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Trade War: Is the iPhone American, Chinese, or Neither?

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 {complink 2125|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 {complink 831|Broadcom Corp.}, {complink 11384|Numonyx BV}, and {complink 1130|Cirrus Logic Inc.}, 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.

16 comments on “Trade War: Is the iPhone American, Chinese, or Neither?

  1. Barbara Jorgensen
    March 8, 2011

    Great analysis, Tam. I have long suspected that a lot of the data we digest comes from analysts that don't really understand how the electronics supply chain works. How do you value the IP that went in to designing the iPhone? How does that factor into the trade figures? And you are correct in that this is very disturbing given that world-chnaging decisions are made based upon these numbers.

  2. Anna Young
    March 8, 2011

    Statistics however important it may appear has never been a true reflection of reality. The calculation is clearly detrimental to America's trade interest.

    This is baffling. If 3.6percent of the total manufacturing cost originates from China (a supposed assembly point) whilst the rest of the components comes from other places, why is China attributed a greater percentage?

     

  3. Eldredge
    March 8, 2011

    I agree. It seems like there must be records on the value of components that are shipped to China to build products, and that those components should be able to be accounted for on the correct side of the ledger – wherever they come from.

  4. SunitaT
    March 8, 2011

    Tam,

      Thanks for highlighting this issue. Its really surprising to know that China gets the full value of those computers, accessories, and telecom equipment just because they are assembled there. Question now is will this issue be seen as flip side of outsourcing or debate will begin on the way countries deficit is calculated ?

  5. eemom
    March 8, 2011

    The question is how we change this calculation so that intellectual property has more value than the assembly.  Who is in charge of changing the formula?  Who's responsibility is it to lobby for the change?  Should Apple be active in making sure that we do not continue to down the same path?

  6. Parser
    March 8, 2011

    It is clear from the stamp on an iPhone “Designed by Apple in California Assembled in China” At least our engineers and managers are being paid for the work done. All parts come from many different countries. Only 3.6% of the production cost stays in China. The deficit with China is computed incorrectly; also there are some customers who will not buy iPhone because they think it is made in China and that is more devastating. There comes also a security questions. Hard drives by Seagate and Western Digital are also made in China. Do we have to worry about potential sleeping cells inside our electronic products assembled in China?

  7. jbond
    March 8, 2011

    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.

  8. tioluwa
    March 9, 2011

    Is this really a trade war?

    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

  9. t.alex
    March 9, 2011

    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.

  10. G-Linden
    March 10, 2011

    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.

  11. Mr. Roques
    March 10, 2011

    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.

  12. G-Linden
    March 11, 2011

    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.

  13. Mr. Roques
    March 23, 2011

    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?

  14. G-Linden
    March 23, 2011

    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.

  15. Tam Harbert
    May 10, 2011

    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.

  16. Mr. Roques
    May 10, 2011

    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.

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