WTO chief Pascal Lamy: World must change the way it measures trade flows
It is economic nonsense to continue to calculate bilateral trade balances – like those between the US and China – the way we do today. What we need to monitor is the effective added value in each country, not the overall value of goods and services imported and exported.
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To understand where the efficiency in this new configuration of international trade comes from, we have only to refer to a simplified Ricardo-Schumpeter model. From David Ricardo we take the increased manufacturing efficiency that he argues is to be gained from an increasing international division of labor, while from Joseph Schumpeter we take his theory based on the uninterrupted cycle of the destruction and creation of manufacturing systems, the least efficient making way for the more productive, which then employ the labor and capital thus freed up.Skip to next paragraph
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This movement is speeding up at the global level, and it is triggering an increase in growth and employment at an international level. But the division of employment and the changes affecting it are by no means uniform. Social and economic fabrics cannot develop at the same pace, and they take considerable time to adapt to the changes to which they are subjected.
Hence the deindustrialization process that is hitting certain traditional labor pools, triggering dramatic social shocks in certain regions. Hence also the painful social insecurity in job markets in developed countries where the previous model had been stable for a long time
In this new configuration of international trade, commercial issues broadly transcend the mere issue of trade imbalances. And in any case, bilateral trade imbalances are becoming meaningless when China’s exports to the United States contain almost 50 percent of Chinese added value while US exports to China contain 80 percent to 90 percent of American added value. It is economic nonsense to continue to calculate bilateral trade balances the way we do today. What we need to monitor is the effective added value in each country, not the overall value of goods and services imported and exported.
Naturally, China is in a surplus situation and the US is in deficit. That is a macro-economic problem whose causes are well-known: excessive consumer restraint in the former case and insufficient savings in the latter. Yet politicians focus on the two countries’ bilateral trade relations, which makes very little sense these days as we can see from the example of the manufacture of iPads.
That is why we have to stop measuring international trade flows using a gauge that increases a product’s overall value each time that product crosses a border. We need to calculate trade in the same way as we calculate gross domestic product (GDP), in other words by adding together the value-added flows. An approach of this kind would also allow us to conduct a meaningful analysis of the impact of trade on employment, the most crucial policy issue in today’s world.
Pascal Lamy is the director general of the World Trade Organization.