Atlantis wrote:Merkel is right that traditional ways of representing trade flows of goods and/or services don't give an accurate picture of trade relations.
She said "based only on goods", which is simply nonsense.
Anyway,
the paper I was talking about.The issue is explained well in the paper:
Second, MNEs own significant stocks of intangible capital (e.g., intellectual property,
brands, blueprints) and have a presence in countries that vary widely in corporate tax rates.
These characteristics allow MNEs to legally take advantage of differences in national tax
regimes to shift profits from high-tax jurisdictions—such as the United States—to lowtax
jurisdictions, such as Bermuda. Increasingly common profit-shifting practices include
transfer pricing and complex global structuring related to intangible capital, in which an
MNE effectively underprices intangible capital when“sold”from one of its entities in a hightax
jurisdiction to another of its entities in a low-tax jurisdiction or engages in a series of
transactions among subsidiaries that are strategically located in order to reduce the MNE’s
effective global tax rate. For U.S. MNEs, these strategies allow them to book earnings in
low-tax foreign affiliates in ways that are disproportionate to the economic activity carried
out in those affiliates. These tax strategies have generated discussion among both the
compilers and users of official statistics regarding the treatment of transactions within
MNEs and their effect on national statistics.
The effects of profit shifting on value added can be illustrated through a concrete
example. Consider the iPhone, which is developed and designed in California but assembled
by an unrelated company in China, with components manufactured in various
Asian) countries. Taking some hypothetical ballpark figures, suppose the bill of materials
and labor costs of assembly amount to $250 per iPhone and the average selling price is
$750, for a gross profit of $500 per phone. For simplicity, assume that there are no further
costs of retailing and that all iPhones are sold to customers outside of the United States.
Two important questions arise from this simple scenario: First, defining GDP as total
domestic value added, how much should each iPhone contribute to U.S. GDP? Second,
given the profit-shifting practices described above, how much of each iPhone’s gross profit
is actually included in U.S. GDP?
To answer the first question, note that the $250 paid to contract manufacturers and
suppliers in Asia is not part of U.S. GDP, whereas how much of the $500 gross profit
should be attributed to U.S. GDP depends on where that value is created. If consumers
are willing to pay a $500 premium over the production cost for an iPhone, it is because they
value the design, software, brand name, and customer service embedded in the product.
If we assume these intangibles were developed by managers, engineers, and designers at
Apple headquarters in California (Apple, U.S.), then the entire $500 should be included in
U.S. GDP. In the national accounts, the $500 would be a net export under charges for the
use of intellectual property in expenditure-based GDP, matched by an increase in Apple’s
earnings in income-based GDP. To the extent that some intangible assets were created
outside of the United States, only the appropriate share of the gross profit and related net
export would accrue to the United States.
As to the second question, the gross profit actually included in U.S. GDP may be
very small. Suppose that Apple generates intangible assets in the United States and
legally transfers them to a foreign affiliate (e.g., one in Ireland). Payments for the use of
intellectual property will accrue in Ireland rather than in the United States, which means
that the returns to Apple U.S.’s intangible assets are attributed to an Apple affiliate outside
the United States and not included in U.S. GDP. In this case, the returns are captured in
“income on USDIA,” which is included in U.S. gross national product,
Thus, relative to the conceptual measure, U.S. net exports and GDP are understated and
earnings on USDIA are overstated.
...
Profit shifting distorts the relationship between the location of economic activity and
the location of reported profit. To realign reported profit and economic activity, we use
the firm-level data to reattribute earnings on USDIA among a U.S. parent and its foreign
affiliates, based on factors that reflect economic activity, under a method of formulary apportionment.
Under this method, the total worldwide earnings of an MNE are attributed to
locations based on apportionment factors that aim to capture the true location of economic
activity. As apportionment factors, we use, in each geographical location, a combination
of (i) labor compensation and (ii) sales to unaffiliated parties, as they are likely to be
good proxies for the actual economic activity taking place in each location. It should be
noted, however, that formulary apportionment assumes away real factors that can create
differences in the returns to productive factors in different locations. Primarily for this
reason, the results of formulary apportionment presented here should be interpreted as
rough estimates; it is our intention to emphasize the direction of adjustments rather than
the level of the adjustments.
...
Our assumption is that the reattributed income is the result of intangible assets created
in the United States, so the exports would be classified as“charges for the use of intellectual
property” and counted as a service export from the United States. In Figure 11b, we plot
the trade balance for goods and services separately. Our adjustment does not change
the goods trade balance, so the only differences between the adjusted and unadjusted
goods trade-balance-to-GDP ratios are from changes to GDP in the adjusted measure.
Our adjustment makes the services trade balance more positive, and, as before, the effect
grows over time and especially rapidly in the 2000s. In 2014, the unadjusted services trade
balance is 1.5 percent of GDP, and the adjusted services trade balance is 3.1 percent of
GDP.
These large effects of our adjustment on the trade balance raise a natural question:
What is the effect on the current account? As is evident from equation (1), our adjustment
decreases income on USDIA and increases exports of services by the same amount, leaving
the current account unchanged.
USDIA stands for "U.S. direct investment abroad". Note what they do is just different accounting, income on USDIA is being replaced by export income, de facto it changes nothing, but it reduces the overall trade deficit roughly by half.
I think we can draw two conclusions from this:
1) The trade deficit is even less of an issue. The high return on American assets abroad relative to foreign assets in the US stems from the market power of American MNEs and less from some irrational believe in the safety of the dollar.
2) American MNEs and thus US capital income are dependent on access to foreign markets, where most of the profits are made.
Trump's strategy against the trade deficit already looked stupid before, now even more so.
- By late
- By Deutschmania