Apple's iPhones not really made in China (or USA)
Tags and advertising slogans proclaiming manufacture in a specific country are fading, because goods assembled with components from many countries represent a growing share of international trade.
"Made in USA" still appeals to many consumers, but businesses have found that that classification can be iffy. And how do you decide what is an import and what is an export when imports are important inputs into many exports, and vice versa?
In their new book, Outsourcing Economics, William Milberg and Deborah Winkler contend that neither the economics profession nor national trade accounts have caught up with that question.
Whose Apple?
No company illustrates this phenomenon better than Apple. Most iPhones are assembled in China, contributing to a huge trade surplus with the US in recent years. But a detailed case study estimates that in 2009, the value added in China amounted to less than 4% of the total manufacturing cost. In other words, iPhones are not really made in China, even though their final assembly takes place there.
The cost of components imported from Germany, Japan, South Korea, US and other countries far exceeded the value added in China. Measured in these terms, rather than final sales, China's apparent trade surplus in iPhones is actually a deficit.
Rather than exporting iPhones, China simply represents a particularly visible part of Apple's global supply chain. The traditional theory of foreign trade is based on the notion that some countries have a comparative advantage in the production of specific goods and services in a competitive global market. It offers few insights into the strategic behaviour of corporate oligopolies choosing the optimal location for the performance of specific tasks.
Milberg and Winkler define offshoring as "all purchases of intermediate inputs from abroad, whether done through arms-length contract (offshore outsourcing) or within the confines of a single multinational corporation". They estimate that the value of imported inputs as a percentage of total nonenergy inputs in manufacturing in the US reached 16.4% in 2010, up from 6.2% in 1984.
Muscle Power
Who cares if trade takes the form of offshoring (apart from the fact that it becomes more difficult to measure)?
One could argue that it still offers potential benefits for consumers, even at the cost of job loss. But attention to global value chains moves analysis of trade away from markets toward institutions — both corporations and governments — that regulate or fail to regulate their practices.
Most large multinational corporations enjoy considerable market power, increasing their bargaining power with small supplier companies. Their resources make it easy for them to use the lowestwage labour. They can use these cost savings to increase their profit margins and overall profits rather than to lower prices for consumers.
Apple's gross margins on iPhones from 2010 to 2012 exceeded 49%. Traditional trade theory contrasts gains to consumers with losses to workers in specific industries. But with offshoring, the job losses extend beyond specific industries (such as clothing or textiles) to affect the manufacturing sector as a whole. In the idealised world of perfect markets, high profits quickly faded away as new entrants joined the fray.
In the world we actually live in, large companies take advantage of economies of scale and manoeuvre strategically to buffer themselves from price competition. As a result, they capture a large share of the gains to trade that would otherwise be passed on to consumers. The growing separation of management, production and regulation has also weakened the relative bargaining power of workers.
Category: Apple, Business, Business Tech, Iphone 6, Technology News
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