Analyzing the U.S. Content of Imports and the Foreign Content of Exports

Committee on Analyzing the U.S. Content of Imports and the Foreign Content of Exports

Center for Economic, Governance, and International Studies

Division of Behavioral and Social Sciences and Education

NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES

THE NATIONAL ACADEMIES PRESS
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports Analyzing the U.S. Content of Imports and the Foreign Content of Exports Committee on Analyzing the U.S. Content of Imports and the Foreign Content of Exports Center for Economic, Governance, and International Studies Division of Behavioral and Social Sciences and Education NATIONAL RESEARCH COUNCIL OF THE NATIONAL ACADEMIES THE NATIONAL ACADEMIES PRESS Washington, D.C. www.nap.edu

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This project was supported by Award No. DG135004CN0124 between the National Academy of Sciences and the U.S. Department of Commerce. Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the organizations or agencies that provided support for the project. International Standard Book Number 0-309-10131-X Additional copies of this report are available from the National Academies Press, 500 Fifth Street, N.W., Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Printed in the United States of America. Copyright 2006 by the National Academy of Sciences. All rights reserved. Suggested citation: National Research Council. (2006). Analyzing the U.S. content of imports and the foreign content of exports. Committee on Analyzing the U.S. Content of Imports and the Foreign Content of Exports. Center for Economic, Governance, and International Studies, Division of Behavioral and Social Sciences and Education. Washington, DC: The National Academies Press.

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports THE NATIONAL ACADEMIES Advisers to the Nation on Science, Engineering, and Medicine The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Wm. A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Wm. A. Wulf are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports COMMITTEE ON ANALYZING THE U.S. CONTENT OF IMPORTS AND THE FOREIGN CONTENT OF EXPORTS EDWARD E. LEAMER (Chair), Chauncey J. Medberry Chair in Management, University of California, Los Angeles GARY GEREFFI, Department of Sociology, Duke University GENE GROSSMAN, Department of Economics, Princeton University LAWRENCE F. KATZ, Department of Economics, Harvard University CATHERINE L. MANN, Senior Fellow, Institute for International Economics, Washington, DC ROBERT H. MCGUCKIN, III, The Conference Board, New York ROBERT E. SCOTT, Economic Policy Institute, Washington, DC MATTHEW J. SLAUGHTER,* Tuck School of Business, Dartmouth College, Hanover, NH MICHAEL STORPER, Department of Urban Planning, University of California, Los Angeles JANE L. ROSS, Director, Center for Economic, Governance, and International Studies MICHAEL MOLONEY, Study Director NEVZER STACEY, Study Director (until January 2005) LINDA DEPUGH, Program Assistant *   Resigned October 2005

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports Preface THE GREAT INCREASE IN THE IMBALANCE in imports and exports of finished manufactured goods since the 1960s has long been a source of concern and has stimulated a debate among economists regarding the impact of international trade and trade agreements on the well-being of U.S. workers and U.S. consumers. To that debate we have recently added the word “outsourcing” or, more properly, as discussed in this report, “offshore outsourcing,” which refers to the imports not only of finished manufactures, but also of parts and other intermediate goods and services, particularly intellectual services that had been thought to be the exclusive domain of the United States. The trend toward more offshore outsourcing has intensified existing concerns about U.S. global competitiveness and U.S. income inequality and has raised new concerns. Those concerns are the backdrop of this study, which responds to a request to consider if the foreign content of U.S. exports and the U.S. content of imports can be measured accurately. Specifically, the U.S. Congress in the House of Representatives Conference Report on the FY 2004 Consolidated Appropriations Act instructed the U.S. Department of Commerce to request the National Research Council (NRC) of the National Academy of Sciences “to conduct a study regarding foreign content in U.S. exports and U.S. content in foreign imports” with two components. First, the NRC was asked to carry out a study on the availability and quality of data on the foreign content of U.S. exports and domestic content of U.S. imports. The charge to the committee noted that

