Sun-Sentinel interview with Tony Villamil, CEO

May 1, 2005 -
The soaring U.S. trade deficit has many Americans worried. But they needn't be, says economist Tony Villamil.

By focusing on trade in goods, they're looking at an antiquated measuring stick -- a tool that helped set policy decades ago when America depended on manufacturing and most countries traded little.

But fretting over the wrong number now can lead to bad policy, at a time when America depends more on services and when U.S. companies spread production across borders.

Indeed, it's time to invest in updating U.S. economic accounting for the global economy -- just as we're revamping U.S. intelligence to combat terrorism after the Sept. 11, 2001, attacks, Villamil says.

The South Florida Sun-Sentinel talked with Villamil -- a former U.S undersecretary of commerce, Florida's former economic czar and member of President Bush's trade advisory group. An edited version follows.

Q: People worry about the trade deficit, but you say it's an outdated measure. Why?

A: The merchandise trade deficit was meant to measure an economy when we made go ods, when nations were mostly closed, when exports were good because they led to good jobs, and when imports were bad, because you were buying someone else's production. It derives from an industrial age in the 1940s and 1950s.

But today, companies and people do business all over the world. For example, when I go to Naples, I see Germans who have companies that design machinery in Florida, and then send information over the Internet to have the machines made in Germany and sold back in the United States. That integrated activity is not reflected in a goods import bill [of shipping]. It doesn't reflect that we're exporting knowledge services from the United States.

Q: So what should we be counting instead -- services?

A: We already count services in our national accounts, but badly. For instance, when a visitor comes to South Florida from Europe or South America, and they rent a hotel or eat at restaurants, we're exporting a tourism service, and we count that. But we're not good at measuring other knowledge-based services we export.

Q: Like what?

A: Legal services. When lawyers in Florida provide advice in Latin America and Europe and bill the foreign company, that's an export of a knowledge-based service. But we don't have a sample at the national level to capture that.

And medical services we provide visitors at hospitals, we don't count that properly. Or educational services. Kids come here from the rest of the world to our universities. They pay foreign tuition, which is higher than state tuition, and their families come and spend. That's export hardly measured.

Q: So how can we improve the accounting?

A: We need to provide more money for the Bureau of Economic Analysis and the Bureau of Census. But every time you tell a congressman or senator we need to improve our statistics, you give them a case of MEGO: "My Eyes Glaze Over."

So, we're not capturing the global economy in our data, and that misinforms the public. For example, many people see China's huge exports to the United States as a problem. But it may be that China is exporting too much because of unfair trade practices. Or maybe the exports come from U.S. companies producing in China.

Now, if we decide to close the U.S. market to Chinese clothes because of the deficit, because we think imports are bad, then you, me and our neighbors -- we're all going to pay a higher price for clothes.

Q: Is there a way to separate out trade by U.S. companies? Or do U.S. companies even exist in a global economy?

A: That's the problem. We don't know. We don't know if our deficit with Germany, for example, is U.S. companies producing in Germany or German companies that have part of their production in Florida.

Q: So how do we realign the system? And if we don't, do we have wrong policies based on wrong measurements?

A: We're having wrong policies based on wrong measurements all over, not only the trade deficit. We have problems with the way we compute the gross domestic product or GDP, for example, because of the way we measure services.

We need to take very seriously what I call "statistical radar" to make policy decisions.

If you're flying a plane, and the radar is telling you that you're going to hit a mountain, you're going to climb. But there may not be a mountain in front of you. Or imagine you're flying and the radar tells you everything is fine and then, you hit a mountain. It's the same with statistical systems. It's our radar for the future.

And right now, we're not measuring properly. What we need to do is invest, work with the United Nations, with the International Monetary Fund and develop a system that truly measures what's going on in this integrated, global system of production.

Q: What kind of investment are we talking about? Tens of millions of dollars or hundreds?

A: Not hundreds, but certainly millions. You need to increase the size of samples and coverage. You need to do primary research in countries exporting to us and at least understand who is exporting and why.

Q: And on the services side?

A: On services, samples definitely need to be expanded, too. We're not counting services properly, and that's why the trade deficit [in goods and services] looks so huge and why people are very concerned and get protectionist.

Q: Is there any country keeping better records? Or have we all evolved so fast that systems haven't kept pace?

A: There are really no models, and again, it's a case of MEGO, "My eyes glaze over." This is not a "fun" thing to look at. But it's a good investment, with a huge return.

Doreen Hemlock can be reached at dhemlock@sun-sentinel.com or 305-810-5009.

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