We estimate China only makes $8.46 from an iPhone – and that’s why Trump’s trade war is futile

Apple CEO Tim Cook with a staffer at Chinese contract manufacturer Foxconn.

The Trump administration’s tariffs on China have so far targeted mostly industrial goods like aircraft engines and gas compressors.

But the administration has also threatened to slap tariffs on US$200 billion in other goods if the dispute continues.

No list of all the goods that might be subject to tariffs has been released but it would have to include consumer electronics, such as smartphones, which is the largest single product category in China’s exports to the U.S.

One well-known product that might be affected is Apple’s iPhone, which is assembled in China. When an iPhone arrives in the US, it is recorded as an import at its factory cost of about $240, which is added to the massive U.S.-China bilateral trade deficit.

IPhone imports look like a big loss to the US, at least to the president, who argues that “China has been taking out $500 billion a year out of our country and rebuilding China.” One estimate suggests imports of the iPhone 7 and 7 Plus contributed $15.7 billion to last year’s trade deficit with China.

But, as our research on the breakdown of an iPhone’s costs show, this number does not reflect the reality of how much value China actually gets from its iPhone exports – or from many of the brand-name electronics goods it ships to the US and elsewhere. Thanks to the globe-spanning supply chains that run through China, trade deficits in the modern economy are not always what they seem.

Who really makes the iPhone?
Let’s examine an iPhone 7 a little more closely to see how much value China is actually getting.

Start with the most valuable components that make up an iPhone: the touch screen display, memory chips, microprocessors and so on. They come from a mix of US, Japanese, Korean and Taiwanese companies, such as Intel, Sony, Samsung and Foxconn. Almost none of them are manufactured in China. Apple buys the components and has them shipped to China; then they leave China inside an iPhone.

So what about all of those famous factories in China with millions of workers making iPhones? The companies that own those factories, including Foxconn, are all based in Taiwan. Of the factory-cost estimate of $237.45 from IHS Markit at the time the iPhone 7 was released in late 2016, we calculate that all that’s earned in China is about $8.46, or 3.6% of the total. That includes a battery supplied by a Chinese company and the labour used for assembly.

The other $228.99 goes elsewhere. The US and Japan each take a roughly $68 cut, Taiwan gets about $48, and a little under $17 goes to South Korea. And we estimate that about $283 of gross profit from the retail price – about $649 for a 32GB model when the phone debuted – goes straight to Apple’s coffers.

In short, China gets a lot of (low-paid) jobs, while the profits flow to other countries.

The trade balance in perspective
A better way of thinking about the US-China trade deficit associated with one iPhone would be to only count the value added in China, $8.50, rather than the $240 that shows up as a Chinese import to the US.

Scholars have found similar results for the broader US-China trade balance, although the disparity is less extreme than in the iPhone example. Of the 2017 trade deficit of $375 billion, probably one-third actually involves inputs that came from elsewhere – including the U.S.

The use of China as a giant assembly floor has been good for the U.S. economy if not for U.S. factory workers. By taking advantage of a vast, highly efficient global supply chain, Apple can bring new products to market at prices comparable to its competitors, most notably the Korean giant Samsung.

Consumers benefit from innovative products, and thousands of companies and individuals have built businesses around creating apps to sell in the App Store. Apple uses its profits to pay its armies of hardware and software engineers, marketers, executives, lawyers and Apple Store employees. And most of these jobs are in the US.

If the next round of tariffs makes the iPhone more expensive, demand will fall. Meanwhile Samsung, which makes over half its phones in Korea and Vietnam, with a lower share of U.S. parts, will not be affected as much by a tariff on goods from China and will be able to gain market share from Apple, shifting profits and high wage jobs from the US to South Korea.

Put another way, research has shown globalisation hurt some Americans while it made life better for many others. Putting globalisation in reverse with tariffs will also create winners and losers – and there could be far more of the latter.

Why not make the iPhone in America?
When we discuss these topics with policymakers and the media, we’re often asked, “Why can’t Apple just make iPhones in the US?”

The main problem is that the manufacturing side of the global electronics industry was moved to Asia in the 1980s and 1990s. Companies like Apple have to deal with this reality.

As the numbers we’ve cited make clear, there’s not much value to be gained for the US economy or its workers from simply assembling iPhones here from parts made in Asia.

