Hollow Victories: The Best Anyone Can Hope for in Trump's Trade Wars

Greg Ip, my favorite WSJ columnist, discusses iPhone assemblies and hollow victories of Trump's trade wars.

Wall Street Journal columnist, Greg Ip, says Bringing iPhone Assembly to U.S. Would Be a Hollow Victory for Trump.

> Apple’s iPhone is one of the most successful consumer products in history, and one of the most globalized. The iPhone 7’s camera is Japanese, its memory chips South Korean, its power management chip British, its wireless circuits Taiwanese, its user-interface processor Dutch and the radio-frequency transceiver American, according to a study of the value added in smartphones by Jason Dedrick of Syracuse University and Kenneth Kraemer of the University of California at Irvine.

> The factory workers who assemble iPhones in China contribute just 1% of the finished product’s value. Apple’s shareholders and employees, who are predominantly American, capture 42%.

> The economics of the iPhone’s competitors are quite similar: Assembly represents only 1% of the value of Samsung Electronics Co.’s Galaxy S7 and just 4% for Huawei Technologies Co.’s P9, according to Mr. Dedrick and Mr. Kraemer. For all three phones, the most valuable parts of the supply chain occur elsewhere: in the parent company’s design and research; the manufacturing of key components such as microprocessors, memory and communications chips, and cameras; and the intellectual property embedded in key patents. These jobs aren’t as numerous but they pay more and have more spinoff benefits for the rest of the economy in the form of innovation, expertise and profits reinvested in new products and markets.

> This is where the real stakes in the current trade row lie. It’s too late for the U.S. to bring back all of the supply chain. The time to act would have been in the early 1980s, before Western manufacturers began outsourcing the assembly of personal computers and many components to east Asia. Taiwan and South Korea exploited those supplier relationships to acquire know-how for manufacturing increasingly sophisticated products.

> Mr. Trump accuses China of using forced technology transfer, subsidies and nontariff barriers to help its companies supplant foreign competitors at home and abroad. The U.S. has a lot of leverage in this fight given China’s continued dependence on U.S. technology and the presence of companies like Apple to hone its capabilities. But the fight has risks: forcing Apple to shoulder costs its competitors don’t hurts its own dominance, and China has multiple ways to punish American companies, as it did recently by blocking Qualcomm Inc.’s takeover of Dutch chip maker NXP Semiconductors NV on antitrust grounds.

Assembly Workers

Based on 2 hours assembly time, Apple could do assembly in the US and create approximately 60,000 jobs. But at what expense?

Answer: Higher priced phones or lost profits.

Ip writes:

> Hiring that many workers is no picnic: In 2013 Motorola Mobility set out to make its Moto X phone in the U.S. but struggled to find enough American workers according to Willy Shih, an expert in manufacturing at Harvard Business School who is also a director of Flex Inc., the contract manufacturer that Motorola used. In 2014 Motorola decided to outsource production. Apple has encountered similar problems assembling its Mac Pro computer in Texas.

> Assuming Apple could find 60,000 workers, it would have to hire many away from other employers given how low unemployment currently is. The benefit of the wages they earn would be offset by the higher prices other Americans pay for their phones.

> The bigger cost of U.S. assembly, says Mr. Dedrick, would be the inability to quickly add hundreds of thousands of workers when new phones are launched, which is only possible in Asia. Apple can charge premium prices in part because it introduces superior features before its competitors do.

If they are coming to market late and their products cost more…Apple is going to lose market share,” says Mr. Dedrick.

Brad Setser Chimes In

Policies

​I am not in favor of targeted subsidies. The US government ought not be picking winners and losers which is precisely what targeted subsidies and tariffs do.

Setser removed that Tweet so perhaps he agrees.

I am in favor of tax policy that encourages all companies to do business in the US.

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Mike "Mish" Shedlock

Comments (14)
No. 1-7
Brian1
Brian1

Mish, are you going to ignore Whelan's retraction?

Kinuachdrach
Kinuachdrach

We need to think not just about reforming tax policy which has disadvantaged US production, but also about the cost/benefit ratio of high US regulation. We also need to be realistic about time frames -- the Political Class has been driving business offshore since before Chrissie was groped; reversing the process is probably going to take 20-30 years.

Further, we need to have a serious look at non-tariff barriers. The EU's refusal to accept curved bananas is a classic laugh-getter, while Japanese social pressure against driving foreign cars is a much more serious economic issue. And China's "Make it in China 2025" policy is the 800 lb gorilla in the corner. Zero reciprocal tariffs will not achieve what enthusiasts expect as long as non-tariff barriers are ignored.

Thalamus
Thalamus

I like the 1% of value is contributed in China angle. Yes, that represents very low cost assembly and that savings goes to shareholders. That is exactly globalism, extracting profits around the world for shareholders/elite bankers at the expense of society. Why/how is this a good thing?. Trump is starting us back on the slow painful road of a balanced playing field. Taxes and regulations need to be fixed too here in the states.

pi314
pi314

It seems to me that Greg Ip is not against the idea in principle as he wrote "the time to act would have been in the early 1980s." He is against doing it now for reasons he stated. It took US a decade or two to offshore manufacturing in the 80s and 90s. Given today's technology and automation, I suggest that we can bring them all back within 5 years. Actually Mish is even more optimistic about technology, e.g. self-driving cars. So perhaps Apple can bring it back in under 5 years. LOL.

lol
lol

Soaring deficits are driving tariff talks,deficits tracking 10 billion a day in red ink (15 billion next year)that's danger close to default!Sure the fed is printing that away ,but are folks prepared for 20-30 inflation??