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.