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BEHIND THE NUMBERS: U.S. Trade in the World Economy Introduction The United States economy is becoming increasingly integrated with the world economy. The nation's trade deficit and foreigners' investment in the United States have generated newspaper headlines, affected financial markets, and become an issue in U.S. domestic and foreign affairs. In the face of this new global economic environment, several questions become critical: How complete is the available picture of U.S. international economic activities? How accurately do the data depict U.S. international trade and finance? How useful are they for public and private decision making, especially since most of the data collection systems were devised decades ago in a different economic environment? How efficiently does the United States manage the collection, analysis, and dissemination of these data? Although U.S. systems for collecting data on international transactions are probably the most advanced in the world, rapid changes in the global economic environment have outpaced improvements to them. In a recent report, the Working Group on the Quality of Economic Statistics (1987) of the President's Economic Policy Council recommended that a panel of experts be convened to study the adequacy of existing systems for the collection, processing, and dissemination of U.S. merchandise and services trade data, and to recommend data that will most usefully and accurately represent U.S. international trade in coming decades. With the support of the Bureau of the Census, the Bureau of Economic Analysis, and the International Trade Administration
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BEHIND THE NUMBERS: U.S. Trade in the World Economy of the U.S. Department of Commerce and the Customs Service of the U.S. Department of the Treasury, the Panel on Foreign Trade Statistics was convened under the aegis of the Committee on National Statistics at the National Research Council in June 1989. A subsequent research grant from the Chase Manhattan Bank also supported the panel's work. At the time the panel was formed, its charge was much narrower than the one it subsequently assumed. The original mandate was to examine the adequacy of the system for the collection of merchandise trade statistics and, to the extent possible, that for services. The panel soon recognized, however, that the key issue to be addressed was much broader: to provide useful economic data to better inform public and private decision makers at a time when the U.S. economy is becoming increasingly integrated with the world economy. The panel thus undertook a more comprehensive study to address both narrow and broad questions about international merchandise trade and services transactions. In addition, in view of the growing linkages among transactions in goods, services, and capital flows, the panel believes that it is also necessary to consider data on international capital flows. By evaluating existing data on U.S. international transactions in goods, services, and capital flows, the panel hopes to emphasize the importance of examining these disparate data in more unified ways and integrating the results into a broad statistical framework that can be used to better understand the changing nature and extent of U.S. international economic activities. A comprehensive review of all three types of data also highlights what data gaps exist and what possible changes yield the highest payoffs. The panel hopes that this approach will spur additional efforts to enhance the usefulness of data on U.S. international economic activities. Recent studies on the adequacy of existing data on U.S. international transactions are few: most separately address data on merchandise trade, international services transactions, and capital flows; some examine only certain aspects of them. For example, two recent studies undertaken by the International Monetary Fund (1986a, 1992) on the statistical discrepancies of the world current accounts and the world capital accounts discuss the possible sources of errors and omissions in the balance-of-payments transactions of major industrialized countries, including the United States. To the panel's knowledge, no comprehensive reviews of all three major types of data on U.S. international transactions have been undertaken in recent years. Thus, although
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BEHIND THE NUMBERS: U.S. Trade in the World Economy this study benefits from the existing literature, we hope it also breaks new ground by taking a comprehensive approach and gathering information from many sources and experts. Our study focuses on the emerging global trading environment, how it has increased the demand for international economic data, in what respects the existing data are inadequate for meeting current and future data needs, and what correctives can be introduced. THE INTERNATIONAL ECONOMIC ENVIRONMENT Even the most cursory review of major international economic trends over the past two decades shows that there has been a dramatic expansion in the volume of world trade in goods, accompanied by even more rapid growth in services transactions and capital flows across national boundaries. U.S. statistics (adjusted for inflation) show that over the decade of the 1980s, while U.S. gross national product (GNP) rose 30 percent, U.S. imports and exports of goods and services increased 72 percent, and combined capital inflows and outflows jumped 60 percent. These developments have significantly transformed the U.S. economy and made it considerably more interdependent with those of other countries. Underlying these trends have been quantum changes in technology and major institutional developments. Innovations in transportation technology, especially in aviation industries, have facilitated the movement of goods and people. Changes in computer and telecommunications technologies have revolutionized the gathering, transmission, and processing of information, facilitating a dramatic expansion in financial and other business services transactions across national borders. Technological developments have reduced the costs of managing operations around the globe, further spurring cross-border direct investment. At the same time, successive rounds of multilateral trade negotiations and a new emphasis on free trade areas have significantly lowered trade barriers for goods and services. Deregulation and removal of restrictions on capital flows in major industrial countries have liberalized international financial transactions. More recently, developments around the globe—such as the progress made toward the economic unification of the European Community, the rapid growth of East Asian economies, the implementation of the United States-Canada Free Trade Agreement and its possible expansion to include Mexico, and emerging efforts to integrate Eastern Europe into the world economy —have expanded
