This is a nice little example of why we need to be quite careful about what economic statistics are telling us. It's vital that we remember what it is that is actually being counted before we try to figure out what effects our numbers have on the real world. Our example is the effect that
Our data source is here, at FT Alphaville:
Though iPhone is an American product, it’s assembled in Mainland China (henceforth China) and all iPhones, except those sold in China, and are counted as China’s exports. The iPhone 6 is also important for Taiwan because the economy provides a significant amount of iPhone components including producing processors.
We found that the upcoming iPhone 6’s release could add about 1% per month to China export growth for the rest of 2014, while Taiwan’s export growth could be boosted by around 2% per month during August-October and 1% per month in November 2014 to January 2015. These numbers are not that small. Export growth of China and Taiwan was only 4.9% and 4.4% yoy in 2Q14 respectively, so a boost of 1 to 2 percentage points to headline export growth is no small matter, especially for the currency market which closely tracks export growth numbers.
The point here being that the export of an assembled iPhone is counted, the total value of it, as an export from China. Which it is of course. But total exports really aren't the most important thing: they're not even a very important thing. What actually matters is the trade balance. And we can derive that from the following from the same report:
Despite the hefty export bills brought by iPhones, China is little more than the low- end assembly line of the whole iPhone value chain. We estimate that manufacturing iPhone 5S in China only adds about US$8 per unit versus an average retail sales price at US$749 and the value added in iPhone 6 might be only slightly improved, so the launch of iPhone 6 will only have a negligible impact on growth of China’s GDP this year (at around US$9.8tn).
The value added in China is around $8. So that's the addition to China's GDP that comes from the manufacturing/assembly of each iPhone there. That's also, obviously, the amount by which China's trade balance benefits from the local assembly of that phone. The effect on China's gross export numbers is significant, the effect on the trade balance is pretty small and in the context of a $10 trillion economy, the addition to GDP is pretty much nothing.
We can also use these same numbers to look at what would be the effect of the same phone on US trade figures. Obviously, if all iPhones were assembled in the US then US export figures would rise by the same amount that China's do now. A finished export is a finished export. But the effect on the trade balance would be the same as it is on the Chinese one. All of those parts (at least those that aren't already made in America and we'll not try to go to that level of detail....and anyway, US manufactured components that go to China to be assembled are already counted as US exports) would have to be imported so the effect on that balance would be as it is for China. The only addition would be that assembly cost. And that would also be the only addition to GDP: that assembly cost.
We can take a stab at how important that would be too. Just to pluck a number from the air imagine that Apple sells 50 million iPhones that they've assembled in America. The addition to US GDP would be around $400 million. Or, in the context of the $17 trillion economy of the US, about 10 minutes of the country's economic activity in any one year.
At which point we might conclude that it's really not that important where the iPhone is manufactured or assembled. Simply because there's not much value add in that process, not much addition to the GDP of whichever country it does take place in. And we'd be right to reach that conclusion too.
However, that's not our final resting place. We don't actually know what Apple's net profit on each phone sold is. But we're pretty sure that it's up over $100, maybe as much as $200 per unit (gross margins we know a little bit more about, we think they're around 50% of sales price). And that amount really does get booked to US GDP. Yes, even those phones that Apple sells in Europe and then keeps the money in Bermuda or Ireland or where ever. Apple is a US domiciled company and so its profits are part of US GDP ( and this is one reason why the corporate profit share of US GDP keeps rising. All those profits that Apple,
So the profits that Apple makes on selling phones are part of US GDP: and that's a much, much, larger number than the amount that is spent to assemble them. All of which means that we've probably got the various activities of the firm properly organised in order to maximise the value that accrues to the US economy. All those expensive designers and engineers are in California and their wages are very definitely part of US GDP. The vast profits the company makes are part of US GDP. And it's only the low value stuff like assembly which is done in other countries. And as we can see from the above the actual assembly itself is of such a small value, 0.002% of GDP in fact, that we wouldn't even notice in our aggregate figures whether the work was being done in the US or not. We just don't measure GDP to that level of accuracy, 0.1% is our limit.
In the end the net effect of this analysis is that we want to make very sure that the US is where people design and engineer electronics and other new and sexy products. We also want it to be American companies that do this, assuming that the health of the US economy is what we care about. But where the actual work gets done of gluing it all together? It's such a low value operation that we really just don't care where it's done or who by.
In other words, as public policy, we'd do best by keeping Silicon Valley happy and just not worrying about manufacturing.
