Baruch the amateur economist has been mulling this question for a while now, and still doesn’t know. Baruch was reading this World Bank blogpost (via Paul Kedrosky)* discussing how much we can rely on China to pull us out of our current funk, which we’ve just been reminded us we are sort of still in.
It makes the reassuring point that China has been the global economic growth engine for some time already, accounting for 20% of global GDP growth over the past decade, twice the contribution of the US. So presumably stagnation in the US, zero growth, would be fine for global growth, ceteris paribus everywhere else, so long as Chinese growth was to increase proportionately, and it’s supposed to. This of course is great news. Except then the blogpost then starts to cavil because the blogpost is actually called “China Can’t Do it Alone”, and then it starts a discussion on how Chinese imports aren’t actually going up very much at all:
Assuming China’s bilateral trade surpluses decline in equal measure, increasing Chinese net imports would add less than 0.1% of GDP to US final demand this year. This simply pales in comparison with the discretionary fiscal stimulus measures . . . implemented in the US (and other advanced economies).
The only way China can pull the US out of the slump is by importing more, it would seem, and it isn’t doing it. So in other words when these stimuli expire, and they will, we’ll all be stuffed again and China won’t help us at all. The authors conclude,
China is too often seen as a one-stop shop for the crisis recovery. A replacement for the US consumer? Check. A source of low-cost borrowing to stimulate your OECD economy? Check. A source of investment funds for emerging, commodity-rich economies? Check. . . Alas, if it sounds too good to be true, it probably is
As a conclusion this does sound possible. But the path the WB bloggers take to get there, viz China isn’t importing more relative to exports, doesn’t make any sense when it comes to looking at the technology sector. I think in tech at least, that discussion is pretty irrelevant.
It’s hard to talk about a trade balance between China and the US in tech hardware, when almost all the hardware, and many of the components that go into the finished good, are “made” in China itself. There isn’t any balance. It’s all “export” then. Hardware and assembly outsourcing was probably one of the key drivers of the trade imbalance between China and the developed world this decade.
But of course it isn’t proper “exporting”, is it? It’s outsourcing. In fact I really don’t know what to call it. Let’s look at the not-so-humble iPhone.
The iPhone is assembled in China by Foxconn, to a design coming from Cupertino, California (although a lot of the R&D is being outsourced to India and China these days). The important bits that make it go are an apps processor, built by Samsung, most likely in a Korean fab though some may be outsourced to Taiwan, and a baseband processor built by Infineon, based in Bavaria and a fab in Dresden but with outsourced production in Taiwan again, and a bunch of memory chips possibly made in China, Japan, Singapore, Korea, Taiwan or Idaho. The raw silicon, mind you, may come from Norway. Casing, touchscreen, PCBs and lots of discrete components will come from literally everywhere, but mostly from China. IP and software makes these components go. The OS is Cupertino again, the middleware too no doubt, but key drivers will come from component makers, and the IP behind them will come from people like Qualcomm, ARM, Infineon, Nokia, Rambus, Intel, Sandisk, various standards associations, IBM, literally dozens of sources. The iPhone is shipped from China to (I imagine) various global distribution hubs (I’m still not sure what that means) and from there legally “imported” into the US, UK, Germany etc. Ironically China, where it is “made”, is not a totally legit destination for iPhones although that will change too (and when it does will that be an “import”?). But I presume, despite all this, that an iPhone would be classified formally by the World Bank dudes as a “Chinese export.”
But seriously, what the fuck is going on here?? It’s insanely complicated. Foxconn (which is of course a taiwanese company) gets to keep only about 5% of the wholesale value of the iPhone to pay wages and taxes on, but that’s the bit that determines its Chinese “export” status. But Korean, Japanese or German companies probably keep the same or more, and of course, US-based Apple keeps more than anyone else. And by outsourcing it to smart, cheap Chinese labour, Apple (and the US treasury, mostly US-based AAPL shareholders, and most of all options-laden US-based management) get to keep more money than they would had it been actually built in Cupertino by American, overpaid, unionised electricians. That’s “gains from trade”, or something, I am sure. I remember that from Trade Theory classes, the ones with “Wine” and “Wool” charts . . .
Presumably to work out the real trade balance in terms of where trade flows, or where the wealth generated by iPhones goes, classifiying it as an export for the purposes of assessing a trade balance is misleading. You’ve also got to include all these other component transaction (which probably are), and then the software and IP transactions (which probably aren’t). Aren’t these latter more invisible transactions, and in fact the orders themselves, in some sense offsetting “imports” into China that don’t get counted in the current account balance? Just the fact that China is the destination for production outsourcing shouldn’t totally skew the “real” trade balance, should it? You’re going to need some seriously smart economists to work that lot out. Baruch can’t do it.
Where there are totally integrated global supply chains, I suspect that the definitions of “import” and “export” begin to lose meaning. Don’t get me wrong, there are sectors still where classical national accounting is relevant. Commodities and simpler finished good like textiles, tires, energy etc presumably still answer well to traditional import-export definitions and these flows probably make up the majority of global trade. But tech, the only one I know anything about, just doesn’t any more, and that’s probably been a large part of the skew in the trade balance these past few years. I wonder if there are any other sectors like that?
If there are any professional economists left reading UB, please help. What is the state of current trade theory in the face of this extreme integration? By the way, commenters are hereby released from having to comment in Haiku form. That really didn’t work out so well.
* what does it mean for econo-blogging when the WORLD effing BANK has a blog, how rock and roll and underground are econobloggers any more? Not very, clearly. Especially when Zero Hedge, ZERO HEDGE, brags about how wired in they are to like, the Key Global Decision Makers and they’re supposed to be the most rock and roll and underground of them all god help us. What are they like, CNN?