White House Trade Lesson: “Determining Trade Balances”…

It is going to take a heck of a lot of deep-weed education to cut through the economic gaslighting of the multinational corporations, Wall Street and their purchased institutional media.  However, I give the White House team (Secretary Ross, Secretary Mnuchin, Ambassador Lighthizer and Adviser Peter Navarro) a measure of strong credit for beginning:

WHITE HOUSE:  Measurement of trade flows is usually an uncontroversial topic relegated to macroeconomic classrooms and government technocrats. Recent debates about trade policy have brought the topic out of the shadows, and we hope to clarify how economists measure trade.

Every day there are international transactions for tens of thousands of different products. Physical goods, interchangeably called merchandise, are what usually comes to mind first. However, an increasing share of international trade is in services that are not physically transported between countries—think about financial insurance, licensing of trademarks, or services like consulting.

To make the world a bit more complicated, goods and services are increasingly bundled together, such as when a manufacturer sells a piece of machinery along with an international maintenance contract. The machinery is a good, but the maintenance agreement is a service.

From a macroeconomic perspective, economists typically use the balance of payments (BOP) basis. The BOP captures flows of what we would normally think of as imports and exports of goods, but also includes a series of adjustments. This process better aligns trade data with national income accounts such as GDP. The BOP has the added advantage of being applicable to service transactions as well.

The International Monetary Fund defines BOP as “a statistical statement that systematically summarizes, for a specific time period, the economic transactions of an economy with the rest of the world.” BOP transactions are valued using BPM6 methodology that emphasizes using balance sheet analysis to understand international economic developments and to improve comparability with other countries.

In order to construct the BOP, start with the customs value of imports and exports. A frequently used U.S. government data source reports monthly “customs basis” for transactions. There are different methods of customs valuation.

The transaction value method is the price actually paid by the buyer for the imported goods and includes all payments made as a condition of sale. But the transaction may or may not occur at the border—some international shipments change ownership when loaded, others when unloaded, some even at a specified point in transit.

Recognizing this array of contracts, alternative methods that evaluate imports based on identical or similar goods, deductive value, or computed value are used in various situations. Government statistics are specific about where the customs value is reported, with common specifications including “free on board” (f.o.b.), “free alongside ship” (f.a.s.), or “customs, insurance, and freight” (c.i.f) to designate how much of shipping costs are included in the transaction value.

Starting from the customs value, a series of adjustments are made to arrive at BOP. These adjustments are typically fairly small, but they can be significant in aggregate. The current U.S. adjustments are:

In 2017, the aggregate difference between customs goods imports and BOP goods imports was $19.0 billion on a customs basis of $2.34 trillion. For goods exports, the correction was similar—a difference of $4.0 billion on a customs basis of $1.55 trillion.

Subtracting imports from exports gives the trade balance. Trade balances can be calculated for goods, for services, for goods and services, for one country, for a group of countries, or for the whole world.

The most inclusive measure of trade covers both goods and services. Some economists worry about the measurement of trade in services, which may be subject to inconsistencies, and so prefer to focus on trade in goods alone. After all, goods are tangible things that are easier to count.

Others prefer to focus on goods alone because on average all goods-producing industries have higher wages than all service-producing industries; in Q3 of 2017 average total compensation per hour worked in goods-producing industries was about 20 percent higher at $39.97 while the same measure for service-producing industries was $32.21.

Although BOP accounting is similar across nations, each country can interpret BOP methods slightly differently, which leads to differences in reported values of surpluses and deficits. These details are typically spelled out in exhaustive detail in government documents that could be prescribed as a cure for insomnia. For an example, see the Bureau of Economic Analysis document here.

To illustrate some of the concepts presented in this post, consider U.S. bilateral trade balances with Canada. In 2017, the U.S. goods and services balance was a surplus of $2.77 billion. The goods alone balance on a BOP basis was a U.S. deficit of $23.16 billion, but on a customs basis it was a deficit of $17.58 billion. Note that the difference between the BOP goods and services balance and the BOP goods alone balance implies a trade surplus in services of $25.93 billion.

In contrast, Canadian statistics report a goods and services trade surplus with the United States of $26.76 billion, using the Canadian BOP methodology. The goods alone balance is $40.50 billion on a BOP basis.

