ProgramProgram Report Report

IPP introduces the statistical stability of calculated in- The set of LOO price indexes selected additional Locality dexes. This article discusses trends for publication was determined accord- found in these newly-published Local- ing to the current levels of pricing data of Origin import ity of Origin import price indexes. collected monthly by the IPP as part of price indexes the voluntary survey sample of import- Background ing and exporting U.S. companies. To Helen McCulley guarantee accuracy and stability of a and The motivation for producing price in- price index by locality of origin, an in- Melissa Schwartz dexes by geographic region of origin is dex must contain consistent and abun- twofold. First, the types of products be- dant price information. The methods for The International Price Program (IPP) of ing traded differ across localities; there- selecting potentially publishable LOO the Bureau of Labor Statistics, as the pri- fore, price indexes across localities indexes based on accuracy and stability mary source of data on price changes in should exhibit different trends that could are outlined in the “Other decision cri- the foreign sector, publishes monthly in- not otherwise be observed from the teria” section of this article. Data on dexes of import and export prices for world goods price indexes. For ex- imported products from the Consump- U.S. merchandise.1 While such indexes ample, the proportion of trade in manu- tion Entry Documents collected by the convey price information across prod- factured goods is relatively higher for U.S. Customs Bureau serve as an infor- uct categories of goods traded between industrialized countries than for devel- mation source on the value and type of the United States and the rest of the oping countries.5 As such, petroleum trade with foreign countries. These data world, there is evidence that price trends and other raw materials prices have a serve as weights across product catego- further vary by the geographic source of lesser impact than manufactured goods ries within an LOO index and are updated the product being traded.2 U.S. Local- prices in the industrialized LOO price in- annually to reflect frequent shifts in ity of Origin (LOO) import price indexes dex than in the other LOO price index. trade. The preferred price basis for im- were first published by IPP in 1992 for (See chart 1.) ports is f.o.b. (free on board), which is the following groupings, geographic re- Second, the U.S. ’s fluctuation the price at the foreign port of exporta- gions, and countries: industrialized and against foreign has an impact tion before insurance, freight, or duty other countries, Canada, European on internationally traded products. The are added. The product universe for Union, , and the Asian Newly In- magnitude of the influence of constructing price indexes is defined as dustrialized Countries (NICs); in 1997 fluctuation on price levels (often re- all merchandise that is consistently the Latin America locality was added to ferred to as the pass-through rate) de- traded, excluding works of art, military publication.3 Since 1992, other coun- pends on a variety of factors. 1) His- items, and used items. tries and regions such as and torically, raw materials prices have been The LOO indexes are constructed us- Mexico have emerged as important trad- more independent of exchange rate fluc- ing a modified Laspeyres index formula ing partners with the United States. tuations than finished goods prices. 2) and the North American Industrial Clas- Thus, in January 2005, price index se- The magnitude and duration of ex- sification System (NAICS) for the aggre- ries for these two countries were added change rate movements also impact the gation structure. An updated classifica- to the set of published LOO price indexes pass-through rate—larger and more per- tion system reflecting new and emerging along with six other localities: France, manent fluctuations are more likely to industries, NAICS has been implemented Germany, the United Kingdom, the Pa- pass through to prices. 3) A particular or is in the process of being imple- cific Rim, the Association of South East industry’s pricing conventions, such as mented across many Federal statistical Asian Nations (ASEAN), and the Asia Near longer durations between negotiations agencies to provide a consistent concep- East.4 (See box.) The new localities were among buyers and sellers, tend to result tual framework. The NAICS further al- determined according to customer inter- in less responsiveness to exchange rate lows the LOO indexes to be published— est, having a sufficient number and va- fluctuations. 4) The impact of exchange publishability standards permitting—at riety of usable item prices to reflect the rate movements on transaction prices the disaggregated “manufacturing” and actual dollar value and type of trade, and between trade partners may vary de- “nonmanufacturing” categories. pending on whether said trade is intra- Helen McCulley is a mathematical statistician, and Melissa Schwartz a former economist, in the firm or not. 5) Finally, the degree of Recent trends International Price Program, Bureau of Labor competitive pressures in an industry can Statistics. determine whether a seller absorbs ex- The United States is the world’s larg- E-mail: [email protected] change rate fluctuations or passes them est market for other exporting coun- [email protected] on to selling prices. tries. In 2004, it imported more than

