I beat the Wall Street Journal to the punch! More on the China trade war
Regular readers of my blog will recall that on January 4, I posted something called “Made in America (or some such place…).” In summary, I wondered why the locale of final assembly was not only important to certain special-interest groups like unions, but also why the trade-balance accounting did not take into account the total value-added in other locales when labor and expertise are split among countries. Take a look at this excerpt from my post:
First, the job priorities of the “buy America” crowd are simplistic and counterproductive. [A]ssembly jobs are more demeaning, lower paid, less fulfilling, and more dangerous than the jobs that replace them when they are outsourced. Take Apple’s iPhone for instance. Which jobs would you rather choose from? In America you might design computer chips, manage the supply chain, write software, analyze data, render product designs, engineer phone parts, and audit the company. In China, you get to screw the phone together and …well, that’s it really.
Second, and the greater point, is that it highlights the economic stupidity of the mercantilist view of the trade balance. Remember that, in the ultimate trade balance tally, those aforementioned iPhones are being “imported” into the United States. But what’s the relative value-add? When you could train monkeys to screw these phones together, the total value of the assembly work is justifiably only a tiny percentage of the value of the phone. And why would we choose to pay more for so little value?
So when it comes to our manufactured products, we should be asking more pertinent questions than whether it is ”made” here. Where is the expertise? Where is the value-add? Where is the heart and soul of the product? It is not in the assembly, and I cannot fathom why we should want it to be.
Since the WSJ has gotten into the act, we now have hard stats, and as it turns out the “tiny percentage” of value-added from screwing the iPhone together makes up roughly 3.5% of the total value of the phone. Compare what I posted (one week earlier!) to this editorial from the Wall Street Journal, called “The $6.50 Trade War.”
To the extent that protectionists present Chinese exporters as a threat to U.S. prosperity despite the more pressing problems America faces, the argument over China’s exchange-rate policy is a distraction the economy can’t afford.
How much of a distraction is suggested by a paper out last month from the Asian Development Bank Institute. Economists Yuqing Xing and Neal Detert examined the supply chain of the iPhone to reach a surprising conclusion: Technically, the iPhone contributes to America’s trade deficit with China.
The basic explanation is that data on bilateral trade are calculated assuming that the entire value of a traded good is created in the exporting country. If that ever made sense, it certainly doesn’t in a global economy marked by increasingly complex supply chains.
In the case of the iPhone, Messrs. Xing and Detert note that the device was invented in America by an American company, Apple. The components are manufactured, either inside or out of China, by companies based in several other countries. The only part of the process that is unambiguously “Chinese” is the final assembly—a process that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the $178.96 wholesale value of an iPhone.
Yet that entire $178.96 value ends up attributed to China in official trade statistics. As a consequence, the iPhone contributed nearly $1 billion to China’s bilateral trade surplus with America in 2008, and nearly $2 billion in 2009, the authors conclude. If the trade data had been based solely on the $6.50 cost of assembling each unit, the iPhone would have added only $34 million and $73 million in those years to China’s surplus.
Thank you to the Wall Street Journal for fleshing out my point, and for making it so much clearer by using the same example that I did in the iPhone. I’m also glad they were able to cite hard statistics, since it makes the point that much more effective when you’re able to quickly compare a $2 billion “trade deficit” with the actual number of $73 million. Now we know that the trade balance statistics that are so relied upon as meaningful indicators by the “buy America” crowd are inflated by as much as 96%!
So thanks again, WSJ, and keep reading The Solution is the Problem.