The iPhone Is 1% of the U.S.-China Trade Deficit?*

In many ways, Apple is the ideal company for the next American economy. It's cutting edge, wildly innovative, and it makes products that other countries want and will pay us for.

But according to a new paper by Yuqing Xing and Neal Detert, Apple's iPhone contributes significantly to our trade deficit because so much of the hardware is made and assembled overseas and then shipped to the United States.

The abstract is below:

Even high-tech products invented by American companies will not increase the US exports, but to the contrary exacerbate the US trade deficits.

The iPhone contributed US $1.9 billion about 0.8% of the US trade deficit with PRC in 2009. Unprecedented globalization, well organized  global production networks, repaid development of cross-country production  fragmentation, and low transportation costs all contribute to rational firms such as Apple making business decisions that contributed directly to the US trade deficit. Global production networks and highly specialized production processes apparently reverse conventional trade patterns so that developing countries, such as PRC, export high-tech  goods--like the iPhone while industrialized countries, such as the US, import high-tech  goods they themselves invented. In addition, conventional trade statistics greatly inflate bilateral trade deficits between a country used as export-platform by multinational firms and its destination countries. Based on the value-added approach, the iPhone trade would generate US$48 million trade surplus for the US.

Read the full story in WSJ.

*Update: As Jim Fallows points out, and I did not, the most important takeaway from the piece is not the first bold sentence in the abstract above, but rather the last bold sentence. A more sophisticated approach to global trade stats that pays attention to where value is added to a product rather than only to its final point of assembly completely changes the story about the iPhone.

Officially, the entire $180 wholesale cost of a shipped iPhone is credited to China. This is mostly because China is the final point of assembly. However, if you take a closer look at which countries and companies produce the electronics, casing and other manufacturing that make up the final iPhone product, you'll see that China contributes minuscule value to the phone's components and labor.


According to this more sophisticated value-added approach, illuminated in the graph above, iPhone sales (vis a vis China) add to the U.S. economy rather than subtract $1.9 billion, as official trade statistics would imply. Author Andrew Batson writes: "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."

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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