US Trade Deficit and China

While many have been harping about the US trade deficit and the role China has in it, that has been the key argument to support a stronger yuan. However, the reality is quite different. I have said before that about 60%-70% of China's exports are actually produced and manufactured by foreign companies operating in China. The WSJ has a brilliant article on the iPhone trade imbalance and perception. 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, officially.

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 Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month.

"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.

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.

Read more: http://online.wsj.com/article/SB10001424052748704828104576021142902413796.html#ixzz18TMfW1B5

p/s of course the other fascinating thing is how much an iPhone actually cost to produce, ... even if you lock in another $100 for advertising and marketing, Apple is enjoying incredible margins before appointing the "die hard telcos" wanting to work with Apple.