iPhones inflate US trade deficit with China

Apple’s iPhone has been widening US trade deficit with China even though it is entirely designed and owned by an American company, says a study.

In 2009, iPhone sales contributed to $1.9 billion to the US trade deficit with China, according to a recent report by economists at Asian Development Bank Institute.

“Even high-tech products invented by American companies will not increase the US exports, but to the contrary exacerbate the US trade deficits,” said the study's authors, Yuqing Xing and Neal Detert.

The study found that flaws in conventional trade statistics greatly inflate the US trade deficit with China. But, based on the value-added approach, the iPhone trade would generate $48 million trade surplus for the US.

The production of iPhones mainly takes place outside the US like China which is counted as a Chinese export to the U.S. in both countries' trade statistics.

“The traditional trade flow accounting recognizes the iPhone as a Chinese export because China assembles the parts and ships the finished product,” the report said.

As China is the final point for assembly of iPhones, it receives full credit for the handset’s $179 wholesale price even though the assembly and shipping it provides represent a small fraction of the product's total manufacturing cost. The value of work performed in China accounted for just 3.6 percent or $6.50 of total wholesale cost.

The iPhone was not introduced to the Chinese market until late 2009 and as such the shipment of iPhones from China to the US becomes a part of the US trade deficit, the report said.

Further, the study said that if all iPhones were assembled in the US, the $1.9 billion trade deficit in iPhone trade with China would not exist.

“Unprecedented globalization, well organized global production networks, repaid development of cross-country production fragmentation, and low transportation costs all contribute to rational firms such as Apple making business decisions that contributed directly to the US trade deficit,” the report said.

Also, iPhone sales in the US are estimated to reach 21.3 million units by 2011, almost doubling the current sales.

“Under the existing production patterns, in which all iPhone are exclusively assembled in China, the contribution of the high-tech product iPhone to the Sino-US trade deficit would be expected to rise further as more and more Americans purchase iPhones,” the report said.

Finally, the study said even a 50 percent appreciation of yuan against the dollar would not bring a significant change in total manufacturing costs, as the assembling cost-contribution of Chinese workers to a ready to use iPhone is very little. Therefore, it is unlikely that a yuan appreciation would lower many components of the trade deficit, in this case the portion due to iPhone trade.

The US lawmakers have been criticizing China’s exchange rate policy saying Beijing is keeping the yuan undervalued to boost exports. The US trade deficit with China stood at $25.5 billion in October.

On the other hand, exports from China rose 34.9 percent to $153.3 billion in November year-on-year and imports increased 38 percent to $130.4 billion, leaving a trade balance of $22.9 billion in November.