"Foreign Policy" Magazine
June 10, 2009
Robert Koopman and Zhi Wang are chief economist and economist, respectively, at the U.S. International Trade Commission. Shang-Jin Wei is professor of finance and economics and international affairs at Columbia University.
From shoes to electronics to kitchen appliances, that ubiquitous stamp, "Made in China," has become a symbol of the times. In the last decade, annual U.S. imports from China have grown from about $81 billion to last year's $338 billion. Everything, it seems, comes from the Middle Kingdom.But as it turns out, "Made in China" is a bit of a misnomer these days. Over the last 20 years, supply chains have fragmented across the globe -- with one part made here, and another made there. Rarely is any one product made in any one country. China often specializes in the final stage of production: putting components together before exporting to the final users. Indeed, much of the value of U.S. imports from China, and similarly from Mexico, includes parts and components made in other countries -- the United States among them. According to our recent study, domestic content (the stuff that directly contributes to domestic economic growth) makes up about 45 percent of Chinese exports and 34 percent of Mexican exports to the United States. The rest comes to China from abroad to be assembled and sold. A tag like "Made in China, Vietnam, the United States, Japan, and China again," might be more apt.
The very nature of China's and Mexico's export industries keeps their domestic input relatively low. In every year since 1996, more than 50 percent of exports in both economies have been "processing exports," wherein firms import parts and components from abroad under favorable tariff treatment and assemble them for export. The finished products arrive in the United States, Europe, and other markets with their whole value counted as imports from China in official trade statistics.
In some categories, such as consumer electronics, "processing trade" accounts for upwards of 90 percent of the countries' exports. China and Mexico add very little value to these products -- less than 20 percent for computers, electronic devices, iPods, and cellphones. Many components, and hence the value, in those exports come from Japan, South Korea, Singapore, Taiwan, or even the United States and the European Union.
So what?
First, it means that the U.S. trade deficit with China and Mexico is not as large as meets the eye. What's more, the United States' deficit with countries that make component parts -- such as Japan -- is probably understated. Yes, U.S. imports from all of Asia over the last 15 years have slightly declined, while China's share of U.S. imports has increased rapidly. But it's not that the world has stopped importing Japanese, Korean, and other countries' products; China is just "indirectly" exporting them instead by buying international components, assembling them, and then shipping them abroad.
Second, understanding that "Made in China" doesn't quite mean what we think it means helps clear up a mystery. Since the economic crisis began, China's exports have dropped significantly, but the impact on its GDP growth, oddly, appears muted. What's going on? Given the low share of domestic value added in China's exports, the Chinese economy's true dependence on exports is only half as large as the headline trade data would lead one to believe. The pain of a reduction in China's exports is shared with other economies that supply components, such as Japan, Korea, Taiwan, Singapore and Hong Kong. For example, for every iPod that the United States decides not to import, the "decline" in recorded exports from China is $150 -- but only about $4 of that value was added in China. In other words, China's GDP declines just $4 for each lost $150 iPod. Japan, on the other hand, contributes about $100 to the $150 value and takes the far bigger GDP hit from "China's" decline in exports.
Yet while the crisis has hit China with only a soft blow, Mexico's case is less benign. The country has become highly integrated into a North American supply chain for autos, consumer durables, and electronics, importing parts and components from the United States, Canada, and to a lesser extent Asia. Mexico's average domestic value added in its exports to the United States is even smaller than China's, meaning that a slowdown in exports may have limited effect on Mexico's GDP per unit. (The feedback from a Mexican exports slowdown is likely felt mostly by the United States and Canada, rather than by Japan.) However, as reliant as Mexico is on the U.S. economy, a drop in usually huge export volumes is already proving very painful.
Although China's processing export model may be proving a keeper in times of economic crisis, what might need changing is the way we look at trade deficits. With truly global supply chains, perhaps it's time for a more accurate stamp: "Made Everywhere."
