According to some economists, trade in finished products – the things consumers actually buy, such as cars, computers and iPods – declined by much less than 12.2% last year. That is because as much as two-thirds of the value of goods that go into trade statistics represent intermediate parts, which are imported from other countries and used to make finished products that then get re-exported.
Economists call this the "valued-added effect." If the value of imported parts were stripped out, however, global trade would have declined by between 4% and around 8% last year, economists say.
China imports a huge quantity of parts from places like Japan and South Korea, but when those components are assembled into finished goods and shipped to the US, all the pieces count as Chinese exports, inflating the US trade imbalance with its most polarizing trade partner.
A study by the Sloan Foundation in 2007, for example, found that only $4 of an iPod that costs $150 to produce is made in China, even though the final assembly and export occurs in China. The remaining $146 represents parts imported to China.
If only the value added by manufacturers in China were counted, the real US-China trade deficit would be as much as 30% lower than last year’s gap of at $226.8 billion, according to a number of economists.
Wall Street Journal reports the hard part is building a model that figures out the big picture. Ari van Assche, a Belgian economist at the HEC Montréal business school, is currently working on China. The point, he says, "is that trade is as big at it seems, but countries often get credit for inputs that aren’t theirs."