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BEHIND THE NUMBERS: U.S. Trade in the World Economy business opportunities globally. Coupled with new and improved managerial techniques, these developments have accelerated the multinationalization of enterprises. Several factors in the United States—including significant economic growth over the past decade, a strengthening of the technology-driven and information-based service sector, deregulation of the telecommunications and finance industries, and a strong dollar in the early 1980s—further boosted U.S. merchandise imports, expanded U.S. services exports, and attracted considerable foreign direct and portfolio investment to this country. Globalization of markets will continue throughout the 1990s because it offers many benefits to the world economy. Larger markets tend to lower unit costs by enabling producers to take advantage of economies of scale. Increased international competition is likely to prod inefficient firms and promote productivity. Rising transnational activities will accelerate technological diffusion. In this new international economic environment, the United States faces enormous challenges and opportunities. As cross-border movement of goods, services, labor, capital, and technology have spawned rising numbers of production and financial centers, international trade and finance have become more competitive. Meanwhile, enlarged regional markets and the economic strengths of a number of developing nations have provided immense opportunities for international commerce. To deal effectively with these challenges and to take full advantage of the opportunities they present, both the public and the private sectors need timely, accurate, and relevant information on the new global economy. DATA NEEDS In the internationalized U.S. economy, many new economic issues and increasingly complex traditional concerns face public officials: Coordinating U.S. macroeconomic policies with those of other countries to reduce global external imbalances, stabilize exchange rates, promote full employment, and foster strong economic growth with low rates of inflation; Negotiating bilaterally, regionally, and multilaterally to enhance market access for U.S. goods and services abroad, reduce foreign restrictions on U.S. direct investment activities abroad, and protect U.S. intellectual property rights; Assessing the impact of international transactions in goods
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BEHIND THE NUMBERS: U.S. Trade in the World Economy and services, as well as foreign direct and portfolio investment, on domestic production, employment, and overall economic growth; and Determining appropriate adjustment measures to assist domestic industries to meet foreign competition, such as policies to strengthen the U.S. technological edge, raise workers' skill levels, and improve research and development capabilities. Similarly, to remain competitive as multilateral trading opportunities increase, business decision makers face a range of increasingly complex new and old issues: Weighing the opportunities of selling their products at home and abroad; Evaluating the alternatives of producing their goods and services domestically for export or of undertaking direct foreign investment and producing the goods and services abroad; Considering the opportunities for importing various components of a final product rather than purchasing supplies and parts from domestic sources; Determining what combination of local and host-country personnel to employ and whether they should be permanent or transient; Identifying the most cost-effective sources of financing of both domestic and foreign operations, taking into account differences among countries in capital costs, exchange-rate risks, and political conditions; and Considering the appropriate forms of cross-national commercial activities including joint ventures, coproduction, partnerships, mergers and acquisitions, and other collaborative arrangements with foreign counterparts. In this global environment, informed public and private decision making requires a wide range of data, including: The international trade of the United States and other countries in goods and services; The intracompany trade of U.S. firms and their foreign affiliates and their use of traded intermediate inputs; The production and sales of goods and services abroad by foreign affiliates of U.S. multinational companies; The production and sales of goods and services in the United States by U.S. affiliates of foreign multinational companies; U.S. direct investment abroad and foreign direct investment in the United States;
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BEHIND THE NUMBERS: U.S. Trade in the World Economy U.S. portfolio investment abroad and foreign portfolio investment in the United States; The employment and economic contributions of foreign firms in the United States and the employment and economic contributions of U.S. firms abroad; Expenditures on research and development by U.S. multinational firms abroad and those by foreign firms in the United States; The financing arrangements for affiliates' operations at home and abroad; and The availability of technological innovations and their diffusion. In addition, to assist public policy deliberations and business analyses, the growing interrelationships between domestic and international economic activities necessitate that data on international economic activities be comparable to domestic economic data and that international trade and finance data be comparable among countries. FOCUS OF ANALYSIS How well do existing data serve public and private users' needs? How can the data be improved? Our review shows that an enormous quantity of data is collected by different federal statistical agencies on U.S. international transactions, but