TEPAV: “New Definitions for International Trade and Current Accounts Needed” TEPAV stated that some indicators need to be reconsidered since the spread of multinational firms throughout the world has altered the balances between countries.

04/03/2011 - Viewed 1702 times ANKARA - TEPAV argued that the nation-state based analysis of international trade and balance of payments accounts might lead to false interpretations and maintained that the mentioned accounts need to consider new definitions that regard international trade networks.

Evaluation note "Shift of paradigms in the context of globalization: Does Apple damage the US economy?" by TEPAV Research Associate Ayşegül Dinççağ was published. Highlighting that a recent report published by the Asian Development Bank stated that iPhone of the US based Apple is manufactured in China, worsening the bilateral trade imbalance between the US and China to the detriment of the former, the note said:

"Manufacturing of an iPhone involves 9 firms apart from Apple. These firms are based in the US, Germany, Japan, Korea and Taiwan. The components produced by eight firms are assembled in Taiwan-based Foxconn's plant in China. iPhones are then exported to the US and the rest of the world. The production process and the cost structure of iPhone distorts the bilateral trade balance between the US and China to the detriment of the US: Although out of the total cost of one unit of iPhone, which is US$ 178.96, only US$ 6.5 (3.6 percent) originates from China, the entire value of the assembled iPhones sold by China to the rest of the world are counted as China's exports. However, out of a total of US$ 2 billion corresponding to China's exports of iPhone to the US, only US$ 73 million originated from the value added contributed in China."

Emphasizing on the basis of the iPhone case that calculation of international trade balances on the basis of the nation-state definitions falls short in explaining the dynamics in which multinational production chains spread increasingly throughout the world, the note stated that a clearer picture of the current outlook can be drawn by considering the "trade balance = value added - imports" formula accompanied with the conventional "trade balance = exports - imports" formula.

The note maintained that since the spread of multinational firms throughout the world has altered the balances between countries, some indicators need to be reconsidered. The note continued:

"The mentioned process, which affects the trade and current account balances of developed countries adversely, similarly might tend to overstate some indicators in favor of developing countries. For instance, countries hosting the production facilities of multinational firms will enjoy a positive impact on their balance of payment, understating the economic risks. Calculation of the trade balance on the basis of value-added created and of the balance of payments accounts on the basis of ownership might give alternative insights about the state of a given economy. Moreover, stock market indices that give clues about the state of an economy must be reinterpreted since they will be influenced by the decisions of multinational firms in this milieu of globalization."

Implications for Turkey...

Emphasizing that the mentioned indicators and paradigms are of importance for countries like Turkey which go through a process of transition from medium-technology to high-technology production pattern, the note concluded: "In order to analyze the economic impact of the changes in export patterns as a result of the production multinational firms carry out in Turkey, international value chains must be considered and the current account deficit phenomenon must be reinterpreted in the context of globalization."