(What’s Left of) Our Economy: Trade and Supply Chain Disruption Myths are Getting Disrupted by Apple

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Apple Inc., Breitbart.com, China, deadweight loss, design, engineering, global value chains, John Carney, manufacturing, marketing, Nikkei Asian Review, production, research and development, sourcing, supply chains, tariffs, Trump, {What's Left of) Our Economy

Yesterday’s report from Japan’s Nikkei Asian Review (NAR), on how the U.S.-China trade war is affecting Apple Inc.’s sourcing plans, was stunning not only for claiming that the company is studying moving up to 30 percent of the China production capacity it uses out of the People’s Republic. It also greatly undermined three of the most pervasive myths surrounding the decision by such companies to concentrate so much manufacturing in China, and the resulting impact on the American economy.

Since Apple’s production in China and elsewhere is handled almost entirely by independent contract manufacturers like Taiwan’s Foxconn, its reported decision to ask them to start estimating the costs of partly leaving China speaks volumes about why multinational companies place various links in their supply chains in the countries decided on.

The first myth? That production and sourcing decisions are based overwhelmingly on the kinds of free market forces and developments that supposedly dominate the current world trade system, and that explain its root assumption that any government interference will reduce – to every country’s detriment – trade’s ability to maximize global efficiency.

According to the NAR piece, however, a team of 30 Apple employees has begun “discussing production plans with suppliers and negotiating with governments over financial incentives they might be willing to offer to attract Apple manufacturing, as well as regulations and the local business environment.” In other words, Apple’s decisions won’t solely, or even mainly reflect the principle of comparative advantage – which holds that economic activity naturally flows and should flow to locations where it’s most efficiently conducted.

The NAR article also hints at a point that’s become crucial in today’s trade war-spurred debate – about whether trade barriers like the Trump administration’s recent tariffs create major “deadweight losses” for the world economy by forcing companies to spend precious time and resources coping with government interference, rather than on continuing to improve their products and processes. For as the NAR piece states, among the advantages China has offered manufacturers for so long have been “lighter labor rules.” That’s a euphemism for a government policy of ruthlessly repressing worker’s rights to organize freely.

NAR could have also added practices such as government-encouraged technology extortion (which forces foreign businesses to hand over their knowhow to Chinese partners in return for the ability to operate in China), value-added taxes (which fosters producing inside China by penalizing importing and rewarding exporting), an artificially depressed currency (which has effects similar to those value-added taxes), explicit requirements that goods made in China contain certain levels of Chinese content, and all manner of tariffs and subsidies that are illegal under World Trade Organization rules.

Moreover, as detailed in my 2002 book on globalization, The Race to the Bottom, foreign government distortion of trade is hardly confined to China. It’s long represented the way much manufacturing-related business has been done around the world.

In other words, the deadweight loss issue, and government interference in trade flows, is nothing new, and raised few hackles among economists until the United States under President Trump started imposing serious trade barriers of its own. (See this article by Breitbart.com‘s John Carney for an excellent discussion of the issue and the hypocrisy of Trump tariff opponents.)

The second Apple- (and broader offshoring-related-) myth debunked by the article is that the reshuffling of global supply chains already being prompted by the Trump tariffs will devastatingly disrupt worldwide manufacturing and economic fortunes. But here’s what one Apple supplier representative told NAR: “It’s really a long-term effort and might see some results two or three years from now. It’s painful and difficult, but that’s something we have to deal with.” In other words, rather than whining and/or throwing in the towel, such companies are apparently rolling up their sleeves and getting to work.

P.S. – So, reportedly, is Apple. Not that the company hasn’t whined about the Trump tariffs. But according to the NAR article, its examination of diversifying away from China – where currently more than 90 percent of its worldwide manufacturing is located – began “at the end of last year” to “expand [the aforementioned] capital expense studies team.”

Moreover, the trade war evidently wasn’t the only issue on Apple’s mind. Said “one executive with knowledge of the situation,” a “lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse [China] factors are not going anywhere. With or without the final round of the $300 billion tariff, Apple is following the big trend [to diversify production].” The biggest implication – which should have always been obvious – is that because countries and their economies, societies, and demographics are constantly changing independent of government policies, no smart business would ever view its supply chains as being set in stone.

The final myth – that performing nearly all Apple manufacturing in China has enormously strengthened the U.S. economy, and that this proposition holds for much China production by U.S.-owned multinational companies.