their adequacy for informing public and private decision making has been called into question by the myriad of new demands, as well as by clear gaps. Many new economic issues have risen from the emerging international trading environment, and the existing statistical framework is inadequate for analyzing them. This report discusses the need for a broadened statistical framework to supplement the existing balance-of-payments accounts—one that will reflect emerging international economic relations. The supplemental framework should be conducive to analysis of such issues as the extent of the internationalization of the U.S. economy and how well U.S. institutions (public and private) have responded to it; the international competitiveness of U.S. firms; the impact of foreign direct investment on the domestic economy; and bilateral, regional, and multilateral negotiations on market access for trade and investment and the enforcement of the negotiated rules. It should also improve estimates of components in the foreign sector of the national accounts. Our review also shows that there is limited comparability be-
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BEHIND THE NUMBERS: U.S. Trade in the World Economy tween U.S. international trade data and domestic production and other domestic economic data. This limited comparability has detracted from the analytical usefulness of the data for assessing the impact of international transactions on domestic economic output and employment, which is a greater problem now than in the past because of the increasing linkage between domestic and international economic activities. There is also limited comparability of international economic data across countries, and the report notes that there are several efforts being undertaken by international organizations to harmonize international economic data. The report also considers the quality of U.S. domestic data in relation to prospective improvements in U.S. international data. A third general topic discussed in the report is the lack of connection between statistical agencies and data users in evaluating the usefulness of the data collected. Growing demand for data and the changing international economic environment—all in a period of tight federal budgetary constraints —require that statistical programs be made more cost-effective. Among the data gaps addressed in our review are shortcomings in coverage and accuracy of existing data on merchandise trade, international services transactions, and capital flows. These are evident in the rise in the magnitude, as well as in the direction, of the statistical discrepancies shown in the U.S. balance-of-payments accounts. Under the double-entry accounting concept, the balance in the current account —which records transactions in goods and services and investment incomes, as well as unilateral transfers—should mirror that in the capital account, but with opposite signs. The latter shows capital flows, consisting of changes in U.S. assets abroad and foreign assets in the United States. In fact, however, discrepancies in the two accounts in the U.S. balance of payments have grown significantly in the past decade. As reported in the U.S. balance-of-payments accounts over the years, cumulated errors and omissions, for example, surged from −$5.5 billion for the decade of 1960-1969 to +$36.4 billion for 1970-1979 and to +$151.74 billion for 1980-1989. In 1990 alone, such errors and omissions rose to an unprecendented high of +$63.5 billion, or about 70 percent of the current account deficit. Our review shows that these persistently rising statistical discrepancies are more a result of increasingly inaccurate valuations, growing inadequacies in coverage, and errors in estimation procedures than of time lags between offseting transactions in the current and capital accounts. Large errors and omissions have diminshed the meaningfulness of individual trade balance figures and compounded the
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BEHIND THE NUMBERS: U.S. Trade in the World Economy difficulty of assessing the economic standing of the United States in the international economy. Other topics considered in our analyses include measurements of merchandise trade, affiliates' transactions, services trade, and direct and portfolio investment, which have been complicated by frequent foreign currency conversions related to fluctuations in exchange rates, arbitrary intracompany pricing practices, and outdated assumptions used in estimation methods and asset valuations. Growing numbers of financial intermediaries and product innovations that facilitate capital transfers through nontraditional channels have also made it more difficult to capture capital transactions under existing data systems. They also have compounded the difficulty of identifying the location of residents and nonresidents and rendered geographic breakdowns of data less meaningful and less useful. In addition, our review points out that although information on U.S. merchandise trade is collected in great detail, data on the rapidly growing U.S. services trade, foreign direct and portfolio investment, and sales of goods and services of U.S. and foreign affiliates are much less complete. The panel recognizes that federal statistical agencies have been confronted with tight budgetary constraints over the past decade. On the basis of information provided by the Office of Management and Budget (OMB), we computed in real dollar terms (that is, adjusted for inflation) the budgets for the two agencies with major responsibility for the compilation of data on merchandise trade and international economic accounts, the Bureau of the Census for merchandise trade statistics and the Bureau of Economic Analysis (BEA) for international economic accounts:1 1977 1991 $ Millions Census 13.8 12.6 BEA 4.3 8.1 Total 18.1 20.7 1 The Customs Service, which is responsible for the collection of trade documents, does not in its budget separate its data collection functions from its other commercial operations; hence, no budget figures covering Customs' data collection functions are available. Similarly, for the U.S. Department of the Treasury, which uses the Federal Reserve banks as agents in the collection of data on U.S. portfolio transactions, with the Federal Reserve banks bearing the costs, no separate budget figures for statistical programs are available.
