AAPL Apple Inc

By Fred P. Hochberg 

At the Jan. 15 White House signing ceremony for an initial trade deal with China, President Trump's top trade negotiator, Robert Lighthizer, noted that his boss "has, for years, complained about our enormous trade deficit with China." Indeed, Mr. Trump and others have long considered that gap a reflection of American economic weakness. The premise seems to be that a $420 billion trade deficit with China is akin to Washington just forking over $420 billion to Beijing each year. In 2012, Mr. Trump tweeted that "every year... China is making almost $300 billion off the United States." This is the equivalent of saying that your local gas station "made $20 off you" when you put $20 worth of gas in your car.

In fact, bilateral trade deficits are about as useful for determining the health of trade relationships as they are for determining the weather. A trade balance between two countries simply measures the value of goods and services sold from country A to country B versus the value of goods and services moving in the other direction. The country that buys more than it sells is running a bilateral trade deficit with the country that sells more than it buys.

I run this kind of trade deficit with my barber because I repeatedly purchase the service of a haircut from him, even though he never purchases anything from me. That deficit doesn't tell you much, of course, about the state of either of our finances. By the same token, the nearly $420 billion trade deficit that the U.S. ran with China in 2018 doesn't offer us much information about the strength or weakness of the U.S. economy.

One object in many of our daily lives, the iPhone, renders trade deficits especially laughable as a talking point. The iPhone was invented and designed in America, is powered by Central African minerals and is brought to life by European and Asian technologies, but both the World Trade Organization and the U.S. nevertheless classify it as a 100% Chinese export.

For the purposes of calculating the U.S. trade deficit, it wouldn't matter if 99 out of every 100 iPhone suppliers were located in downtown St. Louis. The country "where the last substantial transformation" of a product occurs gets credit for it. Because the overwhelming majority of iPhones have their final assembly done in China, the value of their Swiss gyroscopes, Dutch motion chips, Japanese retina displays and American glassware gets assigned to the Chinese economy. The iPhone's assembly is largely handled by the Taiwanese company Foxconn Technology Group, the world's largest contract manufacturer of electronics. According to Reuters, that final assembly is estimated to represent just 3-6% of the cost of building each phone, or about $10 to $20 for every iPhone X.

The price of iPhones varies considerably by model and features, but let's say that a typical one retails for about $999. Business Insider and the data portal Statista have estimated that, in 2017, just over 69 million iPhones were sold in America. Because the trade deficit is calculated using factory costs -- an estimated $230 per iPhone -- rather than retail prices, iPhones would contribute about $16 billion to the U.S. trade deficit with China. Only Apple knows the exact number of iPhones sold in the U.S. each year, so the actual value of these imports could be somewhat lower or higher, but the figure is certainly in the tens of billions, which gets factored straight into our $420 billion trade deficit with China.

Yet every time a $999 iPhone gets sold to a U.S. customer, that money doesn't get wired directly to Beijing. The global information provider IHS Markit estimates that for every iPhone X that gets sold, $110 is sent to Samsung, the South Korean conglomerate that makes iPhone displays. (Samsung also produces the Galaxy series of phones, making them Apple's chief rival in the smartphone market.) Another $44.45 finds its way to the iPhone's memory chip suppliers: Toshiba Corp. of Japan and SK Hynix Inc. of South Korea. A little money goes to Singapore; a little goes to Brazil; a little goes to Italy; and a little goes to Corning, N.Y. The vast majority of those dollars go to Apple Park in Cupertino, Calif., while China earns only an estimated $8.46 for the labor and parts that it supplies.

The iPhone may be calculated as a Chinese import, but most of the money that Americans spend on them doesn't travel far from home. And this is just one of many possible examples showing how America's trade deficit with China is artificially and substantially inflated, simply because China often happens to be the last stop in a given product's long global supply chain.

Trade deficits are also unreliable measures of economic health for several other reasons. For one, they can be easily distorted by factors that go beyond a tally of imports and exports. When the U.S. dollar rises or falls in value, for example, our trade balances fluctuate. A high dollar renders American exports more expensive and imports cheaper. So even if the number of products that the U.S. has imported from overseas hasn't changed, when the dollar becomes more valuable, American shoppers will probably buy more imports and sell fewer exports -- making the U.S. trade deficit "worse." But is that a bad thing? Any change in exchange rates, inflation or how much people in a country save or invest has an effect on trade surpluses and deficits.

Global trade has made many products cheaper, stronger, more innovative or more accessible by influencing supply and demand. It lowers the price tag on our clothing, allows for more durable car parts and provides us with blueberries in the wintertime.

But its impact on smartphones and other gadgets has been far more profound than that: By weaving together the technologies and resources of many countries, trade has made extraordinary products possible. American audio chips, Korean batteries, Congolese minerals, Japanese cameras, German accelerometers: The iPhone may well be the most truly global product yet.

The oft-touted $420 billion trade deficit with China isn't just a poor metric for determining the strength of the U.S. economy. It is also an imprecise number that can lead to bad policy choices. China isn't the enemy here. In fact, the Chinese make products like the iPhone possible without reaping much of the benefits.

The lesson of the iPhone is clear: If Americans were left to our own devices, we'd be left without many devices of our own.

--Mr. Hochberg was chairman and president of the U.S. Export-Import Bank in 2009-17. This essay is adapted from his new book, "Trade Is Not a Four-Letter Word: How Six Everyday Products Make the Case for Trade," recently published by Avid Reader Press.

(END) Dow Jones Newswires

January 31, 2020 10:53 ET (15:53 GMT)

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