The US trade deficit could technically be halved if statisticians were better able to capture the value of the software developed in Silicon Valley and embedded in smartphones worldwide, according to Hal Varian, Google’s chief economist.
Trade economists have long argued that current methods of collecting data do not reflect the complexities of modern global supply chains, with the iPhone’s physical product an often-cited example.
While US import data reflect the retail cost of a phone as coming entirely from China, only a small portion of its value is actually added in the country, as the phones are assembled in Chinese factories from products sourced from across the world. Most of the profits also go to Apple, a US company, rather than its Chinese suppliers.
Google’s Android operating system — installed on 80 per cent of smartphones around the world — is treated slightly differently by statisticians, because the software is open source, and Google barters it with companies who agree to display Google Apps on their devices. But the effect is similar: Android software does not count towards US exports, but when a finished phone is sold in the US, it is reflected in imports. There are further distortions if the phone is sold in a third country other than the US.
The problem has led economists at the OECD to work on new “trade in value-added” databases to more accurately reflect modern trade. But that data takes years to assemble.
Mr Varian argued it would be a more accurate measure of economic activity to include the value of product design and software in exports. If worldwide sales of smartphones totalled around $400bn a year, with around $200bn of that, at a conservative estimate, representing the value of software, “that cuts the US trade deficit in half”, he told a conference in London.
“It’s easier to count a physical good going into the US and an email attachment going out,” he said. “A chip is counted as an export. Software isn’t. But they do the same job.”
A change of this kind would affect not only measurement of the digital economy, but also sectors such as carmaking and even clothing — where manufacturing costs represented only about 20 per cent of the retail price, Mr Varian said.
These issues of statistical measurement are increasingly contentious in the context of the rising tension on trade between Washington and Beijing.
In 2014, the US Office of Management and Budget abandoned plans to create a new classification of “factoryless goods producers” after receiving thousands of complaints from small businesses that saw it as a smokescreen to hide the decline of American manufacturing.
Mr Varian also said that gross domestic product — often misused as a yardstick for national living standards — would potentially become an even less adequate measure of welfare in a world of global supply chains and rapidly changing technology.
From digital photography to GPS navigation systems, audio players to fitness monitors, discrete services that used to count towards gross domestic product were now largely bundled into smartphones and uncounted because they were effectively free to consumers.
Nor was there any clear way to measure their contribution to users’ welfare or productivity.
“Think about all the time we save from not getting lost,” he said. “GPS is a huge increase on my personal productivity but that doesn’t show up in GDP because it’s not a market transaction.”
Additional reporting by Shawn Donnan in Washington
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