One important difference in BOP methodology between the Canadian and U.S. approaches is the treatment of re-exported goods. USTR raised a related issue, on the role of re-exports in Census-based bilateral trade balances, in its 2018 Annual Report.  (link)

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This entry was posted in Canada, Economy, India, Japan, Mexico, N Korea, NAFTA, President Trump, Trade Deal, Uncategorized, US dept of agriculture, US Treasury, USA. Bookmark the permalink.

66 Responses to White House Trade Lesson: “Determining Trade Balances”…

  1. Scout says:

    Now put it in a 30 second soundbite for Joe Sixpack who can absorb impressions but has not much attention available for detail.
    There’s the problem.

    Liked by 4 people

    • That’s easy!
      Real markets create a natural balance; artificial markets created by following theoretical models screw the middle class and enrich the upper class.

      Is that easy enough?

      Liked by 13 people

    • Deplorable_Infidel says:

      “put it in a 30 second soundbite”

      That is the problem with the format of the vast majority of MSM broadcasting today. Not enough time is dedicated to really delve into some detail for an issue like this. During the week, forget it. Some weekend programs do a little better. The former Al Jazeera network used to do in-depth television pieces that went into detail during the entire week.
      .
      Besides the rare 30 or 60 minute “special”, the program offering a very detailed analysis form one perspective is Mark Levin’s new show at 10 pm on Fox. The week he has Dr.Larry P. Arnn of Hillsdale College. they will be discussing the founding documents of our country.

      Perhaps more than being concerned with giving Joe Sixpack an economic education, our President is going to rely on tangible results out in the country that Joe Sixpack will see and experience. A plant re-opening and a bigger paycheck at the end of the week cannot be adequately dismissed by “fake news” outlets

      Liked by 5 people

      • Tegan says:

        Put it to rap …and end it with…uh,uh,uh. (For the ghetto Obama voters)
        Cheap imports? That’s like giving you a B.B. gun to shoot deer. (For the NRA voters)
        What would Jesus do..throw the Globalist out of the Temple. (For the Evangelists)

        Hey, it’s a start off the top of my head! LOL. Let’s take the Joe Sixpack challenge…we have some very clever posters. Bako can even write a poem.

        Like

    • wheatietoo says:

      Okay, how’s this:

      Want a good job?
      Cheap Imports = No good jobs.
      How can you afford to buy even cheap imports if you don’t have a job.

      Liked by 8 people

    • DD_SC says:

      Enter H. Ross Perot with charts pointing out that “giant sucking sound”.

      Liked by 4 people

    • Sentient says:

      Summation: turns out Trump was right all along about our trade deficit with Canada.

      Liked by 3 people

      • Sylvia Avery says:

        Yes. I read Sundance’s article, but I majored in English Lit not Business and Econ classes gave me hives so it is safe to say this stuff IS NOT MY THING.

        I struggle through it and catch glimmers of the meaning and can see the shape well enough to know I’m putting my chips on PDJT. I am confident that if he and his econ and trade team tell me something I can believe it and everyone else can just go soak their heads.

        Liked by 3 people

        • Maquis says:

          Sadly, I too am a bit illiterate in the macro-economics department. But I try. And at the end of the day, as with you, I trust PDJT like no other Human Being, ever.

          I am glad though, that they are putting this out there. We now have a few more crumbs of understanding, and for those that live and breathe numbers this is the kind of transparency and willingness to help Americans understand where we are, have been, and are going, that can shift paradigms and help the entire country wake the heck up to the miracles being churned out by this Administration.

          Liked by 3 people

        • Did you see this comment above by Guy Bee? It worked for me, Very clear and concise:

          If you buy more than you sell, you run out of money and have to make up for the loss somehow. We import (buy) more than we export (Sell). Therefore, we have to make up the difference through higher taxes or higher prices.

          Liked by 2 people

          • Marica says:

            I love Guy bee’s comment–“therefore, we have to make up difference through higher taxes (yuk) or higher prices (tariffs) ? Right? I am absolutely for the latter–Americans have too much stuff! We can simplify easier than pay higher taxes…At least thats where I ammcoming from!

            Like

          • Really good, everyone, but IMHO, all you have to know is what the supply and demand curves mean. I had a great econ TA who taught those and he made more sense than anyone else I have read or heard. It is very simple, does NOT involve math, or numbers, or other things you were made to hate or fear.

            Like

          • Sylvia Avery says:

            You’re right, that WAS easy to understand.

