I, Nutella

Via Radley Balko, these pieces never get old:

Some 250,000 tons of Nutella are now sold across 75 countries around the world every year, according to the OECD. But that’s not what’s amazing about it. Nutella, it turns out, is a perfect example of what globalization has meant for popular foodstuffs: Not only is it sold everywhere, but its ingredients are sourced from all over the place too.

Even though Ferrero International, which makes the stuff, is headquartered in Italy, it has factories in Europe, Russia, North America and South America. And while certain inputs are supplied locally—like, say, the plastic for the bottles or milk—many others are shipped from all over the world. The hazelnuts are from Turkey; the palm oil is from Malaysia; the cocoa is from Nigeria; the sugar is from either Brazil or Europe; and the vanilla flavoring is from France.

The OECD mapped it all out. Have a look:

The whole OECD study is available here.

Government Woefully Unprepared for Market Innovation, Part 7491

I've discussed "3D printing" before, but a new must-read article from The Economist explains just how the new technology is causing a "Third Industrial Revolution."  The whole article is worth reading, but I was particularly struck by this discussion of the revolutionary technology's immense impact on national policy:

Consumers will have little difficulty adapting to the new age of better products, swiftly delivered. Governments, however, may find it harder. Their instinct is to protect industries and companies that already exist, not the upstarts that would destroy them. They shower old factories with subsidies and bully bosses who want to move production abroad. They spend billions backing the new technologies which they, in their wisdom, think will prevail. And they cling to a romantic belief that manufacturing is superior to services, let alone finance.

None of this makes sense. The lines between manufacturing and services are blurring. Rolls-Royce no longer sells jet engines; it sells the hours that each engine is actually thrusting an aeroplane through the sky. Governments have always been lousy at picking winners, and they are likely to become more so, as legions of entrepreneurs and tinkerers swap designs online, turn them into products at home and market them globally from a garage. As the revolution rages, governments should stick to the basics: better schools for a skilled workforce, clear rules and a level playing field for enterprises of all kinds. Leave the rest to the revolutionaries.

This all should scare the bejeebus out of those of us who advocate national trade and economic policies which reflect modern realities of today's markets.  Why?  Because our policymakers still haven't accepted obvious market phenomena that have been around for a decade or more, and thus develop and advocate archaic policies that actually serve to hurt domestic industries, workers and the economy more broadly.  For example, almost all US politicians - in both major parties - still kvetch about the US-China trade balance, even though study after study has demonstrated just how pointless that statistic has become in this era of global supply chains.  The latest example of that fact comes from this great new graphic (h/t ToGetRichIsGlorious) which shows the cost and profit breakdown of the iPad in 2010:

As you can see, of the of the $499 retail price, Apple (30.1%) and other US companies (2.4%) get 32.5 percent of the profits, while China gets only a tiny fraction of that (1.6%).  Yet 100% of the iPad's US customs value adds to the US-China trade deficit.  So why on earth do our politicians act like this bilateral deficit - or any bilateral trade deficit for that matter - should form the basis for US-China trade policy?  It's simply mind-boggling.

Another common example of the gaping market-politics disconnect that I've frequently lamented - and one hinted by the story above - is our politicians' continued fetishization of manufacturing (and manufacturing employment).  It warms my heart that a few politicians appear to be getting the message about services, as this recent and (mostly) refreshing op-ed from US Trade Representative Ron Kirk demonstrates:

The United States today is a services trading powerhouse, and it's vital that we build on our already robust services surplus with dynamic new opportunities...

Next month, the U.S. will host the 12th round of negotiations in the Trans-Pacific Partnership. Those critical talks will follow closely on the heels of a number of key engagements with America's global trading partners, including last week's Summit of the Americas, this week's meetings of the G-20 trade ministers, and May's Strategic and Economic Dialogue with China. In June, the trade ministers of the Asia-Pacific Economic Cooperation forum (APEC) will meet in Russia.

In all of these fora, the U.S. will be seeking new avenues for American businesses to sell more of their products around the world, and to hire more workers in the services sector, which already accounts for four out of five American jobs.

