Sunday, December 19, 2010

US Trade Deficit and China

While many have been harping about the US trade deficit and the role China has in it, that has been the key argument to support a stronger yuan. However, the reality is quite different. I have said before that about 60%-70% of China's exports are actually produced and manufactured by foreign companies operating in China. The WSJ has a brilliant article on the iPhone trade imbalance and perception. Two academic researchers estimate that Apple Inc.'s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year, officially.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries. A distorted picture is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step—assembling and shipping the phones.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month.


http://paul.kedrosky.com//MK-BI355A_CHIPH_NS_20101215184019.gif

"What we call 'Made in China' is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries," Pascal Lamy, the director-general of the World Trade Organization, said in a speech in October. "The concept of country of origin for manufactured goods has gradually become obsolete." Mr. Lamy said if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half. To correct for that bias is difficult because it requires detailed knowledge of how products are put together.

Based on U.S. sales of 11.3 million iPhones in 2009, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for parts produced by U.S. firms such as chip maker Broadcom Corp., they arrive at the figure of the $1.9 billion Chinese trade surplus—and U.S. trade deficit—in iPhones. 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.

Other economists say some aspects of the researchers methodology may have led them to overstate their case. The study, for example, assumes that companies such as Toshiba Corp. and Samsung Electronics Co. that make components for the iPhone wholly assembled them in their home countries. But many of Apple's suppliers have manufacturing facilities in China, so it's likely that some portion of the components they build for the iPhone are made in China as well.

The latest results are broadly similar to analyses made by the Personal Computing Industry Center at the University of California, Irvine, of the trade and manufacture of another Apple product, the iPod. That research also found that Chinese labor accounted for only a few dollars of the iPod's value, even though trade statistics credited China with producing its full value.

Read more: http://online.wsj.com/article/SB10001424052748704828104576021142902413796.html#ixzz18TMfW1B5

p/s of course the other fascinating thing is how much an iPhone actually cost to produce, ... even if you lock in another $100 for advertising and marketing, Apple is enjoying incredible margins before appointing the "die hard telcos" wanting to work with Apple.

8 comments:

thegame said...

I am a bit naive on this matters.If what you say is true and i believe you and the statistic,how did they amass two trillion dollars over such a short period of time and still afford to spend huge amount of military items and expansion.

Layman said...

Dear sir,

I am still young in stock market and always have the dream of buying good shares and keep for next generations.Being longer time in this field than me,does this concept ever appear in your mind? Thanks for your time. Thank you.

ps. i know i am trying my luck to get response from you.

bernald said...

I am quite naive on this matter as well. I think that's true and the statistic is real. If the GDP represent the actual situation of the world current trade balance, by right China should have amass more than two quadrillion dollars in even a shorter time.

The average Americans have been spending lavishly and deplete the Earth resource as if they own the Earth all by themself that eventually cause global warming and global financial crisis which due to they have been spending more than they can effort but when they are seriously in debt to others due to their pathetic spending habits they blame others for creating imbalance competition?

Only 3 years old children will believe in the Americans lies! US government made me recall of the Ah Beng who is a "samseng" that always spend so much more than he can effort but always borrow money from people to pay for his extravagant lifestyle. When he was in deep shit due to he borrow money from the whole village and no where to go, he blame his lenders for earning all the monies by working diligently that resulted him jobless. Then this Ah Beng also blame his lender for working too hard for a very low salary thus it's unfair to him in competing against them to obtain a proper job. I have always wonder what kind of mentality Ah Beng has in order for him to maintain such a "thick face".

Well, it never fail to amaze me how correlate the mentality between the US government and the samseng "Ah Beng". Spend, Spend, Spend by borrowing from others and when seriously in debt, blame his lenders for working at a competitive rate and save their hard earn money too much which eventually is unfair to himself and as if it's others people fault for his pathetic situation.

P.S. : No offense to anyone except the samseng "Ah Beng" and those who act like him.

jackofalltrades said...

Thanks Dali for you call on MTD.

Salvatore_Dali said...

jack,

finally somebody who attended my last talk... lol... finally somebody who remembered ... to those who did not attend, MTD was the special stock mentioned as the final pick ... remember I asked you all not to chase, there was plenty of time to buy, I believe it was 3.80-4.00 ... I guess everybody sold out by the time it got to 5.00-6.00, so no sound from everyone... yea, I also sold at around 6.00

thegame said...

bernald, hahaha thank god i am not a three year old to believe all you say too.I am not going to waste my energy talking about the Americans.Its China i was interested in not America.

T816B said...

Haha Dali, I did remember well on MTD and I posted in the comment section few months back. Yeah, I sold it at below RM 6 as well, but good enough since target met.

The price was RM 3.00-RM 3.60 in early March, after your talk.

graph cut said...

Thanks Dali. I'm also benefited from your MTD recommendation during the last talk.