            No likee. 😦

            Like

      • DB says:

        Canada and Mexico through NAFTA have been doing the bidding for the likes of China, Korea and India when it comes to cheap goods. The minimal processing requirements within NAFTA make it easy to basically tranship to the U.S.. I’ve been 30+ years in international trade, yes Perot was right and so is Trump now. Oh by the way Sundance… technical tidbit, C.I.F = Cost Insurance & Freight (Incoterms). Doesn’t change the narrative, but anyway, nice piece.

        Like

    • Michael says:

      Charity begins at home.

      Liked by 1 person

  2. H.R. says:

    I get 404 Page not found when I try to access the page that explains the difference between U.S. and Canadian BOP calculations.

    Like

  3. MakeAmericaGreat says:

    As Sundance says, this is going to be an information war. This is where the rubber meets the road for the globalists. This is where they actually will start to lose serious money.

    This is why I’m so glad Trump is doing his personnel revisions now. Get it over with so we are fully loaded to bear for the fight against the COC and the rest of the globalists’ tools.

    Ditch Cohn, Tillerson and anyone else who wants to resist MAGAnomics and MAGA diplomacy.

    We need real fighters in the trenches now. There is much nastiness yet to come. Much of it to come from “our” side.

    Liked by 14 people

    • Deplorable_Infidel says:

      “This is why I’m so glad Trump is doing his personnel revisions now”

      Laura Ingraham said the same thing on her radio show today. She is amazed that the media pundits get so bent out of shape over this and is not the least bit concerned, either.
      President Trump was not an experienced politician, so at the outset his “team” was a mishmash compiled from suggestions from various perspectives (which he wants, to some degree). However, now that he knows what he wants he can make changes accordingly. Especially to those who allow their personal beliefs to interfere with the MAGA agenda.

      Laura had mentioned that someone associated with former Speaker John Boehner was primarily responsible for ,many of the political appointments that were made at the start of the administration, which is how we would up with Mr. Rosenstein as DAG. That explains a lot.
      BTW – Laura will have attorney Allen Dershowitz on her TV show this evening to discuss “guided missile” Robert Mueller.

      Liked by 2 people

  4. fleporeblog says:

    I don’t give a rats a$$ how Canada determines their BOP! According to Charles Payne and our Government, we are getting destroyed by Canada year in and year out!

    At the rate Canada is going, they may have a trade surplus of $43.56 Billion in 2018 ($3.63 x 12 months)!

    The world economies love our President because Americans are so damn happy that they are spending more meaning we are importing more!

    The damn Mexicans are laughing their a$$es off at our expense!

    Liked by 9 people

    • fleporeblog says:

      and Charles is right look what happened today to 1st Quarter GDP projections from both the Atlanta and NY Federal Reserves!

      Look at the reason that the Atlanta Federal Reserve gives for lowering their forecast today:

      “The nowcast of 1st Quarter real private fixed-investment growth increased from 2.4% to 3.3% (THIS IS FANTASTIC NEWS) after this morning’s new residential construction release from the U.S. Census Bureau & this morning’s industrial production & capacity utilization release from the Federal Reserve Board of Governors. This increase was more than offset by the modest downward revisions (HERE IT IS CLEAR AS DAY / DEVASTATING NEWS) to the contributions of real consumer spending, real net exports, and real inventory investment to 1st Quarter real GDP growth.”

      Liked by 6 people

      • wheatietoo says:

        At least the Fed won’t have any reason to raise Interest Rates, with those numbers.

        But given the level of corruption in our bureaucracy, with all the Obama-holdovers still in place…I am struggling with being able to trust what the US Census Bureau is putting out.

        Liked by 4 people

    • Deplorable_Infidel says:

      “how Canada determines their BOP”

      That is an important point for 2 reasons:

      1) The comparisons for both countries would have to be done the same (comparing apples to apples)
      2) We are a sovereign nation, so we have a responsibility to our nation to look out to do what is best for OUR citizens.

      Liked by 2 people

    • talkietina says:

      We will laugh last, because they will pay for the wall.

      Liked by 3 people

    • duchess01 says:

      Cut out the laughing, Amigos! Not funny!

      Liked by 1 person

    • trialbytruth says:

      The other problem Flep is the service economy can be outsourced overnight…. Lets see what was the native language of the last telephone service center person you talked to.

