The Truth on Trade

We are hearing a great deal on trade between the U.S. and China.  However, let's take another look at trade through the eyes of Charles Kadlec, who's article appeared on The Daily Reckoning.  He suggests that the way trade imbalances are calculated is severely out of date in this global economy.  According to the old rules of determining trade and value, the U.S. is actually worse off for having developed the iPhone, as compared to China!

Gold, More Relevant Than Ever

January 25, 2011

Charles Kadlec

The Daily Reckoning 

When Chinese President Hu Jintao visited the White House Wednesday, President Obama made sure to raise the contentious issue of currency values and press the Chinese leader to allow the renminbi to rise against the dollar. Not least among the reasons given was China’s $226 billion trade surplus with the US. 

The problem: The Obama administration’s weak dollar policy is based on official trade data that grossly misrepresent the bilateral trade balance between two countries. According to the World Trade Organization (WTO), the actual US trade deficit with China is less than half the official number, or less than $115 billion.

The official trade data are based on a 19th-century world in which it was reasonable to assume that goods, from wine to machinery, were produced in a single country. If a bottle of French wine were imported to the US, the entire cost of the wine was credited to France in the calculation of the US-France trade balance.

While that simplified view of trade generally still holds for trade in agricultural products such as wine, it no longer reflects the 21st-century reality of global supply chains in all things manufactured.

Take, for example, the case of the Apple iPhone. Using the 19th-century approach, the entire $178 estimated wholesale cost of the iPhone is credited to China, because that is the place of final assembly. As a consequence, imports of the iPhone in 2009 contributed $1.9 billion to the US trade deficit with China.

In other words, official trade data imply that the invention of the iPhone has cost the US jobs, reduced our competitive position and made us poorer relative to the Chinese. That alone should cause any policy-maker to question the use of trade data in the development of international economic policies.

Here is what they would find: What the 19th-century approach ignores is that Chinese workers contribute only $6.50 to the value of the phone. According to a study by Yuqing Xing and Neal Detert of the Asian Development Bank Institute (ADBI), this is far less than the value add provided by Japan ($60.60), Germany ($28.85), South Korea ($22.96) or the US ($10.75).

When the value add from the US is taken into account, every iPhone imported into the US in 2009 actually contributed $4.25 to the US trade balance with China – the difference between the $10.75 of parts China imported from the US and the $6.50 in payments received for assembling the iPhone. That turns the $1.9 billion iPhone trade deficit with China using official trade data into a $48 million trade surplus.

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