How the iPhone widens the US trade deficit with China

How the iPhone widens the US trade deficit with China
http://voxeu.org/index.php?q=node/6335


Yuqing Xing
10 April 2011

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What can the iPhone tell us about the trade imbalance between China and the US? This column argues that current trade statistics greatly inflate the value of China’s iPhone exports to the US, since China's value added accounts for only a very small portion of the Apple product's price. Given this, the renminbi’s appreciation would have little impact on the global demand for products assembled in China.

At the centre of global imbalances is the bilateral trade imbalance between China and the US. Most attention to date has been focused on macro factors and China’s exchange-rate regime. Little attention, however, has been paid to the structural factors of economies and global production networks that have reversed conventional trade patterns, transformed the implications of trade statistics and weakened the effectiveness of exchange rates on trade balances.

Today’s trade is not that experienced by the British economist David Ricardo two hundred years ago (Grossman and Rossi-Hansberg 2008). It is almost impossible to define clearly where a manufactured product is made in the global market. This is why on the back of an iPhone one can read “Designed by Apple in California, Assembled in China”. In this column, I use the smartphone in your pocket to argue that current trade statistics have distorted the reality of the Sino-US trade imbalance and the appreciation of the renminbi would have little impact on the imbalance.
How iPhones are produced

The iPhone is designed and marketed by Apple. Apart from its software and product design, the production of iPhones primarily takes place outside of the US. Manufacturing iPhones involves nine companies, which are located in China, South Korea, Japan, Germany and the US (Table 1). All iPhone components produced by these companies are shipped to Foxconn, a Taiwanese company located in China, for assembly into final products and then exported to the US and the rest of the world.

By any definition, the iPhone belongs to high-tech products, where the US has an indisputable comparative advantage and China does not domestically produce any products that could compete with it. However, the iPhone trade pattern is not what is predicted by either the Ricardian comparative advantage theory or the Heckscher-Ohlin theory. The manufacturing process of the iPhone illustrates how the global production network functions, why a developing country such as China can export high-tech goods, and why the US, the country that invented the iPhone, becomes an importer.

Table 1. Apple iPhone 3G’s major components and cost drivers

Manufacturer

Component

Cost
Toshiba (Japan)

Flash Memory

$24
Display Module

$19.25
Touch Screen

$16.00
Samsung (Korea)

Application Processor

$14.46
SDRAM-Mobile DDR

$8.50
Infineon (Germany)

Baseband

$13.00
Camera Module

$9.55
RF Transceiver

$2.80
GPS Receiver

$2.25
Power IC RF Function

$1.25
Broadcom (USA)

Bluetooth/FM/WLAN

$5.95
Numonyx (USA)

Memory MCP

$3.65
Murata (Japan)

FEM

$1.35
Dialog Semiconductor (Germany)

Power IC Application Processor Function

$1.30
Cirrus Logic (USA)

Audio Codec

$1.15
Rest of Bill of Materials

$48.00
Total Bill of Materials

$172.46
Manufacturing costs

$6.50
Grand Total

$178.96

Source: Rassweiler (2009)
iPhones and the Sino-US trade imbalance

The shipment of the ready-to-use iPhones from China to the US is recorded as China’s exports to the US. Using the total manufacturing cost $178.96 as the price of the iPhone, China’s iPhone exports to the US amounted $2.0 billion in 2009. Assuming that the parts supplied by Broadcom, Numonyx and Cirrus Logic, valued at $121.5 million, were imported from the US the iPhone alone contributed $1.9 billion trade deficit to the US, about 0.8% of the US trade deficit with China (Table 2).

On the other hand, most of the export value and the deficit due to the iPhone are attributed to imported parts and components from the third countries and have nothing to do with China. Chinese workers simply put all these parts and components together and contributed only $6.50 to each iPhone, about 3.6% of the total manufacturing cost (e.g. the shipping price). The traditional way of measuring trade credits all $178.98 to China when an iPhone is shipped to the US, thus exaggerating the export volume as well as the imbalance. Decomposing the value added along the value chain of the iPhone manufacturing suggest that, of the $2.0 billion iPhone export from China, 96.4% is actually the transfer from Germany ($326 million), Japan ($670 million), Korea($259 million), the US ($108 million) and others ($ 542 million). All of these countries are involved in the iPhone production chain.

If China’s iPhone exports were calculated based on the value added, i.e., the assembling cost, the export value as well as the trade deficit in the iPhone would be much smaller, at only $73 million, just 3.6% of the $2.0 billion calculated with the prevailing method (Table 2). The sharp contrast of the two different measurements indicates that conventional trade statistics are inconsistent with trade where global production networks and production fragmentation determine cross-country flows of parts, components, and final products. The traditional method of recording trade has failed to reflect the actual value chain distribution and painted a distorted picture about the bilateral trade relations. The Sino-US bilateral trade imbalance has been greatly inflated.

