It’s been 9 years since I warned of how awful the Trump Administration was going to be about trade and tariffs. Before the first term even started, I was pointing out that Peter Navarro, Trump’s economic adviser, had some extraordinarily odd ideas about the subject — and I ended with the hope that The Donald wasn’t listening. Alas, it seems that Trump does have the power to listen after all.
Well, that’s ageing for you — finding out the world does indeed get worse. In my own area of technical expertise, very weird metals, we’re now seeing inefficient mines gaining guaranteed purchases at twice current pricing — just at the point where the global industry is about to flood the market and crash prices.
But as a larger, possibly less technical, example, consider Apple. The essential logic of trade is that there are some things that others do better than we do, so they should do them. That’s absolute advantage of course and it’s the next bit, David Ricardo, that confuses everyone. Comparative advantage means that we should look among the varied things that we can do. So, which of those are we least bad at? For if everyone does what they’re least bad at then we swap the results — then we’ll all be better off. Because if everything is done by those least bad at that thing then there’s more production and we are richer. This is true of individuals and any grouping of them, from county through company to country – it doesn’t stop at any of the borders. It simply is not true that there is essential merit in something being made in Tecate (US) rather than Tecate (Mexico). Nor vice versa.
Trump is now demanding that Apple manufacture in the US — which is either grossly uniformed or very silly indeed
But Navarro thinks otherwise, Trump believes Navarro and so here we are. Now, true, there is immense political — and social — pleasure to be derived from the heretic trashing the orthodoxy. It can be essential. But trade isn’t a matter where this is the case. For a start US manufacturing output has not declined, it is manufacturing employment that has. But then global manufacturing employment has declined too. This is simply increasing productivity — the very thing that makes us all richer. We require fewer hours of human labour to produce this something, that means there is more labour for making another. We are richer by the value we put on that new and other thing.
But Apple. Trump is now demanding that Apple manufacture in the US — which is either grossly uniformed or very silly indeed. Because to any useful level of consideration Apple products are manufactured in the US. The stuff that is done in China (or India now) is some 1 per cent or so of the process. You know, the level at which the correct response is who the hell cares?
Think on it. “The cost of making an iPhone 16 Pro, Apple’s latest iPhone, is $568. Components to make a phone include the screen, the phone casing, the camera, the battery, software, chips, and more.” Apple then charges between $999 and $1,599 for it in the US. So, by eyeball, there’s a 40 to 60 per cent margin there. All of which is made in the US of course.
Yes, we all know how Apple played lovely games in Ireland — using tax lawyers to make a corkscrew jealous. But it never has done that on its US sales. Over there, it just pays its tax on its US sales like a good little corporation. More than that, the software, the chip design, is done by Apple inhouse. Manufacturing of the chip by TSMC, which is in Taiwan, not China (and at least some have been made by Samsung in Austin, TX). The glass comes from Corning, in fact absolutely nothing of any great value comes from China at all. OK, these days, perhaps a bit of wiring, some solder and so on. But Apple’s China business is to import all the expensive bits, get people to stick ‘em together and then leave.
Exactly how much stays in China (largely with Foxconn, which is itself Taiwanese) is going to be an estimate but the usual one is $10 per phone. Yes, really, all this “made in China” shouting is over 1 per cent of the retail value of an iPhone. It’s simply not relevant to anything other than politics.
But politics is insisting that this terribly valuable business of “making” iPhones must be reshored to the US? I’ve been known, just sometimes, to be a bit sceptical of the value of politics in matters economic. Odd that, eh?
But sadly it gets worse. The actual jobs that will be reshored are not those lovely, highly paid ones, in brand creation, software writing and chip design. Those are already at home after all. The insistence is actually that electronics assembly jobs — the stuff that is actually done in China — must come home. Which is bringing us back to that Ricardo stuff — what is it that the US is good at? 8 – 4 shifts on an assembly line? Not so much. So why bring back what’s not done very well?
Worse, if we are going to insist upon things being done at home, it’s the things that pay a high wage that we’d like to have done at home, right? So, electronics assembly pays a median hourly wage of $21.17 an hour. The median hourly wage is $36.44. What is anybody doing thinking about trying to reshore millions of jobs that pay only just over half the average wage? This will, by simple subtraction, reduce the average wage in the country.
Which brings us back to the entire point of trade. We get foreigners to do the stuff that we’re not all that good at or don’t like doing very much. This makes what we want to have cheaper.
Electronics assembly doesn’t add much value, which is why China gets paid $10 an iPhone. This should all be brought back to the US, so that everyone’s phone is more expensive and also millions have to work on half average wages? Be still my beating heart.
No, I am not a sceptic about the value of politics in economics — I am a realist. The politicians should butt out as they have no clue. This is not exclusive to Messrs Navarro and Trump — they’re just today’s examples. Seriously, insisting upon importing low paid jobs back into your own country? But, but…
