How the iPhone Increases the Trade Deficit

Apple's smartphone has ignited a debate about the ways we measure global trade

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Attention iPhone users who think their beloved device is only for video chatting, Angry Birds, and the occasional phone call: it's also capable of influencing U.S.-China trade relations.

That's the conclusion drawn by two researchers at the Tokyo-based Asian Development Bank Institute, who estimate that Apple's iPhone 3G added $1.9 billion to America's trade deficit with China last year.

Why? Apple, which is based in the U.S., designs and owns the iPhone and largely manufactures its parts in a host of Asian and European countries. But traditional trade flow accounting recognizes the iPhone as a Chinese export because China assembles the parts and ships the finished product. China, in other words, receives full credit for an iPhone's $179 wholesale price even though the assembly and shipping it provides represent a small fraction of the product's total manufacturing cost.

The researchers--Yuqing Xing and Neal Detert--observe that developing countries like China are exporting high-tech goods while industrialized countries like the U.S. "import the high-tech goods they themselves invented." They conclude that "even high-tech products invented by U.S. companies will not increase US exports." If Apple decided to assemble all iPhones in the U.S., they add, it would eliminate its $2 billion trade deficit with China and add $5.7 billion in U.S. exports.

Xing Detert concede that the trade statistics they employ in their analysis are flawed because they inflate trade deficits between nations. How are other industry observers reacting to this startling finding?

  • Trade Statistics Debate Has Real-World Consequences, states Andrew Batson at The Wall Street Journal. These statistics, Batson points out, "are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices." Just how dramatically does the picture change when different trade metrics are used? If China is credited with contributing only its share of an iPhone's value, he explains, its exports to the U.S. would result in a U.S. trade surplus of $48.1 million rather than a trade deficit. Batson adds that the questions raised by the ADBI research are also important given that exporting high-tech gadgets is an oft-cited solution for stimulating the U.S. economy.
  • Statistics Must Be Updated, says Stephen Green at Pajamas Media: "We're using 19th Century accounting to track 21st Century design, manufacturing and trade. Something's gotta give."
  • Very Notion of Trade Deficits Is Irrelevant, declares James Joyner at Outside the Beltway: 
What's important isn’t whether the item is 'Made in the USA' or 'Made in China' but tangible things like collecting taxes, paying wages, and buying stuff. Presumably, the US Government and its localities are collecting tax money on the sales of iPhones, whether in the form of tariffs on imports, levy on corporate profits, or at the point of sale. And American workers are being paid for their role in designing, marketing, shipping, and servicing the phones. And American consumers are improving their lives because, well, there's an app for that.
  • Nothing Forcing Apple to Manufacture iPhone Abroad, says Josh Harkinson at Mother Jones. He notes the ADBI finding that Apple's gross profit margin on iPhones in 2009 was 64 percent and adds that Apple is probably more interested in maximizing profit by assembling its iPhones in China than in employing more Americans.
This article is from the archive of our partner The Wire.