Transfer Pricing Associates

Increasing intangibles trade and its importance

post Wednesday May 2, 2012

renjith krishnan

The saying “when America sneezes, the rest of the world catches a cold” represents the fact that the US has been widely known for being one of the leading economies of the world.

More surprisingly however is their ongoing trade deficit since the mid 1980’s. The US has been a longstanding major importer of goods and services, often resulting in large trade deficits. But what causes these large trade deficits? Krugman and Baldwin did a study on the origin of the trade deficit in the US and found that exchange rates, trade volumes, trade deficits and trade prices all affect the balance of trade. Since 1985, when the US experienced a large decline in their exchange rate, import prices did not change and US producers did not take advantage of this decline in exchange rate. All this together with the increases in imports by a higher rate than increases in export, leads to large trade deficits.

According to the Bureau of Economic Analysis, the trade deficit in the year 2010 was roughly $500 billion versus a higher figure of $560 billion in 2011, which is higher than the GDP of Hong Kong and Venezuela put together [Source: IMF world economic outlook database, 2012].The US kicked off the first month of 2012 with a trade deficit of $52 billion, which is the highest it has been for a single month since 2010. Delving deeper we see that the main trade in the service sector has been accounted for by “other private services” which consists of financial, educational, insurance, telecommunication, engineering, architectural and construction services, to name a few ($23 billion for exports and $17 billion for imports respectively).

Did you know that the export by end use category for January 2012 has been the highest in the “capital goods” category ($43 billion)? It encompasses anything ranging from computer accessories, industrial engines, semi conductors and textile, to railway transportation equipment, drilling and oilfield equipment, whereas the main imports have been in “Industrial Supplies” ($65 billion). The increase in the deficit has been largely due to an increase in imports of automotive vehicles, parts and engines (a 10% increase from December 2011 to January 2012) and a 3.3% increase in petroleum goods imports.

On the intangibles side of the trade balance, according to Athena Alliance, in January 2012, the increase in intangibles exports was $68 million. This can be mainly attributed to the increment in royalty fees. Overall, the trade balance for intangibles has been upward trending since 2006.

When comparing the trade balance of goods with that of intangibles, it becomes clear that the trade deficit of goods has increased from January 1992 till 2008 (at -$80 billion). It then decreased suddenly to -$40 billion in 2009 only to subsequently increase again to -$70
billion in 2012. The trade balance of intangibles, however, has always been positive, and has especially been increasing since 2010, as of January 2012 its been at $13 billion. Furthermore, the business services trade balance has been positive and upward trending since 1992 and increased even more since July 2010 and is as of January 2012, at a level of about $6 billion.

From the figures it is obvious that the exports in intangibles has been the US’s strength as compared to goods and business services trade. Nowadays the importance of the knowledge economy and thus intangibles are being resonated across studies and the corporate world. Hence the increasing focus on intangibles by the US could potentially signal a convergence from mainly bottom line focus and industrial logic, to more human, knowledge focused corporations.

[Sources: Athens Alliance, Bureau of Economic Analysis and “The growing importance of intangible assets in the stock markets” by Ghisi et al.]

Image courtesy of renjith krishnan

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