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.
RealityChek 