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Why The iPhone Adds $1.9 Billion A Year To Our Trade Deficit With China
by Jacob Goldstein
The iPhone is designed in America. It's built of parts made by companies based in South Korea, Germany, Japan, and the U.S., among other countries.
Those parts are assembled at a Chinese factory owned by a Taiwanese company. The cost of assembly is about $6.50 per phone.
But the entire manufacturing cost of each iPhone â€” about $179 for each iPhone 3G, as of 2009 â€” is counted toward China's export totals.
As a result, the iPhone wound up adding $1.9 billion to America's trade deficit with China last year, according to a new paper by a pair of Tokyo-based economists.
It would make more sense, the authors suggest, to calculate the trade deficit based on the amount of value added in each country. If we did that, the iPhone would no longer contribute to our trade deficit with China.
The broader idea here â€” that trade figures are calculated using methods that haven't kept up with global supply chains â€” has been around for a while now.
In a story today on the paper, the WSJ quotes from a recent speech by a Pascal Lamy, director-general of the WTO.
"The concept of country of origin for manufactured goods has gradually become obsolete," Lamy said. The WSJ continues:
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 Chinaâ€”$226.88 billion, according to U.S. figuresâ€”would be cut in half. That means, he argued, that political tensions over trade deficits are probably larger than they should be.
Comment from one reader:
Bajie Zhu (zhuubaajie) wrote:
No question, there is a huge imbalance in the U.S. China trade. As the iPhone example indicates, the contrast in PROFITS kept by each side is extreme. Out the $179, China gets $6.50. The bulk of the over $100 in profits go to Apple.
On a collective basis, the numbers are even more lopsided. According to Am Cham, 57,000 American entities report more than $80 Billion in profits from their China operations. That real profits are of course higher, due to transfer pricing moves. But even just taking that $80 Billion reported, that is already MANY TIMES the profits possible on the $300 Billion exported to America from China (which carry 1-5% margins).
Beijing is being polite - Vice PM Wang only uses the iPhone example obliquely, without demanding a BALANCE OF PROFITS, which makes much more sense than a balance of trade.
A plastic kitchen utensil from China carries a 3% profit. Microsoft's WORD export to China carries a 98% margin. To equate the two as comparably and demanding that the sales volume must match, is plain silly and unreasonable.