discussions….If the government adopted the new method, the deficit with Mexico would be nearly twice as high. The Journal reported that career government employees at the U.S. Trade Representative's (USTR) office objected to a request to prepare data using the new methodology.
The Wall Street Journal story can be found here if you can get past the fire wall. Tyler Durden appears to be unhappy with this idea and reports:
According to WSJ sources, the White House is considering not counting re-exports from the US trade balance: i.e., excluding from U.S. exports any goods first imported into the country, such as cars, and then transferred to a third country like Canada or Mexico unchanged. Such an approach would inflate trade deficit numbers because it would typically count goods as imports when they come into the country but not count the same goods when they go back out.
That does seem odd. Let’s take an example based on Ford selling its cars to Canadian customers and having them manufactured in Mexico. Suppose Ford Canada sold a car for $20,000 that cost Ford Mexico $16,000 to produce and cost Ford Canada $2000 to distribute. Ford worldwide made $2000 in profits off of that car. The balance of trade statistics currently would take Ford’s transfer pricing as given so let’s speculate on how this might work. Suppose Ford US paid Ford Mexico cost plus 5% or $16,800 but then charged Ford Canada $17,600 on the premise that the Canadian distributor deserved a 12% gross margin as its operating expenses were 10% of sales. Ford US would retain $800 per car in profits for effectively doing nothing. Of course Ford might argue that this represents the value of Ford’s intangibles. I can see the tax authorities of Canada and Mexico disagreeing on this allocation of income. My simple point, however, is that current balance of trade accounting relies on the intercompany pricing of multinationals which at times can be suspect.


Don Coffin said...

But in any event, under that (suggested? proposed? floated to provoke academic disdain so as to be able to attack pointy-headed intellectuals) national income accounting scheme as proposed, there would be $16,800 worth of imports and $0 in exports. Regardless of the transfer pricing scheme, there would never be less than $16,000 in imports and always $0 in exports. Which is, to put it charitably, bullshit.

William Ryan said...

Auto parts that come into LA and then get forwarded to Mexico should not be counted twice US exports. This is BS. I believe the Jeff Ferry at CPA.org is right in saying, "China's past competitive advantage has been in cheap labor cost intensive products. Today competitive advantage is now more in merchantilist policies of massive state subsidies to capture dominant positions in global markets for targeted products and technologies".

ProGrowthLiberal said...

William - this Jeff Ferry?


Could you provide a link to what you are quoting. He seems to be taking this idea seriously.