Donald Trump has declared that trade wars are “easy to win”. He is right, only not in the way that he thinks.
The US president wants to cut America’s US$375 billion bilateral merchandise trade deficit with China by US$100 billion.
But Trump could even more easily achieve his trade objective, without Chinese cooperation, and without throwing a spanner in the works of global commerce by resorting to import tariffs.
First, however, he would have to fetch a hammer and smash the iPhone that he reportedly adopted last year to broadcast his midnight Tweets.
Unfortunately, Trump seems set on doing things the hard way. Last week his trade representative published a list of 1,333 imports from China worth US$50 billion – largely capital goods – on which the US says it will impose tariffs of 25 per cent. In retaliation, China threatened to slap tariffs of its own on a range of US goods including soybeans, chemicals and plastics.
Many observers in the US worry that the escalating trade dispute will do far more harm than good to the American economy. However, Trump and his advisers believe that the current trade regime is so stacked against the US that things can barely get any worse.
Yet the problem is not so much America’s inability to trade on a level playing field with China, but rather how its foreign trade is measured. This is where Trump’s iPhone comes in.
Over the past 10 years Apple has sold some 370 million iPhones in the US, all of them imported, most of them from China. That is because although Apple is a US company, it has long adopted a “platform” model, in which it concentrates on its strengths in design and branding, outsourcing lower margin operations to an extensive global supply chain.
As a result, if Trump were to take a hammer to his iPhone, he would find inside a mass of components made by companies based everywhere from Switzerland to Singapore. In the iPhone X, for example, the screen is made by Korea’s Samsung, the camera by Japan’s Sony, and the radio frequency chip set by Qualcomm of California.
Although iPhones are assembled in China, relatively few of their parts are sourced from Chinese companies (the batteries in the iPhone X are a notable exception). And although some of the components made by Japanese or Korean companies are manufactured by factories in China, again the highest-margin activities, especially design, are done in Tokyo or Seoul.
Typically an iPhone X retails in the US for anywhere from US$1,000 to US$1,200. Of that amount, the import cost is between US$400 and US$500. So every iPhone sold adds US$400-500 to the US trade deficit with China.
However, if you look at the actual value contributed to the final product by China, it is far lower, with estimates typically putting China’s value added at considerably less than US$100, and certainly less than America’s own contribution.
In other words, the way trade data is collected – which fails to account for the complexity of global value chains – artificially inflates the size of the US trade deficit.
Admittedly, iPhones are an extreme example. But the same patterns are visible across the whole spectrum of US merchandise imports. According to the Trade In Value Added database compiled by the Organisation for Economic Co-operation and Development and the World Trade Organisation, China contributes only around two-thirds of the value of its exports to the US, with major shares also coming from Japan, Korea, Germany and the US itself. In contrast, the US contributes 85 per cent of the value added in its own exports to China.
Unsurprisingly, this way of looking at global commerce makes a big difference to the perceived imbalances in America’s trading relations with the rest of the world.
Working from a slightly more up-to-date database, analysts at the Conference Board estimate that in 2014, US imports from China did not total US$483 billion as the headline statistics implied, but US$320 billion. As a result, in value-added terms the US bilateral trade deficit with China in 2014 was not US$316 billion, as shown by the official data, but US$200 billion.
Under Xi, China is attempting to bring more high-value-added businesses onshore. But that is a long-term project. As a result, we can safely assume that the US bilateral trade deficit with China last year was not really US$375 billion, but more like US$250 billion.
That’s still a sizeable amount, of course. But it is more than US$100 billion less than the official figure. So all Trump has to do to achieve his target of cutting the US deficit with China is to update the way America compiles its trade figures. Then he can claim victory in his trade war, all without firing a single shot. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years