January 11, 2010 4:06PM

The Real Meaning of China’s Export Primacy

The Washington Post reports today that China surpassed Germany to become the world’s largest exporter in 2009, adding yet another economic feat to its expanding trophy case. Undoubtedly, U.S. trade skeptics and globophobes will consider this "accolade" the latest evidence of American decline and Chinese ascendancy. But more than it is any refection of China's economic might, the milestone is testament to the successful erosion of economic, political, physical and technological barriers that had previously constrained human possibilities.

Widespread liberalization of trade and investment rules beginning in earnest after World War II; China’s opening to the West beginning with reforms in 1978; the fall of the Berlin Wall in 1989 and the Soviet Union two years later; the collapse of communism as a viable choice for developing countries; the advent and proliferation of containerized shipping, GPS technology, just-in-time supply chain management techniques, and other marvels of the information, transportation, and communications revolutions have spawned a global division of labor and way of doing things that defy traditional trade policy considerations, and render trade flow accounting rather meaningless.

To borrow the theme and some phrases from my recent paper, "Made on Earth," global economics is no longer a competition between "Us and Them." It is no longer "Our" producers against "Their" producers. Instead, because of cross-border investment and transnational production and supply chains, the factory floor has broken though its walls and now spans oceans and borders, rendering U.S. workers and foreign workers collaborative, even complementary, in so many endeavors. There is, of course, competition, but that competition is often between production/supply chains or brands that defy any meaningful national identification because the final products are composed of value-added from multiple countries. Thus, there is cooperation within production/supply chains before there is competition between them.

So, what does all of this have to do with China’s status as the world’s biggest exporter? It means that we should avoid the temptation to attach the wrong meaning to the title. China has become the world’s largest exporter primarily because the global division of labor that has helped reduce the burdens of poverty and create greater wealth still prescribes for China the role of lower-value-added production and final assembly operations in global production/supply chains.

While intermediate goods—components and raw materials—are shipped to China from countries such as Japan, Taiwan, Singapore, Australia, and America, those inputs are often "snapped together" or perhaps subject to slightly higher Chinese valued-added operations before being exported as final goods. For the purpose of trade flow accounting, the entire value of the merchandise is registered as Chinese export value, even when a very small percentage is actually Chinese labor, material and overhead.

That accounting methodology helps explain why China’s exports—to the world and the United States—have surged over the decades (as the division of labor evolved and supply chains proliferated), and why policy focus on the U.S. bilateral trade deficit with China is misplaced. As aptly put in the conclusion of this now-famous study about who captures value in the iPod supply chain:

"[T]rade statistics can mislead as much as inform. For every $300 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost). Yet, the value added to the product through assembly in China is probably a few dollars at most."

Chinese value-added is very low in higher technology and more sophisticated electronics exports. It is higher in other products that Americans import from China. According to the findings in a recent NBER paper titled "How Much of Chinese Exports is Really Made in China," about 50 percent of the value of a typical cargo container imported into the United States from China is Chinese value-added, which comports roughly with estimates undertaken by others.

So, as we consider the meaning of China's new status as global export leader, it is important to understand the value and limitations of the trade data.  Those data speak much more convincingly to the virtues of economic interdependence than to China's stand-alone export prowess.