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. dollar’s fluctuation the price at the foreign port of exporta- gions, and countries: industrialized and against foreign currencies 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, Japan, and the Asian Newly In- magnitude of the influence of currency 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 China 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.