Fighting for Jobs in a Globalized World
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.