How The iPhone Figures In The U.S.-China Trade Gap

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When the U.S. counts imports, it uses the fully assembled wholesale value of a product like the iPhone.

Published: January 18, 2011

by Wendy Kaufman

Trade will be one of the big issues when President Obama and Chinese President Hu Jintao sit down to talk this week. The U.S. trade deficit with China is large and growing. But the numbers don't tell the whole story.

The Apple iPhone is an iconic American product, invented, designed and sold by a California company. But when trade figures are tallied, the iPhone is counted as a Chinese import. That means every iPhone sold here makes the U.S. trade deficit with China grow.

The iPhone is made up of hundreds of individual parts. Those components are made in the U.S., South Korea, Japan and many other places. But they are assembled into an iPhone in a factory in China.

Few if any of the important parts are actually made in China, but when the U.S. counts imports, it uses the fully assembled wholesale value of a product.

Mark Doms, the chief economist at the Commerce Department, acknowledges this approach has limitations but says there really isn't any other way to do it. "There's really no practical way to ask companies to break out the value of the goods by country of origin for all the individual components," he says. "That just isn't very feasible."

Instead, the total wholesale value of the iPhone -- for the 3G model it was about $180 -- goes on the Chinese import side of the trade ledger. As a result, says economist Rob Feenstra of the University of California, Davis, "The U.S. trade deficit with China tends to be exaggerated."

Right now that annual trade deficit is more than $275 billion. How much of it can be traced to the iPhone?

In a much-talked-about paper, Chinese economist Yuqing Xing took a stab at the figure. "If you look at the manufacturing costs, China's contribution is $6.50."

He says that figure represents the actual cost of assembling each iPhone. And he concludes that if that number were used instead of the entire wholesale cost, the U.S. trade deficit with China would shrink by roughly $2 billion.

Some economists dispute his figures, but there's little doubt that the real trade deficit with China is less than the number that shows up in the headlines.

Doms acknowledges that but adds that even if you strip away the inflated value of some Chinese imports, it won't change the fundamental fact: The U.S. trade deficit with China is increasing. [Copyright 2013 NPR]

TRANSCRIPT:

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When President Obama meets with China's president, Hu Jintao, tomorrow, trade will be one of the main issues on the agenda. The U.S. trade deficit with China is large, and it's growing - roughly $275 billion a year.

But as NPR's Wendy Kaufman reports, the numbers don't tell the whole story.

WENDY KAUFMAN: The iPhone is an iconic American product - invented, designed and sold by a California company. But when trade figures are tallied, the iPhone is counted as a Chinese import. That means every iPhone sold here makes the U.S. trade deficit with China grow.

How is that possible?

For help, we turn to Glenn Fleishman, a technology writer for the economist.com and other publications.

Mr. GLENN FLEISHMAN (Technology Writer): This is an iPhone 4. This is made of dozens or hundreds of components in it - some large, some small.

KAUFMAN: Those components are made in the U.S., South Korea, Japan and many other places, but they are assembled into an iPhone in a factory in China.

Mr. FLEISHMAN: Just on the back of the main logic board, there's a chip from Samsung. It's got the memory. There's a Cirrus Logic audio codec. There's a Texas Instruments touch-screen controller, which...

KAUFMAN: Few, if any, of the important parts are actually made in China. But when the U.S. counts imports, they use the fully assembled wholesale value of a product.

Mark Doms, the chief economist at the Commerce Department, acknowledges this approach has limitations but says there really isn't any other way to do it.

Mr. MARK DOMS (Chief Economist, Commerce Department): There's just really no practical way to ask companies to break out the value of the goods by country of origin for all the individual components. That just isn't very feasible.

KAUFMAN: So the total wholesale value of the iPhone - for the 3G, it was about $180 - goes on the Chinese import side of the trade ledger. As a result, says Rob Feenstra, an economist at the University of California, Davis, the...

Mr. ROB FEENSTRA (Economist, University of California, Davis): U.S. trade deficit with China tends to be exaggerated.

KAUFMAN: Right now, that annual deficit is more than $275 billion. How much of it can be traced to the iPhone?

In a much-talked-about paper, Chinese economist Yuqing Xing took a stab at the figure.

Mr. YUQING XING (Economist): If you look at the manufacturing costs, China contribution is $6.50.

KAUFMAN: That $6.50 is the estimated cost of the actual assembly. He says if you use that figure, not the entire wholesale amount, the U.S. trade deficit with China would be about $2 billion less.

Mr. XING: Yes, yes. Actually, yeah, that's the bottom line.

KAUFMAN: Some economists dispute his figures, but there's little doubt that the real trade deficit with China is less than the number that shows up in the headlines.

KAUFMAN: Still, Department of Commerce economist Mark Doms says...

Mr. DOMS: Even if we think about the iPhone and whatnot, the overall pattern of the increase in trade deficit with China won't be changed by these types of issues.

KAUFMAN: Fair enough. But as the iPhone example illustrates, accurately measuring bilateral trade flows is complicated.

Wendy Kaufman, NPR News. Transcript provided by NPR, Copyright NPR.