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports the panel was being asked to address these data issues because of their importance to current trends in outsourcing and their impact on the U.S. workforce. Second, the committee was asked to identify proxy measures to assess foreign and domestic content of goods and services when direct measures are unavailable. Completing this study has been challenging because the wider context that lies behind this report—for example, labor market trends, the decline in manufacturing jobs, the national trade imbalance, and so on—raises a panoply of complex issues over which economists are not in complete agreement. Though all members of this committee understand well this context and have great expertise on this set of issues, a full discussion of the contextual issues was beyond the scope of our assignment. In our report, we do offer comments on the context, but we focus our efforts on the narrow question of how best to measure U.S. trade when imports of parts from foreign countries are used to produce U.S. exports and when U.S. imports from foreign countries are made partly with U.S. parts and U.S. services. We have attempted to create a document that is accessible to general readers and interested public policy makers alike. We hope this report will not only respond to the important task set by the U.S. Congress, but also help in clarifying some of the issues and even the language of the public debate on “outsourcing.” In presenting this report, I would like to thank my colleagues on the committee for their contributions to this report and for the fascinating conversations we enjoyed during the course of this study. In addition, this report would not exist without the dedication of the staff of the NRC, who provided the committee with much assistance in developing the focus and approach to the report. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the NRC’s Report Review Committee. The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectivity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. We thank the following individuals for their review of this report: Jonathan Eaton, Department of Economics, New York University; Robert Feenstra, Department of Economics, University of California, Davis;

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports Gordon H. Hanson, Graduate School of International Relations and Pacific Studies and Department of Economics, University of California, San Diego; Lori G. Kletzer, Department of Economics, University of California, Santa Cruz; Thea M. Lee, Policy Department, AFL-CIO, Washington, DC; Rachel McCulloch, International Finance, Brandeis University; Robert C. Pfahl, Jr., Vice President’s Office, International Electronics Manufacturing Initiative (iNEMI), Herndon, VA; and Natalia Tamirisa, European Department, International Monetary Fund, Washington, DC. Although the reviewers listed above have provided many constructive comments and suggestions, they were not asked to endorse the conclusions or recommendations, nor did they see the final draft of the report before its release. The review of this report was overseen by John F. Geweke, Department of Economics, University of Iowa, and Samuel H. Preston, School of Arts and Sciences, University of Pennsylvania. Appointed by the NRC, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring committee and the institution. Edward Leamer, Chair Committee on Analyzing the U.S. Content of Imports and the Foreign Content of Exports

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports Contents     EXECUTIVE SUMMARY   1 1   INTRODUCTION   5      Addressing the Charge,   6      Recent Trends,   7      Getting the Vocabulary Right,   8      The Wider Context,   10      Data Currently Collected,   11      Measuring Cross-Border Transactions,   12      Foreign Direct Investment and Affiliate Activities,   13      Prices,   13      Labor Input,   14      Data on Services,   15 2   MEASURING CONTENT USING INPUT-OUTPUT TABLES   16      Estimating the Imports Embodied in Exports,   19      Using a Use Table,   20      Step One: Make an Input-Output Table with Import Rows,   21      Step Two: Estimate the Direct Imports Used to Produce Exports,   25      Step Three: Estimate the Indirect Imports Used to Produce Exports,   31

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Analyzing the U.S. Content of Imports and the Foreign Content of Exports      Accuracy and Validity of the Content Calculations,   33      Bidirectional or Unidirectional Supply Chains,   44      Timing Issues,   45      Price Data and Price Responses,   46      Measuring Content for Services,   46      Calculating the U.S. Content of Imports to the United States,   48 3   KNOWING THE CONTENT: DOES IT MATTER?   49      Answering the Content Question Is Misleading,   50      The Wider Context,   51     REFERENCES AND BIBLIOGRAPHY   53     APPENDIX: Biographical Sketches of Committee Members   61