Commentary

U.S.-China Trade a Collaborative Effort

The visit last week of China’s President Hu Jintao was considered a diplomatic success, but it seems to have only hardened the determination of Sen. Charles E. Schumer, New York Democrat, and other critics to get tough on Chinas alleged unfair trading practices toward the United States.

Despite the trade-war rhetoric we heard last week, it’s a mistake to see China as a monolithic economic rival to the United States. While certain U.S. companies do compete head to head with producers in China, the reality is that producers in both countries occupy different locations in an increasingly complex global supply chain. U.S. companies are more likely to be collaborators than competitors with producers in China.

This is true not just for U.S. companies but for firms throughout East Asia. The story of the past two decades is that 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 of the 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 import from China typically are designed and engineered outside China and built with more expensive components made outside China. The products are assembled in China, but even that lower-end work is usually performed in factories owned and managed by multinational corporations outside China.

On a macro level, this dividing up of the supply chain shows up in our trade numbers with the countries surrounding China. Yes, imports from China have grown exponentially since 1990, from $15 billion to more than $300 billion in 2010. This has provided fodder for the critics to claim were being swamped by a tidal wave of low-cost imports that have displaced U.S. production.

What the critics miss is the relative decline of imports to the United States from other major Asian economies. 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 in market share by any measure, but that growth 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 an analysis last year by iSuppli, a market-research firm in El Segundo, Calif., just a few dollars of the value of an iPhone 4 is actually added in China during the final assembly. The major components come from suppliers in Japan, South Korea, Taiwan, the United States and even Germany and Switzerland. Of the $600 final price of an iPhone, 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 the critics were to get their wish for higher tariffs on imports from China, the result would not be a repatriation of jobs to the United States, but a massive disruption of intricate global supply chains that are benefiting both American consumers and American companies and workers every day. The cost of producing an iPhone would go up sharply, driving up the final cost to consumers and reducing final 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.

The losers from an outbreak of anti-China protectionism would be those Chinese workers who assemble the final products, to be sure, but also American consumers, workers and investors. In our more globalized economy, we really are all in this together.

Daniel Griswold is director of the Cato Institute’s Center for Trade Policy Studies and author of the 2009 book, Mad About Trade: Why Main Street America Should Embrace Globalization.