2 min read.Updated: 25 Oct 2020, 11:47 PM ISTVivek Kaul
The intermediate goods, which go into the making of final products, shipped back and forth across these networks, make for more than half of all international trade
A collapse in transportation costs over the decades, especially by sea, led to the establishment of global supply chains and manufacturing networks, wherein a product is made across different countries. Mint looks at how this led to nations overstating their exports and imports.
As Matthew C. Klein and Michael Pettis write in Trade Wars Are Class Wars: “Most of the world’s manufacturing takes place in one of the three cross-border manufacturing networks centred on the US, Germany, and China." The intermediate goods, which go into the making of final products, shipped back and forth across these networks, make for more than half of all international trade. Hence, a seat-belt for a car made in America “might have fibres manufactured in Mexico, woven and dyed in Canada…sent back to Mexico to be sewn up, and then installed somewhere at a plant in the US."
What are some such product categories?
Electronic products assembled in China (or in any other country) are filled with intermediate goods imported from other countries. Let’s specifically take the case of the iPhone 7, assembled in China. As can be seen from the chart above, intermediate products from many different countries went into the making of this model. The Chinese contribution to it was limited to around $8.46 per unit, or around 3.6% of the overall factory cost of $237.5. Along similar lines, German cars are filled with intermediate parts made in Eastern European countries, and American trucks are filled with Mexican parts.
As Klein and Pettis write: “Statistics… attribute all of the value of the imported inputs to whichever country happens to ship the finished product." If we were to limit ourselves to value-added only, $8.46 per unit of the iPhone 7 should have shown up as Chinese exports, but the entire factory cost does, simply because the product was shipped out of China.
How does this anomaly impact trade data?
As Klein and Pettis write: “For the US, imports are overstated by about 16%, while exports are overstated by about 20%. Chinese imports and exports are both overstated by about 30%." Hence, the huge trade deficit between US and China, where the US imports much more from China, than vice versa, is basically overstated. China assembles a lot of products, which are finally exported. The intermediate goods going into the making of these products are imported from all across the world.
What’s the lesson for India in such a set-up?
If Indian exports have to increase, companies need to become a part of such global supply chains. As Philip Coggan writes in More: “These supply chains are international… Parts may cross international borders many times before they are assembled into the finished product. Perhaps 30-50% of the trade in manufactured goods occurs within multinational companies." This is a reality that Indian businesses and the government need to wake up to
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