The Trump administration’s tariffs on China have so far targeted mostly industrial goods like aircraft engines and gas compressors. But the administration has also threatened to slap tariffs on US$200 billion in other goods if the dispute continues.
No list of all the goods that might be subject to tariffs has been released, but it would have to include consumer electronics, such as smartphones, which is the largest single product category in China’s exports to the US.
One well-known product that might be affected is Apple’s iPhone, which is assembled in China. When an iPhone arrives in the US, it is recorded as an import at its factory cost of about $240, which is added to the massive US-China bilateral trade deficit.
IPhone imports look like a big loss to the US, at least to the president, who argues that “China has been taking out $500 billion a year out of our country and rebuilding China.” One estimate suggests that imports of the iPhone 7 and 7 Plus contributed $15.7 billion to last year’s trade deficit with China.
But, as our research on the breakdown of an iPhone’s costs show, this number does not reflect the reality of how much value China actually gets from its iPhone exports – or from many of the brand-name electronics goods it ships to the US and elsewhere. Thanks to the globe-spanning supply chains that run through China, trade deficits in the modern economy are not always what they seem.
Who really makes the iPhone?
Let’s examine an iPhone 7 a little more closely to see how much value China is actually getting.
Start with the most valuable components that make up an iPhone: the touch screen display, memory chips, microprocessors and so on. They come from a mix of US, Japanese, Korean and Taiwanese companies, such as Intel, Sony, Samsung and Foxconn. Almost none of them are manufactured in China. Apple buys the components and has them shipped to China; then they leave China inside an iPhone.
So what about all of those famous factories in China with millions of workers making iPhones? The companies that own those factories, including Foxconn, are all based in Taiwan. Of the factory-cost estimate of $237.45 from IHS Markit at the time the iPhone 7 was released in late 2016, we calculate that all that’s earned in China is about $8.46, or 3.6 percent of the total. That includes a battery supplied by a Chinese company and the labor used for assembly.
The other $228.99 goes elsewhere. The US and Japan each take a roughly $68 cut, Taiwan gets about $48, and a little under $17 goes to South Korea. And we estimate that about $283 of gross profit from the retail price – about $649 for a 32GB model when the phone debuted – goes straight to Apple’s coffers.
In short, China gets a lot of (low-paid) jobs, while the profits flow to other countries.
The trade balance in perspective
A better way of thinking about the US-China trade deficit associated with one iPhone would be to only count the value added in China, $8.50, rather than the $240 that shows up as a Chinese import to the US.
Scholars have found similar results for the broader US-China trade balance, although the disparity is less extreme than in the iPhone example. Of the 2017 trade deficit of $375 billion, probably one-third actually involves inputs that came from elsewhere – including the US.
The use of China as a giant assembly floor has been good for the US economy, if not for US factory workers. By taking advantage of a vast, highly efficient global supply chain, Apple can bring new products to market at prices comparable to its competitors, most notably the Korean giant Samsung.
Consumers benefit from innovative products, and thousands of companies and individuals have built businesses around creating apps to sell in the App Store. Apple uses its profits to pay its armies of hardware and software engineers, marketers, executives, lawyers and Apple Store employees. And most of these jobs are in the US.
If the next round of tariffs makes the iPhone more expensive, demand will fall. Meanwhile, Samsung, which makes over half its phones in Korea and Vietnam, with a lower share of US parts, will not be affected as much by a tariff on goods from China and will be able to gain market share from Apple, shifting profits and high wage jobs from the US to South Korea.
Put another way, research has shown globalization hurt some Americans while it made life better for many others. Putting globalization in reverse with tariffs will also create winners and losers – and there could be far more of the latter.
Why not make the iPhone in America?
When we discuss these topics with policymakers and the media, we’re often asked, “Why can’t Apple just make iPhones in the US?”
The main problem is that the manufacturing side of the global electronics industry was moved to Asia in the 1980s and 1990s. Companies like Apple have to deal with this reality.
As the numbers we’ve cited make clear, there’s not much value to be gained for the US economy or its workers from simply assembling iPhones here from parts made in Asia.
While it’s possible to do so, it would take at least a few years to set it up, cost more per unit than production in Asia, and require a lot of carrots and sticks from policymakers to get the many companies involved to do so – for example, like the potential $3 billion in subsidies Wisconsin gave to Foxconn to build an LCD factory there.
A flawed response to the challenge from China
There is, of course, plenty for the US to complain about when it comes to China’s high-tech industry and policies, whether it’s the lack of intellectual property protection or non-tariff barriers that keep major tech companies such as Google and Facebook out of the huge Chinese market. There is room for much tougher and more sophisticated bargaining to address these issues.
But where trade is concerned, policies should reflect that manufacturing is now a global network. The World Trade Organization has already developed an alternate set of trade numbers that shows each country’s trade in value added terms, but the administration seems to have missed the memo.