      Liked by 2 people

  5. bessie2003 says:

    The link for the 2018 Annual Report, the last one in your post, says “404 Page Not Found”

    Thanks for this very informative article. I’ve saved it in order to refer back to it from time to time.

    Liked by 1 person

  6. Ziiggii says:

    It’s all Chinese to me… but my Engineering background is Japanese to others!

    Liked by 4 people

    • Kenji says:

      Economics is mostly Voodoo … worse than Chinese. The only part of Economics that makes any sense … is the part where the “consumers” behaviour is driven ENTIRELY by self-preservation. Basic Economic SURVIVAL … is the basic human instinct for self-preservation. If the winter appears to be a long cold hard one … we will ration our food (limited resources) to make it last. If we see a bountiful summer in the future we can afford to take chances. There is no such thing as an Obamaesque “new normal”. And Trump can’t force feed MAGA to us REAL PEOPLE.

      Like

  7. missilemom says:

    Will need to review many more times to come close to understanding fully; but would appreciate more information on how transaction value changes at certain points of transit.

    Liked by 1 person

  8. fred5678 says:

    First modern VAT was France’s in 1950’s, and France asked GATT (now WTO) to EXEMPT their VAT from trade offsets because it was “too complicated” and France was only country with VAT.

    Now 145 countries have a VAT, and all have export/import advantage over countries without a VAT, yet WTO still exempts VAT from considerations. Canada introduced their VAT in 1991.

    https://en.wikipedia.org/wiki/Value-added_tax#Criticisms

    “VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues….”

    ” AMTAC claims that so-called “border tax disadvantage” is the greatest contributing factor to the $5.8 trillion US current account deficit for the decade of the 2000s,”

    and this

    “Trump administration
    A border-adjustment tax (BAT) was proposed by the Republican Party in their 2016 policy paper “A Better Way — Our Vision for a Confident America”,[32] which promoted a move to a “destination-based cash flow tax”[33]:27[34] (DBCFT), in part to compensate for the U.S. lacking a VAT. As of March 2017 the Trump Administration was considering including the BAT as part of its tax reform proposal.”

    https://en.wikipedia.org/wiki/Value-added_tax#Trump_administration

    TRILLIONS at stake, indeed!!

    Liked by 1 person

    • fred5678 says:

      IMPORTANT from above:

      “VAT has essentially replaced lost tariff revenues….”

      VAT’s are TARIFFS. Duh to Tommy and CoC.

      Liked by 3 people

    • trialbytruth says:

      NO VATS ever. Globalist scheme to multiply taking on anything created in country single tax on imports. Want a sales tax, point of sale to end user works for me.

      Liked by 2 people

  9. Deplorable_Infidel says:

    The only things that are certain in life are death and taxes.
    (sigh)

    Like

  10. jeans2nd says:

    The White House link read like Larry Kudlow’s work, so checked the White House link authors
    Yup. Kudlow. Already on the job and working.
    Well done, sir, and thank you. Even this Deplorable dummy understood.
    And thank you to those who provide us the deep weeds here at CTH. Much appreciated.

    Liked by 1 person

  11. MVW says:

    Trump’s team, Wilbur Ross et al, are handling this. There is no better team in the history of the world. My mind is resting easy.

    Liked by 2 people

  12. Elizabeth Carter says:

    This is an article from the Council on Foreign Relations about President Trump’s Tariffs. It is very informative and well worth the read and explains about the day the WTO died.

    https:// http://www.cfr.org/blog/trump-china-and-steel-tariffs-day-wto-died

    Liked by 1 person

    • Sylvia Avery says:

      Well, I read it. I thought it would be interesting because of the title about the day the WTO died because I would simply adore for the WTO to die. I’d drive a hawthorne stake through its heart though, just to be sure.

      It was interesting to see things from the Globalist perspective. Now I have to go take a shower because I got CFR cooties all over me.

      Liked by 3 people

  13. There’s also this, which I have yet to see any person rebut. https://www.youtube.com/watch?v=qmUlN3p8qK8&t=13s

    Like

  14. davecatbone says:

    Only Sundance can make me hang in and focus on stuff described as a cure for insomnia.

    Thanks SD

    Like

  15. Mark says:

    Remember when we were told that trade with China would topple communism there? I seem to remember a certain wife of a certain politician, that sat on the board of the largest importer from China saying the same as well.

    Like

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