Trade data are misleading indicators of trade flows
By Terence Corcoran - April 06, 2010, The National Post, Canada
As a symbol of the dangerous sham and total wonkiness of the official Obama administration campaign to force China to upvalue the yuan, Apple’s hot new iPad is perfect. The iPads now selling in the United States retail priced at US$499 and up carry a label: "Assembled in China." Based on early deconstruction work by U.S. firms who began taking the iPads apart this past weekend, it looks like the iPad’s manufacturing history is similar to Apple’s iconic iPods.|
The imported cost of the basic iPads, maybe US$250, will show up as another part of the U.S. "trade gap" with China that needs to be "rebalanced." In reality, as little as 5% of the import price is value added at assembly in China. The real content of an iPad, reports The Wall Street Journal, comes from South Korea’s Samsung, Japan’s Toshiba, Broadcom in the United States and (for batteries) Amperex Technology, a Hong Kong company owned by TDK in Japan.The touchscreen, processors, wireless gear and a score of other elements are created and manufactured around the world.
What’s China got to do with it? It is actually impossible to know with absolute certainty, but "not much"is the main answer. A study by iSuppli Corp. estimated the total parts and manufacturing cost of the mid-range iPad with 32GB and 3G capability at $287, but all of that is parts cost. The final “assembled in China” portion amounted to $11.20. In other words, not much has changed in the Apple supply chain system since the precursor iPod was first deconstructed several years ago by California researchers.
One of those researchers, Greg Linden at the Personal Computing Industry Centre at the University of California, Irvine, said in an interview yesterday there’s no evidence that the China component of the iPad has improved over the years compared with the iPod. Mr. Linden adds that the manufacturing plant in China where the iPad is assembled is actually run by a Taiwanese company. "China is just not getting into these global supply chains." Even if some of the parts assembled into an iPad were made in China, the value-added China content would still be minuscule, he said.
With so little of an iPad actually Chinese, iPad imports into the United States become important misleading indicators of the alleged underlying trade imbalance. The import data on a mid-range iPad will raise the U.S. trade gap with China by $287—even though China’s role isn’t worth more than $12. As Mr. Linden and his colleagues put it in a paper last year, the realities of the iPad global production scheme "shows that there is a need for better data to understand what that [China-U.S.] trade deficit really means for each country."
The biggest beneficiary of the system is Apple, which analysts estimate could retain a gross profit of more than $200 per iPad. So here’s the issue: The United States is launching a major trade and currency offensive against China which, in the iPad case, amounts to attempting to punish China for trade transactions that are a huge benefit to U.S. companies, investors and consumers.
In raw theory, if China were to revalue its currency and raise the yuan by 20%, then the dollar value of an imported iPad would rise 20% from $287 to $344, thereby raising the price of an iPad in further increasing the trade deficit. But theory is unlikely to apply here, since the deep international Apple supply chain suggests that actual U.S.price of an iPad may not change at all. It would certainly not make sense for Apple to raise the import price of iPads by $57 to account for a currency shift when the actual yuan value added to an iPad is less than $12.
The iPad demonstrates that trade data are grossly inadequate as indicators of global trade realities. Products, resources, components, design and innovation are now global in nature while trade data are antiquated remnants of national data collections systems. Those systems essentially date from a century ago, when products were actually made in one country and shipped to another. Attempts to manipulate and rebalance global trade flows among countries through currency and other policies are deeply flawed and doomed to fail.
The China-U.S. trade and currency conflict has little justification, but it is now at the top of the U.S. trade agenda. The Obama administration has decided not to issue a new report that many expected would charge China is manipulating its currency, a charge that has many supporters in U.S. business circles. Avoiding a direct confrontation with China over currency revaluation is a good idea in principle, although much depends on motivation.
China, sensing weakness in the United States on trade policy, said the other day that the trade/currency issues would be manageable if the United States kept China’s other issues in mind, including "the proper handling of Taiwan and Tibet." Iran is also an area of friction between the two countries. How much is the Obama administration willing to bargain away in foreign policy to placate U.S. trade protectionists?
The iPad should serve as a guide, a symbol of what’s right with trade today and a warning of what is wrong with U.S. trade policy.