He predicts that “richer” areas will tend toward research and design of products, and “poorer” ones toward production, as is already the case. Some areas will specialize in the production of products requiring manual work, and others will move toward even more automation. Some areas will produce higher cost and more customized products, and others will count on toward traditional mass production. All of this assumes, of course, that countries are not driven by national hubris to attempt to interrupt the process through political and/or military means, or protectionism, which has historically been shown to have very negative long-term effects.
But in thinking about his book, I became increasingly impressed at the misleading character of the overall numbers we use to measure national success in global ventures, This is particularly true with overall trade balance numbers. For instance, our use of GDP rather than GNP lumps production in factories in a country together, independently of ownership. As an example, our scoring system considers all products produced in China as “Chinese”, even though a quarter of the manufacturing in China is controlled by non-Chinese owned businesses (many U.S.), and does not take account of the elaborate nature of global value chains.
Marsh gives an interesting example in his book by breaking down the dollar flow from Apple iPhones, which receive much attention for being “built” in China. In 2009, the listed value of the Chinese export of iPhones to the U.S. totaled approximately $2 billion, enough to promote significant anti-China feelings among those oriented in such a direction. According to his figures, the factory transfer price (paid by Apple to Foxconn, for instance) was $179 each. But these phones contained $121.5 million of components made by US companies and exported to China to be included in the finished product. Only $6.50, or 3% of the transfer price was for assembly. The remaining $172.50 in each phone was for components coming not only from the U.S., but also from other countries such as Japan, Korea, and Germany. Looking at these figures, Marsh calculates that the trade balance to the U..S. could be seen as being $73.5 million paid to Foxconn for the assembly and related engineering effort put into the phones, offset by $121.5 million of U.S. products exported to China, for a net surplus of $48 million in our trade with China, rather than a deficit of approximately 2 billion. Components from countries other than the U.S. were, of course, indirectly paid for by the U.S. via the $179 transfer fund, but they show up as imports to China, not the U.S. Sound confusing? It is to me. And of course Apple does very well by selling the finished product for approximately $500, so other than our perceived loss of jobs to Foxconn, which provides outstanding service to Apple, how unhappy should we be that the assembly of iPhones is “outsourced” to China?
When it comes to global manufacturing, if the “New Industrial Revolution” predicted by Marsh continues to take place and global value chains become even more complex, we have to learn to think a bit more deeply about balance of payments, and more cooperation between nations wiil be necessary, as well as the traditional competition.
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