Table 2. iPhone trade and the US trade deficit with China

Year

2007

2008

2009
iPhone Sales in the US* (million Units)

3.0

5.3

11.3
Shipping Price/unit**
(the US dollar)

229

174

179
China’s Export to the US in iPhone (million US dollar)

687

922.2

2,022.7
China’s Trade Surplus with the US in iPhones

N/A

N/A

1,901.2[1]
China’s iPhone exports to the US based on value added ( million US dollar)

19.5

34.35

73.45
Value added / total exports

2.8%

3.7%

3.6%
China’s trade surplus with the US in iPhones based on value added

N/A

N/A

73.45[2]

Sources: * Hughes (2010); ** Rassweiler (2009)
[1] When calculating trade deficits between PRC and the US in iPhones, we assume that all parts supplied by Broadcom and Numunyx were imported from the US.
[2] The parts provided by Broadcom and Numunyx are shipped back to the US within the ready-to-use iPhones. They are “round tripping” exports, which should not be considered as actual exports in the value-added approach.
iPhone trade and the appreciation of the renminbi

Many believe that appreciation of the renminbi would be an effective means to solve the Sino-US trade imbalance. Appreciation proponents ignore the fact that the appreciation can only affect a small portion of the cost of made/assembled-in-China products. If the renminbi appreciated against the US dollar by 20%, the iPhone's assembly cost would rise to $7.80 per unit, from $6.50, and add merely $1.30 to the total manufacturing costs. This would be equivalent to a 0.73% increase in total manufacturing costs. It is doubtful that Apple would pass this $1.30 to American consumers. Even a 50% appreciation would not bring a significant change in the total manufacturing cost, as the appreciation would only affect the assembling cost. Therefore, the expected pass-though effect of the renminbi’s appreciation on the price of the iPhone would be zero and the American consumers’ demand on the iPhone would not be affected. The appreciation of the renminbi would have little impact on the Sino-US trade imbalance.
Could the iPhone be assembled in the US?

There is no doubt that US workers and firms are capable of assembling iPhones. If all iPhones were assembled in the US, the $1.9 billion trade deficit would not exist. There are two possible reasons for Apple to use China as an exclusive assembly centre for iPhones. One is competition, the other is profit maximisation.

The gross profit margin of the iPhone was 62% when the phone was launched in 2007, then rose to 64% in 2009 due to reductions in manufacturing costs (table 3). If the market were perfectly competitive, the expected profit margin would be much lower and close to its marginal cost. The surging sales and high profit margin suggest that the intensity of competition is fairly low and Apple maintains a relative monopoly position. Therefore, it is not the competition but profit maximisation that drives the iPhone’ s assembly to China.

Table 3. Profit margin of the iPhone



2007

2008

2009
Unit Price to carriers

$600

$500

$500
Unit manufacturing costs*

$229

$174.33

$178.96
Profit margin

$371

$325.67

$321.4
Profit Margin (%)

62

65

64

Sources: iSupply, and the authors’ calculations.

An interesting hypothetical scenario is one where Apple had all iPhones assembled in the US. Assuming that the wage of American workers is ten times as high as those of their Chinese counterparts, the total assembly cost would rise to $68 and total manufacturing cost would be pushed to approximately $240. Selling iPhones assembled by American workers at $500 per unit would still leave a 50% profit margin for Apple. In this hypothetical scenario, the iPhone could contribute to US exports and reduce the US trade deficit, not only with China, but also with the rest of world. More importantly, Apple would create jobs for US low-skilled workers.

In a market economy, there is nothing wrong with a firm pursuing profit maximisation. Governments should not restrict such behaviour in any way. However, corporate social responsibility has been adopted as a part of corporate values by many multinational companies, including Apple. Employing American workers to assemble iPhones may be an effective way to practice corporate social responsibility.
Concluding remarks

Due to the limitations of the data, it is not possible to outline a more detailed distribution of the iPhone’s manufacturing value chain across all countries involved. However, adding additional countries and parts into the analysis would not change the bottom line – the value added created by Chinese workers accounts for only a small portion of a ready-to-use iPhone, so current trade statistics greatly inflate the value of China’s iPhone export to the US as well as the corresponding trade imbalance. Given this, the renminbi’s appreciation would have little impact on the global demand of the products simply assembled in China.
References

Grossman, Gene M and Esteban Rossi-Hansberg (2008), “Trading Tasks: A Simple Theory of Offshoring”, American Economic Review, 98(5):1978-1997.
Hughes, N (2010), “Piper: 15.8M US iPhone sales in 2010, even without Verizon”, Apple Insider, 6 January.
Rassweiler, A (2009), “iPhone 3G S Carries $178.96 BOM and Manufacturing Cost, iSuppli Teardown Reveals”. iSuppli, 24 June.

