Tuesday, December 20, 2011

Review of US China Bilateral Relations for 2012

US China bilateral relations had an up and down year and most indications point to more of same or worse for 2012, a presidential election year in the US. I have written an analysis exclusively for China-US Focus which can be read in full at their website.

One of the most contentious issues bedeviling the bilateral relations has been the proper value of the Renminbi and its alleged impact on the placement of manufacturing jobs, i.e., whether jobs have fled the US because an undervalued yuan.

My chat friends have called attention to a series of articles that would shed light and dispell much of the confusion surrounding this subject.

A professor of economics from Tokyo presented a careful deconstruction of the cost of an iPhone (3G) designed in the US and made in China. The value added in China in assemblying the iPhone was $6.50 out of a total export price of $179. The difference between China's value add and the export price represents the cost of bill of material consisted of parts and components purchased from Germany, Japan, Korea and the US. In calculating the trade deficit, the entire $179 is credited to China's account and not just 3.6% of the total.

Another analysis revealed that Apple captured 58.5% of the profit from each iPhone sold while China's share of the profit was 1.8%. In other words, for every dollar China made on the iPhone, Apple made $32.50. Both authors went on to say that with more than 60% margin, Apple could afford to make a little less and have the iPhone made in the US but choose to have it assembled in China to maximize its profit.

The same case can be made about Apple's latest "insanely great" product, the iPad. China's value added is about $8 out of $499 cost of the product. Apple's share of the cost for design and marketing is about $150. Ironically because the iPad sells for a higher price inside China, Apple makes even more money for the iPad made in China and sold in China and it doesn't even show up in trade statistics--except of course for those made in America parts and components that were imported by China to put into the iPads.

Basically iPads make in China and sold in America inflates the trade deficit while iPads sold in China reduces the actual deficit by the amount of made in America parts put into the iPad. This is not a new story. When Zhu Rongji was premier and was asked about the trade deficit, he pointed out then that a pair of Nike sneakers that retail for over $100 in the US contained only a couple of dollars of value added from China.

Maybe Congress and the watchdogs of Washington can be fooled by derivatives and home mortgage swaps, but it doesn't take advanced degrees in rocket science to understand that trade deficits are greatly exaggerated. Politicians are not stupid enough to not understand, they just don't want to.

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