1050x300-PL-Traditional Trade Figures Understate Importance of Services

Traditional Trade Figures Understate Importance of Services

Author(s): Patrick Low

Date: Mar 5, 2015

Theme(s): Trade & Investment

Publications: Opinions & Speeches

Vice President of Research Patrick Low writes on the need to move away from traditional trade data that fails to reflect reality.

In a landmark report released on the day before Christmas Eve last year, the mainland revised down its 2012 exports from US$2.2 trillion to US$1.4 trillion. Expressed as a share of gross domestic product, that is a drop from 27 per cent to 17 per cent.

Despite the timing of the Ministry of Commerce data release, this would have made global headlines if it were the result of a disastrous and career-terminating blunder by hapless statisticians for whom numbers are only what you can get people to believe. It was not.

The original value is a gross number that includes both the import content of trade and the domestic contribution. The second is a domestic value-added number only and properly reflects the mainland’s production and trade performance. Unfortunately, most governments only report the first number because of the difficulty of deriving the second one.

The mainland is ahead of the game in generating detailed national trade in value-added numbers. It took an interagency taskforce three years to bring out these numbers. They are gleaned from a variety of sources, including data from firms.

The greater an economy’s reliance on trade as a source of income and jobs, the more misleading the traditional gross values become as a guide to national economic performance.

Our continued reliance on trade numbers that fail to reflect reality is a theme that this column has taken up before. The gross numbers mislead on the composition and technology content of bilateral trade flows, and incorrectly state bilateral trade balances. They mask the true nature of interdependency among countries through trade flows.

The greatest casualty of reliance on gross trade numbers is the services sector. Significant value generated by services is concealed as trade in goods. Only when the numbers are broken down into the sources of value does the true contribution of services become clearer.

It is fortunate for governments that their data-collecting efforts are not subject to truth-in-advertising laws. For years, services were deemed to constitute less than a quarter of global trade. After efforts were made to measure trade in value-added terms – notably by the Organisation for Economic Cooperation and Development, supported by the World Trade Organisation and a number of other institutions and government agencies – the share jumped to almost half.

This is still an underestimate. Even though global data bases have made great strides in removing a veil of ignorance over services trade, the numbers are still highly aggregated. Some services remain incorrectly identified as goods. This is something that firm-level information such as that used by the mainland will help to address.

In terms of stimulating the domestic economy, the evidence from the mainland also reveals that exports of services generate more domestic value-added than exports of goods. Every US$1,000 of services exported generates US$848 value-added at home, compared to US$621 for goods exported. The same story emerges for jobs. Every million dollars of services exports contributed 105 jobs in 2012, and only 59 for goods exports.

James Carville, former U.S. president Bill Clinton’s strategist in the 1992 presidential campaign, put a sign up in campaign headquarters that said “The Economy, stupid”, referring to what he considered among the most important issues in the election. The same invitation to greater awareness applies to services today.

The mainland’s trade and production profile no doubt differs in various ways from those of many similarly placed emerging and developing economies when it comes to services. But shared trends and challenges underlie the coming struggle to breach middle-income status.

For reasons relating to the demand and supply sides of economic activity, services rise in prominence along with income growth. Emerging economies can no longer rely on additions of capital and labour dedicated to exports as the primary driver of growth.

Domestic reform, heightened productivity and increased domestic consumption must play a growing role. A whole range of private and public services are a big part of that story.

A sounder statistical grasp of facts on the ground contributes much. But better policy would doubtless contribute more. Over-regulation, protectionism and poor regulatory performance punish services more than any other sector in most economies.

 

This article first appeared in the South China Morning Post on March 4, 2015.

The views expressed in this article are the author’s own and do not necessarily reflect Fung Global Institute’s editorial policy.