Chapter 1. Sum of iPhone Parts

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©STANCA SANDA/Alamy

Products like the Apple iPhone are often assembled in China from components made in many other countries.

Although the iPhone sold in the United States is assembled in China, most of its value comes from parts made in other countries. Counting its full value as a U.S. import from China therefore exaggerates the size of the U.S. trade deficit with China.

One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves. Yet two academic researchers have found that Apple Inc.’s iPhone—one of the most iconic U.S. technology products—actually added $19 billion to the U.S. trade deficit with China last year. How is this possible?

… Though the iPhone is entirely designed and owned by a U.S. company, and is made largely of parts produced in other countries, it is physically assembled in China. Both countries’ trade statistics therefore consider the iPhone a Chinese export to the U.S. So a U.S. consumer who buys what is often considered an American product will add to the U.S. trade deficit with China. The result is that according to official statistics, “even high-tech products invented by U.S. companies will not increase U.S. exports,” …. This isn’t a problem with high-tech products, but with how exports and imports are measured …

The new research adds to a growing technical debate about traditional trade statistics that could have big real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China’s currency policies and its allegedly unfair trading practices. But there is a growing belief that the practice of assuming every product shipped from one country is entirely produced by that country may need to be adjusted. “What we call ‘Made in China’ is indeed assembled in China, but what makes up the commercial value of the product comes from the numerous countries that preceded its assembly in China in the global value chain,” Pascal Lamy, the director-general of the World Trade Organization, said in a speech in October. “The concept of country of origin for manufactured goods has gradually become obsolete.” Mr. Lamy said that if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half. That means, he argued, that political tensions over trade deficits are probably larger than they should be.