How Apple's iPhone Widens the Trade Deficit With China (And How to Fix That)

The iPhone is the invention of an American company, Apple, and ought to benefit our nation's economy. Why, then, is it contributing $1.9 billion to the U.S. trade deficit?

That figure comes from a working paper by researchers at the Asian Development Bank Institute in Tokyo, and was spotted by Mother Jones. A paltry minority of the components of the iPhone are actually made in the U.S.—equivalent to only 6 percent of the phone's $179 wholesale cost. The great bulk of the parts are made by Japanese, German, and Korean companies; they're then funneled through China, where they're assembled at Foxconn, and sent out at an inflated price.

According to the study authors, Yuqing Xing and Neal Detert: "Global production networks and highly specialized production processes apparently reverse trade patterns: developing countries such as the PRC [People's Republic of China] export high-tech goods—like the iPhone—while industrialized countries such as the US import the high-tech goods they themselves invented."

The authors offer a scenario in which Apple suddenly decides not to pursue profit maximization, dumps the oft-criticized Foxconn, and decides to pursue a model of corporate responsibility and patriotic we're-in-it-togetherness. It's true that U.S. workers fetch about 10 times as much as Chinese workers, and the manufacturing costs would rise to $68 per phone from about $6.50 per phone. But if Apple sold the phones at an average of $500 (already the asking price for some models), they say, it would still clear a 50% profit margin.

"If all iPhones were assembled in the US, the $1.9 billion trade deficit in iPhone trade with PRC would not exist," reckon the authors. "Moreover, 11.4 million units of iPhone sold in the non-US market in 2009 would add $5.7 billion to US exports."

Of course, the same applies to any high-tech device manufactured abroad (check out these troubling stats via the National Science Foundation here)—the authors are simply holding up the iPhone as an important symptom of a wider trade phenomenon.

[Image: Flickr user mager]

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  • walstir

    "The iPhone is the invention of an American company, Apple, and ought to benefit our nation's economy."

    Apple is California company - why should the invention benefit the economies of other states? Apple is a Cupertino company - why should the invention benefit other cities? In fact you should run your business to benefit only your coreligionists and your own ethnic group. Shop in your brother's store and eat in your cousin's restaurant and only hire people who are related to you. Keep all that economic activity as close as possible.

  • Isaac

    When these types of study's are done how are licensing and patent revenue calculated. I am always confused as to how that enters into the trade deficit conversation. If Apple has all the patents and is reaping not only that revenue but also the end sales revenue with the retailers I think that benefits the USA. The manufacturers like Foxconn are paying royalties as well as holding all the labor, material, and cash flow risk in their razor thin margins. How does that model hurt the USA company by contributing to the trade deficit. Apple is making a lion share of the profits while taking a very small cash flow risk (the age old patent portfolio revenue stream). We really need to get to a more accurate measurement if trade deficits calcs do not account for these aspects...