People talk about the U.S. trade deficit with China a lot, but what is it really?
The U.S. imported $463 billion in goods and services from China in 2016 and exported $116 billion. If you subtract imports from exports, you get a U.S. deficit of $347 billion.
U.S. President Donald Trump says based on this, China is beating the U.S. in trade.
But the picture is a lot more complicated than these numbers suggest. The WTO says 40 percent of China’s manufacturing exports to the U.S. included parts and components produced in other countries, but were delivered to China for final assembly. Economists call these exports “intermediate products.”
According to Oxford University, if we subtract the value of imported components from these intermediate exports, it would cut the size of the U.S. trade deficit with China by half. This would be roughly equivalent to the U.S. trade deficit with the European Union.
Let’s look at an example.
To produce the iPhone 3 back in 2009, Chinese manufacturers used about $11 worth of parts imported from U.S. companies, and just over $172 worth of components from an additional least three other countries.
Completed units were then shipped to the United States for about $180. Apple’s markup was more than triple that — selling the iPhone 3 for $600. So what did Chinese companies earn? About $8, or just over 1 percent of the retail price, while Apple, and other American companies, received nearly 70 percent of the value.
Many media reports on U.S. trade data show nearly the full import value of an iPhone originating in China. This inflates the size of the U.S. trade deficit with China.
Global supply chains make U.S. trade figures misleading. They show where products are imported from, but don’t show who benefits.