While it’s possible to do so, it would take at least a few years to set it up, cost more per unit than production in Asia, and require a lot of carrots and sticks from policymakers to get the many companies involved to do so – for example, like the potential $3 billion in subsidies Wisconsin gave to Foxconn to build an LCD factory there.

A flawed response to the challenge from China
There is, of course, plenty for the US to complain about when it comes to China’s high-tech industry and policies, whether it’s the lack of intellectual property protection or non-tariff barriers that keep major tech companies such as Google and Facebook out of the huge Chinese market. There is room for much tougher and more sophisticated bargaining to address these issues.

But where trade is concerned, policies should reflect that manufacturing is now a global network. The World Trade Organisation has already developed an alternate set of trade numbers that shows each country’s trade in value added terms but the administration seems to have missed the memo.

Trump’s trade war is based on a simplistic understanding of the trade balance. Expanding tariffs to more and more goods will weigh on US consumers, workers and businesses. And there’s no guarantee that the final outcome will be good when the dispute ends.

The ConversationThis is a war that should never have been started.

RELATED VIDEO: Stephen Jacobi on why Trump's trade war is bad for NZ (April 22)

Jason Dedrick is a professor at Syracuse University; Greg Linden is a research associate at the University of California, BerkeleyKenneth L. Kraemer is a research professor at the University of California, Irvine

This article was originally published on The Conversation.


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23 Comments & Questions

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This headline sums up we have a productivity probem and the Chinese don't.

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When will reporters in NZ actually report about some of the good Trump is doing. It’s just cheap and boring journalism to have a permanent anti Trump stance. While there are repocusions and unforeseen situations from his stance it is not all that bad.

He has already achieved a lot by pushing back on the Chinese. The Chinese have simply taken and copied for so long without consequence. Now they are on notice

Perhaps NZ will only take notice when all of the IP we let the Chinese use without consequence comes to compete against our own industries. Namely in the form of genetics and farming production systems

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I wouldn't hold your breath if I were you, Derek. And you raise a number of very important points too, but they will remain lost on the dim the dull and the dumb of the media of which this country seems to have more than its fair share. But hey, Jacinda has just had a baby. How great is that? It's really put New Zealand on the map! And what about Winston, the incorrigible old bugger. Eh, eh? He's doing well and gives us a good laugh too. That'll show em.

Fortunately, Derek, we do have Trump in the White House to start to tackle some of the trade and existential issues of our age that actually matter and that will be important for setting the agenda for the next 30-40 years. And again, New Zealand gets to get it for free.

And what better time for the Americans to do this than when they are coming from a position of such economic might and power whereas Europe is weak and China has built its empire on the sand. The strategic initiative is certainly with the US and Trump clearly knows it.

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Empire on the sand?

Who caused the GFC?

And building up towards the next GFC?

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GFC was caused by Wall St not the US Government

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Actually it was US government social-economic intervention in the form of Congress trying to widen home ownership by sponsoring soft Fannie Mae and Freddie Mac loans to new homeowners who ordinarily wouldn't meet bank lending criteria.

This government indulgence, coupled with Greenspan's credit expansion leveraged the whole edifice which culminated in Wall Streets flakey products.

Nothing could have got to the heights of the pre-GFC peak before correcting without the faux security of the Fannie and Freddie properties undergirding it all

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GFC caused by artificial low interest rate set by the Fed; their federal government promoting equality of out come in housing market, forcing banks to loan to people who otherwise cannot get a loan, then using Fannie Mae Freedie Mac (state owned enterprises) to ensure those loans (aka subprime mortgages). People who knew about these information have been saying a crisis is going to happen years before the GFC.

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So jobs are created by Wall St and has nothing to do with the US government? Profound logic indeed!

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Sweet pivot points of history, where once mighty empires lose their global superpower status and turn to the decline. It looks like the entire world is starting to unite around Trump, except it's in opposition to his asinine and damaging Trade War, not for it. This is going to get very interesting indeed - "May we live in interesting times"

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Unfortunately, there is a huge liberal and anti-Trump sentiment in NZ that the media feeds. Trump’s style may not appeal, but who else is standing up to China’s theft of IP, barriers to reciprocal investment, and thuggish trade practices?

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Ah - and so it was that within our lifetime not so long ago that a country called NZ required companies wanting to access the market here to :

1. Have manufacturing with local partners here - electronics and cars come to mind.

2. Financial institutions must have local partners (minimum 49%).

All in the name of 'protecting' the local market and giving locals a leg up.

