Analyzing the U.S. Content of Imports and the Foreign Content of Exports (2006)

REPORTS OF WHAT IS COMMONLY termed “outsourcing” appear nearly daily in the mass media. These stories, more often than not, describe U.S. multinational companies moving U.S. jobs to foreign locations, to the apparent advantage of the companies’ owners and managers and the apparent disadvantage of U.S. workers. The outsourcing discussion has spilled over into the political debate at all levels: candidates for national office have made statements and suggested policies for dealing with outsourcing, and states have enacted their own legislation on these issues.

“Outsourcing” in this document refers to the transfer of a business function from inside a firm to an outside source, with no reference to borders of countries. “Offshoring” refers to the movement of jobs that had been in the United States to a foreign location, without regard to business ownership. The increasing ability and willingness of firms to fragment the production process—locating design in one place, parts manufacturing in another place, and assembly in a third place—has important implications for U.S. competitiveness, wages, and employment.

In the context of this ongoing debate, Congress mandated a study by the National Research Council, which was undertaken by this committee under a contract with the U.S. Department of Commerce. The charge to the committee and the central focus of this report is a fairly narrow aspect of the globalization debate: the availability and quality of data on the foreign content of U.S. exports and the domestic content of U.S. imports. The committee refers to this question as “the content question.”

Yet the committee is mindful that its charge is part of a broader set of issues about globalization of interest to policy makers. Although neither trade in final goods nor trade in raw materials and parts is new, the volume and range of functions that are being transferred across borders is new. Recently, the trend has increasingly included the highly skilled services sector that has been the bedrock of U.S. comparative advantage in the world economy and a source of U.S. economic growth. The growing ability and willingness of firms to fragment the production process—locating design in one place, parts manufacturing in another place, and assembly in a third place—has implications for U.S. competitiveness, wages, and employment. The effects on the U.S. economy of the changing location of the production of goods and services are also of interest in the context of technology policy and perhaps because of the national security implications of more and more of U.S. products being dependent on non-U.S. originating intermediate goods and services. A detailed sorting through of these broader issues on economic effects, technology policy, and national security implications is beyond the scope of this study.

The committee’s central task has been to assess the availability of data that can be used to estimate the foreign content of U.S. exports and the domestic content of U.S. imports. This has not been an easy task as data on actual content simply do not exist. Many exported and imported products have inputs from the United States and other countries embedded in them. Many imports to the United States have U.S. inputs in them, and many exports from the United States have inputs from other countries, perhaps even the country to which the product is being exported. Obtaining a measurement of the foreign content of exports would require a way to trace imports through the economy and ultimately to export or to final domestic use. An alternative to tracing every detail of the supply chain from imports to exports would be electronically or chemically to put a “tag” on imports that would make the imported value added evident when the export is inspected at the point of exit. Clearly tracking exports and imports on this scale would be an impractical task.

The only alternative to such tracking would be to use data already available, that is, with some sort of proxy measure. Such an estimate for exports can be calculated using the input-output tables assembled by the U.S. government, based on data gathered by the Bureau of Economic Analysis (BEA) at the Department of Commerce. These data show how sectors of the economy provide input to, and use output from, each other sectors to produce output. Services are included in these input-output

tables, but the accuracy of the service data is doubtful, particularly the data on international trade in services. The calculation of the foreign content of U.S. exports using input-output tables is based on the assumption that U.S. imports originate 100 percent from foreign sources, which is not the case and is one source of inaccuracy. Measuring the U.S. content of imports into the United States is much more difficult because there is no input-output table that applies to the rest of the world and thus no way of doing the same calculation on U.S. imports.

This conclusion might suggest a major effort to remedy the shortcomings in the data. But the rationale for asking the content question is presumably to better understand how global trade is affecting U.S. and global prosperity and U.S. and global workforce trends. Because of this context, the committee performed a third task: to determine if answering the content question more accurately would be useful to understanding the broader economic and workforce trends.

Currently available measurements of the domestic content of imports and the foreign content of exports for the United States and for other countries have usefully revealed the growing vertical specialization of global supply chains and have identified sectors in which vertical specialization is more substantial than others. But content measurements can be misleading

because exactly the same changes in the foreign content of U.S. exports can be associated with either an increase or a decrease in the demand for workers in manufacturing. A more accurate answer to the content question does not help to determine who are the winners and who are the losers from the increased offshoring of U.S. work, nor does it materially inform the associated policy debate on the economic effects of those developments. Many effects—such as the evolution of shorter product cycles, rapid technological change, the availability of more flexible technologies, and an increase in the variety of international supply routes—may affect economic indicators, including employment levels, wages, the trade deficit, and so on.