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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
2
Measuring Content Using Input-Output Tables
MEASURING THE EXTENT TO WHICH the United States is integrated with the global economy through imports and exports is conceptually straightforward when finished goods are exchanged for finished goods, but measurement is more difficult when imported intermediate inputs and raw materials are used to produce final goods that are later exported. Figure 2-1 illustrates the case in which Country 1 produces an intermediate good and exports it to the United States, where it is combined with two intermediate domestic goods along with capital and labor to produce a final good or a further processed good. Figure 2-2 illustrates the case in which the United States produces an intermediate good and exports it to Country 1 for further processing and it is then exported back to the United States as a final good. In both cases, the intermediate good flows back and forth across the border, the second time as part of the finished item.
Currently, the United States records the gross value of exports and makes no adjustment for the fact that some part of the value of exports may have been produced in a foreign country. Likewise, the country currently records the gross value of imports and makes no adjustment for the fact that some of those imports include parts made in the United States. The request to the committee to consider the “content” question in effect is calling for a new way to do the accounting, in which a portion of U.S. exports is attributed to foreign production and a portion of U.S. imports is attributed to U.S. production.
The U.S. national income accounts routinely deal with the double
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
FIGURE 2-1 Illustration of imported intermediate goods as part of U.S. exports.
* Final good or further processed good.
SOURCE: Adapted from Hummels, Ishii, and Yi (2001).
counting of domestic output that internal supply chains might create by using a strictly value-added approach. For example, the contribution of the U.S. auto sector to gross domestic product (GDP) is counted as value added, exclusive of the value of the steel and plastics that are made by other domestic sectors. Current accounting for trade does not use a value-added approach to the measurement of exports and imports.
To understand how the accounting is currently done and how it might be done more accurately, consider an example in which $1,000 of parts are made in the United States and then shipped to Mexico for assembly before returning to the United States as $1,500 of final goods. There are two ways this sequence of transactions might be recorded. Current accounting methods would record U.S. exports as $1,000 and U.S. imports as $1,500, with a trade deficit of $500. The $1,000 contribution to GDP from this transaction would then be recorded as sales to consumers ($1,500) plus exports ($1,000) minus imports ($1,500), that is, $1,000 of value added. An alter-
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
FIGURE 2-2 Illustration of exported U.S. intermediate goods that are subsequently imported back to the United States as a part of final goods.
* Final good or further processed good.
SOURCE: Adapted from Hummels, Ishii, and Yi (2001).
native external accounting would remove the “revolving door trade” by recording no exports and only $500 of imports.
Both accounting systems yield the same number for GDP and for net exports. The difference is in the volume of trade. The traditional accounting approach gives the impression that the United States is trading exports for imports, while the more accurate accounting approach shows the $500 payment for the assembly services provided by Mexico, with no offsetting export payment.
These two accounting systems have very different implications for determining the U.S. terms of trade. In the traditional approach, this transaction affects both the import price and the export price. The price is the amount of money for which goods and services are bought and sold. The price of parts is included in the export price index with a value weight of $1,000, and the price of finished goods is included in the import price index with a value weight of $1,500. This seems to show that the United States is exchanging parts for finished goods. The more accurate alternative approach records a value-added import price equal to the price of finished goods minus the price of parts times the value share of parts in final output.
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Another example illustrates accounting for the foreign content of U.S. exports. Suppose that $1,000 of parts are made in Mexico, shipped to the United States for assembly, and then exported to third countries as $1,500 of final goods. Current accounting methods would record U.S. exports as $1,500 and U.S. imports as $1,000, with a trade surplus of $500 and GDP of $500. An alternative external accounting would remove the revolving door trade by eliminating the $1,000 foreign content of U.S. exports and by reducing imports by a like amount. As above, both accounting systems yield the same numbers for GDP and for net exports. The difference is in the volume of trade. The traditional accounting gives the impression that the United States is trading exports for imports, while the more accurate accounting indicates that the $500 in exports has no offsetting import amount.
In these simple examples of the foreign content of U.S. exports and the U.S. content of U.S. imports, no one currently directly keeps track of supply chains inside and outside the United States and these simple adjustments to exports and imports cannot be done.
