Fisher Investments Editorial Staff
Capitalism, Trade, Globalization, Geopolitics, Media Hype/Myths

Creativity Counts

By, 12/17/2010

Story Highlights

  • When discussing US/China relations, trade is predictably a central topic—and this year, a particularly contentious one.
  • Official numbers can be misleading and oversimplified, but the story remains the same—free trade ups prosperity worldwide.
  • Luckily, US anti-trade sentiment continues thawing as the pace of trade agreements heats up elsewhere.

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The US and China are each other's largest trading partners and the two largest economies on earth. When discussing US/China relations, trade is predictably a central topic—and this year, a particularly contentious one. US politicians have decried China's "unfair" trade advantage propped up by an artificially undervalued currency—the knee-jerk response? Erect trade barriers of our own. Punish those cheaters.

A free-floating Chinese currency might make US-produced goods more competitive—but alternatively, US businesses and consumers also benefit from cheap Chinese goods, subsidized by…well, the Chinese. Thanks! And we often direct the assembly of those cheap goods in creative and innovative ways, adding tons of value and making profits. Yet, official statistics show none of this—trade is often perceived as a competition, a zero sum game, with a winner and a loser (an outdated notion if we've ever heard one).  

We found an interesting story this week that shows just how wrong the notion of trade winners and losers can be. Smartphones, which are quickly becoming ubiquitous, are mostly assembled in Emerging Markets like China. And because of the wonky manner in which trade statistics are calculated, the entire value of an item like the iPhone is considered an export to the US from China by both countries. The iPhone alone reportedly added $2 billion to the much maligned US/China trade deficit in 2009.

If you're in Washington, the iPhone looks like a "big win" for China. Which is strange because it's made by a very successful American company. That's your first clue something funny is going on. Turns out these devices rely on a complex global supply chain where parts and ingenuity are sourced from all over the world, even if they're actually "assembled" in only one country. Of the $600 retail price of a Chinese-assembled iPhone, over 60% goes directly to US companies, and less than 1% goes to China.

How can this be? You can't call family and friends, surf the internet, or read e-books with a pile of silicon, plastic, and metal. But creatively assemble those components, and you've got a smartphone. Put another way, the vast majority of an iPhone's value is in the creative direction of assembly, not the extraction of raw materials or the assembly itself. That's called value added, and the US is simply stellar at it. What happens if you calculate the iPhone-induced China/US trade deficit taking into account value added? A $2 billion deficit is transformed into a $48 million surplus—and in our opinion, the protectionist argument takes another big hit.

Luckily, protectionism got a lot more press than action this year. Here's a list of some major deals signed in 2010. And protectionism is even on the wane here in the US. There's been progress with a US/South Korea free trade agreement—recently renegotiated and awaiting ratification. And on Wednesday, the US and China completed two days of productive trade talks. At the meetings, China agreed to lift restrictions on US beef imports and promised their desire to foster home-grown innovation wouldn't keep US firms out of lucrative Chinese markets.

We hope the US and world continue to move toward freer trade. Because no matter what trade figures and politicians say about trade deficits, we mostly hurt ourselves by erecting trade barriers.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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