The trade gap between America and China is much exaggerated
Jan 21st 2012 | from the print edition
AMERICA’S trade deficit with China hit another record last year. Estimated at almost $300 billion, it made up over 40% of America’s total deficit. Yet official data grossly overstate US imports from China.
Take the iPad, which America imports from China even though it is entirely designed and owned by Apple, an American company. iPads are assembled in Chinese factories owned by Foxconn, a Taiwanese firm, largely from parts produced outside China. According to a study by the Personal Computing Industry Centre, each iPad sold in America adds $275, the total production cost, to America’s trade deficit with China, yet the value of the actual work performed in China accounts for only $10. Using these numbers, The Economist estimates that iPads accounted for around $4 billion of America’s reported trade deficit with China in 2011; but if China’s exports were measured on a value-added basis, the deficit was only $150m.
The chart shows a geographical breakdown of the retail price of an iPad. The main rewards go to American shareholders and workers. Apple’s profit amounts to about 30% of the sales price. Product design, software development and marketing are based in America. Add in the profits and wages of American suppliers, and distribution and retail costs, and America retains about half the total value of an iPad sold there. The next biggest gainers are South Korean firms like Samsung and LG, which provide the display and memory chips, whose profits account for 7% of an iPad’s value. The main financial benefit to China is wages paid to workers for assembling the product and for manufacturing some inputs—equivalent to only 2% of the retail price.
China’s small contribution to total costs suggests that a yuan appreciation would have little impact on its exports. A 20% rise in the yuan would add less than 1% to the import price of an iPad. For imports such as clothing and toys the Chinese value added is much higher. But electrical machinery and equipment, with more complex cross-border supply chains, make up one-quarter of China’s exports to America. Pascal Lamy, the head of the World Trade Organisation, has suggested that if trade statistics reflected true domestic content, America’s deficit with China might be more than halved.