This article may be reproduced with appropriate attribution. See Copyright (below).

Topics: Exchange rates, International trade
Tags:

China
exchange-rate policy
global imbalances
iPhone
US




Yuqing Xing
Professor of economics and the Director of Asian Economic Program at the National Graduate Institute for Policy Studies, Tokyo
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「硬違約」浪潮將至 - 信報網站 Kyle Bass AmeriCatalyst 2011

「硬違約」浪潮將至 - 信報網站

2011年12月13日

信報研究部 投資遠見

「硬違約」浪潮將至

歐債危機已幾可肯定必將名列2011年十大經濟新聞榜首。經合組織（OECD）預期，今年環球工 業國借貸總額增至10.4萬億美元，2012年繼續上升，OECD因此警告，明年可能爆發借貸危危機。Business Insider稱為「對沖基金超級巨星」（Hedge Fund Superstar）的巴斯（Kyle Bass）11月上旬接受AmeriCatalyst訪問亦暢論當前歐、美、日的債務困局和投資部署。

時機（timing）在於投資來可算 是成敗最重要的因素，身經百戰如索羅斯，在2000年前後的科網股熱潮，也因為太早押注科網股泡沫爆破而被迫割掉虧損；對沖基金Hayman Capital創辦人巴斯（Kyle Bass）令人佩服的是他在美國房市泡沫及希臘主權債務兩場金融危機，都能夠準確拿揑時機作出投資決定，尤其是希債危機一役，巴斯在專業投資銀行也未曾注 意到希臘隱藏債務危機的情況下，幾乎是以最低價買希臘CDS（詳見2011年10月25日信研「由次按贏到希債再…… 」）。

巴 斯去年9月在AmeriCatalyst專訪解釋美國房市泡沫的理據，今年11月9日，他再接受AmeriCatalyst訪問則大談環球主權債務問題。 巴斯在11月的Hayman Capital投資通訊（《HC通訊》）警告，環球債務已達飽和水平；他在AmeriCatalyst的訪問節目指出，由2002至2011年，環球債務 以平均每年12％的速度上升，債務總額由80萬億美元增至210萬億，GDP每年平均增幅則只有4%，而政客都在盡量拖延時間（kicking the can down the road）迴避債務問題，不過，歐洲、日本、美國等全球三大發達經濟體系的債務賬單接踵到期，今天是歐洲，明天是日本，然後輪到美國，目前（美國）政客估 計還有10年時間等待經濟復蘇，政府稅收增加便會逐步解決財政收支失衡問題，但他認為，歐洲及日本危機相繼爆發的骨牌效應，大約3至5年便蔓延到美國。歷 史每次出現信貸市場債務超越GDP的200%，都是由於國家為準備戰爭而大舉借貸，在環球沒有爆發戰爭危機的今天，全球信貸市場債務超過GDP的300% 可說前所未見。

主權債務延續性公式

他表示，量度主權債務的延續性（sustainability）或是否資不 抵債（solvency）有一條簡單的公式，即債務利息支出不可以超過政府收入10%，希臘政府就因為每年債務利息支出佔政府收入達16%而導致主權違約 危機，巴斯強調不要以為希債「削髮」50%便可以解決問題，希臘政府的資產負債表只能承擔每年4.4%的利率，但希臘兩年期債券孳息已升至100%，10 年長債孳息亦高達27%（希債孳在巴斯的訪問之後持續上升，最近希臘2年和10年債息一度升至逾150%和35%），希臘實際已經完全破產。又例如另一歐 豬大國意大利，6個月前的意大利仍是歐盟中的主要樑柱，但當10年期債券孳息由5%升到6%，多年累積下來的債務因為這僅僅1%的利息成本增加，意大利頓 時陷入財政收支失控危機；而深受債務問題困擾除了歐豬五國之外還有比利時和歐羅區第二大經濟體法國。

《HC通訊》並揭穿較早前傳媒報道 IMF準備提供6000億歐羅（7940億美元）緊急貸款，讓意大利有12至18個月緩衝期去解決債務問題只是安定人心的謠言。他表示，IMF貸款的原意 是幫助國際收支平衡（balance of payments）有問題的第三世界國家以及各成員國穩定經濟，雖然IMF貸款的核心理念是為成員解決經濟危機，但並非要為揮霍無度以致債台高築的歐洲發 達國家或日本擔當最終貸款人的角色，而根據IMF網頁資料，目前IMF可用結餘只得3850億美元，遠未足以應付謠傳的7940億美元貸款額。IMF較早 前承諾為希臘提供相等於雅典政府3,200%的SDR（特別提款權）配額，已經是開IMF自己角色的玩笑。另外，歐洲金融穩定設施（EFSF）或將來其他 類似名目的機制（歐盟就歐債問題舉行多次峰會，先是成立永久性基金ESM，12月9日結束的會議通過設立財政聯盟；巴斯有預知之能？）也無法解決歐債危 機，投資者（主要是對沖基金）對EFSF擔保的歐債風險仍有很大戒心，最近EFSF發行30億歐羅債券，由於認購不足而自己購回發行額的20%；《HC通 訊》認為EFSF只是由多個囊空如洗的國家組成的機制。

