One widely touted solution for current U.S. economic woes is for America to produce more of the high-tech gadgets that the rest of the world craves.
Yet two academic researchers have found that  Apple  Inc.’s  iPhone—one of the most iconic U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.
How is this possible? Though the iPhone is entirely designed and owned by a U.S. company, and is made largely of parts produced by other countries, it is physically assembled in China. Both countries’ trade statistics therefore consider the iPhone a Chinese export to the U.S. So a U.S. consumer who buys what is often considered an American product will add to the U.S. trade deficit with China.
The result is that according to official statistics, “even high-tech products invented by U.S. companies will not increase U.S. exports,” as two researchers at the Asian Development Bank Institute in Tokyo, Yuqing Xing and Neal Detert, write in a recent report.
This isn’t a problem with high-tech products, but with how exports and imports are measured, they say. Conventional trade statistics can provide only “a distorted picture” of a complex world where products are designed in one country and assembled in another country of parts made in yet another country.
The new research adds to a growing technical debate about traditional trade statistics that could have big real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China’s currency policies and its allegedly unfair trading practices.
There’s a growing belief that the practice of assuming every product shipped from one country is entirely produced by that country no longer reflects the complex reality of global commerce.
“What we call ‘Made in China’ is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries that preceded its assembly in China in the global value chain,” Pascal Lamy, director-general of the World Trade Organization, said in a speech in October. “The concept of country of origin for manufactured goods has gradually become obsolete.”
Mr. Lamy said that if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half. That means, he argued, that political tensions over trade deficits are probably larger than they should be.
“The statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counterproductive, decisions,” Mr. Lamy said in his speech to the French Senate in Paris.
To correct for that bias is difficult, because it requires detailed knowledge of how products are put together. The Asian Development Bank Institute researchers estimate that the assembly of the iPhone in China—done by local employees of a Taiwanese company, Hon Hai Precision Industry Co.—accounts for 3.6% of the wholesale cost of an iPhone, or $6.50 of an estimated $179. Yet for the purposes of calculating trade, China is credited with producing the entire value of each iPhone.
A spokeswoman for Apple said the company declined to comment on the research.
If the yuan rose by 20% against the U.S. dollar, the dollar cost of producing the iPhone in China would of course also go up by 20%. But according to the ADBI researchers, that would mean that the assembly cost rises to just $7.80 from $6.50, adding just 0.7% to the total manufacturing cost. That is unlikely to be enough to alter the overall trade flows between the U.S. and China.
The value-added approach, in fact, shows that sales of the iPhone are adding to the U.S. economy—rather than subtracting from it, as the traditional approach would imply.
Based on U.S. sales of 11.3 million iPhones last year, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for iPhone parts produced by U.S.-based companies, they arrive at the figure of the $1.9 billion Chinese trade surplus—and U.S. trade deficit—in iPhones.
If China was credited with producing only its portion of the value of an iPhone, its exports to the U.S. for the same amount of iPhones would be just $73.5 million, the researchers estimate. And once the parts the U.S. contributes are accounted for, the result would be a U.S. trade surplus, and Chinese trade deficit, of $48.1 million in iPhones.
The latest results are broadly similar to analyses of the trade and manufacture of another Apple product, the iPod, made by the Personal Computing Industry Center at the University of California, Irvine. That research also found that Chinese labor accounted for only a few dollars of the iPod’s value, even though trade statistics credited China with producing its full value. So rather than being a Chinese product that displaces American jobs, those researchers found that the iPod sustains tens of thousands of high-paying jobs in the U.S.
In a speech in September in New York, Chinese Premier Wen Jiabao cited that research to argue that trade tensions between the U.S. and China are overblown. Many of China’s exports are products that are made in China on contract for foreign companies, he said, so the U.S. shouldn’t criticize China for running a big trade surplus.
“Foreign-funded enterprises, including those of the United States, are major beneficiaries” of this system.
Article via THE WALL STREET JOURNAL