Trouble is that NZ (Australia too) never rose to the challenge of developing anything beyond getting super fat and super profitable from all those measures.

Now that Japan, Korea, Taiwan and goodness gracious heavens above, China are able to develop beyond just being copycat manyfacturers and service providers, CRY FOUL!

CRY INFRINGEMENT OF IP!

CRY ANYTHING BUT KEEP THEM BACKWARD AND BEHIND THE WEST!

Too late, losers.

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If China is so great why doesn’t anyone want to live there? China has nothing to offer except weight in numbers

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NZ has more New Zealanders not wanting to live here (500,000 alone in Australia) than there will ever be Chinese wanting to leave China. In fact, there are plenty of overseas Chinese (highly qualified and young) beating a path to work and live in China.

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Your numbers look pretty wonky Derek as millions of Chinese have emigrated - with hundreds of thousands in NZ alone!

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Breathtaking moronic statement - officially there are less than 200,000 people of Chinese origin in NZ. So take your hundreds of thousands and you know what to do with your attempt to state a bare face lie. Most satisfying to catch a liar out.

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You might want to check that.

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15% of the population of NZ migrated and now lives in Australia. 15% of China population will be 1.95 billion living overseas.

Next.

Most satisfying indeed to catch such an incredibly dumb statement out.

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Simpleton Trump says "Trade Wars are good, and easy to win". Meanwhile, articles like this highlight the vast complexity of global trade and the fact that everything is interconnected, and that such simpleton views will do a helluva lot more harm than good.

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The fact that Chinese assembly is such a smal part of the cost of an iPhone illustrates the vulnerability of China to Trump’s tariffs. Apple could shift assembly to another country and incur higher costs with only a minor effect on Apple’s profit. The prospect of wider tariffs will discourage non-Chinese companies from contracting for assembly in China and encourage them to shift to Vietnam and India. I do not like Trump but his tariffs look more effective in disrupting China than most commentators acknowledge.

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I am surprised that very few analyses of Trump’s tariffs on Chinese goods consider whether the underlying objective is to disrupt China so as to delay or prevent China successfully challenging the US world role. In this context the tariffs may well very very effective. Any company contemplating use of Chinese assembly of their products is likely to have second thoughts. Given the prospect of extension of tariffs on exports from China they will look to alternative countries such as Vietnam and India. The analysis of the iPhone costs demonstrates that the cost of assembly in China is a small part of the overall cost. Logically, there would be little effect on Apple’s profits if it transferred assembly to Vietnam even if assembly in Vietnam was more costly than in China.

Thus I conclude the authors have missed the point. Trump’s tariffs may well have a dramatic effect in discouraging use of Chinese rather than alternative countries for assembly. Seen in this context Trump’s tariffs may well be the beginning of a protracted campaign by the US to disrupt China. A Democratic President would likely follow Trump and adopt an aggressive approach to China. Advocates of building further trade ties with China would not get a hearing. Specifically, Republicans would find if difficult to argue against a Democratic President taking an approach based on Trump’s lead.

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It seems unlikely to me that iPhone/other consumer good assembly could easily shift en masse to Vietnam or India without such a move taking years. The infrastructure that's baked into this supply chains is difficult to replicate on such a scale.

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Apple already has a I Phone assembly unit in India. It could be a matter of time before they move the total assembly ,to India or Vietnam, as the cost of manufacturing will be much lower than China

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I tend to agree here, the strategic push is to break up China's drive to move from low tech assembly to high tech pre-eminence using its long standing mercantilist behaviours. These behaviours have proven to be immune to appeals through conventional rules based trade negotiations

The authors suggestion that 'there is room for much tougher and more sophisticated bargaining...' to achieve the required step changes in China's anti-competitive behaviour sounds empty and naive, nothing in the normal tough minded years long trade negotiation processes to date have made a scrap of difference.

Tariff bashing can hurt business transactions in the immediate time frame, quite apart from the worry about Trump's explicit escalation threats. These bring tangible and intangible pressures on Chinese firms at the same time that Xi is trying to do a breathless end run around a very big bubble of existential threat to his regime, which is the colossal and still growing shadow property and debt bubble

The other side of the coin is Trump's 'putting America first' calling card in front of his voter market, over and over

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