ESTIMATING THE IMPORTS EMBODIED IN EXPORTS
One of the committee’s central tasks was to determine if there are ways to measure the foreign content of U.S. exports. For example, in the agricultural sector, we were asked to seek an answer to the question: How much of the $19.6 billion of exports of agricultural goods in 1998 reflects value-added originating on U.S. farms and other sectors of the U.S. economy versus value-added originating in other countries—such as imports of cattle feed from Canada that help to grow cattle for export to Mexico?
The task for this study asks whether one can directly measure the U.S. content of imports and the foreign content of exports. The example of trying to measure the value of exported cattle due to the cattle having consumed foreign feed shows easily the difficulty with this kind of direct measurement in one particular instance. Also, for the information to be complete one would have to know not only how much feed of foreign origin the cattle consumed, but also if any of that feed happened to contain product from another country or countries.
It is clear, therefore, that at the point of export, there is no way by inspection of cattle to determine how much of the feed the cattle consumed was imported from Canada or other countries. In order to obtain a measurement of the foreign content of U.S. agricultural and other exports, one would need to find a way to trace imports through the economy and
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
ultimately to the point of export or to final domestic usage. An alternative to tracing every detail of the supply chain from imports to exports would be to “tag” imports, electronically or chemically, so that the imported value added would be evident when the export is inspected at the point of exit. Clearly tracking exports and imports on this scale would be an impractical task.
What might be possible would be for the federal government to carry out a series of case studies on particular items of significant interest or of importance, for instance, to national security. One could imagine the government requesting, for instance, an aircraft manufacturer to report on the country of origin of all the inputs into a commercial aircraft. However, even in this case, accurate data would require foreign-owned offshore companies to report any inputs to these parts that originated in third countries. The complexity of such measurements increases significantly quite quickly.
CONCLUSION: It is impractical to directly measure the foreign content of U.S. exports and the U.S. content of imports to the United States.
An alternative to these rather fanciful ideas about how to measure directly the foreign content of U.S. exports is to use U.S. input-output tables to form a proxy measurement.1 The following content analysis has been developed by the committee having examined the reported analysis by Hummels, Ishii, and Yi (2001).2
Using a Use Table
A U.S. 1998 “use table” is reproduced in Table 2-1 (Parts A and B).3 Each column of this table records the purchases of commodities by a sector of the economy. Thus, agricultural businesses purchased $69 billion of ag-
1
The Industry Economics Division (IED) of BEA prepares input-output accounts. For more information, see BEA’s Industry Economic Accounts Information Guide, available: http://www.bea.gov/bea/dn2/iedguide.htm#IO [accessed January 2006].
2
For information on firm-level import and export data for the United States, see Bernard, Jensen, and Schott (2005).
3
In illustrating the calculations reported herein, the committee chose to use a 1998 data set—a decision that also facilitated comparison with content measurements reported elsewhere for a similar time period (discussed below).
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
ricultural products, $368 million of minerals, and so on. The data in the table rows indicate that agricultural businesses sold $69 billion to other farmers, $78 million to miners, and so on. The Bureau of Economic Analysis (BEA) also produces a “make table” with rows corresponding to industries and columns to commodities. A make table indicates the commodities produced by each industry.
The direct requirements matrix in Table 2-2 is found by multiplying the normalized make matrix times the normalized use matrix. The data in this table represent the intermediate input fraction of the value of total output for each sector (column). This table should be read by column.
The destination shares matrix reported in Table 2-3 is found by dividing each row of the use matrix by the value of output. This represents the fraction of total output that is shipped to each sector. This table should be read by row.
These data tables can be used to answer the content question though there are several very restrictive assumptions necessary to do so.
Step One: Make an Input-Output Table with Import Rows
An input-output table has no rows for imported inputs as distinct from U.S. output. Therefore, the table does not reveal how much of those $23 billion of imports of agricultural goods and how much of other imports were used as intermediate inputs and how those intermediate imports were allocated across sectors. The first step is to create a use matrix like Table 2-1 that includes rows that represent imported intermediate goods. This is done by dividing the total intermediate inputs reported in Table 2-1 into domestic and imported inputs.
