Thursday, January 18, 2018

When is the value of an export not the value of the export?

Here is a graphic I found on Twitter (lost the source).  It is a vivid example of how the trade numbers are a bit of an illusion.

The graphic on the right is the one I am interested in. It shows the dollar cost to produce an iPhone to be $600.00. This is the total value as it leaves its final assembly point in China.

When it is shipped from China to the US, China is credited with $600 in exports and the US is debited $600 for importing the phone.  It appears the US has a trade deficit with China at this point---which is the case with the conventional way export and imports are accounted for.  The final producer gets the spoils of being the full value exporter of the good. However....(see you below the graphic)

Source HERE

The graphic on the right tells a more complicated story.  The inputs that go into making the output (finished i-phone) come from a vast network of the supply chain. The pie chart shows China adds only $6.50 of the $600 total cost of the i-phone (caveat: there could be other Chinese suppliers that supply inputs in some of the other categories in the pie chart).

$6.50!  But they get credit for a $600 export and we get dinged for the same amount as an import.

Keep in mind what is good for the goose is good for the gander---the same logic applies to goods we make in the US with imported inputs (intermediate goods).

Bottom line: We have to be careful when we hear reported in the media about the "trade deficit" we have with China (or Mexico or...).  The number is not what it appears to be.

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