36 Monthly Labor Review December 2005 been one of world’s tional Price Program is introducing in- U.S. locality of origin (LOO) import price indexes fastest-growing; its dexes for the Pacific Rim region and the gross domestic Association of South East Asian Nations Industrialized countries product (GDP) has (ASEAN). Comprised of 14 Eastern Other countries grown from around Hemisphere nations—including China, Canada $600 billion in Japan, and Australia—the Pacific Rim European Union 1978 to well more is the most aggregated regional price France than $5 trillion in index for that part of the world. The Germany 2003. Direct for- ASEAN was established in 1967 with the United Kingdom eign investment in- mission of providing not only economic Latin America creased to nearly integration, but also cooperation in so- Mexico $50 billion, up from cial areas such as health, labor, poverty, Pacific Rim less than $300 mil- women’s and children’s issues, educa- China lion in 1978, while tion, and disaster management. Its Japan the volume of im- population extends to nearly 500 million Asia Newly Industrialized Countries (Asian NICs) ports and exports people with a collective GDP of nearly Association of Southeast Asian Nations (ASEAN) both increased by $686 billion, and exports to the United Asia Near East well more than States totaling nearly $82 billion in 1,000 percent over 2003. 7 NOTE: Localities in bold were added to publication in 2005. the same period. Chart 4 displays the China, Pacific All other LOO indexes were first published in 1992, except Latin More recently, the Rim, and ASEAN Locality of Origin im- America which was first published in 1997 growth of China’s port price series for 2004. Because such imports, particu- small percentages of imports from these larly for raw mate- regions are of nonmanufactured goods, $1.3 trillion worth of merchandise— rials, has been attributed as a factor in the price index for all imports exclud- accounting for more than 17 percent rising world spot prices for raw materi- ing petroleum is included in the chart for of the total value of world-wide im- als and energy.8 Their fuel and raw ma- comparison purposes. The data show ported goods.6 Of the total 2004 U.S terials imports have increased more than that the price index for imports from imports, half came from the four top 250 percent over the last decade. Chi- China is stable throughout 2004; during trading partners: Canada (17 per- nese demand for finished goods has also this time the U.S. dollar equaled roughly cent), China (13 percent), Mexico (11 increased substantially over the same 8.28 yuan, which has been the exchange percent), and Japan (9 percent). (See period: manufacturing imports have in- rate since October 1998. Prices for im- chart 2.) When the Locality of Origin creased more than 200 percent. ports from the ASEAN have drifted indexes were first introduced in 1992, China has also become a major pro- slightly downward over the year, evi- Canada and Japan were overwhelm- ducer of manufactured products. Its ex- dence of the falling price trend for world ingly the top suppliers of merchandise ports of manufactured products have in- computers and electronics, an industry to the United States. (See chart 3.) creased well more than 400 percent in area that comprises approximately 57 In the time since, the volume of trade the past decade. The United States is percent of imports from the ASEAN re- with the United States for both China’s largest market, and approxi- gion. Prices for imports from the Pa- Mexico and China substantially in- mately 40 percent of China’s exports cific Rim region as a whole, like those creased; imports from China have were purchased by the United States in from China, were relatively flat during grown a staggering 665 percent since 2003, consisting mostly of the follow- 2004. 1992, and imports from Mexico have ing manufactured items: office and grown 343 percent over the same pe- household machinery, telecommunica- Mexico. Mexico has also become an riod. What has changed? tions and electronic equipment, furni- increasingly important trade partner ture, textiles, clothing, and footwear. with the United States. Since the en- Asia-Pacific region. In 1978, the year Imports from the Pacific Rim region actment of the North American Free Deng Xiaoping announced China’s as a whole totaled nearly $500 billion in Trade Agreement (NAFTA) in 1994, Open Door Policy, market-oriented eco- 2004, more than doubling the import Mexico’s trade with the United States nomic reform began in China, including dollar value since 1992. Adding to the and Canada has tripled.9 Despite the the opening up of markets to world set of price indexes for imports from economic crisis that began in late trade. Since then, China’s economy has Asian-Pacific economies, the Interna- 1994 and resulted in a large current

Monthly Labor Review December 2005 37 Program Report

Chart 1. Comparison of world import price indexes with industrialized and other countries LOO indexes Annual percent change Annual percent change 15 15

10 10 All imports Industrialized countries Other countries

5 5

0 0

-5 -5

All imports less petroleum

-10 -10

-15 -15 1993 94 95 96 97 98 99 2000 01 02 03 04

Chart 2. Proportion of U.S. imports value held by top trading partners, 1992 and 2004, in percent

1992 2004

(Total = 100 percent) (Total = 100 percent)

Japan Mexico Japan 18 11 9 Mexico 7 Canada Canada 19 China 17 China 13 5 Germany 5 Germany 5

Other Other 42 42 United Kingdom 4 United Kingdom 3

NOTE: Data are in millions of U.S. , not rebased because these are percentages of total.

