Commentary: The Slip Up That's Slanting The Trade Deficit

Congressional critics of America's trade policy clear their throats around the third Thursday of every month. That's when the government releases its monthly report on the U.S. trade deficit, which hit a record $19.7 billion in March.

Before they speak up next month, however, those critics might do well to ponder one big problem with those numbers. Because exports are not measured accurately, billions of dollars' worth of trade goes uncounted. The Commerce Dept. estimates that as much as 10% of U.S. goods exports--which totaled $671 billion last year--simply slips across borders untallied. And because the government does a better job auditing imports, undercounting exports results in a higher trade deficit. Had all exports been tallied, the 1998 U.S. trade deficit might have been as little as $101 billion, far below the reported $169 billion.

LOST IN CYBERSPACE. Why are exports undercounted? Small-ticket items such as auto parts, software, and gourmet foods--any outbound shipment that's valued at less than $2,500--does not have to be reported to the Commerce Dept. And the volume of these small shipments is rising. For starters, the number of small companies exporting, typically in small shipments, is growing. A May 25 survey of 10,000 small businesses by the National Association of Manufacturers found that 36% of companies derived 5% or more of revenues from sales abroad in 1998, up from 27% in 1992.

Also, just-in-time inventory techniques add to the sub-$2,500 flow as U.S. companies feed parts to overseas factories in small, sometimes daily, batches. And the North American Free Trade Agreement spurs U.S. companies to move assembly plants to Canada and Mexico. Many of the small shipments of components to these plants go uncounted.

Commerce also has trouble tracking software sales and E-commerce. For example, at Kent (Conn.)-based Cyberian Outpost Inc., which sells PC goods online, some 15% of its $85 million in fiscal 1999 sales--about $12.75 million worth of PCs and related products--were shipped overseas. Nearly all of the parcels fall below the $2,500 reporting threshold, so few are counted. Software downloaded over the Web also goes virtually unreported. "Measuring what's happening on the Web in a way that's statistically meaningful requires new categories and new definitions," laments Commerce Under Secretary for Economic Affairs Robert J. Shapiro.

The Clinton Administration is trying to modernize its reporting system. One proposal would create a single agency to track all international trade. But the "International Trade Data System" so far exists as little more than a Web site. Until the case of the missing exports is solved, critics should think before sounding their monthly alarm.

Before it's here, it's on the Bloomberg Terminal.