One can create the import rows for the input-output matrix using the destination matrix (Table 2-3) with an assumption of input similarity. That is:
Assumption 1–Import Similarity: Within the product categories of the input-output table, the mixes of imports and U.S.-made goods are the same and therefore have the same destinations.
Applying this assumption, Table 2-3 shows that if 51.6 percent of the gross output of agriculture is shipped to manufacturing for further processing, then 51.6 percent of agricultural imports are also shipped to manufacturing. Similarly, if 38.2 percent of the gross output of the minerals sector
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
TABLE 2-1 The Use of Commodities by Industries, 1998 (in millions of dollars) Part A: Industries
Commodities
Industriesa
Agriculture
Mining
Construction
Manufacturing
Agricultural products
68,682
78
5,860
144,622
Minerals
368
31,478
7,368
81,722
Construction
3,369
4,693
895
28,756
Manufactured products
49,395
14,510
299,429
1,380,590
Transportation, communication, and utilities
12,625
12,652
24,847
179,922
Trade
13,948
3,498
81,671
230,668
Finance, insurance, and real estate
20,647
33,253
16,485
71,167
Services
8,998
5,851
103,708
240,141
Other
166
29
1,076
13,826
Noncomparable imports
64
1,872
22,929
Total intermediate inputs
178,262
107,913
541,338
2,394,342
Value added
105,028
39,826
464,841
1,559,242
Total industry output
283,290
147,738
1,006,179
3,953,584
aThe input-output (I-O) accounts use two classification systems, one for industries and another for commodities, but both systems generally use the same I-O numbers and titles.
goes to the transportation, communications and utilities sector, then so does 38.2 percent of the minerals inputs.
With this assumption the destination matrix in Table 2-3 can be used to estimate the imports of intermediate inputs and their allocations across sectors. Returning to the example of the agricultural sector, the input-output table indicates that of a total agricultural output of $281 billion,
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Transportation, Communication, and Utilities
Trade
Finance, Insurance, and Real Estate
Services
Otherb
154
1,816
11,476
12,310
567
52,354
31
6
32
3,061
47,369
12,694
66,515
28,785
25,895
70,485
68,005
19,318
340,944
17,593
200,933
68,214
52,626
120,762
22,872
15,081
32,685
4,925
68,036
2,646
40,283
108,418
445,679
243,750
7,945
144,495
219,223
191,363
530,971
13,585
3,306
11,226
28,196
24,713
3,034
21,939
7,722
8,553
5,189
1,144
596,399
530,035
828,656
1,375492
98,341
653,908
1,022,277
1,718,897
2,104,140
1,113,367
1,250,307
1,552,311
2,547,553
3,479,631
1,211,707
b“Other” consists of government enterprises, general government industry, household industry, and the inventory valuation adjustment.
SOURCE: Planting and Kuhbach (2001).
24.5 percent was sold to other farmers (69/281) and 51.6 percent (145/ 281) to manufacturers. Applying the same ratio to $23 billion of total agricultural imports, we estimate $5.7 billion of agricultural intermediate imports sold to farmers and $12.1 billion to manufacturers. Similar calculations for the other sectors lead to the imported inputs by sector of use that are reported in Table 2-4.
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
TABLE 2-1 The Use of Commodities by Industries, 1998 (in millions of dollars) Part B: Final Uses
Commodities
Total Intermediate Use
Final Uses (GDP)
Personal Consumption Expenditures
Gross Private Fixed Expenditures
Changes in Business Inventories
Agricultural products
24,564
34,596
1,236
Minerals
176,417
105
956
387
Construction
218,971
577,089
Manufactured products
2,260,269
1,078,057
587,174
41,694
Transportation, communication, and utilities
695,452
437,478
17,996
1,250
Trade
453,157
873,411
112,475
5,127
Finance, insurance, and real estate
987,627
1,369,009
51,135
Services
1,458,335
2,010,510
166,967
25
Other
85,574
5,119
−48,174
23,409
Noncomparable imports
69,413
47,744
Total intermediate inputs
6,650,777
Value addedd
Total industry outputc
5,856,029
1,465,618
73,127
cMay not sum to totals due to rounding.
dConsists of compensation of employees, indirect business tax and nontax liability, and other value added. “Other value added” consists of the following components of gross domestic income: consumption of fixed capital, net interest, proprietors’ income, corporate profits, rental income of persons, business transfer payments, and subsidies less current surplus of government enterprises.
