The great iPhone trade-off

28th May, 2011

Is the iPhone made in China? The question is harder to answer than you might imagine. At first sight, the statistics seem open and shut. The Chinese make the iPhones, the Americans buy the iPhones, and the result is an increase in the US’s trade deficit with China: $1.9bn in 2009, according to Yuqing Xing of the National Graduate Institute for Policy Studies in Tokyo, and Neal Detert of the Asian Development Bank.

Bilateral trade deficits are funny numbers at the best of times, though. Our bilateral trade deficit with China, for instance, is the total cost of all the things we buy from China, minus the total cost of all the things China buys from us. This is not necessarily an interesting figure.

To see why, imagine a world with three trading nations: Narnia, Mordor and Prydain. Narnia makes wine, Mordor makes iron and Prydain makes cloth. But the main demand for wine is in Mordor, where they are intemperate drinkers, while Prydain wants iron and the preening Narnians want cloth. Mordor will run a bilateral trade deficit with Narnia, Prydain will run one with Mordor, and yet every country might find its exports exactly balanced its imports overall.

Let’s leave Mordor’s trade deficit to one side, and return to the iPhone question. That $1.9bn is a large number: about 1 per cent of the total US-China trade deficit. But the figure of $1.9bn is highly misleading. Xing and Detert, after studying analysis from companies who take phones apart and report on their contents, calculate that the iPhone’s components cost about $172.50. In contrast, the cost of assembling the components in China is around $6.50. Apple declined to comment on these estimates, but they sound reasonable enough: when you’re talking about an iPhone, it’s hardly a surprise that the components are more expensive than the labour cost of screwing them all together.

But here’s the point: all these components are imported into China. Some come from the US, some from Germany, and many from Japan, specifically from Toshiba. The Chinese themselves add very little value to the package.

To see why this matters, assume that the Chinese currency appreciates by a hefty 25 per cent. For the $172.50 of components bought from the likes of Japan, assembled and then exported to the US, the currency appreciation would all come out in the wash. The cost would remain $172.50. It’s only the $6.50 of local Chinese costs that would be affected – adding a whopping $1.55 to the cost of the iPhone and barely shifting the US-China trade statistics.

Olaf Storbeck, economics editor of Handelsblatt in Germany, points out that policymakers’ obsession with the US-China exchange rate may be misplaced.

A similar story seems to hold for jobs. Greg Linden, Jason Dedrick and Kenneth Kramer of the University of California, Irvine, look at the jobs created by the old faithful iPod. Their study reckons that the iPod accounted for almost 41,000 jobs worldwide in 2006, and only 30 of those were in manufacturing in the US. But the iPod supported more than 6,000 engineering or other professional jobs in the US – as well as almost 8,000 lower-paid jobs in the likes of retail and distribution. Linden and his colleagues reckon that US workers earned more than two-thirds of all the wages paid to workers in the iPod value chain.

It may well be that many US workers have been hurt by the forces of globalisation. But the iPhone and iPod show why the whole business is complex. Products that are made in China may actually be rewarding producers in Japan and California, and, of course, consumers across the world. It’s a curious paradox: the more pervasive globalisation becomes, the less we understand it by looking at trade statistics.

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