I just bought an iPhone. And by buying one of the coolest, most American gadgets on the planet (thanks, Steve Jobs), I also just contributed to the rising US trade deficit with China.
At least that's how the trade statisticians figure it. Because the iPhone (as well as many other consumer electronics and computer products) is assembled in China, that country gets credited with the full value of the device. In these simplistic calculations, the iPhone counts as an export from China and an import to the United States.
That fact added $1.9 billion to the US trade deficit with China last year, according to two academic researchers at the Asian Development Bank Institute in Tokyo. The researchers, Yuqing Xing and Neal Detert, published a paper in December that uses the iPhone to illustrate how modern trade calculations ignore the realities of today’s global supply chain.
Most people in the electronics industry already understand what the researchers go to great pains to point out: Most of the iPhone’s value did not originate in China. The researchers figure that the iPhone's assembly by Foxconn Electronics Inc. in Shenzhen is worth about $6.50 per unit -- just 3.6 percent of the total manufacturing cost. Most of the value of the product comes from its components: the display, memory, processors, camera module, etc., which are manufactured in other places and then shipped to China for assembly.
What's amazing is that the folks who calculate trade statistics don't account for that. At all.
According to US Census foreign trade data, the trade deficit with China increased from $226.9 billion in 2009 to $273.1 billion in 2010. This is the largest imbalance the United States has ever recorded with a single country, according to the Associated Press. While the US managed to increase exports to China by $22.4 billion (primarily in passenger cars, industrial machines, and soybeans), imports from China increased by more than three times that, or $68.6 billion (primarily computers and accessories, household goods, and telecommunications equipment), according to the government.
Under the current calculation method, China gets the full value of those computers, accessories, and telecom equipment even if they were only assembled there. And if that’s the case, then the other countries that contributed to those products, including the United States, get no value.
Xing and Detert assume that some of the iPhone components, specifically chips supplied by Broadcom Corp. (Nasdaq: BRCM), Numonyx BV , and Cirrus Logic Inc. (Nasdaq: CRUS), were imported from the United States (an assumption that I question because these parts are likely manufactured in Asian foundries) and estimate the value of those parts at $121 million. If China is credited with only its 3.6 percent portion of the iPhone value, and if the US is given credit for the value of the Broadcom, Numonyx, and Cirrus Logic chips, then the numbers switch to an iPhone-related trade surplus of $48 million on the US side of the ledger, according to the paper.
I’m not sure I follow the math on this -- you can find the paper here -- but I do understand the main point. And the more I ponder it, the more it alarms me. Our politicians, our government, and our trade negotiators are relying on numbers that are inaccurate, perhaps wildly so. And if this method of calculation doesn't change, then the more the computer and electronics industry booms and the more hit products like the iPhone or the iPad come from US-based innovation, then the bigger our official trade deficit with China will become. But the statistics won't reflect reality. That could lead to some very bad policy decisions that could hurt the electronics industry, the United States, China, and the rest of the world.
I was reading that China was buying all the US bonds, and has over a trillion dollars. Making it (the biggest?) "investor" in the US. It has a lot of reasons (a trillion of them) to want the US to do good.
I don't know if the US is concerned about how many resources China has in bonds - making it at least a voice to be heard when talking about economic reform.
Even though some people realize what's going on and "the money goes to the right place," I think our country is in danger of making some serious policy mistakes if we are basing policy on statistics that are very inaccurate. The numbers also contribute to the growing opinion that the U.S. is on the decline, economically, while other countries like China and India are growing. If we could better document how much innovation such as the iPhone actually contributes to our economy and our trade stats, it could stimulate much more such innovation.
Investors probably have too many other data points to be misled by trade statistics. But the political importance of the US-China trade balance should not be understated. The emergence of China on the world stage is probably the major story of this century, and its relationship with the US is central to how that story unfolds. If US policy is guided by bad numbers that suggest China is stronger in trade than it really is (especially likely in the absence of market signals from a convertible renminbi), the US stance may become more confrontational than it needs to be. If the relationship breaks down into trade and other squabbles, there may well be economic consequences for countries/companies beyond the China-US pair.
Thank you for your post, it cleared that up for me. Do you think third countries could be influenced into thinking that since the 'trade deficit' is so big (in favor of either country), they will invest in that... my question is, beyond diplomacy, what's the impact?
Yes, "the money is still going to the right place" but a lot of diplomatic effort is spent trying to "fix" our trade deficit with China when in reality we don't know the true size of it. The US overall trade deficit is large and unsustainable, but it is important for us to know which countries ultimately receive those trade dollars so that we lobby for the right kinds of adjustments with the right nations. We have numerous areas of conflict and cooperation to sort through with China, and they would all be made a little easier to address if trade turns out to be less of a concern than everyone now thinks.
I also get the point but how does that impact the real World? -- are the wrong policies being implemented because of that unfair distribution? the money is still going to the right place.
We raised this point a few years ago looking at the iPod (http://pcic.merage.uci.edu/papers/2008/WhoCapturesValue.pdf). The WTO has been working on the issue by developing a World Input Output Database (search on WTO and WIOD), but it's actually very tricky to make all the trade numbers balance at the level this would require. And be careful what you wish for; the new system might impose extra documentation burdens on companies.
I am quite surprised with this analysis when the iphone is simply an import item from China into the US. In fact, if this is the way adopted for calculating trade deficits, many of the products nowadays follow the same suite.
Apple is making its money and i don't know they are complaining.
China is making their money too and i'm sure they are not complaining.
isn't this "war" as it is called just the concern of analysts and concernt individuals not really the stake holders?
I don't know how much it saves apple to assemble the iphone fully in china, while importing every single component.
Why can't those components be imported into the US? I know they say its cheaper to do all that in china, but really, how much cheaper is it, and for how long?
So if the point is simply profit, then i don't see any war going on here, just sharing the profit between US and CHINA
This is very interesting and disturbing at the same time. This is just another example of how statistics can be distorted. You would think there would be a better way to record the true numbers so they reflect where the dollars should rightfully be allocated. If the system doesn't change in the future, the foreign trade market could be skewed even more than it already is.
Qualcomm has launched a big push to spread its cellular technology, and thus increase its royalty income, not to mention chip sales, beyond mobile phones.
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Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
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