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July 02, 2007

The iPod supply chain, or why a China focus is insufficient

As we've noted before, there are plenty of problems with China trade. Some in the debate however choose to focus only on "their [currency] prices," as opposed to "our [currency] prices," or on China as opposed to the unfair WTO-style rules of the game.

Hal Varian's recent NYT column on the i-Pod's tangled supply chain pointed out a fact that should make it clear that we cannot eliminate the U.S. trade deficit or solve manufacturing problems just by cracking down on China:

Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese.

This is because all the parts come from elsewhere in Asia, and only the final assembly is done in China. Granted, the super low Chinese wages account for part of the reason why such a low percentage of the end value "comes" from China - with higher wages, we should see a higher Chinese share (assuming Apple did not just simply seek out a lower cost locale, which of course they would.)

So, we could eliminate the Chinese trade deficit, only to have U.S. manufacturing still face the crippling effects of an overvalued dollar, and the trade deficit simply shift to other parts of Asia. Rather than playing whack-a-mole around the globe, couldn't we just get to the root causes of the problem (i.e. the flawed rules of the game; absence of forward-looking U.S. policy)?

Thanks to the folks at IELP for pointing this out.

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