1. www.bea.gov Global Manufacturing and Measurement Issues Raised by the iPhone Robert E. Yuskavage Jennifer Ribarsky May 6, 2011

2. www.bea.gov 2 Globalization ▪ International fragmentation of production across borders ▪ Vertical specialization trade  Global sourcing of parts and materials  Increased trade in intermediate products ▪ Much of this activity occurs within multinational companies but not all ▪ iPhone is often cited as an example

3. www.bea.gov 3 U.S. Trade with China $ in billions

4. www.bea.gov 4 Key Facts from iPhone Study ▪ Assembled in China using parts from around the world and U.S. technology ▪ Materials imported by China from a variety of countries including the U.S. ▪ Wholesale value included in U.S. import trade statistics; subtracted from GDP ▪ Gross value assigned entirely to country of origin or destination; affects bilateral balances but GDP is properly measured

5. www.bea.gov 5 iPhone Study Value of inputs from U.S. shipped to China (included in U.S. exports) $10.75 Value of inputs shipped to China from other countries $161.71 Manufacturing costs to China$6.50 Wholesale value of iPhone shipped to U.S. (included in U.S. imports) $179 Retail value of iPhone sold in U.S. stores (included in PCE) $499

6. www.bea.gov 6 Issues with Current Measures ▪ Gross flows do not reflect value added from each country in the supply chain ▪ Large deficits/surpluses misleading if  Domestic factor content of imports high  Foreign factor content of exports high ▪ Distorts significance of bilateral balances ▪ Still provide useful direct trade measures  Well reported and consistently measured  Provides accurate measures of net exports/GDP

7. www.bea.gov 7 Value Added (VA) Approach ▪ Allocates gross flows to producing and supplying countries based on VA content ▪ Measures often based on multipliers from inter-region world input-output tables ▪ Linkages between countries are based on origin/destination data in trade statistics ▪ Requires assumptions about import use  Microdata research now underway can help to improve import use tables

8. www.bea.gov 8 Issues with Value Added Approach ▪ Very difficult to directly measure due to limited information in company records  Firms may not know sources of inputs ▪ National Academy of Sciences (2006)  Impractical to directly measure foreign and domestic content of exports and imports  Questioned the validity of the I-O approach ▪ BEA will contact industry and supply chain experts to learn more about using bar codes and electronic tags

9. www.bea.gov 9 VA Approach and the iPhone ▪ VA approach for the iPhone would result in  Smaller U.S. trade deficit with China  Larger deficits with countries that supply inputs to China such as Japan, Germany, and South Korea ▪ VA approach could be useful as a supplementary or satellite system  BEA has taken this approach before with statistics on services by foreign affiliates  Would require advances in the accuracy of linked world input-output tables

10. www.bea.gov 10 International Standards: SNA and BPM6 ▪ New treatment of “goods-for-processing” would address some of the concerns ▪ When ownership does not change and goods are returned after processing  Gross merchandise trade flows are excluded  Value of the processing service included as services trade measured by the processing fee  No impact on overall trade balance but it shifts the balance between goods and services

11. www.bea.gov 11 Impact of Change in Treatment on Chinese Trade Statistics $ in billions, 2007BPM5AdjustmentBPM6 Exports of goods1,220-618602 Imports of goods905-352553 Balance on goods315-26649 Exports of services122266388 Imports of services130 Balance on services-8266258 Balance on goods and services307 Current account balance372 Source: IMF, BOPCOM-08/11

12. www.bea.gov 12 International Standards: SNA and BPM6 ▪ Major challenges for new treatment  No indication of goods-for-processing in customs data used for merchandise trade  Companies have indicated they cannot identify such transactions in their records ▪ Other countries face similar issues ▪ BEA is working with Census to develop measures based on matching trade data with enterprise information

13. www.bea.gov 13 New Standards: Merchanting ▪ Goods that are purchased and resold but do not cross the border (e.g., petroleum) ▪ Currently the gross margin on these sales is recorded by BEA as trade in services ▪ Under BPM6 goods sales will be recorded as positive goods exports and purchases will be recorded as negative goods exports ▪ Some global manufacturing activities could be classified in this category

14. www.bea.gov Factoryless Manufacturer ▪ Outsources all the manufacturing transformation activities ▪ Arranges for all required capital, labor, and material inputs required to make a good ▪ Controls the production process ▪ Owns and sells the final product produced 14

15. www.bea.gov Industry Classification of Factoryless Manufacturing ▪ No clear guidance in North American Industry Classification (NAICS) 2007 ▪ Can lead to inconsistent classification of establishments in official statistics  Units may be classified to manufacturing or wholesale ▪ Recommend explicit guidance to classify in the manufacturing sector for NAICS 2012 15

16. www.bea.gov Implications of NAICS 2012 guidance ▪ Expands traditional definition of manufacturing beyond plants, factories, or mills ▪ Impacts source data used in BEA’s accounts such as:  Value of industry and product shipments  Material costs and other expenses for manufacturing industries  Value of sales for wholesale industries  Price indexes ▪ Impacts productivity measures as well 16

17. www.bea.gov Factoryless Manufacturers and Offshoring ▪ Under ‘Ideal’ scenario  Shipments of factoryless manufacturers are included in domestic shipments  Important to record the correct international trade flows ▪ Implementation of “goods-for- processing” would address some of the concerns  Overseas contract manufacturer providing a service and not a good 17

18. www.bea.gov Process and Timeline for NAICS Implementation ▪ Interagency subcommittee made up of members from various program offices of the Census Bureau, the BLS, and the BEA to ensure consistent implementation ▪ Because of the complexity of the change and the long planning process involved implementation not expected until 2017 ▪ Work has started  Additional survey questions added as test cases to identify contract manufacturing activities 18

19. www.bea.gov 19 Questions for the Committee ▪ Do the new international standards provide more relevant trade measures and should their implementation be a high BEA priority? ▪ Do the new standards go far enough or should BEA also consider developing value- added input-output based trade measures? ▪ Do you agree with the recommendations for classifying factoryless manufacturers and the resulting implications for statistics?