Misrepresentations about international trade: The case of Apple’s iPhone

By Farok J. Contractor, Distinguished Professor in Management and Global Business

Many misrepresentations about international trade and globalization have circulated for years, and “trade wars” have been launched on the basis of misunderstandings of the nature of international business patterns. 

In the minds of the public glued to social media, Apple Inc. is sometimes accused of being a major contributor to the trade deficit “suffered” by the U.S. “against” China. Looking only at the U.S.-China trade balance, the iPhone alone – just one product – appears to create a sobering trade deficit of some $33 billion. 

However, this is misleading and can cause incorrect policy decisions, because relatively little of the value of the iPhone is added in China and the bulk of its value is added in the U.S. 

Apple is responsible for far more jobs in the U.S. (80,000 as direct employees such as researchers, designers, managers and marketers, plus an additional 450,000 jobs in the distribution of Apple products, and an estimated additional 1.5 million as independent media developers and brokers) than abroad. 

While it is true that the final assembly and shipment of iPhones occurs in China, from a “value added” calculation, the iPhone is an overwhelmingly American product, and China contributes little to its content. 

The iPhone is an excellent illustration of the nature of global supply chains with components sourced from as many as 13 to 15 nations, each specializing in a particular component – according to comparative advantage theory. 

The basis of international supply chains and offshoring is a disaggregation of a product’s value chain (e.g. from R&D to production to marketing to after sales services) and a dispersal of various pieces of the value chain over different nations according to each country’s comparative advantage. 

This specialization (by component or service) in each country puts a technological marvel in the hands of customers, at a reasonable price. If all components and assembly of, say, the iPhone 16 were sourced domestically in the U.S., the final estimated price would likely rise from the current average of $1,100 to $3,500. So, are Americans “suffering” from a trade deficit, or as consumers, are they “enjoying” the benefits? 

Is an iPhone a product or a service? 

Increasingly, what we call “manufacturing” has embedded in the product intermediate services that may often constitute the majority of a so-called “product’s” value. For example, the cost of the raw material content in an iPhone may be less than $6. The global transportation cost and labor content for each iPhone (components and finished product) may comprise another $150 at most. 

Yet the phone sells for some $1,100, because the bulk of an iPhone’s value is not in matter but in thought – in intangibles and intermediate services such as R&D, design, supply chain orchestration, management, marketing, and some profits to shareholders in Apple Inc. and its supplier companies – most of which occurs in the U.S. Real and substantial value is not in matter, but in thought.

Hence only looking at import/export data can be very misleading.

Bilateral trade statistics (especially those between the U.S. and China) can mislead politicians and the public into believing that the U.S.’ participation in international trade is somehow dangerous. Many are misled into thinking that such deficits are detrimental to manufacturing and jobs in the U.S.

Globalization and offshoring do not always mean loss of U.S. jobs. At least in the Apple example, the majority of jobs are in the U.S. 

This is the nature of modern, advanced economies, with the majority of work performed in services and a minority in manufacturing. A “service economy” is driven by creativity and innovation. 

The real strength of U.S. companies is in their R&D, which is a long-term job creator. Some companies, like Apple, illustrate the best type of bargain: orchestrate foreigners to do the work of producing products abroad at lower wages, while retaining high-value service jobs, as well as high-end automation and robotics-enabled manufacturing jobs, at home.

For more in-depth analysis on this and similar topics, please visit Prof. Contractor’s Global Business Blog: https://globalbusiness.blog