September 30, 2011    Volume 18, No. 15

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European Technocrats May Soon Deprive Americans Of Knowing Where Everything They Buy Is Made


By Richard McCormack

The World Trade Organization, the OECD, the International Chamber of Commerce and the European Commission are moving aggressively to eliminate "Country of Origin" labeling, claiming that it does not reflect the current structure of global trade. The Europe-based organizations instead want to adopt a "Made in the World" logo for all products on the grounds that global supply chains have rendered country of origin labeling inaccurate and obsolete.

The intent of the proposal is to reduce public pressure on politicians for protectionist trade policies. "We are going to make history on how we look at trade statistics," says Lucian Cernat, chief economist in the trade division of the European Commission. Europe, which had a $96 billion trade surplus with the United States in 2010, "is ready to act."

The WTO has been working on Made in the World since late 2007, "but in the past two or three years there has been huge momentum to get the necessary information" that would be used to rationalize elimination of country of origin labeling, says Andreas Maurer, chief of the WTO's International Trade Statistics Section. "In 2012, there will be a breakthrough in the availability of data" that will accurately describe all of the countries in which value is added to exported products. The European Commission will provide value-added trade data through its "World Input/Output Database" (http://www.wiod.org/) on almost 85 percent of world trade. "I hope that by the end of next year we will have quite a good view of 90 percent of world trade" tallied by the countries in which exports are determined by value added, says Maurer.

Having comprehensive statistics that provide accurate data on where value is added to a product is essential to killing "country of origin" labeling, say those who back the proposal, most of whom are in countries with large trade surpluses. The European statistical agencies are linking statistics from the firm level directly to trade statistics, so that they know the value of imported parts and components as a percentage of the export value of a final, assembled product. By 2013, the WTO "will know which firm was behind this statistic and what the ownership structure is," says Maurer. "Is it part of a corporation. Is it foreign or domestic. How many employees does the firm have, and the skill level of the firm," according to Maurer.

In developing its World Input/Output Database, the European Commission has found that European countries are heavily dependent on trade, and that they have maintained their competitiveness in world markets by focusing on manufacturing high value, quality products. "The EU has a very large share of the value added which is absorbed in the nation country in the form of final goods," says Cernat of the European Commission in Brussels. "That is why we did this analysis that links trade performance with the ability to generate jobs in Europe."

There are 36 million jobs in Europe that are directly and indirectly involved in trade, with 18 percent of the continent's employment dependent on Europe's ability to sell its products globally.

With the rise of global production chains, the WTO says current trade data is all wrong. An export might be attributed to one country, but the majority of the components that go into that product might be made in other countries, including the design and intellectual property associated with that product. Currently, the total value of an export is assigned to one country when it crosses the border. "Intermediate goods such as parts and components cross borders several times and each country adds value," says WTO Director General Pascal Lamy in a video clip on the WTO's "Made in the World" website. "Many goods are assembled in China, but their commercial value comes from the numerous countries that precede its assembly. We want to know the value added by each country in the production process of the final goods."

The new database might not look good for American companies, however. The U.S. aerospace sector has long boasted that it is the country's leading export industry. But analysts have noted that foreign parts, components and systems constitute 80 to 85 percent of Boeing's new aircraft. If the value-added trade data system were put in place, the current trade surplus could turn into a trade deficit. Numerous other American industries that rely on imported raw materials and components would be weaker than current trade measurements indicate.

The WTO and others have conducted "screwdriver studies," pulling apart products such as the Apple iPad, which is assembled entirely in China. They found that China makes very little money on producing that product for foreign markets, with the majority of value gained by Apple itself and the foreign makers of major components. Yet China is credited with the full price of the export. If the statistics change to value added, then China's export surplus would drop dramatically, relieving pressure in the United States for politicians to take retaliatory action.

At a public meeting on the subject in Geneva on Sept. 26, five-members of a panel discussing Made in the World were all enthusiastic about the initiative. Cernat of the European Commission said the idea "sounds to me like the famous movie, 'A Beautiful Mind' -- an idea that is bound to succeed."

Cernat said the "WTO itself has benefited from being the champion of this very important concept. WTO Director General Lamy said that the firms that are smart enough to adopt it as part of their marketing philosophy will be very successful."

With value-added trade data, the public will know if their country is making money on outsourced production, said the panel members. They will also realize that protectionist barriers would hurt their own businesses competing in global markets. Here is how Henrik Isakson, Senior Advisor for Sweden's National Board of Trade describes it: "The most important thing that will come out of any work on value-added trade is that you will have a better informed media, better informed politicians, general public and business community and that will cause less support for protectionism. That might be one of the reasons why protectionism didn't explode as a result of the financial crisis after 2008. Many more people than previously, knew that it would hurt themselves. Protectionists in general might not care that tariffs are hurting consumers but they do care if it is hurting businesses, and it is hurting business because these businesses are in need of these inputs. The most important thing that will come out of all of this research on value-added trade is not what you do, it's rather what you don't do: you don't propose protectionism. That was valid before, but it's even more valid now with these new trade statistics."

Once the public understands how important cheaper inputs are to the production of final products for export, the public might demand that countries reverse their policies of export promotion and instead demand promotion of more imports, said Isakson. "It is something that should be considered," he says.

Adopting the new trade data regime could also lead to the end of countries imposing antidumping duties on other countries' exports, because the public will understand that those duties are "causing havoc on the international supply chains," Isakson added.

In a case study undertaken in Sweden after the European Union imposed anti-dumping orders against Chinese and Vietnamese shoe producers, Swedish researchers found that most of the value in the Chinese and Vietnamese shoes was added in the European Union and not in China and Vietnam. The companies most hurt by the order were European shoe producers. The European companies were benefiting from outsourcing "because the actual manufacturing and factory costs in these two countries are low," said Isakson. "Manufacturing is a very small part of the overall picture, which is logistics, research and marketing. For the really high-end shoes designed in Italy but manufactured in China, if you impose antidumping orders against those shoes you are imposing antidumping against Italian shoe designers instead. That is where most of the injury will be inflicted."

When Sweden studied its exports based on value added, it found that its trade statistics are radically different. "Our trade balance with the U.S. would change by 50 percent in our favor," says Isakson. "The Chinese trade balance would also change by some 40 percent in our favor, that is, our trade deficit with China would decline by 40 percent."

The EU, Isakson adds, "has a very large share of the value added," which supports millions of well paying jobs.

To view WTO Director Pascal Lamy extol the virtues of Made in the World, set your browser to the WTO "Made in the World" website at: http://www.wto.org/english /res_e/statis_e/miwi_e/miwi_e.htm.


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