The entries in Table 2-4 can be used as the import rows of a new input-output use table. The domestic rows are the same as in Table 2-1, except that imported intermediates are subtracted to reflect the fact that some of the inputs comes from imports. Dividing each column of the resulting matrix by total output produces the input-output requirements matrix reported in Table 2-5. The two parts of this matrix (the domestic part at the
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Exports of Goods and Services
Imports of Goods and Services
Government Consumption Expenditures and Gross Investment
GDPc
Total Commodity Outputc
19,563
−23,438
2,984
34,940
280,503
6,961
−47,469
-180
−39,241
137,176
78
210,040
787,208
1,006,179
523,300
−828,893
210,188
1,611,520
3,871,789
70,106
−15,367
74,784
586,248
1,281,700
70,298
19,586
22,215
1,103,110
1,556,267
73,154
−9,896
37,315
1,520,718
2,508,344
38,456
−8,322
6,745
2,214,382
3,672,717
93,720
−5,783
963,760
1,032,052
1,117,626
−127,801
10,644
-69,413
8,781,523
895,637
−1,047,382
1,538,494
15,432,301
top and the import part at the bottom) add up to the totals reported in Table 2-2.
Step Two: Estimate the Direct Imports Used to Produce Exports
Estimating the inputs used directly to produce exports can then be carried out with the addition of an input-output requirements matrix such
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
TABLE 2-2 U.S. Input-Output Requirements (in percent)
Inputs
Outputs
Agricultural
Minerals
Construction
Manufactured
TCU
Trade
FIRE
Services
Other
Agricultural products
24.2
0.1
0.6
3.7
0.0
0.1
0.5
0.4
0.0
Minerals
0.1
21.3
0.7
2.1
4.2
0.0
0.0
0.0
0.3
Construction
1.2
3.2
0.1
0.7
3.8
0.8
2.6
0.8
2.1
Manufactured products
17.4
9.8
29.8
34.9
5.6
4.4
0.8
9.8
1.5
TCU
4.5
8.6
2.5
4.6
16.1
4.4
2.1
3.5
1.9
Trade
4.9
2.4
8.1
5.8
1.2
2.1
0.2
2.0
0.2
FIRE
7.3
22.5
1.6
1.8
3.2
7.0
17.5
7.0
0.7
Services
3.2
4.0
10.3
6.1
11.6
14.1
7.5
15.3
1.1
Other
0.1
0.0
0.1
0.3
0.3
0.7
1.1
0.7
0.3
Noncomparable imports
0.0
1.3
0.0
0.6
1.8
0.5
0.3
0.1
0.1
Total intermediate inputs
62.9
73.0
53.8
60.6
47.7
34.1
32.5
39.5
8.1
Value added
37.1
27.0
46.2
39.4
52.3
65.9
67.5
60.5
91.9
Total industry output
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
NOTE: TCU = transportation, communication, and utilities; FIRE = finance, insurance, and real estate.
