May 14, 2012    Volume 19, No. 8

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Everything Is 'Made In The World': WTO Is One Step Closer To Eliminating Country-Of-Origin Labels

By Richard A. McCormack

The label on products Americans purchase that names the country in which they are made may soon be gone. The World Trade Organization and the European Union have moved one step closer to eliminating "country of origin" labeling. The WTO has signed a contract with the OECD to start issuing official statistics on international trade based on value added. It is part of the WTO's "Made in the World" initiative, which has been created to modernize global trade statistics and reduce public opposition to free trade.

As companies have created global supply chains "attributing the full commercial value of imports to the last country of origin can skew bilateral trade balances, pervert the political debate on trade imbalances and may lead to wrong and counter-productive decisions," says the WTO.

The WTO's work on developing a new measuring system for trade flows "is now mature enough to move from academic research to official statistics and international policy making," says the WTO. The WTO and OECD have been working with the U.S. International Trade Commission and the World Bank in the United States, the Institute of Developing Economies (IDE) and the Japan External Trade Organization in Asia, and the recently created World Input-Output Database (WIOD) consortium in Europe to implement the new trade statistics. The effort "is by itself an example of today's globalization," says the WTO.

The WTO's Made in the World initiative is part of a process of "re-engineering global governance," said WTO Deputy Director General Alejandro Jara at the April 16, 2012, event launching the opening of the World Input-Output Database. With the rise of global supply chains "it is misleading to rely solely on gross trade flows as a measure" of a country's competitive position.

Jara gave the example of a Nokia smart phone exported from China. The country-of-origin label for that phone, "Made in China," suggests "that all the jobs necessary to produce this good are Chinese jobs, but this is hugely misleading, if we look at research carried out in Finland," Jara said. That research, published in September 2011 in the Journal of Industry, Competition and Trade ("Who Captures Value in Global Supply Chains? Case Nokia 95 Smartphone"), determined that only 2 percent of the final price of the cell phone was attributed to assembly costs in China, while 33 percent of the cost was in intermediate goods and 31 percent was Nokia's own value-added.

What is true of a Nokia smart phone is just as true for every other product, added Karel De Gucht, the European Commissioner for Trade, "If we look closely at the production process for everything from children's toys to passenger jets we will see the same pattern repeated over and over," De Gucht told the World Input-Output Database conference. The trade statistics are wrong, the proof of which is the fact that world trade grew 65 percent faster than world output from 1990 to 2008. De Gucht described it this way: "Today, we measure trade by counting the total price of the good that is being exported or imported. But because we do this both for components and for final products, we get a distorted picture of what is really happening. If we look at the global level, it means that components in traded products are often counted twice. Imagine a car's wheels are produced in one country and its engine somewhere else. They are all then shipped to a third country for assembly before the final product is sold to a consumer in a fourth. This is a common scenario and one we should be able to account for. And yet, as far as global trade statistics are concerned, we have produced a car with eight wheels and two engines. Not very accurate."

Country-of-origin labels are like giving a gold medal to the final runner on the relay team "while his teammates get silver and bronze," said De Gucht. "It doesn't take account of the fact that the final result is the product of a joint effort."

WTO deputy director Jara said that most countries in Europe along with the United States, Japan and Korea add value to products through design, component production, branding and marketing. "This reality has enormous implications for the way we think of trade impacts," Jara said. "It is wrong to think uni-dimensionally of imports sucking jobs out of the economy and exports creating them. The picture is far more complicated than that."

If the value-added measurement for international trade were adopted, then the U.S. trade deficit with China as it is currently reported would shrink by 40 percent, said Jara. The new measure will "profoundly impact the policy debate."

This leads to a bigger problem that must be addressed: "We still think as early 19th century mercantilists [in that] 'I must try to reduce my imports and increase my exports.' " said Jara. "This has created an adversarial mind-set, thus missing the true nature of our interdependency and the gains from trade among nations." It also has an impact on competitiveness: "In a world of global value chains, my imports become a key component of my exports. Without access to competitive imports for my industries, they lose international competitiveness and market share."

The World Input-Output Database initiative was funded by the European Union's Seventh Framework program. The result "is that our cars will now have four wheels and one engine and our relay runners will each get the medal they deserve," said De Gucht. Here are the organizations that are involved:

- University of Groningen, Netherlands
- Institute for Prospective Technological Studies, Spain
- Wiener Institut fur Internationale Wirtschaftsvergleiche, Austria
- Zentrum fur Europaische Wirtschaftsforschung, Germany
- Osterreichisches Institut fur Wirtschaftsforschung, Austria
- Hochschule Konstanz, Germany
- The Conference Board Europe, Belgium
- Organization for Economic Co-operation and Development, France
- Netherlands Bureau for Economic Policy Analysis, Netherlands
- Institute of Communication and Computer Systems, Greece

For a related story on whether "Made in the World" is accurate, see the October 12, 2011, story in Manufacturing & Technology News by Dr. Charles McMillion:

China Trade Apologists Know a 'Reality' That Is NOT True

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