勿期望IMF做救世者

巴斯又提醒投資者莫寄望IMF或 歐洲央行會成為債務危機的救世者，也不要相信政府輕言會解決難題的說話，即使危機已迫在眉睫，政客也會告訴你一切如常，例如2008年雷曼兄弟破產前一個 星期，雷曼高級債券孳息比國庫債券超出400基點，當時的財長保爾森仍堅稱銀行體系沒有問題。《HC通訊》指出，歐洲政客們也心知傾歐盟全力也走不出債務 困境，除非容許歐洲央行開動印鈔機，為歐羅區成員印製等於18萬億美元的鈔票，但大印鈔票的後果是將歐洲推回von Havenstein時期的局面（Rudolf von Havenstein是1914至1918年世界第一次大戰期間的德國中央銀行Reichsbank行長，當時他為籌募戰爭經費而大印馬克，最後導致惡性 通脹。Rudolf von Havenstein事迹請參閱2010年3月11日信研「炮製惡性通脹的翩翩公子」）。巴斯表示從未見過「有秩序違約」（orderly default）；《HC通訊》預期一幕「硬違約」（hard defaults）浪潮快將出現。

歐債危機成為今年第四季以來最熱門的財經 新聞，《HC通訊》估計日本不久將取代歐洲佔據報紙頭版，原因有二：日本是全球債務問題最嚴重的國家，公債等於政府收入的20倍，意大利、希臘都瞠乎其 後。而債務無法解開的死結是日本的人口結構，過去3年，日本的人口減少了3百萬至現在約1.28億人，由於日本是全球恐外性（xenophobic）最強 烈的發達國家，外國人要成為日本公民困難重重，全國1.28億人口之中只有1百萬並非原籍日本人。再加上全國超過三分之一是60歲以上的長者，政府收入隨 着勞動人口的減少而日漸萎縮，巴斯將日本的情況比喻為馬多夫（Madoff）的「龐茲投資計劃」，意思是投入工作人口比離開的多，政府財政最後將無法支 撑。《HC通訊》並引述11月28日路透報道，OECD指出，日本政府債務不斷增加，長期利率（JGB）有上升風險。意大利的長債利率上升帶來的後果將成 為日本的前車之鑑。

巴斯將美國列為歐洲和日本之後的第三張骨牌，雖然美國的債務利息支出亦已接近聯邦政府收入的10%，但美國比歐洲先走一 步，為銀行去槓桿化做過一番工夫；而相比日本，美國傳統歡迎移民，過去10年人口都有輕微增長；巴斯並希望美國政客會汲取歐洲和日本的教訓，放棄黨派之爭 及早處理債務問題。

巴斯在AmeriCatalyst的專訪最後談及投資部署，他認為歐洲和日本的債務危機將引發資金流向美國避險，因此美 元中短期可以看高一線，但股市則不宜沾手。他解釋，美股P／E的「E」並不可靠，由於聯邦政府買入企業的「有毒」資產才令股市的P／E看似很吸引。巴斯強 調，在危機四伏的環境，未來幾年保本比追求資本增值更重要，他建議吸納有增值能力的資產（productive assets），例如油田和物業。至於黃金方面，巴斯重申必須買實金，他曾經造訪COMEX（紐約商品交易所），COMEX交收部負責人告訴巴斯，期貨及 期權合約的黃金長倉總值約800億美元，但COMEX金庫只儲存27億美元的黃金準備讓客戶提取，巴斯一算之下，若有4%期貨及期權的客戶要求實金交收， 後果也不堪設想。

《HC通訊》指出，自第二次世界大戰之後，西方發達主權國從未發生過違約事件，新一代投資者可能因此存在諾貝爾經濟獎卡尼 曼教授（Daniel Kahneman）所說的「現成啟發式（availability heuristic，人們根據現成相關例子以衡量類似事件發生的可能性）心理，普遍認為西方發達國集體主權違約是不可思議，但巴斯表示，金融史上違約事件 俯拾皆是，就連德國違約也不是陌生個案。不過，即使爆發集體主權違約也不是世界末日，當然很多投資者會蒙受巨大損失，巴斯說，他的責任就是做好對沖，保護 自己和Hayman Capital客戶不會成為虧損的一分子。

Return of capital is much more important in the next few years than return on capital. ——Kyle Bass

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