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
TABLE 2-10 U.S. Imports, Exports, and Imports Embodied in Exports, 91 by 91 Input/Output Matrix, 1998
Product
Total Imports
Intermediate Imports
Percent
Livestock and livestock products
2,519
2,461
97.7
Other agricultural products
12,089
8,875
73.4
Forestry and fishery products
8,931
10,364
116.0
Agricultural, forestry, and fishery service
9
8
92.9
Metallic ores mining
−1,248
−921
Coal mining
326
309
94.7
Crude petroleum and natural gas
61,648
96,294
156.2
Nonmetallic minerals mining
1,201
1,233
102.6
New construction
0
0
Maintenance and repair construction
0
0
Ordnance and accessories
922
7
0.8
Food and kindred products
32,855
12,432
37.8
Tobacco products
1,155
66
5.7
Broad and narrow fabrics, yarn and threads
5,269
5,137
97.5
Miscellaneous textile goods and floor coverings
2,790
1,608
57.6
Apparel
66,035
15,334
23.2
Miscellaneous fabricated textile products
5,923
3,057
51.6
Lumber and wood products
18,124
17,527
96.7
Furniture and fixtures
16,717
3,135
18.8
Paper and allied products, except containers
17,063
14,293
83.8
Paperboard containers and boxes
600
574
95.7
Newspapers and periodicals
274
60
22.1
Other printing and publishing
3,323
2,165
65.1
Industrial and other chemicals
22,458
19,995
89.0
Agricultural fertilizers and chemicals
3,358
2,664
79.3
Plastics and synthetic materials
8,046
7,429
92.3
Drugs
37,954
13,463
35.5
Cleaning and toilet preparations
3,641
687
18.9
Paints and allied products
743
641
86.3
Petroleum refining and related products
14,581
8,194
56.2
Rubber and miscellaneous plastics products
23,872
21,520
90.1
Footwear, leather, and leather products
18,632
9,591
51.5
Glass and glass products
4,333
4,124
95.2
Stone and clay products
9,762
10,108
103.5
Primary iron and steel manufacturing
17,372
19,575
112.7
Primary nonferrous metals manufacturing
21,491
24,142
112.3
Metal containers
325
323
99.4
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Total Exports
Direct Imports
Percent
Direct Plus Indirect Imports
Percent
907
112
12.4
173
19.0
14,581
353
2.4
721
4.9
2,263
437
19.3
849
37.5
38
0
1.3
1
2.1
1,023
−92
−9.0
−266
−26.0
1,396
6
0.4
26
1.9
3,223
4,039
125.3
10,639
330.1
677
54
7.9
117
17.3
0
0
0
69
0
0.0
0
0.0
2,373
1
0.0
1
0.0
25,446
339
1.3
592
2.3
4,943
6
0.1
7
0.1
3,696
470
12.7
688
18.6
2,171
122
5.6
186
8.6
8,085
1,596
19.7
1,701
21.0
1,076
237
22.0
279
25.9
5,224
494
9.5
1,151
22.0
4,283
240
5.6
268
6.2
10,864
666
6.1
1,400
12.9
1,363
45
3.3
71
5.2
768
2
0.2
4
0.5
3,608
59
1.6
154
4.3
23,496
2,331
9.9
4,360
18.6
4,113
280
6.8
471
11.4
12,452
711
5.7
1,404
11.3
11,534
463
4.0
518
4.5
4,528
44
1.0
70
1.5
1,266
36
2.8
60
4.7
9,467
564
6.0
1,021
10.8
12,703
1,898
14.9
2,827
22.3
1,858
1,351
72.7
1,085
58.4
2,375
299
12.6
502
21.1
2,250
196
8.7
454
20.2
4,480
2,230
49.8
4,088
91.2
9,345
3,248
34.8
5,900
63.1
258
20
7.6
32
12.3
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Product
Total Imports
Intermediate Imports
Percent
Heating, plumbing, and fabricated structures
3,213
2,956
92.0
Screw machine products and stampings
3,019
2,883
95.5
Other fabricated metal products
17,910
16,763
93.6
Engines and turbines
5,586
3,616
64.7
Farm, construction, and mining machinery
10,037
1,473
14.7
Materials handling machinery and equipment
3,878
1,509
38.9
Metalworking machinery and equipment
10,799
3,705
34.3
Special industry machinery and equipment
9,731
1,722
17.7
General industrial machinery and equipment
13,949
8,482
60.8
Miscellaneous machinery, except electric
2,978
2,781
93.4
Computer and office equipment
79,871
39,331
49.2
Service industry machinery
4,255
2,585
60.8
Electrical industrial equipment and apparatus
12,168
9,471
77.8
Household appliances
7,666
1,488
19.4
Electric lighting and wiring equipment
9,216
9,164
99.4
Audio, video, and communication equipment
48,455
11,753
24.3
Electronic components and accessories
46,361
45,470
98.1
Miscellaneous electrical machinery and supplies
13,854
10,095
72.9
Motor vehicles (passenger cars and trucks)
115,857
929
0.8
Truck and bus bodies, trailers, and motor parts
39,406
35,542
90.2
Aircraft and parts
