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Fighting for Jobs in a Globalized World

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Last week, the U.S. Congress passed a bill that authorized the Obama administration to raise tariffs against Chinese goods in response to China’s alleged manipulation of its currency, purportedly to gain an unfair trade advantage. According to this article , while the Obama administration “has not taken a position on the bill … [t]he vote ‘shows lawmakers have serious concerns about this issue…’.” Leaders of the European Union appear also to join the chorus in bashing the Yuan, claiming that the Yuan may hurt prospects of overall European economic recovery.

Rather than presenting more economics theories, as I have outlined in previous articles such as this, I will focus here on sales of iPads to illustrate how all this RMB bashing for jobs can all be voodle politico econo talk.

iSuppli has a good study (see also this ipad news daily article and this businessweek article) recently providing in detail the various component costs of the iPad. For the cheapest model of the iPad costing $499, Apple makes a gross profit of $269.65 on costs of $239.35.  Of the costs, only $10 represent the “Made in China” labor costs, with the rest ($229.35) representing costs of components “imported” to China from all around the world, including the U.S.

Most of the iPad components are made outside of Mainland China in regions such as South Korea, Japan, U.S., and Taiwan.  For example, the most costly part of the iPad is the vivid color screen by LG based in Korea. The next costly part is the touch and associated mechanics from Wintek based in Taiwan. The chips that control the touchscreen are made by American companies based in California and Texas. The memory modules are supplied by Japanese and Korean companies. The battery is supplied by American companies in New York.

Of course, an iPad would not be iPad without Apple’s design, marketing, and branding. It is difficult to say how much net profit Apple makes for each iPad, but it is safe to say that of the $269.65 Apple reaps for itself a large chunk of that as profit, with the rest going to design, marketing, and branding – services that are certainly mostly provided by American companies and Amercan talent.

Now that we have the value chain of a concrete product in front of us, we can ask: what would an appreciation of the yuan do?

For one, it might raise the price of iPad slightly. If the Yuan does rise 50%, the cost of manufacturing would rise from $10 to $15. But what effect would that have on American’s jobs and trade deficit?

On the surface, if Apple does “bring back” the job of assembling iPads back to the U.S., the  trade deficit numbers (at least for China) would appear to improve since each iPad that used to rack up $239.35 of deficits to China would now rack up $0.  But the improvement would be mostly a mirage. To see why, we have to go back to see how the trade deficit against China is assessed. 

When a Made-in-China iPad is sold to the U.S., $239.35 is attributed as a trade deficit to China even though most of the $239.35 represent components China had to import from elsewhere (China only contributed $10 (labor cost of assembling an iPad). But what used to constitute voodoo accounting have real consequences in this hypothetical. Even if Apple were successful in bringing the $10 assemblage  jobs back to the U.S. (instead of shipping to other low cost nations such as Vietnam, India, even Mexico), the U.S. would find its trade deficit to remain obstinately high.  The U.S. would still have to import a large chuck of the $239.35 of components previously counted against China from other economies.

Is this what you thought the fight over the Yuan was all about?

Is the fight over the Yuan merely to bring back minimum wage jobs that minimally decrease America’s trade deficit?  The $10 manufacturing jobs are important to the Chinese economy, but should they be important to the U.S. economy?  Should not Americans strive to compete to make the touch screens and memory modules made by Korea and Japan competitors instead of the iPad assemblage jobs from China?  Should not Americans focus on building the next generation of innovations that has made the iPad so profitable to America? Note that an appreciation in the RMB would not affect U.S. competitiveness in any of these areas.

There is also tendency these days in the West to assume that $1 of  wage lost in China is $1 of wage gained from a would-be competitor, but one must not fall into the zero sum thinking that has so recently been applied to everything about China.

It is refreshing to see that some in the world do understand the importance of a strong competitive China to global prosperity and security (see, e.g., this article from Asia Times and this from Time). To the extent the Chinese economy grows, it is a win-win for the world. China not only presents an abundant resource of cheap labor which the rest of the world can reap. When Chinese people become rich, they buy things like iPad and Gucci whereby it is Western companies that occupy the most lucrative portion of the global value chain. As China moves up the value chain itself, China will start providing pioneering innovations that will benefit the rest of the world as much as innovations from the rest of the world have benefited China.

Please note that I am not arguing that there is nothing wrong with the international trade regime as currently practiced.  To the extent the U.S., E.U., and China represent major economies, the leaders of the three regions should consult and discuss with each other issues of common concern.  However, the U.S. and E.U. must also focus on solving structural problems each has within each prospective economy.  Bashing others – especially an upcoming but still relatively weak global player – may be easy, but it will not solve problems.

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  2. Good article from WSJ, finally, about substantially the same thing – with one twist – the iPod – which some calculates as creating a trade deficit of $1.9 B actually creates a trade surplus of $48 M for the U.S.

    BEIJING—One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves.

    Yet two academic researchers estimate that Apple Inc.’s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.

    How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

    “A distorted picture” is the result, they say, one that exaggerates trade imbalances between nations.

    Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China’s contribution is the last step—assembling and shipping the phones.

    So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month.

    A spokeswoman for Apple said the company declined to comment on the research.

    The result is that according to official statistics, “even high-tech products invented by U.S. companies will not increase U.S. exports,” write Yuqing Xing and Neal Detert, two researchers at the Asian Development Bank Institute, a think tank in Tokyo, in their report.

    This isn’t a problem with high-tech products, but with how exports and imports are measured, they say.

    The research adds to a growing debate about traditional trade statistics that could have 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.

    “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,” Pascal Lamy, the 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 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.

    To correct for that bias is difficult because it requires detailed knowledge of how products are put together.

    Breaking down imports and exports in terms of the value-added from different countries can lead to some controversial conclusions. Some U.S. lawmakers, for instance, argue China needs to let its currency rise significantly against the U.S. dollar in order to reduce the trade gap between the two nations.

    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 in 2009, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for parts produced by U.S. firms such as chip maker Broadcom Corp., 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 a U.S. trade surplus of $48.1 million, after accounting for the parts U.S. firms contribute.

    Other economists say some aspects of the researchers methodology may have led them to overstate their case. The study, for example, assumes that companies such as Toshiba Corp. and Samsung Electronics Co. that make components for the iPhone wholly assembled them in their home countries.

    But many of Apple’s suppliers have manufacturing facilities in China, so it’s likely that some portion of the components they build for the iPhone are made in China as well.

    The latest results are broadly similar to analyses made by the Personal Computing Industry Center at the University of California, Irvine, of the trade and manufacture of another Apple product, the iPod. 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.

    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, Mr. Wen said.

  6. I have on good authority (TECO conference) that roughly 25-30% of China’s export to US is booked thru Taiwan. So do these figure count as trade with Taiwan or China (they are currently counted against China.)

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