Asian Development Bank Meets the Smiley Curve

By James Fallows

[See update at the bottom]
Smiley2.jpgThree years ago in "China Makes, the World Takes," I discussed the Irish-born China-based entrepreneur Liam Casey and his concept of the "smiley curve." This was the graph that traced the evolution of a modern product -- from corporate brand and product concept at one end of the "smile," through components and assembly at the bottom of the curve, and on to shipment, retail, and services on the other end. The big profits, he said, were on the two ends of the curve, which were the fields American, European, Japanese, and other rich-country companies dominated. The Apple brand, the Intel chips, Japanese and Korean components or display screens, plus the final retailers. The skimpiest rewards were at the bottom part of the curve -- simply assembling the product, which was done in China. That is why, he concluded, American customers might pay $1000 for a "made in China" laptop computer, but less than $100 of that would end up in any Chinese person's hands.

Yesterday the Wall Street Journal had a story, by Andrew Batson, about a new study from the Asian Development Bank Institute that dramatized this issue. In normal US-China trade statistics, Yuqing Xing and Neal Detert of the ADBI said, the entire cost of the "made in China" product is counted as a Chinese "export" to America. This grossly distorts our picture of the trade relationships, they say -- making China's surplus look bigger than it "really" is, and disguising exports from Japan, Korea, and elsewhere, plus what is really "US" content.

The Journal illustrated the pattern this way, through costing out the components of an iPhone. Using current counting techniques, in which the phone's entire value is assumed to be "Chinese," on its own it accounts for nearly $2 billion of the Chinese surplus with the U.S. But if it is allocated to its real sources, most of the surplus is from Japan (famous for its "failed" economy), and second-most from Germany. The US-China direct exchange is actually a small surplus for the US.
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WSJSmileyCurve.jpg

The ADB study is here, and while it's not very long and doesn't pretend to be comprehensive, it suggests the increasing complications of international production chains. In a "nation-vs-nation" sense, these new figures make America (and, especially, Japan) look "stronger" and China "weaker" than we normally think. But the flow of money to Apple, Intel, Amazon, etc, with the shift of assembly jobs to China, may intensify rather than reduce the steady polarization of American economic life.

And on that point, a few other references: a powerful Reuters special report that starts with yet another deindustrialized Michigan town and goes on to ask, "Is America the Sick Man of the Globe"?; a column from Michael Sekora, who worked on a "re-industrialization" effort called the Socrates Project under the first President Bush; and a very powerful op-ed by Alan Blinder, in the Wall Street Journal, on the emergence of a Dickensian economy -- in the grim, brutal sense. Eg:

>>Wages. When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that's right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?<<

It is hard to me to read any of this data and, at the same time, consider the latest changes in the estate tax or other benefits at the top end. Some time some leader will succeed in making most Americans see that a more polarized, more Gilded Age social-economy is worse all around. I think most people sense that, but the sense has been given no effective political voice. Here's Bill Moyers, making an attempt in a speech about the new plutocracy.

UPDATE: My Atlantic colleague Derek Thompson reads this report in a different way. Here's where our interpretations diverge: We both see the ADB report as saying that high-tech wonders like the iPhone don't necessarily improve the US overall trade situation, since so many of the components and value come from overseas. But when it comes to the bilateral US-Chinese trade imbalance, the role of "made in China" products is grossly exaggerated -- again, since so much of what is counted as a "Chinese" export (including by Derek in his item) is actually from Japan, Germany, etc. Indeed, if we're thinking only of the US-China balance, the study shows that the iPhone creates a surplus for America.
 
So, we agree in seeing the report as talking about a chronic trade problem for the United States -- but with the world as a whole, not specifically with China. This is all part of the Atlantic's big-tent philosophy.  

This article available online at:

http://www.theatlantic.com/international/archive/2010/12/asian-development-bank-meets-the-smiley-curve/68184/