Because Apple products sell for so much more than the cost of their materials, it’s clear that most of the value they create comes from the company’s mainly U.S.-based research and development, engineering, design, software development, and marketing operations. So its slogan “Designed by Apple in California, Assembled in China” is not only accurate but extremely important economically.

Nonetheless, the company itself has maintained that a significant number of its goods suppliers have been U.S.-owned (though not necessarily American-located). Yet the NAR article found that this number has been shrinking steadily since 2012 – and that the number of China- and Hong Kong-owned suppliers has been rising so strongly that last year they exceeded the number of their American counterparts for the first time.

In fact, as I’ve reported, the China content of most goods produced in China been increasing so significantly for so long that the notion of the People’s Republic as a simple assembler of products that add little value to the Chinese economy is becoming rapidly outmoded. Further, this development has always been a prime objective of the Chinese government, as is especially obvious from its technology extortion and local content requirements.

It’s true that these developments per se don’t affect the aforementioned “white collar” manufacturing activities vital to creating Apple products. But it’s legitimate to ask whether, without the Trump trade war, this extremely high value work would long remain mainly in the United States. After all, even in a world of instant global communications, manufacturers have found it highly advantageous to locate functions like research and development etc close to their factories – because the two broad aspects of manufacturing tend to interact with each other so continuously, and because big differences in time zones means that there’s still nothing as easy and convenient as contacting a colleague by driving a few blocks away or phoning or texting or emailing from there, much less by walking down the hall.

To listen to economists and pundits and even many beat reporters even nowadays (or especially nowadays?), the emergence of the kinds of global value chains epitomized by Apple’s operations has been as much a force of nature, or technology, as economic globalization itself has been portrayed. They’ve ignored how the Trump trade policy revolution reminds invaluably that these trends have also stemmed from human decisions that are anything but givens. The reaction of Apple, and all the other companies that have either left China or are contemplating leaving because of the President’s actual and threatened tariffs, is a welcome sign that the folks who deal with these problems in real life, and not simply in the abstract, have finally been getting this message.

(What’s Left of) Our Economy: Now That It’s a Real China Trade War….

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Apple Inc., Bob Woodward, China, consumer goods, Fear, foreign direct investment, Gary Cohn, intermediate goods, Jobs, manufacturing, national security, prices, producer goods, supply chains, tariffs, technology, Trade, trade war, Trump, {What's Left of) Our Economy

Now it’s a “trade war.” By slapping tariffs on $200 billion worth of imports from China, President Trump has now placed in harm’s way roughly half of all last year’s American purchases of goods from the PRC. So I’ll stop using quotes around the phrase, at least when it comes to China developments. And here are some points that deserve special emphasis:

>For many of the same reasons that the new tariffs on China or on steel haven’t shown any sign of increasing prices for the intermediate (or producer) goods that businesses buy (the focus of previous tranches, and of the Trump metals tariffs), this larger set of tariffs on consumer goods are unlikely to cause much pain for American shoppers.

As I’ve written, if businesses don’t believe that their markets can currently bear price increases, what it is about the tariffs that will change their assessment – especially in the next few weeks and even months? Put differently, if they’re likely to raise prices then, why haven’t they done so already? Are they really in the habit of giving their customers unsolicited and unnecessary price breaks at the expense of their revenues and profits?

In this vein, President Trump’s decision to exempt some prominent Apple products from the new levies suggests he’s been snookered by the tech giant – for fear of spoiling too many Americans’ Christmases. In fact, here’s an article that makes clear that Apple’s pricing policies have virtually nothing to do with the cost of the components it uses.

Of course, it seems logical to suppose that if consumer products companies won’t be raising their prices much because of the tariffs, then the supplier of those products – China – won’t be harmed either, because sales levels will remain generally unchanged. But actually, the tariffs will accomplish a somewhat related but highly worthwhile goal (that is, if you believe that China’s predatory trade practices pose a major problem for the American economy): They’ll make China a higher cost, and therefore less competitive supplier of these products.

As a result, the American companies they depend on will have further incentives to shift supply chains outside China. For most consumer goods, which are labor intensive, nearly all of the beneficiaries won’t be domestic U.S. competitors and their workers. Instead, they’ll be other very low-cost countries with natural comparative advantages in these industries.

But this result will definitely weaken employment in China and possibly the PRC’s politics – whose stability has long depended on the ability of China’s leaders to deliver rising living standards for a critical mass of China’s population. Both developments would unmistakably serve U.S. interests.

