The US trade deficit with China topped $375 billion last year.
It sounds like a scary number. US consumption of durable goods was about $1.5 trillion last year, so the large deficit suggests American consumption depends on China, leaving its citizens both vulnerable and under-employed. President Trump is hoping his proposed steel and aluminium tariffs and restrictions will reduce it. But the trade deficit may actually be much smaller than it looks because the way the deficit is measured is outdated.
Take the iPhone X, designed by Apple, the world’s largest private company based in California. The latest version of the iPhone, launched last year, is assembled in China and costs $1,000 in the US; its components are estimated to be worth $370.25, according to IHS Markit in a Reuters report. But those components come from all over the world—OLED screens from Korea, memory chips from there and also Japan, and so on.
But because of the way trade deficits are measured, almost all the value of those components is attributed to China, which exports the final product. Reuters reports that 61 million iPhones were shipped from China to the US in 2017 and suggests that just a single phone—the iPhone 7 model, released in 2016 and on sale for all of last year—accounted for $15.7 billion of the trade deficit, or 4.4%.
Louis Kuijs, head of Asia economics research at Oxford Economics, told Reuters if trade deficits were measured to account for the complex nature of global supply chains like the ones used by sophisticated consumer products like smartphones, the US-China trade deficit would be about 36% lower, or $239 billion.
This is not an arcane measurement issue.
The iPhone example shows why it is impossible to target one country with a trade war (paywall). Global supply chains have become much more integrated since the 1990s. Many goods we consume represent dozens of countries, lending their comparative advantage, to make goods as efficiently as possible. Trade is no longer about relying on cheap labor in one country, it takes many countries diverse skills and resources to make technology like the iPhone accessible. Cracking down on trade with China also harms allies like Korea, Japan, and Taiwan.
The deficit mismeasurement also shows why identifying the winners and losers from trade is more complicated than simply comparing the cost of lost manufacturing jobs to the benefits of cheaper goods. More tariffs, which aim to reduce trade, harms jobs everywhere, even in the US.