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BEHIND THE NUMBERS: U.S. Trade in the World Economy Between 1977 and 1991, the combined budget for the two agencies grew less than 1 percent a year over the 15-year period. The panel is aware that the President's Council of Economic Advisers has proposed an economic statistics initiative that calls for increases in several agency budgets to improve the quality of federal economic statistics, including those on U.S. international transactions. The panel supports the initiative. Our recommendations have taken into account budget constraints and rising costs and problems associated with capturing growing arrays of U.S. international economic activities. In setting priorities for improving data to meet current and future data needs, our emphasis is on enhancing the analytic capabilities of federal statistical agencies and strengthening the coordination and cooperation among them, especially in developing a conceptual framework that will integrate the disparate data sets to elucidate the complex linkages of the economy; increasing productivity of the data collection systems to improve accuracy and timeliness of existing data; and filling data gaps that will yield the highest payoffs, such as those of international services transactions and capital flows. In recommending improvements in data collection systems, the panel also focuses on specific areas requested by the sponsoring agencies, including: the feasibility of using sampling techniques to collect merchandise trade data; the need for increased automation in the collection, processing, and dissemination of data; and quality-control procedures for merchandise trade data. Most of the panel's recommendations will not add significant costs for statistical agencies. They emphasize in what ways productivity can and should be raised, how cost-saving techniques can and should be used, and how cost-sharing with users can and should be applied. The panel 's recommendations also stress the importance of producing useful information relevant to the new global economic environment, rather than correcting old problems or “improving” old data that may not be worth attention. If statistical agencies receive increased funding for their programs, the panel stresses the need to allocate those resources to strengthen agencies' analytic capabilities to produce relevant and meaningful data. Because significant changes in international trade and finance continue and at an accelerating pace, our work is by no means the last word on the subjects addressed. At a minimum, we believe we have done spadework that will encourage more exhaustive efforts by experts in both the public and private sectors. We hope
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BEHIND THE NUMBERS: U.S. Trade in the World Economy their goal will be, as ours has been, to develop useful information on international transactions that can be used to guide decisions affecting U.S. and global economic developments in the coming years. METHODOLOGY AND REPORT STRUCTURE Our analysis is based on an extensive review of the existing systems used to collect data on U.S. international transactions in goods, services, and capital flows. It has also drawn on the insights and expertise of many individuals in federal and state agencies, international organizations, foreign government agencies, businesses, trade associations, and research institutions. The panel interviewed numerous officials and experts in the United States and abroad, including those from international organizations such as the International Monetary Fund, the World Bank, the Bank for International Settlements, the United Nations, the Statistical Office of the European Communities, the General Agreement on Tariffs and Trade, and the Organization for Economic Cooperation and Development. We also have heard expert testimony and reviewed written comments from more than 100 government, academic, and industry users. Our activities also included canvassing the views of data filers and visiting data collection and processing centers. Because there has been great interest in the nation's merchandise trade balance, we have also performed quantitative analyses to examine its trend and volatility, to show how an alternative procedure might better seasonally adjust the trade balance data to reflect the underlying trend, and to compare the accuracy of U.S. export data with those of U.S. major trading partners. This report is organized into two parts and a set of appendices. Part I focuses on the need for enhancing the usability of the data; it includes Chapter 1, Chapter 2 and Chapter 3. Chapter 1 addresses the increasing internationalization of the U.S. economy and the need for supplementing the existing statistical framework to encompass both balance-of-payments transactions and other multinational operations in analyzing the nation's international economic activities. Chapter 2 examines the comparability of U.S. trade and domestic production and other economic data, as well as the comparability of international data among countries. Chapter 3 considers the need to move toward a flexible data system on U.S. international economic activities so useful, relevant, and cost-effective data are
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BEHIND THE NUMBERS: U.S. Trade in the World Economy collected to guide public and private decision making in a changing international trading environment. Part II presents specific reviews of the adequacy of existing data and recommendations for their improvement; it includes Chapter 4, Chapter 5 and Chapter 6. Chapter 4 assesses the adequacy of existing merchandise trade statistics and considers how greater automation, use of sampling techniques, and effective database management can enhance the timeliness and accuracy of the data. Chapter 5 reviews existing data on U.S. international services transactions and develops recommendations to improve the data. Chapter 6 examines capital flow statistics and sets forth areas for further research. In this report, investment incomes are covered in the discussion of capital flows. Unilateral transfers are not separately discussed but are indirectly reviewed in the transfer of goods, services, and financial assets. The detailed information provided in Part II on the ways these data are currently collected is meant both to alert readers to the vulnerabilities of the systems that affect the quality of the data and to provide the background for our analysis and recommendations for improvement. The appendices contain detailed examinations and background material. Appendix A develops the concept of estimating sales and purchases of goods and services by and between U.S.-owned and foreign-owned firms as identified by national ownership of firms. Appendix B contains results from our canvass of users of existing data. Appendix C compares the accuracy of U.S. export data and those of U.S. major trading partners. Appendix D contains an analysis of the volatility of the monthly merchandise trade balance figures. Appendix E demonstrates how the application of an alternative seasonal adjustment procedure can better reflect the seasonal influences on the trade balance and reduce the volatility in the monthly merchandise trade balance figures. Appendix F discusses the feasibility of using sampling techniques in the collection and processing of merchandise trade data. Appendix G presents biographical sketches of panel members and staff.
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Representative terms from entire chapter: