REALITY BITES
FAKE NEWS IS BAD. BUT HAVING GOVERNMENT DECIDE WHAT’S ‘ REAL NEWS’ IS WORSE.
If I dig the iron and coal out of the ground to make the steel; and fashion the lug nuts, door frames and hatchback; and if I make the glass and the rubber for the windows, tires and windshield-wipers; and if I manufacture all my own paints and rustproofing chemicals and so on; and if I cut down the trees to make the paper that I tape to the rear door to show the sticker price, then the car I sell you will be all my own value- added. I won’t have bought any inputs from anybody else.
Regarding i ndividual people or businesses, most of us probably think that would be nuts: Why do everything yourself ? There must be somebody around who can do at least some of it better and cheaper than you. As a rule, specialization makes people richer. In fact, only very rich countries can afford self- sufficiency fads like the locavore “eat local” craze.
Regarding c ountries, however, many of us seem to think do-it-all-yourself makes more sense: Even if other countries could do parts of the job for us, it’s better if we do it all ourselves. That’s the core of Trump-ism. To which the best response is: Why assume the benefits of specialization stop at the border?
Whatever we think of the merits of “value- added trade” — in which countries sell products they’ve produced from the ground up — the world has been moving away from that kind of trade over the last four decades. That’s the conclusion of a new research paper by Robert C. Johnson of Dartmouth College in New Hampshire and Guillermo Noguera of the University of Warwick in England. They track the ratio of value-added trade to total trade for 42 countries ( accounting for 95 per cent of world GDP) from 1970 to 2009.
Johnson and Noguera find that the ratio of valueadded trade to total trade fell by about 11 percentage points over those 39 years, with most of the decline coming after 1990. The ratio was about 87 per cent in 1970 and fell to about 76 per cent in 2009. For all you read about how interconnected global production is these days, those numbers may strike you as high. If everybody is buying as many inputs offshore as people seem to think, old- fashioned valueadded trade should be a lot lower.
In fact, the VA ratio has fallen more for manufacturing, from about 65 per cent to about 46 per cent, which does seem low enough to be consistent with all the hype about supply chains. For “non- manufacturing industrial production” the ratio has jumped around a lot, but in 2009 was more or less where it was in 1970. And for both services and agriculture, forestry and fishing it has actually risen, which seems counterintuitive.
Canada and the U. S. have had a similar and pretty typical evolution. The ratio of VA trade fell 10 points here between 1970 and 2009 and nine points in the U. S. The fall in the ratio was greater in U. S. manufacturing, however: 20 percentage points there versus 15 here. Both countries’ manufacturing got more integrated with other countries but that happened a little more in the U. S. than here.
As for manufacturing’s share in total U. S. exports, it didn’t actually change much between 1970 and 2009, falling by just one percentage point. Here it fell by five percentage points. In China it rose by 32 percentage points — though China in 1970, at the peak of Maoism, mainly exported the Little Red Book. In Mexico over this period, manufacturing’s share of exports rose 41 points.
If manufacturing hasn’t fallen much as a share of U.S. exports, why all the angst about the Rust Belt — which has been rusting for quite a long time now — and the populist revolt? The problem is not that the world isn’t buying U. S. goods anymore. It’s that it doesn’t take as many Americans to make those goods anymore.
Why is value- added trade down in manufacturing? Johnson and Noguera conclude the main reason is reduced trade frictions. Transportation and logistical costs have fallen, but trade barriers have also come down. Significantly, countries that joined regional trade deals saw greater reductions in valueadded trade, i. e., greater increases in production integration.
Although the study doesn’t try to decide what’s good or bad, firms presumably built international supply chains because it made sense to do so. The resulting efficiencies must have been passed along to somebody. Trumpkins and Sanderistas believe it all went to the one per cent. In reality, cheaper and better massmarket manufactures help just about everybody.
The big question as a new president — Mr. Friction himself — walks the U. S. away from trade deals, is whether global supply chains are now a thing of the past.
THE WORLD HAS BEEN MOVING AWAY FROM ‘VALUE-ADDED TRADE’ FOR DECADES. TRUMP COULD CHANGE THAT.