Electronics – both consumer and “higher tech” – look like a conspicuous exception, due to the sheer size of China’s industrial complex in these sectors and the scale advantages alone that they create. Few acceptable alternative production sites will be available for many years. Nonetheless, there’s much more potential for production and job shifts back to the United States for the large number of non-electronics advanced manufacturing industries where domestic American producers would boast considerable competitive advantage – especially if they didn’t need to worry about predatory Chinese competition.

>The President’s decision to limit the tariff on the new group of targeted Chinese products to ten percent (at least initially) strongly indicates his awareness that his trade policies could well provoke even greater opposition than has been expressed already. In other words, despite his professed confidence, trade wars aren’t always “easy to win.” But he needs to do much more to generate and even preserve needed public support. Specifically, Mr. Trump needs to make an address – or even a series of addresses – from the Oval Office, with all its trappings, explaining why the stakes of America’s economic conflict with China are so high, and therefore why some domestic sacrifice will be absolutely essential.

The President has spoken about the need for tariffs at numerous rallies and brief sessions with reporters. But his main points – that the Chinese have been ripping Americans off for decades, that basic fairness must be restored, and even that success will mean investment and jobs flooding back to U.S. shores – are sadly inadequate to the task. As widely observed, at risk from continued China policy failures are the nation’s security and future as global technology leader – which will undercut future U.S. prosperity in ways that dwarf even the employment and production damage suffered so far.

That such an address hasn’t been made – and by such an effective communicator – could be a sign that an overarching China strategy still hasn’t been developed. And although Mr. Trump’s initiatives so far show every sign of throwing Beijing off balance, they’ll fall way short of their (needed) potential unless carried out as part of an integrated strategy.

>My own candidate for such a strategy – economic disengagement from China. The main reasons?

First, the clearest lesson from decades of generally unfettered U.S.-China trade and investment is that the two countries’ economic systems are simply too incompatible to permit mutually beneficial commerce.

Second, as I’ve written, even full Chinese agreement to most American demands can’t be adequately verified by Washington. China’s manufacturing complex is too vast, and its government operates too secretively. In this vein, in particular, subsidies are way too fungible for outsiders to track.

Third, most forms of continued economic engagement with China will inevitably continue to strengthen directly or indirectly China’s ability to challenge U.S. national security interests. In macroeconomic terms, continuing huge Chinese trade surpluses with the United States will keep ensuring that Beijing will have the resources needed to continue its rapid military buildup while satisfying civilian needs satisfactorily. In more sector-specific terms, continued American manufacturing investment will continue bolstering China’s ability to turn out the advanced weapons and other defense-related goods to enable Beijing to narrow further America’s remaining military and underlying technology edges. (That’s one reason why the administration’s stated objective of making China an easier environment for American business is so dubious.)

The Trump administration has made good disengagement progress on the inbound foreign direct investment front. But even here, much more can and should be done. For how can any acquisitions of American businesses or other assets by a non-market economy like China reinforce the free market basis of the U.S. economy? Indeed, how can such transactions help but distort and ultimately weaken American capitalism?

But let’s end on an optimistic note: Assuming Fear, Bob Woodward’s new tell-all book about the Trump administration, is accurate, there’s no more Gary Cohn running around the White House taking advantage of his position as head of the National Economic Council to snatch needed proposals like these from the President’s desk.

Making News: Hits on Breitbart.com, in The Pittsburgh Post-Gazette…& More!

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Apple Inc., Breitbart.com, China, Gordon Chang, Jobs, John Carney, Len Boselovic, Making News, manufacturing, Pittsburgh Post-Gazette, The Daily Beast, The John Batchelor Show, Trade, trade wars, wages

Time to summarize some recent media appearances!

Yesterday, in a post on a new New York Federal Reserve study on U.S. trade flows, John Carney of Breitbart.com cited my own analysis of this bizarre report. Here’s the link.

Also yesterday, Len Boselovic’s Pittsburgh Post-Gazette analysis of the latest developments in manufacturing wages cited my findings about how hourly pay in industry has lost its leadership status in the U.S. economy.

On Saturday, August 11, TheDailyBeast.com ran Gordon Chang’s latest article on U.S.-China trade relations, which quoted me on the possibility of new pressure on Apple, Inc. from the Chinese government.

Finally, on July 30, I made a short-notice appearance on John Batchelor’s nationally syndicated radio show to discuss the latest developments in the U.S.’ trade confrontation with China. Here’s a link to the podcast of the segment, which experienced some technical difficulties because John was calling in from Azerbaijian!

And keep checking in with RealityChek for news of upcoming media appearances and other developments.