Re-exports part of trade rethink

The nerdy subject of trade statistics has gone mainstream as country ponders reorientation of trade agreements, imports, and U.S. manufacturing    Shifting the U.S. economy from one based on consumption to one based on production is going to take some heavy lifting.
   That’s because, for one, the U.S. economy is not nearly as import-dependent as one might believe. According to 2011 statistics from the Organization for Economic Co-operation and Development (OECD) and World Trade Organization (WTO), 12.3 percent of U.S. “total final domestic consumption” reflected foreign content.
   That was a lower percentage than that of India, for instance, despite the fact that India has long emphasized the importance of domestic self-sufficiency and had a largely closed economy until the 1990s.
   In other words, the United States is far more self-sufficient than it is made to seem, and benefits from its place in the global trading hierarchy far more than is often presented.
   This is important, given some of the comments emanating from President Donald Trump’s key policy advisors. On Thursday, Trump Chief Strategist Steve Bannon laid out a succinct vision with regard to trade.
   Speaking at the Conservative Political Action Committee conference in suburban Washington, D.C., Bannon highlighted the administration’s focus on “what I refer to as economic nationalism and that is Wilbur Ross at Commerce, Steven Mnuchin at Treasury, (Robert) Lighthizer at — at Trade (U.S. Trade Representative), Peter Navarro, Stephen Miller, these people that are rethinking how we’re gonna reconstruct the — our trade arrangements around the world. I think one of the most pivotal moments in modern American history was his immediate withdraw from TPP. That got us out of a trade deal and let our sovereignty come back to ourselves, the people…
   “People are starting to think through a whole raft of amazing and innovative, bilateral relationships — bilateral trading relationships with people that will reposition America in the world as a — as a fair trading nation and start to bring jobs. High value added, manufacturing jobs, back to the United States of America.”
   Bannon’s clarity on the administration’s position on global trade was underlined earlier this week by a subtler development last weekend.
   The Wall Street Journal reported Feb. 18 that careerists in the USTR and Commerce Department were being asked to exclude re-exports from gross exports in trade statistics. This seemingly benign move – something that’s been supported by policy makers in both parties – could have a sinister effect on how the public views the role of international trade.

There needs to be a symmetry in statistical reporting, and pulling out re-exports breaks up that symmetry.

   Removing re-exports (meaning goods that are imported into the United States and exported to a third country without undergoing a material change) without making similar separations on the import side would have the effect of widening the U.S. trade deficit.
   There are two problems with this.
   First, economists view the segregation of re-exports from total exports with no corresponding segregation of imports as statistically invalid. There needs to be a symmetry in statistical reporting, and pulling out re-exports breaks up that symmetry.
   The problem is that there is no practical way to count imports that end up being re-exported in the way that re-exports can be counted. That’s because a proportion of re-exported goods are imports meant for U.S. domestic consumption that get exported after it’s determined they have less market value domestically than in foreign markets.
   For instance, say a retailer imports goods meant to be sold in their outlets, but U.S. demand for the goods falls short of sales forecasts. The retailer could either deeply discount those goods, or re-export them to another country where demand might be higher at a price closer to full retail.
   The retailer had no way of knowing those goods would be re-exported, and so couldn’t report those goods as designated for re-export upon entry to U.S. customs territory. There’s simply no systematic way to capture these types of re-exports.
   But those goods drive economic activity in the United States even if they aren’t produced or consumed domestically. The goods have to be moved from port to distribution center and then back to port.

The retailer had no way of knowing those goods would be re-exported, and so couldn’t report those goods as designated for re-export upon entry to U.S. customs territory. There’s simply no systematic way to capture these types of re-exports.

   Second, the focus on trade deficits is improper, economists argue, because it ignores variables like investment and spending power. The United States is a wealthier nation than countries it buys from so it will naturally be inclined to buy more from other countries than it sells.
   A mercantilist approach, such as one that Commerce Secretary Ross has alluded to in recent weeks, presumes that the United States should focus only on imports that lead to exports that the rest of the world needs to consume.
   Bill Reinsch, a distinguished fellow at the Stimson Center, a Washington, D.C. think tank, highlighted this approach in a recent commentary on trade deficits.
   He noted that Ross, at his confirmation hearing said: “I view the other countries with whom we have a trade deficit as our vendors…While you need to treat the vendors with respect, they must also treat you as their largest customer, both with respect and most importantly playing by the rules of the road.”
   “This and other statements by Mr. Ross are 19th century mercantilism and neo-colonialism at their best,” Reinsch wrote. “Other countries are to supply us with raw materials so we can manufacture stuff to sell back to them. Gladstone, or Churchill for that matter, could not have said it better.”
  Or as Caroline Freund, a senior fellow with the Peterson Institute, another Washington, D.C. think tank, put it in a recent Tweet: “Bilateral trade deficits don’t matter.”
   Tim Worstall, a senior fellow with the U.K.-based Adam Smith Institute, explained further.
   “Imagine that the U.S. bought $300 billion’s worth from China more than it sold to China–and sold $300 billion’s worth more to Iran than it bought from China, Iran then selling $300 billion more to China than it buys?,” Worstall wrote in a January commentary for Forbes. “In this three party system everyone has balanced trade overall–what would be the problem of the unbalanced bilateral trade? It’s even possible, just about, to see that tripartite model working too. Boeings go from the U.S. to Iran, oil from Iran to China and electronic tchotchkes from China to the U.S. Even if we were to worry about trade deficits these bilateral imbalances would not matter one whit nor iota.”
   Which brings us back to the recalculation of export statistics. If there’s no real way to count imports that are to be re-exported without being materially changed, any attempt to separate re-exports from gross exports should be disregarded anyway.
   As Freund pointed out in an interview with the Adam Smith Project, the U.S. economy benefits from goods being re-exported.
   “Logistics are the value-add,” she said. “These goods have entered the logistics chain. The U.S. is very efficient at that relative to other countries.”

The ability to aggregate volume and distribute it through efficient logistics channels is important. And that activity creates economic value for the United States (warehousing, transportation, technology and supply chain management jobs) that aren’t reflected in trade statistics.

   Shippers contacted by the Adam Smith Project pointed out similar situations and benefits from re-exports.
   For instance, a manufacturer producing in Asia and supplying to customers in North America may use the United States as its logistics platform to serve customers in Canada and Mexico. The ability to aggregate volume and distribute it through efficient logistics channels is important. And that activity creates economic value for the United States (warehousing, transportation, technology and supply chain management jobs) that isn’t reflected in trade statistics.
   And that brings us full circle to the role of imports in the U.S. economy. If imports represent a lower proportion of domestic consumption than perception suggests, and if re-exports create economic benefits that trade statistics don’t fully capture, then is simply driving more U.S. manufacturing the panacea? Time will tell, of course.
   We don’t even know yet if the Trump administration plans to exclude re-exports from gross exports, or if there will be some attempt to provide a symmetrical counting of imports that end up being re-exported. But if Bannon’s statements on trade this week provide a skeleton key, the global trade community should expect the administration to focus statistics on ways to completely reorient the U.S. economy.
   To, as Trump economic advisor Navarro put it in an interview with the Financial Times in late January, “unwind and repatriate” global supply chains.