The U.S. Trade Deficit with China: Separating Fact from Fiction

In recent weeks as the Trump Administration has ratcheted up protectionist tariffs on China, much of the line of argumentation coming out of the Department of Commerce and the Office of the US Trade Representative (USTR) has centered around the need to re-balance what is perceived to be an unfair widening of the U.S.-China trade deficit. However, what is important to note is that U.S. import statistics are highly misleading. As pointed out by Douglas A. Irwin in his book Free Trade Under Fire, in 2009 the United States imported iPhones from China at a per unit cost of $US 179 adding $US 1.9 Billion to the US trade deficit. Fact versus fiction: this is a grossly misleading figure. The imbalance of trade with China in iPhones was nowhere near $US 1.9 Billion in 2009. While iPhones are assembled in China, assembly accounted for $US 6.50 per unit or 3.6% of the cost/value of an iPhone imported into the USA in 2009. But U.S. import statistics attributed the entire $US 179 per unit cost as a Chinese export to the United States because that is where the final product (i.e. the iPhone) was assembled entered the United States from. This scenario means the value of the U.S. trade deficit as least with regard to iPhones and likely everything else is grossly overexaggerated. The iPhone is made from parts produced all over the world. The flash memory and display are made in Japan, the application processor in Korea, the camera and GPS in Germany and the Bluetooth and WLAN in the United States. Because the entire “value” of the phone is registered by U.S. Trade statistics as “made in China” that is a false statistic (you have heard of fake news lets call this fake trade statistics). The value of an iPhone made in China is $6.50 per unit, not $179! So the end game is that the US trade deficit with China using the iPhone as an example overestimate the Chinese deficit and underestimates the deficit with Germany, Japan and South Korea. Lesson learned, it would be wise for the Administration to drill a bit deeper into the statistics and lay out the facts surrounding the trade deficit before using statistics to justify protectionism. Global supply chains are a bit more complex than U.S. trade statistics and the Trump Administration seems to imply [Reference cited: Douglas A. Irwin, Free Trade Under Fire, p. 19].

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