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.

US Presidential Elections - The Rest Of The World Have Voted

The US Presidential elections is followed not just by Americans but much to the surprise of most Americans, the rest of the world as well. I had plenty of discussions during my conference in New York on that topic. It was a great bunch of people more than half of the 24 in my group were Americans and the rest from all over the world. When discussions went to Obama and McCain, I posed a fact to them, whether they knew that the rest of the world have actually voted on the US elections already. They were surprised.

To me, I am very confident that the rest of the world has voted Obama in by a massive landslide. The ROW is always in a predicament, we value the US as the sheriff for the democratic world, we even like American culture and their people, but darn it, we absolutely hate their foreign policies. While I may be making generalisations here, the gist of my arguments stand.

The ROW wants Obama, firstly because he is not Republican. We want a discontinuation of the Bush-Bush-Cheney regime. We want the US to have a new face, a new policy maker to MEND ties all around the world. We need new engagement with countries like North Korea and Russia. We need more fairness in dealing with Israel, not always Israel first, Israel at all cost kind of policy. We need the silly war to end properly and swiftly. We need new faces to engage Iran and Iraq. There are plenty of frayed nerves with respect to dealing with Islamic extremism. We need to engage more neutral Islamic countries to deal with that.

On trade, we need the US to lessen substantially their farm subsidies. We want a US that makes shrinking their deficit a priority. We want a US that takes the lead in emissions and environemntal issues. We want Al Gore to be appointed as lead negotiator in that. We need tough medicine to solve US social security and healthcare. We need a deliberate scaledown in US military budget, do it via more deliberate engagement with "troubling" nations.

Yes, the ROW has already voted in Obama in their hearts and minds. I hope America makes the right choice as well.

p/s photos: Tomoka Kurotani