38 Monthly Labor Review December 2005 Chart 3. U.S. imports from top trading partners, by U.S. dollar value of trade

U.S. dollars U.S. dollars (in millions) (in millions) 300,000 300,000

Canada Japan Mexico China

250,000 250,000

200,000 200,000

150,000 150,000

100,000 100,000

50,000 50,000

0 0 1993 94 95 96 97 98 99 2000 01 02 03 04

Chart 4. Comparison of Association of Southeast Asian Nations (ASEAN), China and Pacific Rim locality of origin indexes with the nonpetroleum import index, 2004

Index Index (Dec. 2003 = 100) (Dec. 2003 = 100) 105 105

104 104 Nonpetroleum import index 103 103

102 102 Pacific Rim 101 101

100 100 China 99 99

98 ASEAN 98

97 97

96 96

95 95 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Monthly Labor Review December 2005 39 Program Report

account deficit necessitating the in U.S.-Mexico trade: about 64 per- gether, the three countries make up more Mexican government to float the cent of U.S. imports from Mexico and than half of the total dollar volume of peso—which subsequently lost half of about 35 percent of U.S. exports to imports from the European Union—and its value against the U.S. dollar— Mexico represent related party trade.11 each is a significant contributor to the Mexico’s export sector rebounded Chart 5 displays the path of the im- region’s production of motor vehicles quickly. Mexico’s GDP grew an aver- port price index for goods from Mexico and chemicals, the industries account- age of 12 percent per year from 1996 in 2004 along with the all imports price ing for the largest share of U.S. imports to 2000; and in 1995, Mexico began index. Import prices from Mexico from the European region. running trade surpluses with the trended upward over the year in a ten- Chart 6 plots the import price in- United States. Such surpluses have dency similar to overall import prices, dexes from Germany, the United grown to more than $40 billion, and though the former showed a more pro- Kingdom, and France along with a in 2001 Mexico overtook Japan as the nounced increase and subsequent de- U.S. dollar-euro exchange rate index United States’ second largest trading crease resulting from the sharp petro- for comparison.12 The U.K. import partner (after Canada) before more leum price movements in the fall. price index diverges from the two recently being surpassed only by other countries’ indexes and is attrib- China. Approximately 85 percent of European countries. The International utable to the effect of world petroleum Mexico’s exports go to the United Price Program has published a Locality prices on the United Kingdom’s re- States, comprising nearly one-quarter of Origin price index for the European fined petroleum industry. A notewor- of Mexico’s GDP.10 Mexico is not only Union since 1992. In 2005, price in- thy phenomenon in recent years is the the fourth largest supplier of petro- dexes for imports from France, Ger- U.S. dollar’s weakening against ma- leum to the United States, but also a many, and the United Kingdom were jor foreign currencies, particularly the significant supplier of manufactured individually added to the set of pub- euro. Between its June 2001 peak and goods such as motor vehicle parts and lished indexes to provide a more com- January 2005, the dollar has lost more electronic equipment. Furthermore, prehensive picture of the behavior of than 30 percent of its value against the intra-company trade plays a key role import prices from that region. To- euro.13 However, chart 6 reveals that

Chart 5. Comparison of the import price index with the Mexico locality of origin (LOO) index, 2004

Index Index (Dec. 2003 = 100) (Dec. 2003 = 100) 110 110

108 108

106 106

All import 104 104

102 102

Mexico LOO 100 100

98 98 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

40 Monthly Labor Review December 2005 Chart 6. Comparison of France, Germany, and United Kingdom locality of origin indexes with U.S. dollar to 1 euro exchange rate index, 2004 Index Index (Dec. 2003 = 100) (Dec. 2003 = 100) 110 110

