Last October 14th, with gloom gathering like a thunderhead over Wall Street, the government reported the trade deficit for August -- an abysmal $15.7 billion. The Dow Jones Industrial Average promptly fell 95 points, a psychological break point that helped set the stage for Black Monday five days later.
The monthly trade figures are the most closely watched numbers in Washington these days. Around them orbit a thousand economic moons, each with its own impact on the business world. Interest rates rise and fall on their announcement, the dollar goes up or down, and talk of hard times ahead reduces spending and hiring.
The trade numbers, however, are so inaccurate and so unrepresentative of the U.S. economy that it is frightening that they yield such important consequences. Consider this: the monthly figures measure only merchandise trade -- and not very accurately at that. They ignore completely all trade in services, despite the fact that the service sector accounts for more than 70% of this country's gross national product. It's doubtful that the monthly figures reflect the true position of U.S. trade within several billions of dollars. But coming as they do with the imprimatur of the government, the only source of these figures, they might as well be carved in stone. To paraphrase a saying in the computer industry, it's garbage in, gospel out.
The garbage going in consists of tabulations of tangible merchandise -- Toyotas, VCRs, petroleum, airliners. In all, the U.S. Customs Service collects data on some 10,000 product categories. Counting tangible goods leaving U.S. gateways would seem to be a rather mechanical task, what with export declarations and all manner of Customs paperwork. But Customs stations, overworked or unmanned, occasionally miss things, such as fully loaded 18-wheelers rolling into Canada. Incredible though it may seem, the government last year reckoned it was underestimating exports to Canada alone by about 25%. Soon the government will begin using Canadian import figures, instead of American export data, in trade calculations.
Moreover, Customs sometimes records erroneous valuations. Seldom captured at all are discounts after the fact, rebates, and the like. Then there are the frantic fluctuations of currency exchange rates. "This gets you into all sorts of problems," says economist Sar Levitan, director of the Center of Social Policy at George Washington University. "You have to adjust for the changes in the dollar value of yen, marks, francs, pounds, and pesos, and that becomes a statistical nightmare."
The most serious fault of the monthly figures, however, is that they grossly misrepresent the nature of the U.S. economy. Devised during the bygone days of America's unchallenged industrial supremacy, the numbers measure only merchandise, or manufacturing, trade. As emblems of America's declining industrial strength, the figures may paint an accurate enough picture. But by ignoring the booming service sector, the statistics greatly exaggerate the nation's trade problem.
The government does track service exports -- they are included in the balance of payments -- but there is a good reason that economists like to call them "the invisibles." For if the government can miss tractor trailers entering Canada, what chance does it have of documenting transponder leasing space on Intelsat satellites, say, or overseas phone calls?
The thankless task of monitoring service exports falls to the Bureau of Economic Analysis (BEA), a division of the Commerce Department. This is the sanctum sanctorum of the government's statistical empire, home of the GNP, the balance of payments, and a publication called Survey of Current Business, the bean-counter's bible. Its 400 staffers, mostly economists, operate from a cramped set of offices several blocks from the White House.
To get a sense of the complexity of their job, consider what is classified as service exports. Start with the 350,000 foreign students in the United States and their expenditures on tuition and housing. Move on to the outlays of all foreign tourists and businesspeople who reach our shores. Tally up medical costs to aliens who come here for health care. And throw in all dividends and interest payments to auslanders who invest in American corporate and government securities. Then, to count service imports, they turn it all around and do the same for Americans buying services abroad.
But that's just the start. The tough part involves overseas transactions of American businesses. Every time an American lawyer, engineer, business consultant, or contractor performs work for foreigners, it is an export of services. Much of it is impossible for the BEA to capture.
Take the case of Thomas Gray, chief economist for the Small Business Administration. Not long ago, he took a leave from his job and flew to Turkey to consult for the Turkish government. For a week's work, he earned about $2,000. "That money is not ever going to get caught in the trade figures," Gray says. "And there are probably thousands of cases like that. We are a brainpower center. We have collected and trained bright people from all over the world, so we ship a lot of services. Information and services are what this country is increasingly about."
Nor will the government measure the service exports of Pacer Systems Inc., in Billerica, Mass. A $33-million company, Pacer is on the verge of booking $4 million to $5 million a year in service business abroad, largely in engineering and computer work. It will be operating as a subcontractor to a native company. "That kind of activity is invisible to the government," says president Jack Rennie. "It just doesn't show up anywhere."
To collect information about service exports, the BEA mails out surveys by the thousands to large service companies. One survey tries to measure freight charges by airlines and ocean shipping firms that transport goods to and from the United States -- the Pan Ams and Lufthansas. Another survey collects data on premiums paid by foreigners to American insurance companies -- but for reinsurance only. A third survey covers U.S. companies selling architecture, engineering, construction, and mining services to foreigners -- big firms such as Bechtel Group. The fourth gathers information on fees, royalties, and licenses paid to U.S. companies for foreign use of copyrights, trademarks, franchises, and manufacturing processes.