21,650
5,280
24.4
Other transportation equipment
6,644
717
10.8
Scientific and controlling instruments
26,319
7,470
28.4
Ophthalmic and photographic equipment
10,331
4,343
42.0
Miscellaneous manufacturing
39,832
13,612
34.2
Railroads and related services; passenger round transportation
208
105
50.5
Motor freight transportation and warehouse
2,112
1,511
71.5
Water transportation
−5,394
−2,185
Air transportation
17,644
7,860
44.5
Pipelines, freight forwarders, and related services
0
0
Communications, except radio and TV
0
0
Radio and TV broadcasting
0
0
Electric services (utilities)
1,382
658
47.6
Gas production and distribution (utilities)
0
0
Water and sanitary services
0
0
Wholesale trade
−19,182
−9,255
Retail trade
0
0
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Total Exports
Direct Imports
Percent
Direct Plus Indirect Imports
Percent
2,903
132
4.5
206
7.1
2,847
400
14.1
523
18.4
9,485
1,773
18.7
2,797
29.5
9,559
461
4.8
584
6.1
11,176
92
0.8
163
1.5
2,289
50
2.2
106
4.6
5,830
510
8.7
862
14.8
8,830
216
2.5
311
3.5
11,804
1,116
9.5
1,642
13.9
2,817
439
15.6
647
23.0
38,203
5,436
14.2
6,787
17.8
5,087
99
1.9
148
2.9
6,610
1,260
19.1
1,733
26.2
3,060
11
0.3
41
1.3
4,960
299
6.0
513
10.3
20,372
1,690
8.3
2,093
10.3
45,480
10,080
22.2
13,099
28.8
7,320
941
12.9
1,311
17.9
23,589
125
0.5
160
0.7
30,438
2,871
9.4
3,664
12.0
57,158
2,100
3.7
2,553
4.5
4,565
60
1.3
96
2.1
30,992
953
3.1
1,205
3.9
3,976
163
4.1
316
8.0
6,165
590
9.6
936
15.2
4,820
6
0.1
12
0.3
15,214
93
0.6
189
1.2
9,951
−246
−2.5
−396
−4.0
29,665
654
2.2
1,047
3.5
3,135
0
0.0
0
0.0
5,597
0
0.0
0
0.0
0
0
0
503
37
7.3
71
14.2
423
0
0.0
0
0.0
67
0
0.0
0
0.0
71,417
−818
−1.1
−1,295
−1.8
33
0
0.0
0
0.0
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Product
Total Imports
Intermediate Imports
Percent
Finance
959
428
44.6
Insurance
2,390
1,019
42.6
Owner-occupied dwellings
0
0
Real estate and royalties
0
0
Hotels and lodging places
0
0
Personal and repair services (except auto)
0
0
Computer and data processing services
1,205
474
39.3
Legal, engineering, accounting, related services
2,200
1,607
73.1
Other business and professional services
3,584
3,101
86.5
Advertising
1,281
1,262
98.5
Eating and drinking places
0
0
Automotive repair and services
4
2
38.8
Amusements
306
102
33.3
Health services
10
0
2.3
Educational and social services, and membership organizations
349
22
6.3
Federal government enterprises
0
0
State and local government enterprises
0
0
Total
1,015,134
586,323
57.8
NOTE: Calculated using formulas as described in McMichael (2002).
United States with imported inputs. The consequent higher price of U.S. finished products would reduce U.S. exports and increase U.S. imports of finished goods, thus mitigating the intended protection of American manufacturing jobs.
Another question that might be raised concerns the effect of the external deficit on the level and structure of imports and exports of manufactures: If the external deficit causes depreciation of the value of the dollar, which stimulates U.S. exports, how much of the increased value of exports is offset by greater imports of intermediate inputs? This question also points to price changes that would change the input-output tables: the depreciation of the dollar would increase the price of imported intermediate goods and encourage a shift to U.S. suppliers. Thus, interventions in the markets for intermediate imports would produce a complicated set of reactions that cannot be predicted with an input-output framework that ignores alto-
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
Total Exports
Direct Imports
Percent
Direct Plus Indirect Imports
Percent
32,803
17
0.1
31
0.1
2,081
16
0.8
37
1.8
0
0
0
37,992
0
0.0
0
0.0
124
0
0.0
0
0.0
83
0
0.0
0
0.0
6,543
20
0.3
41
0.6
11,979
58
0.5
122
1.0
10,011
130
1.3
263
2.6
770
67
8.7
108
14.1
755
0
0.0
0
0.0
1,760
0
0.0
0
0.0
11,416
3
0.0
6
0.0
225
0
0.0
0
0.0
544
1
0.2
2
0.4
270
0
0.0
0
0.0
0
0
0
811,895
54,766
6.7
84,285
10.4
gether the effects of prices on the choice of inputs by businesses and the choice of products by consumers.
