Political candidates across the country, especially in the industrial heartland, tend to make China an economic bogeyman. Unions, political commentators, and politicians courting votes all label free trade as the number one reason why industry is moving offshore. This myopic view of international trade does not take into account how corporate income tax structures in the United States force global corporations to seek opportunities for profit in foreign countries. The tax discussion we will leave for another post. Our point here is that bilateral trade is losing its importance with the development of complex supply chains.
Here we will focus on a much narrower topic. International trade today is the product of highly complex supply chain networks. These complex supply chain networks make it possible to create products from components that are sourced from around the globe. Trade is no longer just raw materials or finished products between two countries. Trade is a complex dance of many parts and components that are sourced from multiple points on the globe, assembled in a high-value labor country, and then exported around the world.
A case in point is the Apple iPhone. A recent study by the Asian Development Bank Institute found that less than 4 percent of the cost of manufacturing an iPhone represents value added in China. The screen comes from Japan. The processor comes from Korea. The GPS system comes from Germany. The memory chips and network components come from the United States. Of the $179 it actually costs to make an iPhone, only $6.50 is spent on the labor to assemble it in China. Since the last point of assembly and packaging is China, the full price of the iPhone hardware is counted as part of the bilateral trade deficit with China.
A product is designed in the United States, but it is manufactured from parts sourced from over 18 different countries and assembled in whichever country provides the best assembly labor value. The result is a product that is sold globally, that creates value and wealth in many countries, but is painted by uninformed partisans as something “bad” for the good ole’ US of A.
This is but one example of what I consider the miracle of global supply chain management. Trade between nations continues to grow, in raw materials, finished goods, and the components used to create the finished goods. Of all the supply chain strategies deployed today, the concepts of postponement and close-to-market assembly are the products of the current state-of-the-art of our logistics enterprise. As the rest of the world catches up to our standard of living, more opportunities will materialize here in the United States. Free and open trade is the lubricator and enabler of this process.