We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.
Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American‐made steel, iron, and manufactured products, is it only a matter of time before the iPod — “Assembled in China,” of all places — comes under scrutiny? You can view the video here:
In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low‐wage countries perform the low‐value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:
The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen‐age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win‐win nature of our trade with China.
Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher‐than‐average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California‐Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”
The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold — an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001 — my teen‐age sons included — pocket far more enjoyment from the devices than the Chinese workers who assembled them.
To learn a whole lot more about how American middle‐class families benefit from trade and globalization, you can now pre‐order the book at Amazon.com.
Earlier today, Doug Bandow weighed in with some commentary on the problems that Buy American provisions are creating for both Canadian and American businesses. Let me reinforce his view that such rules are anachronistic and self‐defeating with some thoughts from a forthcoming paper of mine about the incongruity between modern commercial reality and trade policies that have failed to keep pace.
Even though President Obama implored, “If you are considering buying a car, I hope it will be an American car,” it is nearly impossible to determine objectively what makes an American car. The auto industry provides a famous example, but is really just one of many that transcends national boundaries and renders obsolete the notion of international competition as a contest between “our” producers and “their” producers. The same holds true for industries throughout the manufacturing sector.
Dell is a well known American brand and Nokia a popular Finnish brand, but neither makes its products in the United States or Finland, respectively. Some components of products bearing the logos of these internationally recognized brands might be produced in the “home country.” But with much greater frequency nowadays, component production and assembly operations are performed in different locations across the global factory floor. As IBM’s chief executive officer put it: “State borders define less and less the boundaries of corporate thinking or practice.”
The distinction between what is and what isn’t American or Finnish or Chinese or Indian has been blurred by foreign direct investment, cross‐ownership, equity tie‐ins, and transnational supply chains. In the United States, foreign and domestic value‐added is so entangled in so many different products that even the Buy American provisions in the recently‐enacted American Recovery and Reinvestment Act of 2009, struggle to define an American product without conceding the inanity of the objective.
The Buy American Act restricts the purchase of supplies that are not domestic end products. For manufactured end products, the Buy American Act uses a two‐part test to define a domestic end product: (1) The article must be manufactured in the United States; and (2) The cost of domestic components must exceed 50 percent of the cost of all the components. Thus, the operational definition of an American product includes the recognition that “purebred” American products are increasingly rare.
Shake your head and chuckle as you learn that even the “DNA” of the U.S. steel industry, which pushed for adoption of the most restrictive Buy American provisions and which has been the manufacturing sector’s most vocal proponent of trade barriers over the years, is difficult to decipher nowadays. The largest U.S. producer of steel is the majority Indian‐owned company Arcelor‐Mittal. The largest “German” producer, Thyssen‐Krupp, is in the process of completing a $3.7 billion green field investment in a carbon and stainless steel production facility in Alabama, which will create an estimated 2,700 permanent jobs. And most of the carbon steel shipped from U.S. rolling mills — as finished hot‐rolled or cold‐rolled steel, or as pipe and tube — is produced in places like Canada, Brazil and Russia, and as such is disqualified from use in U.S. government procurement projects for failure to meet the statutory definition of American‐made steel.
Whereas a generation ago the cost of a product bearing the logo of an American company may have comprised exclusively U.S. labor, materials, and overhead, today that is much less likely to be the case. Today, that product is more likely to reflect foreign value‐added, regardless of whether the product was “completed” in the United States or abroad. Accordingly, Buy American rules and trade barriers of any kind (as appealing to politicians as they may be) hurt most American businesses, workers, and consumers.
It’s time to wake up and scrap these stupid rules.
While Iraq’s security situation has been improving – though the possibility of revived sectarian violence remains all too real – the conflict in Afghanistan has been worsening. The challenge for allied (which means mostly American) forces is obvious, which is why the Obama Administration is sending more troops.
But the administration risks wrecking the entire enterprise by turning American forces into drug warriors.
Reports the New York Times:
American commanders are planning to cut off the Taliban’s main source of money, the country’s multimillion‐dollar opium crop, by pouring thousands of troops into the three provinces that bankroll much of the group’s operations.
The plan to send 20,000 Marines and soldiers into Helmand, Kandahar and Zabul Provinces this summer promises weeks and perhaps months of heavy fighting, since American officers expect the Taliban to vigorously defend what makes up the economic engine for the insurgency. The additional troops, the centerpiece of President Obama’s effort to reverse the course of the seven‐year war, will roughly double the number already in southern Afghanistan. The troops already fighting there are universally seen as overwhelmed. In many cases, the Americans will be pushing into areas where few or no troops have been before.
Through extortion and taxation, the Taliban are believed to reap as much as $300 million a year from Afghanistan’s opium trade, which now makes up 90 percent of the world’s total. That is enough, the Americans say, to sustain all of the Taliban’s military operations in southern Afghanistan for an entire year.
“Opium is their financial engine,” said Brig. Gen. John Nicholson, the deputy commander of NATO forces in southern Afghanistan. “That is why we think he will fight for these areas.”
The Americans say that their main goal this summer will be to provide security for the Afghan population, and thereby isolate the insurgents.
But because the opium is tilled in heavily populated areas, and because the Taliban are spread among the people, the Americans say they will have to break the group’s hold on poppy cultivation to be successful.
No one here thinks that is going to be easy.
The basic problem is that opium – and cannabis, of which Afghanistan is also the world’s largest producer – funds not only the Taliban, but also warlords who back the Karzai government and, most important, the Afghan people. The common estimate is that drugs provide one‐third of Afghanistan’s economic output and benefit a comparable proportion of the population. Making war on opium inevitably means making war on the Afghan people.
World governments should be careful not to play politics with the Mexican swine flu outbreak. The health consequences should of course be rigorously addressed — but without adding economic consequences, which is what several countries appear poised to do.
Public health scares have a history of seeping into trade policy without anything resembling sufficient consideration of the evidence. Governments in Russia and East Asia are already banning pork exports from Mexico, even though there is zero evidence that they pose a health hazard. It hearkens back to unfounded bans of U.S. beef in recent years by the European Union and South Korea.
If the U.S. government jumps on board, U.S. exports could be targeted for retaliatory trade actions. One quarter of U.S. pork production is exported, as well as billions of dollars of our soybeans used as feed by foreign hog farmers.
Exploiting this crisis could turn what is so far a manageable health problem into an unnecessary trade and diplomatic conflict. Obviously the global economy does not need the extra strain.
President Obama recently indicated that he would cut the fiscally irresponsible (yet minimally market distorting) direct payments that flow to farmers regardless of their production. An outcry from farming groups has, predictably, ensued.
Just as predictably: “A source in the administration says the proposal is being reconsidered because of the opposition it has received.”