July 08, 2019 • By Aaron Orlowski
The $420 billion 2018 trade deficit between the U.S. and China looms over trade negotiations between the two countries. The common story says that money is draining out of the U.S. and enriching China.
But when Ken Kraemer, a professor emeritus at the UCI Paul Merage School of Business, ran the numbers for one prominent product, the iPhone 7, he found that the details tell quite a different story.
Every time a new iPhone 7 is imported into the U.S., it adds roughly $240 — the factory cost — to the trade deficit balance sheet. But of that value, only a tiny fraction — $8.50 — accrues to China. The rest goes to a variety of countries, such as Japan, Taiwan, Korea and, most of all, the U.S. More than half the retail price of the iPhone 7, which was $649 in 2016, goes straight to Apple’s coffers.
How does that happen? The different components that make up the iPhone, such as the touch screen display, the memory chips and microprocessors, all come from different countries. Those parts are shipped separately into China, and they leave China inside an iPhone. In addition, Taiwanese companies own the factories.
"In short, China gets a lot of low-paid jobs, while the profits flow to other countries," Kraemer wrote in an article in The Conversation.
The article, which Kraemer wrote with two co-authors, describes in-depth the cost breakdown for the iPhone 7, and is based on Kraemer’s research. Similar breakdowns are likely for newer iPhones such as the iPhone X, Kraemer says.
"Consumers benefit from innovative products, and thousands of companies and individuals have built businesses around creating apps to sell in the app store," Kraemer writes. "Apple uses its profits to pay its armies of hardware and software engineers, marketers, executives, lawyers and Apple store employees. And most of these jobs are in the U.S."