Make Trade Math Great Again, iPhone Example: Globalization in Reverse

Trump's trade thesis with China misses the boat. The iPhone provides an excellent starting point for discussion.

Supply Chain Analysis

As trade barriers break up, world-wide supply chains, the real costs are higher prices and fewer choices for consumers says Greg IP, my favorite WSJ author.

Globalization in Reverse

Please consider That Noise You Hear Is the Sound of Globalization Going Into Reverse by Greg Ip. I reordered some paragraphs below.

While globalization is routinely portrayed as bad for U.S. workers, the truth is more subtle. Routine, blue-collar jobs do get outsourced but high-end research, marketing and design work gravitates to the U.S.

Canadian steel uses iron ore from Minnesota, so Mr. Trump’s tariffs hurt both. About 17% of the value of Mexican-made cars exported to the U.S. originated in the U.S., according to Bruegel, a Brussels-based think tank.

Beckett Gas Inc., family-owned manufacturer of components for boilers, furnaces and water heaters, has over the years shifted production from abroad to its Cleveland-area factories. By continuously improving its production process, it has avoided price increases and now sells all over the world.

But that arrangement has been endangered by the 25% tariff on imported steel, the dominant input into Beckett’s products. “There are only foreign competitors to what we do,” Morrison Carter, the company’s chief executive, says. Those competitors now have a 25% cost advantage.

Assembling an iPhone entirely in the U.S. out of American-made components would add up to $100 to its cost, according to a 2016 article in MIT Technology Review. This assumes, of course, Apple successfully relocates its supply chain. When, under pressure from the Obama administration, it began assembling computers in Austin, Texas, it encountered numerous quality-control and workforce headaches.

Of course, supply chains that took years to take shape won’t change location overnight. Businesses still hope the protectionist wave burns itself out, and the logic of globalization reasserts itself. But a growing number are no doubt drawing up backup plans that look a lot like Harley’s.

Spotlight iPhone

When an iPhone arrives in the U.S., it is recorded as an import at its factory cost of about $240, which is added to the massive U.S.-China bilateral trade deficit.

IPhone imports look like a big loss to the U.S., 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 U.S. 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.

China's Biggest Exports

Who Really Makes the iPhone?

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 U.S., 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.

That's it. Of the $237.45 attributed to China as an import, China gets $8.46. The result is US imports from China are overstated by $15- to $16-billion on the iPhone alone.

The Conversation concludes:

Trump’s trade war is based on a simplistic understanding of the trade balance. Expanding tariffs to more and more goods will weigh on U.S. 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.

Trade and Supply Chain Math

Trump understands neither trade nor supply chain math.

The US is a huge beneficiary of China's role in assembling the iPhone. As per Greg Ip's article, the US benefits greatly from auto manufacturing in Mexico.

Trade Math Gone Haywire

The US and and UK both claim to have a trade surplus with each other. Of course, that is impossible. And it highlights how silly these discussions are. I offered this "perfect solution".

Perfect Solution

Change the methodology such that trade surpluses and deficits cease to exist anywhere. If anyone can do that, Trump surely can.

My sarcastic comment aside, Trump's trade math is wrong on numerous fronts. Yet, even if corrected, the US will still have a deficit.

So what?

Make Trade Math Great Again

As I suggested, let's revise the math to make it work, declare victory, and praise Trump for his brilliance (which is all his ego demands anyway). Then we can stop the trade war madness.

Make trade math great again. That's all it takes.

Mike "Mish" Shedlock

“Free markets are great but reality is anything but.”

Thank you for that breath of fresh air, BlauGloriole. Mish is highly perceptive on a lot of topics – but whenever President Trump’s name is associated with anything, he heads towards the nearest cliff and pushes the accelerator to the floor.

It is overwhelmingly obvious that global trade pre-Trump was not some kind of Free Trade utopia. Instead, we had highly managed trade, with strong disadvantages to US producers. Those freebies to other countries may have made sense 30 & 40 years ago, but all they do now is hurt US workers. President Trump did not start a trade war – he started fighting back!

It is also obvious that tariffs are only a small part of the impediments to real Free Trade. The big issue is non-tariff barriers – such as China’s declared program to “Build it in China”, regardless of economic efficiency. Or consider Japan, where the social pressure against driving an imported car is such that most imports are Japanese brands built in places like Malaysia.

Mish clearly is a true believer in Free Trade. It would be surprising that he has such a flawed view of the topic – except that his judgment is clouded by that “Trump” word.

"As trade barriers break up, world-wide supply chains, the real costs are higher prices"

60,000 U.S. factories have closed. The real cost is that unemployed U.S. factory workers can't afford to buy certain things, even at lower prices.

What percentage of Americans don't have enough savings for an emergency, as they are living pay check to pay check on a low income job in a town where a factory closed?

Trump doesn't do math. He can't even get basic numbers right. The USA has a trade surplus with Canada and the EU if you count services. The USA has a huge trade surplus in goods with Canada if you leave out the crude oil. The EU and the US both have average tariffs of 1.6%. The US only pays 22% of NATO's budget! The US has an uncompetetive cost structure because of the medical and education scam, not to mention crony corruption and military expenditures. Moreover, other countries have a value added tax, which automatically encourages export and discourages import on the exact value added, which is the component being highlighted in Mish's article.

I think you are looking at the $8.46 through the wrong lens. The average Chinese factory worker is being paid about that amount per day. They then pay for food, clothing and housing. China not only gains a skilled worker but it also supports the larger economy. The workers skills are transferable to other Chinese industries like their military.

China is also able to promote their trade policy of ‘one belt one road’. China maybe able to supplant the US in the Middle East based on trade and not military intervention. Iran is now connected to China by rail and a port on the Caspian Sea. It is not the $8.46 it’s everything that flows from it.