108 108 United Kingdom 106 106

France 104 104

102 102

100 100 Germany 98 98

96 96 U.S. dollar to 1 euro exchange rate 94 94

92 92

90 90 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

any impact of the exchange rate Other decision criteria samples from the universe of import and movement appears inconclusive in export transactions according to trade both the Germany and France series, The feasibility research for determining dollar values across product categories, which were flat over the year—sug- acceptable additions to the set of pub- rather than the trade dollar values across gesting that exchange rate fluctua- lished Locality of Origin indexes incor- localities.15 The goodness-of-fit mea- tions were not passed through to im- porated the evaluation of several criteria: sures thus provide a picture of how well port prices from major European annual dollar values of trade, goodness- the sampling process represents the dis- trade partners to any notable degree. of-fit measures, and variance analysis. tribution of trade by locality. First, the country’s or region’s trade dol- The first goodness-of-fit statistic Other Asia. The Asia Near East price lar value with the United States generates bases the distribution of price quotes on index, which represents more than customer interest—presumably, higher the total number of prices requested, $40 billion in import merchandise trade flows garner more public interest, while the second goodness-of-fit statis- value in 2003, is expected to be domi- particularly with individual countries such tic bases the distribution of quotes on nated by the behavior of petroleum as China and Mexico. the total number of usable prices. The prices, which account for nearly 60 In addition to customer interest, two general form of the goodness-of-fit sta- percent of its exports to the United goodness-of-fit statistics were used to tistic is 14 States. Indeed, it can be seen in compare the distribution of price quotes 2 æ g f ö chart 7 that the series tracked closely across disaggregated index strata to the g ç i - i ÷ å i ç ÷ with the world price index for petro- distribution of trade dollar values across iÎ S G F GOF = è S S ø leum in 2004. The remaining compo- those index strata. Goodness-of-fit is å g i sition of imports from this region in- especially important in determining the iÎ S cludes apparel, chemicals, and robustness of Locality of Origin indexes diamonds. because the International Price Program (1)

Monthly Labor Review December 2005 41 Program Report

Chart 7. Comparison of the Asia Near East locality of origin index and the import petroleum index monthly percent changes, 2004 1-month 1-month percent change percent change 15 15 Petroleum imports

10 10 Asia Near East

5 5

0 0

-5 -5

-10 -10

-15 -15 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

where g i is the sampled dollar value for bound was set at .05 for both goodness- sizes. This re-sampling was performed of-fit statistics because approximately 50 times to create 50 item set realiza- stratum i; GS is the sampled dollar 95 percent of the two-digit-level Harmo- tions for each locality. For each repli- value of trade in stratum i’s parent stra- nized strata produced values of less than cate item set, bootstrap item weights .05 for both versions of the goodness- were calculated by multiplying the origi- tum S; fi is the number of prices in stra- of-fit statistic.18 Therefore, LOO price nal item weights by the number of times indexes considered for publication each item was randomly selected.20 tum i; F S is the number of prices in should fall below the same upper-bound These re-sampled item sets, along with stratum i’s parent stratum S; as the Harmonized strata; that is, a po- the adjusted item weights, were then and GOF Î [0,1] .16 As the value of tentially publishable LOO price index used to create 50 realizations of each GOF gets closer to zero, the closer the should have a goodness-of-fit result locality’s price index series. Letting PI distribution of prices is to the distribu- equal to or less than .05. denote the price index value, l the local- tion of trade dollar value, indicating that Estimating the variances of price in- ity, s the stratum of interest, i the repli- the number of prices requested or col- dexes is desirable as a measure of accu- cate number, and t the time period (rep- lected is appropriately distributed to racy and stability. Variance estimates resenting a monthly observation), the match trade patterns within a particular were obtained through a bootstrapping replicate annual changes in the price in- price index. method to estimate the variability of the dex values for each stratum within a lo- Acceptable upper-bounds for the two annual change of price index values.19 cality were calculated as goodness-of-fit statistics were found by The set of prices (known henceforth as PI l, s, i, t applying the statistics to price indexes item sets) for each potentially publish- ?q = for import products from the world pub- able country or region was indepen- l, s, i, t PI lished under the Harmonized products dently re-sampled with replacement to l, s, i, t -12 classification system.17 The upper- obtain equivalent stratum-level item set (2)

