Overlooking services’ key role distorts trade picture

Trade statistics do not report services - and if they did, the numbers would be severely understated - twisting economic perceptions

PUBLISHED : Wednesday, 02 April, 2014, 10:29am
UPDATED : Thursday, 03 April, 2014, 5:17am

In less than a week's time, there will be a rash of commentary on the subject of the latest Chinese trade data and what it says about the health of the mainland's export engine and the state of demand in the global economy.

It will be about as useful as the commentary a little less than a month ago after China reported an unanticipated contraction in exports of some 18 per cent in February versus a year ago and set off speculation that the fall - after a surge in January - meant either that China would not meet its 2014 growth target or that it was merely a blip that could be explained by proximate one-off causes.

Whatever the impending March data tells us, it will be less than we should know.

While traditional monthly trade numbers do reveal something about how buoyant an economy is in the short term, they do not tell us enough to assess actual trade performance and its contribution to growth.

These regular trade data releases from countries around the world do little to challenge the famous dictum attributed by Mark Twain to Benjamin Disraeli about there being lies, damned lies - and statistics.

A serious shortcoming is that these statistics do not report services trade, and if they did, the numbers would be severely understated.

The direct consequence of this is to distort business and government perceptions of economic realities and opportunities.

By the standard means of measurement, services are about 25 per cent of total global trade. Yet in production statistics (gross domestic product), they account for some two-thirds of all output.

If China were to report services exports in its traditional monthly releases, the share would be about 10 per cent, compared with a GDP contribution of more than 45 per cent and rising.

These trade shares simply can't be right. Services cross borders to a far greater degree than that.

In large measure, the problem lies in a statistical oddity that I pointed out in this column a month ago - GDP is measured in terms of value addition, while trade is measured as gross value.

That, for example, makes it look as if Hong Kong's total exports are 225 per cent of national production.

Singapore comes in at 200 per cent, Malaysia at 87 per cent and Korea at 57 per cent.

These gross export figures are nonsense, because they take no account of the import content of exports. How can Hong Kong's and Singapore's exports possibly exceed the total value of their GDPs?

Services are a far bigger casualty of the flawed arithmetic than goods.

The consequence of measuring production as value addition and trade as gross flows is that many services are incorrectly counted as goods in the trade numbers. They are incorporated in the gross value of exported goods instead of being separately identified.

The more an economy relies on trade, the greater is the double counting.

The incorrect classification of goods as services occurs to a much lesser degree than the reverse. There are two reasons for this.

One is that services typically contribute more to national economies than goods. This tendency intensifies as incomes grow and the consumption baskets of richer people become increasingly services-intensive.

More importantly, services play a different and - because of globalisation - expanding role in practically all economies. They are essential to many transactions among and between producers and consumers. Services such as telecommunications, distribution, transport, insurance and banking are central to practically every aspect of economic activity.

Our incapacity to get the numbers right makes it much harder to set sound policy and strategy

Many other services one can think of also enter the picture, such as professional and business services, hotels, restaurants, catering, entertainment, household services, maintenance, repairs and many others.

As much of these services are incorporated in exports valued in gross terms, what remain as reported services trade are only those items that can be picked up in the balance-of-payments statistics, involving such activities as cross-border transport, insurance, and tourism for which international transactions can be identified separately.

Production statistics are much better at teasing out the services component, because they look at where value comes from.

Measure exports in the same way as GDP, and the global share of services in trade jumps to almost 50 per cent. For China, the number jumps to more than a third from 10 per cent.

These misperception traps born of statistical inadequacies are highly significant in economic terms.

While the data-drenched details may seem arcane to some, our incapacity to get the numbers right makes it much harder to set sound policy and strategy.

Services play increasingly prominent roles in generating value, determining trade opportunities, contributing to jobs and driving productivity growth. They are central to modern economies.

No government or business can ignore the real and growing role of services in modern economies and expect to prosper.

Patrick Low is vice-president of research at the Fung Global Institute