The recent visit of China’s President Hu Jintao was considered a diplomatic success. But it seems only to have hardened the determination of New York Sen. Charles Schumer and other Chinese critics.

It’s a mistake to see China as a monolithic economic rival to the U.S. And while certain U.S. companies do compete head to head with Chinese manufacturers, producers in both countries occupy different locations in an increasingly complex global supply chain. In fact, U.S. companies are more likely to be collaborators than competitors.

This also is true for East Asian firms. For the past two decades companies in Japan, South Korea, Taiwan and elsewhere have been slicing up their own supply chains, basing their lower-end, labor-intensive operations in China while retaining production of higher-end components and services in their home markets.

As a result, most products we import from China are not really “Made in China” in any real sense of the term. The consumer electronics and other more sophisticated products we buy from China typically are designed and engineered outside of China, and built with more expensive non-Chinese components. The products are assembled there, but even that lower-end work is usually performed in factories owned and managed by non-Chinese multinationals.

On a macro level, shifts in supply chain flows are reflected in trade numbers with the countries surrounding China. Imports from China have grown exponentially since 1990, from $15 billion to more than $300 billion in 2010. This has provided fodder for critics to claim we’re being swamped by a tidal wave of low-cost imports that have displaced U.S. production.

What critics miss is the relative decline of imports to the U.S. from other major Asian economies. Thus, most of the products we import from China are not the type of things Americans were making 10 or 20 years ago, but rather the kinds of products we used to import directly from other Asian countries.

China has become the final assembly operation in a global factory. Since 1990, imports from China have grown from 3 percent of total U.S. imports to 17 percent—a huge increase. But that has come almost entirely at the expense of imports from China’s Asian neighbors. During that same period, the share of U.S. imports from the more developed Asian economies—Japan, South Korea, Taiwan, Hong Kong and Malaysia—has plummeted from 31 percent to 13 percent of total U.S. imports. Overall, imports from those countries combined with China have remained a steady 30 percent of U.S. imports since China entered the World Trade Organization in 2001.

On a micro level, nothing better illustrates what is right with our trade relationship with China than the iPhone. Even though technically made in China, this is an American product in every meaningful sense of the word. It was created by Apple in California, and its success has been a boon to Apple employees and shareholders, application developers and the millions of consumers who enjoy the product every day.

According to iSuppli, a market-research firm in El Segundo, Calif., just a few dollars of value of an iPhone 4 is actually added in China during final assembly. The major components are from suppliers in Japan, South Korea, Taiwan, the U.S. and even Germany and Switzerland.

Of the $600 retail price, less than a third goes into hardware and assembly. The highest value added for the iPhone, as with most manufactured products today, is realized at the beginning and the end of the supply chain—in research, design and engineering at the front end, and distribution, retail, service and profit mark up at the back end.

If higher tariffs were imposed on Chinese imports, there would not be a repatriation of jobs to the United States, but instead, a massive disruption of intricate global supply chains that are benefiting American consumers, companies and workers every day. The cost of producing an iPhone would go up sharply, driving up the cost to consumers and reducing demand. In fact, without the ability to assemble the final product efficiently and economically in a place such as China, products like the iPhone may never be developed in the first place.

Daniel Griswold is the author of the 2009 book, Mad About Trade: Why Main Street America Should Embrace Globalization. This article appeared in Impact Analysis, March-April 2011.
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Daniel Griswold
About The Author Daniel Griswold [Full Bio]
Daniel Griswold is senior research fellow and co-director of the Program on the American Economy and Globalization at the Mercatus Center.




www.mercatus.org


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