To make these problems more clear it is useful to explain how indirect imports are computed. First, one has to find out the level of domestic output directly used to produce exports by multiplying the vector of exports by the domestic rows of the input/output requirements matrix in Table 2-7. This can be expressed as SD x where SD is the matrix of domestic input-output shares and x is the vector of export values. Then, one computes the level of imports needed to produce those inputs by multiplying this amount of domestic output by the import rows of the same matrix: SMSDx, where SM is the matrix of import shares. Continuing on, however, the domestic output SD x requires additional domestic output as inputs: SDSDx, which necessitates additional imports: SMSDSDx. And so on and so on. Adding all
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
these together, one obtains the direct and indirect imports embodied in exports as:
This calculation rests on three problematic assumptions: supply chain transformation, timing, and fixed shares. First, the calculation implicitly assumes that there is no transformation of the product at each stage of processing—the first-stage machinery produced within manufacturing and sold to farmers is indistinguishable from second-stage processed food that is also produced with manufacturing using first-stage inputs provided by agriculture. It is the assumption of no transformation that allows one to use the same input-output requirements matrix at every stage. Second, the calculation assumes that the passing of product back and forth among sectors occurs instantaneously or at least rapidly enough that almost all the passing back and forth can occur within the period of time to which the input-output table applies, typically a year. Third, the input-output fractions are treated as fixed “constants of nature” that are, in particular, not responsive to price changes.
Bidirectional or Unidirectional Supply Chains
It seems logical to assume that after each stage of processing products are changed and the destinations are changed. But the calculation of direct plus indirect inputs assumes that there is no change in the destinations matrix and no change in the input requirements matrix. With exports that require domestically produced inputs, what amount of imports are needed to produce those domestically produced products? The answer can be found by merely multiplying the domestically produced inputs by the import requirements matrix, as if these coefficients describe a production technology for transforming imported inputs and domestic inputs into output.
The repeated applicability of the same destination matrix would make more sense if the supply chains implicit in the input-output table were unidirectional rather than looping back and forth as they do because the input-output use matrix includes the sale of every sector to every other sector: for example, agriculture, manufacturing and finance all sell outputs to each other (see Figure 2-3).
Although these bidirectional sales clearly occur in an accounting sense, much of what appears to be bidirectional is an artifact of the product cat-
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
FIGURE 2-3 Illustration of how supply chains loop around because of bidirectional sales between each sector in the input-output data matrix.
egories. An alternative model would have a unidirectional supply chain that distinguishes, for example, tractors that are sold to agriculture from processed food sold to final consumers (see Figure 2-4).
Timing Issues
The timing of the imports to produce exports is another potentially important issue since supply chains can be stretched greatly over time. For example, U.S. exports of machinery may come back as finished goods imports years later, and U.S. imports of machinery may contribute to export value years later. An input-output table does not allow one to explore the
FIGURE 2-4 Illustration of a unidirectional supply chain that separates manufacturing into a sector that sells only to final consumers (processed food) and a sector that sells only to farmers (tractors).
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
timing issues, and the calculation of direct and indirect imported inputs implicitly assumes that all value added is created in the year to which the input-output table applies. If the supply chain is stretched over many years, the current values of the earliest inputs need to be adjusted upward (depending on the interest rate) to properly account for the “capital” value of those inputs. In addition, if a multiyear supply chain is experiencing significant changes, because of changes in the sources of capital equipment or because of business cycle swings of demand for capital equipment, the current input-output table may give a misleading picture of the part of the foreign content of U.S. exports that is due to input-output relationships in earlier years. Although there is no evidence regarding the importance of this timing issue, the study of global supply chains would ideally allow for the fact that supply chains are stretched over time as well as across country borders and the input-output table could be expanded to allow inputs distinguished by year of purchase.6
Price Data and Price Responses
Full understanding of global supply chains requires measurement of prices as a product is passed from one stage of processing to another. Any policy change will have price effects, and there is no way to know the response to that change without knowledge of prices and without studies of the responsiveness to price changes of final sales and production methods, including the choice of inputs and the geographical organization of supply chains.