Trump’s trade war is based on a simplistic understanding of the trade balance. Expanding tariffs to more and more goods will weigh on US consumers, workers and businesses. And there’s no guarantee that the final outcome will be good when the dispute ends.
This is a war that should never have been started.
Jason Dedrick, Professor of Information Studies, Syracuse University; Greg Linden, Research Associate, University of California, Berkeley, and Kenneth L. Kraemer, Research Professor of Business, University of California, Irvine
This article was originally published on The Conversation. Read the original article.
A member of the Trump Nation – a high school dropout who can neither read nor count – will never understand the math in this well researched piece. Neither will Trump.
Let the US ship production back home and then lose its shirt. A fool and his money soon part company.
Asia Times. What a relief from your usual run of syndicated biased writers and a new sense of media neutrality and objectivity with this article by American academics – Jason Dedrick, Professor of Information Studies, Syracuse University; Greg Linden, Research Associate, University of California, Berkeley, and Kenneth L. Kraemer, Research Professor of Business, University of California, Irvine
They are so very right that this is a bilateral trade war that should never have been started. For it was predicated on trade book keeping, accounting and statistics that have nothing to do with economics but only have relevance in the field of taxation of imports. All so amply summed up in the statement by the authors – “But where (global) trade is concerned, policies should reflect that manufacturing is now a global network. The World Trade Organization has already developed an alternate set of trade numbers that shows each country’s trade in value added terms, but the (United States) administration seems to have missed the memo.” When there is a multipolarity of and multitudinous components from various source countries like in VAT it is the attributive value-adding that counts.
Vincent Cheok
The total value value of US-China trade is closer to USD 1 Trillion. What was not recorded was the amount of trade accrueing to US businesses in China and Chinese businesses in the US.
If we assume the reported figure of about USD 650 billion were goods traded in 2017 thru exports, then the additional USD 350 billion makes up the in-country trades. The Chinese figure in the US is negligible. The US has a tremendous amount of companies manufacturing goods and selling them in the local chinese market.
Therefore it is safe to conclude that more than 90% of the remainder USD 350 billion were attributed to US companies trade inside china. GM, Ford, Chrysler, Buick make and sell their cars in china. AT&T, sells its services to chinese mobile companies. Other american companies are raking up billions more in services. No wonder, Deutsch Bank reported the US actually run a trade surplus of USD20 billion with china in 2017. And yet, none of these numbers get reported in trump and navarro (death by china)’s bid to launch the trade war.
These empire vultures were sucking up billions in profit in china over the last 30+ years. Most of these numbers never get reported as profits and were stashed elsewhere around the world. Yet all of them have the gall to accuse china of stealing and profiteering from their technologies.
Now you know where china can draw their weapons from, in this trade war. The fat cats who are sitting in the boardrooms of GM, Ford, Chrysler, Buick, AT&T, Apple, Merck, Caterpilar, Cargill, are shitting bricks now.
It is now clear that US politicians like Trump, and officials like Navarro, Lighthizer, W Ross, Bannon, etc are psychotic ideologues pushing a bully agenda on the world.
This is very obvious in the military and political with US domains creating havoc and destruction around the world all the while playing victimhood and hiding behind a veil of false expertise and reason. The latest episode is Trump playing the victim in NATO when all the while, Canada and the European countries have incurred huge costs by participating in NATO’s destruction of Libya, Afghanistan and Syria, which have nothing to do with the defence of Europe but all to do with extending US military power and control of the world. Because of the US, millions of refugees flooded Europe causing major financial and social damage. Trump and the US should compensate Europe for all these costs. European leaders are cowards in not bringing this up.
This destructive megalomania has now been extended to the commercial sphere with the US launching " a psychopaths trade war " according to Jeffrey Sachs on the basis of victimhood when it is the USD as reserve currency which has made it very easy for the US to overspent on wars and imports creating a huge trade deficit with 120 countries for the past 40 years. During those past years US politicians and experts were boasting that the US is the most advanced country in the world on account of the shift from the manufacturing to the service sectors. Now, there is a sudden reversal.
The viciousness of the campaign has even affected Rwanda, one of the poorest countries in the world, when US trade officials threatened Rwanda not to raise import duties on imports of used clothes from the US in order to protect its textile industry.
Well, shithole countries are fair game and can be easily bullied.
It is embedded racism and little to do with trade. All the logic and reasoning in the world is lost upon ignorant racists.
This is an unusual intelligent analysis published by Asia Times compared to the usual so-called analyses produced by CIA agents.
trade deficit is a ruse.. .this is economic war that can easily turn into actual war.
What good is if the Apple Iphone is sold for $800 or $900 when I don’t have job. I rather have a job and pay $1200 for the same phone. bring back the manufacturing jobs.
What an economic theft! The exploitation of poor workers is grotesque. Boycott Apple!
Agree, that is why the CPC do not allow erections in China
USA is the best, no matter what happen, just don’t be so jealous people, beacause USA is the last modern empire, before the end comes! understand? ????????????