Debunking the Misconception Over the iPhone 6 Sales Effect on US Trade Deficit with China

The news from Beijing that the US and China struck a deal on electronic goods tariffs is welcome news to the pro-trade lobby, coming as it does amid signals that a freshly reshaped Congress will support President Barack Obama's efforts to secure ambitious international trade agreements.

Free trade's critics, meanwhile, remain concerned about labour market threats and imbalances created by a perceived capital drain from west to east.

A ballooning of the US trade deficit with China to $45bn (£29bn, €36bn) in September, at least in part because of sales of the iPhone 6, might at first appear to justify such fears.

But to take this number at face value is to overlook the misleading way that global trade statistics are traditionally calculated; a potentially damaging misconception.

The iPhone 6 Effect

Currently, when an iPhone is shipped from the factories of southern China to shops in the US, the entire value of the phone is logged as an export from China to the US.

As ground-breaking research by California-based academics Kenneth Kraemer, Greg Linden and Jason Dedrick showed in 2011, however, more than 58% of an iPhone's sale price was Apple profit. They estimated that only 1.8% of the revenue from an iPhone 4, or about $10 per unit, went to pay for Chinese labour.

Recent analysis of US trade data by the World Trade Organisation (WTO) and the Organisation for Economic Cooperation (OECD) found that in 2008 the US deficit vis-à-vis China could have been as much as 40 per cent lower than the headline figures suggested. This is because the underlying statistics don't recognise inputs from other countries that are incorporated into US-China trade flows.

So-called 'value-added' statistics recognise that in the real world a product is often made up of components from many countries.

China may contribute the workers who assemble the iPhone, but the camera modules may come from Germany and the chips from Taiwan, brought together with cobalt from Zimbabwe perhaps and Indonesian copper.

In a world of ever-longer and more convoluted multinational supply chains, value-added trade accounting is likely to become an ever-more complex discipline.

Yet our current system - relying primarily on data that we know to be misleading because it's hard to find out what's really going on - is clearly inadequate and needs reform.

This might all just be another storm in a statistician's teacup if the ramifications were not so serious.

Economic Lifeblood

Trade is the lifeblood of the global economy.

It lowers the cost of living for voters from Milwaukee to Mumbai by supplying cheaper goods, and enables first-generation factory workers from Abuja to Zamboanga to send their daughter to college or to buy a motor scooter to get to market.

Recognising the vital importance of trade to the citizens of developed and developing countries alike, analysts have been calling for a new system of value-added trade statistics for some time.

Patrick Low, formerly a chief economist for the World Trade Organisation (WTO) and now leading trade research at the Fung Global Institute in Hong Kong, has argued that when it comes to formulating trade policy, poor data inputs can lead to poor decisions.

Today, given the fragility of global growth and the potential threats it faces, the case for appropriate trade data has never been more acute.

It would be a tragedy if the global economic recovery - sometimes weak and uneven but still significant -- were to be hampered by misguided reactions to statistics that give an incomplete picture of trade relationships.

Efforts by the WTO and OECD to develop value-added trade statistics deserve support, and will be a vital part of our collective efforts both to counter protectionist impulses and to reach trade agreements that deliver the benefits their authors intend.

Stuart Tait is the head of global trade and receivables finance for HSBC