The iPhone powers growth but not recorded growth Credit - Apple registered traedmark

Donald Trump is showing his ignorance of how trade really works again. He’s starting to insist that Apple should be making their stuff inside the US. Without The Donald realising that Apple pretty much does, already, make its stuff in the US. What is done in China is only assembly, the least interesting, least profitable and least added value part of the whole process. The only truly valuable thing that Apple “makes” is the profit margin and that really is added in the USA. So, what’s the complaint about in the first place? Well, that The Donald doesn’t understand trade, obviously enough:

President Donald Trump has told Apple it should build its products in the US to avoid tariffs on Chinese imports, after the iPhone maker warned of potential price rises for consumers.

Apple found itself the target of a Twitter broadside from Mr Trump on Saturday morning, after recent attacks by the US president on Facebook, Google and Twitter, showing that the iPhone maker is not immune to the political threats facing Silicon Valley.

So there’s the first bit that Trump isn’t getting. Impose tariffs and things go up in price. How does this aid the American consumer? It doesn’t of course, it makes the American consumer worse off.

We’ve a slight problem here in the concept of “make.” What actually do we mean here?

Well, the usual economic thought is added value. And that added in China is trivial. These things are behind a bit of smoke of course but the usual estimation is that “China” adds perhaps $10 to the value of an iPhone. That’s the amount that is being paid for the assembly operations that happen in those vast sheds in Shenzen. There might be a bit more floating around, the provision of solder maybe, possibly capacitors and so on. But that’s all low level and low value stuff. The expensive parts of kit are the screens and processors. The screens usually made in Taiwan, possibly Japan. The processors in Austin TX last time I looked.

Then, of course, there’s the profit margin. That’s 35 to 40% on an iPhone so far as anyone knows. That’s quite obviously added in Cupertino because that’s where it flows to.

So, the demand that “make” happens in the USA is really one that the assembly does.

The company told trade officials in a letter on Friday that the proposed tariffs would affect prices for a “wide range” of Apple products, including its watch.

Apple’s AirPods headphones, some of its Beats headphones and its new HomePod smart speaker would also face levies if the current package of $200bn in tariffs goes ahead as expected in the coming days.

But if that assembly’s worth $10 a piece then who the hell cares where it is done? It gets worse too:

Last night Apple warned that the threatened tariffs would hit “a wide range of Apple products and the products used in our US operations”, including the Apple Watch, computing tools, cables, components, testing equipment and data centres. It claimed, too, that America, not China, would suffer most, owing to lower growth and competitiveness and higher prices for consumers.

Think what happens if Apple does move that assembly work. America will be poorer.

No, really, the US would be poorer. So, that assembly work moves to the US. How much does electronics assembly pay? Last I looked about $13 an hour. The average hourly wage in the US is $25 an hour. Shipping in a few hundred thousand jobs which pay half the average wage isn’t a way to make a place richer now, is it? And no, we cannot then say there are more jobs in the US so all wages rise. The total number of jobs in an economy is determined by fiscal and monetary policy and not trade. Trade affects which jobs are done, not how many there are. So, moving workers from average wage or above to half average wage – nope, not making the place richer.

To demand that Apple manufactures in the US is ridiculous. Because they already do largely do so anyway, that’s where most of the added value is. What’s done in China is only the very low value assembly work and why would anyone want to repatriate that to the US given that it will make the country poorer?

Or, as we started out with, Donald Trump simply doesn’t understand trade.

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MrYan
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MrYan

Donald understands that if he doesn’t do something about China now when he has some leverage it’ll be too late in a few years time.

Spike
Member

2016 saw a decent number of wise people sent to Washington (including by appointment by the President) who, seeing work done offshore, ask, “What did we in government do to force this?” rather than, “How can we beat up on these guys?” Now Trump is sounding like Obama in demanding that business buckle under without waiting for the Land of Obama-care to be a good place for hiring again. Meanwhile, his chief economic adviser Larry Kudlow keeps telling us that tariffs are only a bargaining ploy toward a zero-tariff world.

BlokeInTejas
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BlokeInTejas

It’s true that Apple designs their chips in the USA, predominantly in Austin, and writes software probably all over the place including the USA. But building the chips is a horribly capital-intensive act – you have to sink billions into building and equipping a modern fab, and so the value-add from actually making and testing the chips is enormous; it changes some expensive code on the electronic equivalent of paper into working high performance horribly complicated chips. Apple don’t do the building – they subcontract it (a normal activity). And whether that’s done in the USA or not varies with… Read more »