42 Monthly Labor Review December 2005 And variances were calculated in the world petroleum prices, while the in- 8 See “A hungry dragon,” The Economist, usual way as dexes for China, the Pacific Rim, September 30, 2004. 9 See CIA-The World Factbook, on the Internet 50 2 France, Germany, and the Association at http://www.cia.gov/cia/publications/ 1 of Southeast Asian Nations have been factbook/geos/mx.html. Var l, s, t = (?q l, s, i, t -?ql, s, t ) å 10 50 -1 i=1 comparatively flat. The eight new Lo- Trade data collected from the Foreign Trade cality of Origin import price indexes are Division of the U.S. Census Bureau and from the Organisation for Economic Co-operation and (3) publicly available dating back to De- Development. cember 2003. It was not feasible to cal- 11 Related-party trade information collected where culate indexes prior to December 2003 from the U.S. Bureau of the Census, on the Internet at http://www.census.gov/foreign- 1 50 because the classification structure at ?q = ?q the most disaggregated level changes so trade/Press-Release/2003pr/aip/rp03-exh- l, s, t 50 å l, s, i, t 1.txt. i = 1 frequently that the market basket be- 12 The exchange rate is defined as the yond a 1-year history cannot be recon- monthly average of the U.S dollar to 1 euro, and (4) structed. Trade shifts are especially the exchange rate index is set according to De- cember 2003=100, and then using the monthly critical for LOO indexes; U.S. importers percent changes to create subsequent index val- Baselines for acceptable variance levels regularly change suppliers, which may ues. Note that the United Kingdom employs the were established by calculating vari- not reside in the same locality as previ- British pound as its currency rather than the ances for the LOO indexes already pub- ous suppliers. euro. 13 lished and for the Harmonized classifi- As of January 2005. In June 2001, $1=1.172 euros; in January 2005, $1=.762 euros. cation system import index. In general, 14 The countries included in the Asia Near variances for LOO indexes exceeded the Notes East region include the following: Bahrain, Iran, variances for Harmonized import price Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, indexes—an expected result because the Qatar, Saudi Arabia, Syrian Arab Republic, 1 The Bureau of Labor Statistics also pro- United Arab Emirates, and Yemen. This defini- number of prices in the world Harmo- duces import and export price indexes for a tion is based on that used by the U.S. Census nized indexes are greater than the num- set of services industries. The services sector Bureau. Other definitions include countries in ber of prices in the LOO indexes. How- is not included in locality of origin price in- northeastern Africa and/or all countries along the dexes, and so is excluded from the discussion southern and eastern parts of the Mediterranean ever, most fell within the Harmonized here. Sea. The area is also frequently referred to as variances and the existing Locality of 2 See “New international price series pub- the “Middle East.” Origin indexes’ variances. Locality of lished by Nation and region,” by Michelle Albert 15 For additional details of the International Origin countries and regions were then Vachris, Monthly Labor Review, June 1992, pp. Price Program’s sample design, see Chapter 15 16–22. of the BLS Handbook of Methods, on the Internet ranked and selected according to the 3 The Locality of Origin import price indexes at http://stats.bls.gov/opub/hom/ number of periods that variances fell measure prices at the point of exportation to the homch15_a.htm. below the lowest variances for existing United States. Prior to January 2003, the “In- 16 Disaggregated strata are termed “child LOO indexes; the number of periods that dustrialized Countries” and “Other Countries” strata” when considered relative to “parent” categories were termed, respectively, “Devel- strata, which are the next broadest level in an es- variances fell between the lowest and oped Countries” and “Developing Countries.” tablished classification structure. highest variances for existing LOO in- “Industrialized Countries” includes Western Eu- 17 The Harmonized system is used for prod- dexes; and the number of periods that rope, Canada, Japan, Australia, New uct classification during the sampling process Zealand,and South Africa, and “Other Coun- variances fell above the highest vari- in the International Price Program and so is thus tries” includes all other countries not compris- assumed to offer the most appropriate baseline ances for existing LOO indexes. ing “Industrialized Countries.” The Asia NICs measure. category includes , , South 18 Korea, and Taiwan. Harmonized import and export price in- dexes are published at the following levels: Sec- 4 Conclusion The Pacific Rim countries are Australia, tion, Chapter (2-digit), and 4-digit levels. The Brunei, China, Hong Kong, Indonesia, Japan, HTUSA (import) codes are maintained by the U.S. The addition of newly-published Local- Macao, Malaysia, New Zealand, Papua New International Trade Commission and the Sched- ity of Origin import price indexes to Guinea, Philippines, Singapore, South Korea, and ule B (export) codes are maintained by the U.S. Taiwan. Census Bureau. data offered by the International Price 5 In 2003, the dollar value of nonmanu- 19 Annual percent changes are less noisy than Program enhances the set of price in- factured items comprised just more than 8 per- monthly percent changes. cent of industrialized imports compared with dexes available to measure different as- 20 nearly 17 percent for other countries. The original item weights are those used pects of inflation in merchandise mar- in the calculation of the import and export price 6 Trade data collected from the Foreign Trade kets. In 2004, price indexes for imports indexes and are based on probability sampling Division of the U.S. Census Bureau. techniques. The weights are a function of the from Mexico, the United Kingdom, and 7 World Bank 2004 World Development Indi- product category’s and company’s importance in the Asia Near East have trended with cators CD-ROM. trade.

Monthly Labor Review December 2005 43