HONG KONG: When an iPhone is shipped from a Chinese factory to a store in the United States, who gains the most from this economic transaction?
If you are tempted to say China, you are not alone. Former US president Barack Obama once asked Apple founder Steve Jobs what it would take to bring iPhone manufacturing home. Before taking office, then President-elect Donald Trump put the same question to Jobs’ successor Tim Cook.
Now as President Trump gets ready to meet with Chinese President Xi Jinping on Thursday (Apr 6), his economic team has embarked on a 90-day “country by country, product by product” study to find solutions to US’ huge trade deficit. US commerce secretary Wilbur Ross said the aim is to catch “cheating or inappropriate behaviour” by America’s trading partners.
The US is likely to start with China, a country it ran a US$347 billion deficit with in 2016, accounting for almost 70 per cent of its total trade shortfall.
The problem is that economists have always said a bilateral trade balance figure is a poor gauge of what is really going on between two countries.
“It’s not the only figure people should look at. The White House I’m sure has a more sophisticated view, but this is a very simple way to make a political point," said Tony Nash, Chief Strategist at Complete Intelligence.
Because just like the iPhone, sophisticated industrial products now have long supply chains involving at least a handful of countries. Even though China is where the products are assembled, Chinese value-add is often tiny.
Take the 32GB iPhone 7 for example. According to a report by IHS Markit, China makes just US$5 putting it together. Chinese companies also make the battery, Bluetooth and WiFi components, which together cost less than US$10.
An Apple iPhone 7 and the company logo are seen in this illustration picture taken in Bordeaux, France on Feb 1, 2017. (Photo: REUTERS/Regis Duvignain/Files)
By comparison, Korea, Japan and Taiwan stand to gain much more. IHS Markit said the most expensive part of the iPhone 7 is the display. Anyone who had to replace a cracked iPhone screen before would know that is true. The part which costs US$43 is supplied by Korea’s Samsung and LG, as well as two companies in Japan.
The phone’s processor, the bit that puts the smart in smartphone, costs US$27 and is made by Taiwan’s TSMC. True, some of the Korean, Japanese and Taiwanese companies have manufacturing facilities in mainland China, but analysts said their top of the range products are almost always made at home. Because the work is sensitive but not particularly labour-intensive, China has no competitive advantage.
In fact the component trade is so powerful; all three economies run persistent trade surpluses with China. In 2016 alone, Taiwan’s surplus with the mainland reached nearly US$100 billion. That is an impressive feat for an economy that is just over US$500 billion in size.
So when an iPhone is shipped across the Pacific, its full US$225 cost is recorded as Chinese export to the US. In reality, China’s actual gain is less than 7 per cent of that. Analysts said President Trump would do well to remember that when he embarks on what he promised to be tough negotiations with President Xi.
“China is the point of final assembly. It buys a lot of components from Korea, Taiwan, Singapore, Japan, puts all those components together, stamp Made in China and ships them to the US,” said Tai Hui, Chief Market Strategist for Asia at J.P. Morgan Funds. “If one day the US wants to start a trade war with China, it’s not going to be a US-China trade war, it’s going to be a US-Asia trade war.”