Commentary

A Tale of Two Nanos

By Daniel Griswold
This article appeared on American.com on January 3, 2007.

A few days before Christmas, my kids and I picked through the dwindling and deeply discounted inventory of CDs at the local Tower Records store, which was about to close its doors for the last time. New technology had put them out of business. Why leave home to spend $17.99 for a compact disc when you can spend far less to download your favorite songs from iTunes, Apple’s online music store, and play it on your Apple iPod Nano?

When congressional leaders talk about getting tough with China by imposing tariffs on all those imports, it must bring a twisted smile to the cold-hearted Grinch.My two sons, aged 15 and 12, each received a Nano for Christmas. In a small way, my family’s purchase of two Nanos helped to put the sales clerks at Tower Records out of a job. As I was admiring the cool design and user-friendly functions on my boys’ new Nanos, I noticed an inscription on the back: “Designed by Apple in California. Assembled in China.” That’s a more clever label—and a more accurate depiction of economic trends—than the “Made in China” we see stamped on so many imported shirts, shoes, toys, and consumer electronics.

To those obsessed with the trade balance as a zero-sum scorecard, another imported, $200 Nano merely adds to our growing bilateral trade deficit with China and knocks a few more Americans out of jobs. Wouldn’t we be better off, they ask, if the whole thing were made and assembled at home by American workers?

The answer is a definite no.

As with other high-tech devices, iPods are assembled in China, but the real guts of the device—the brand name, the design, the engineering, the most sophisticated components—come from the United States and other countries outside of China. Like trade in general, importing iPods from China creates a win-win scenario for people in both countries. Assembling the devices is relatively high-paying work in China, so the Chinese workers and their economy do benefit to some extent. But Americans benefit even more from the deal—even, in the long run, the tattooed and pierced erstwhile clerks from Tower.

Thousands of Apple designers, engineers, and programmers are better off, along with the company’s suppliers and everyone who owns Apple stock. And of course, the owners of the 70 million iPods sold since 2001 are reaping far more enjoyment from the devices than the Chinese workers who assembled them. Judging by the delight on their faces a few days ago, my two boys are clearly among the winners.

The example of our two Nanos provides a metaphor for America’s trade relationship with China. Extrapolating from trade numbers through October 2006, Americans bought an estimated $286 billion worth of goods “Made in China” in the year just ended. More than three-quarters of those goods are consumer products that make our lives better everyday at home and the office—just the kind of stuff that made its way under our Christmas trees this holiday season. When congressional leaders talk about getting tough with China by imposing tariffs on all those imports, it must bring a twisted smile to the cold-hearted Grinch.

A steep tariff on iPod Nanos and other imports from China would only succeed in driving up the cost and price of those imports. It would probably still not make economic sense to have them assembled in the United States, because such relatively low-skilled, labor-intensive work would still be done more cheaply in some other developing country. Higher prices for Nanos would mean fewer sales, fewer opportunities for Apple’s own high-skilled workers, lower returns for its shareholders, and fewer Americans experiencing the pleasure of holding one in their hands.

True to the theory of comparative advantage, our trade with China helps us focus on what we do best—such as designing and engineering high-tech devices—while the Chinese do more of what they do best—producing lower-end parts and products at competitive cost, and combining them with more sophisticated components made elsewhere for final assembly and delivery. As the Nano illustrates, China has become the final link in a global manufacturing supply chain in which the United States continues to play a leading role.

In the short run, our friends at Tower are the big losers in this Christmas tale of two Nanos. But given the dynamic, flexible nature of our global labor market, they will no doubt find jobs somewhere else before too long, most likely better jobs. Perhaps, eventually, they will find jobs in sunny California designing devices that will make Nanos obsolete—and will stuff my sons’ sons’ stockings.

Daniel Griswold is director of the Center for Trade Policy Studies at the Cato Institute and author of the recent study, “Who’s Manipulating Whom? China’s Currency and the U.S. Economy.