Measuring Content for Services
Developments in information technologies, most notably the Internet, have led to several key conceptual challenges in tracking the international trade in services. First, information, software, or advice need not be relegated to a physical carrier medium in order to be traded. For example, software need not be put on a diskette or disk drive to be traded or used internationally. It can be transmitted electronically across international po-
6
See Eaton and Kortum (2001) for a method of linking the input-output table to investment data.
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
litical boundaries. Second, the organization and codification of complex information can reduce the specific knowledge needed to use the information. For example, an on-screen menu system in a customer-service center is a tool that replicates expert knowledge so that people with less knowledge can use a system. Third, software programming technologies and management now divide software into stages of design, coding, integration of parts, fixing bugs, and customer interface with the final product.
By and large, the existing trade tracking and classification systems do not yet take account of these developments. For example, how can trade in services be tracked when the international trade does not involve a physical carrier medium for the service activity and the service activity is an intermediate and therefore separable from the ultimate consumer. The Internet and information technologies clearly allow there to be no physical trade by buyer or seller and many of the products are not “final.” Other classification issues arise in the context of trade in services. First, the classification may not be by activity, but by product. So software programming, for instance, could be scattered among a variety of products rather than be measured as a particular activity in its own right.
Second, it may be difficult to obtain data on digital transactions through surveys because corporations may keep data on activity by business line, not by international boundary or activity or cost. For example, there may be data on computer maintenance and repair that it is not separated from customer service costs. Or there may be data on customer service costs, but not where the service originates—Idaho or Ireland. Digitalization could mean that businesses may not know the residency of some activities, particularly final service sales. A business may collect data on overall management and telecommunications costs, but not separate them by business line, or it may separate them from the labor cost component of, say, customer service or programming. Although some of these questions are not new and have been addressed in the context of domestic data on services, the issues will become increasingly relevant to address in the context of collecting and constructing international data (see Fraumeni, 2000).
There is no accepted international statistical standard for the classification of many cross-border services. The lack of such a widely agreed upon and implemented system can lead to mismatches between data on imports to the United States with data gathered by foreign agencies on exports to the United States—making the use of such data for content analysis dubious at best.
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Analyzing the U.S. Content of Imports and the Foreign Content of Exports
CALCULATING THE U.S. CONTENT OF IMPORTS TO THE UNITED STATES
Measuring the U.S. content of imports to the United States is a more difficult problem than measuring the foreign content of U.S. exports because there is no consistent set of input-output tables for U.S. trading partners. Hummels, Isihii, and Yi (2001) have considered how to estimate the U.S. content of imports to the United States.
Consider the example of U.S.-manufactured electronic components that are exported to Korea for the assembly of personal computers that, in turn, are exported back to the United States as finished goods. Hummels, Isihii, and Yi (2001) denote the measurement of the value of exports that are embodied in a second country’s exports as VS1. In terms of this report, VS1 measures the value of the U.S. exports in the goods exported from a second country back to the United States. Figure 2-2 shows a schematic of measuring the U.S. content of imports VS1. VS1 is very difficult to measure because for each trading partner the value of U.S. exports to Country 2 that are used as inputs into producing that country’s exports to the United States needs to be calculated. There are no available data to aggregate the calculation of VS1 across all sectors.
CONCLUSION: The foreign content of U.S. product exports can be estimated by proxy and with some accuracy given available data and assumptions regarding the similarity of imported intermediate inputs (e.g., parts) and U.S.-produced intermediate inputs. The measurement of the U.S. content of U.S. imports of products cannot be done with confidence because there is no reliable way of tracking U.S. exports that are subsequently incorporated into imports in one form or another. For services, calculating such content is even more difficult because of data limitations, including different classification systems, incomplete coverage of international trade, and a key assumption (of similar domestic and international technology ratios) that is clearly not true.
Representative terms from entire chapter:
measuring content