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Profits Surplus vs. Trade Surplus

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Profits Surplus vs. Trade Surplus

The Chinese have a big trade surplus with us. But as I noted yesterday, the U.S. has a massive worldwide profits surplus. Which would you rather have?
James Fallows of The Atlantic is now living in Shanghai and points to a recent study that makes this point in a concrete way. Richard McCormack of Manufacturing & Technology News summarizes here a new study of the components of an iPod, showing the revenue and profit margins of the various vendors and the desinger and seller of the iPod, Apple. The Personal Computing Industry Center found that on the $299 Video iPod Apple’s gross margin was $80, with revenue of $30 going to distribution and $45 to retail. That’s more than half the retail price. Dozens and dozens of other companies supplying endless components make up the other half of the sale price. But their profit margins are far lower than Apple’s, and furthermore, many Japanese, Korean, and Taiwanese components (often themselves designed with help from American engineers) flow through China in final assembly and on to America, where they add to our trade “deficit” with China and China’s trade “surplus” with us. Yet these very transactions lead to a Chinese trade “deficit” with the rest of Asia. Maybe these trade statistics are all just a big smoke-screen.
As the PCIC concludes:

“Trade statistics can mislead as much as inform….For every $300 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost). Yet, the value added to the product through assembly in China is probably a few dollars at most. While Apple’s share of value capture is high for the industry, the iPod’s overall pattern of value capture is fairly representative.
“Today, no single country is the source of all innovation and therefore U.S. companies need to work with international partners to bring new products to market. These companies will capture profits commensurate with the extra value they bring to the table. This is simply a fact of business in the 21st century and the good news is that many American companies are winning this game and continuing to bring significant benefits to the U.S. economy.”

Many politicians want to legislate away the trade “deficit” with Asia. What they effectively seek is the abolition of the U.S. surplus in innovation, captial, profits, and jobs.
-Bret Swanson