A new approach to measuring global trade

Professor Xiaolan Fu of the Oxford Department of International Development (ODID) explains how a proposed new approach to measuring global trade would suggest that the US trade deficit is actually about half as big as official figures report.

As the world moves towards a new trade war, with the imposition of US tariffs on goods from the EU, China, Canada and Mexico, having reliable international trade statistics is more important than ever.

However, it is widely recognised that the way in which global trade is officially measured and recorded has failed to keep pace with the increasingly complex ways in which trade is actually conducted.

This is because international statistics primarily record trade in goods and services and fail to account for the growing trade in ‘intangibles’ – such as patents, brands, trade secrets or ‘know-how’.

Nor do they adequately reflect the fact that trade increasingly occurs in global ‘value chains’, in which different tasks and business functions are dispersed across multiple companies in different regions or countries. Tracing how value is created and how trade flows across these chains can be complex.

So in response, we have developed a new approach to measuring global trade that seeks to bring together measurement of trade in goods and services with trade in intangibles and to reflect the fragmented and segmented nature of global production.

In the model, we identify five modes through which trade in intangibles takes place within global value chains: licensing; foreign direct investment (FDI); outsourcing; collaboration/alliances; and the provision of consultancy services.

We then detail how the value of intangibles is captured in each of these modes – for example through royalty fees in the case of licensing, or through dividends in the case of FDI – and how these might be accurately recorded in a country’s exports and imports. While these flows are currently included in the balance of payments in different ways, for example as investment income, they are not directly attributed to the trade process.

Applying this proposed measurement approach to the available data produces an interesting result: we estimate that the overall US trade deficit would have been around $358 billion in 2016, as opposed to the official figure of $750 billion.

This is a conservative estimate, as it does not take account of intangibles income accrued to US firms through outsourcing activities because of difficulties in tracing such information.
The proposed measure offers a comprehensive picture of the full range of trade interactions between countries and would therefore offer a more accurate basis for policy discussions about global trade imbalances and the impact of globalisation.

In particular, policy could focus on ensuring that the benefits of trade in intangibles – which are currently concentrated in the hands of a few owners of the intangibles, along with a small community of skilled researchers and technicians who created them – are distributed more equitably.

Policies could also seek to encourage multinational enterprises (MNEs) to transfer the gains from trade in intangibles back to their home countries and to curb tax avoidance.

Read the paper on which this article is based here.

Xiaolan Fu is Professor of Technology and International Development and Director of the Technology and Management Centre for Development (TMCD) at ODID.