The U.S. is the largest services trading country in the world, with $1 trillion in two-way trade in 2011 and a services trade surplus last year of $179 billion (up 23% from 2010). In what economist Bradford Jensen defines as the fastest-growing services sectors, Bureau of Economic Analysis data show that the U.S. in 2010 had a trade surplus of $57 billion with the Asia-Pacific region, of $44 billion with the European Union, of $35 billion with the countries covered by the North American Free Trade Agreement (Canada and Mexico), and of $25 billion with the rest of Latin America....

If some of those data sound familiar, they should - they mirror several of the points that I made in December about America's globally-dominant services sector (and politicians' ignorance thereof).  The aforementioned op-ed goes on to explain some of the (mostly good) things that USTR is doing to further expand US service suppliers' access to foreign markets, but unfortunately, Kirk's boss doesn't seem to share the love for the US service sector.  Instead, most of President Obama's tax and trade policies are geared toward boosting the US manufacturing sector (at the services sector's expense, naturally) - a troubling disconnect that I've noted repeatedly.  So while USTR Kirk's services affinity is certainly a welcome development, it's a bit less exciting when one considers the archaic and misguided policies pushed by the rest of his colleagues in the Obama administration.

And this gets me back to 3D printing and the "Third Industrial Revolution."  If our very "modern" and "progressive" government (and other governments like it) still refuses to recognize and adapt to simple and obvious market developments that have been going on for decades now, what hope does it have in recognizing and adapting to the more complicated and revolutionary things that are happening right now?

If the trade-related examples above are any indication, the answer to that question is as depressing as it is obvious.  That answer also should inform our faith in government policy accepting and adapting to other critical market phenomena too.  Maybe, just maybe, highly complex things like industrial policy or nationalized healthcare aren't very good ideas after all, huh?

Crazy thought, I know.

Umm, Yeah, About that "Made in China" iPad

Apple's iProducts continue to not only break sales records but also provide invaluable lessons on modern global supply chains and the pointlessness of bilateral trade deficit figures.  The WSJ's report on iFixit's teardown of the iPad3 the "new iPad" explains again why the back of the device should read "made on Earth":

The new iPad sports a speedier Apple-designed processor, a sharper screen and next-generation wireless Internet connections, known as 4G LTE.

Broadcom, a communications-chip specialist in Irvine, Calif., made the chips used for Bluetooth and wireless Internet access, iFixit said after posting a so-called teardown report from Australia. Chips from San Diego-based Qualcomm are used by the iPad to connect to cellular networks, including 4G services using a technology called LTE.

Elpida, a Japanese company that has filed bankruptcy proceedings, supplied dynamic-random access memory chips for the iPad, the site added. IFixit also identified other memory chips from Toshiba Corp., also based in Japan.

Other chips identified by iFixit came from companies that include Texas Instruments Inc., Fairchild Semiconductor International and TriQuint Semiconductor Inc....

One of the highest-profile suppliers to the iPad is Samsung, whose display had earlier been reported to be the only one that met Apple’s specifications for the high-resolution screen and was being used in the device. Competing displays from Sharp Corp. and LG Display Co. recently met Apple’s requirements, according to people familiar with the matter, and Sharp’s components are expected to begin shipping soon.

Samsung, which is currently locked in patent litigation with Apple, also the manufacturer of Apple’s third-generation processor, the A5X, according to iFixit. (The Korean company has built prior Apple-designed chips used in mobile devices). The firm said it found markings on the chip that said it was manufactured by Samsung in the first week of this year.

The iFixit breakdown makes clear that most of the iPad's components aren't made in China, but instead in Japan, Taiwan and, yes, even the United States.  Those parts are then shipped to China for final assembly.  Thus, the actual value accruing to Chinese iPad "manufacturers" is pretty low, while the suppliers all over the world reap much larger shares of the assembly costs.

The WSJ goes on to explain that the total component costs for the new iPad are $309, while the retail price for the 16GB model is $629.  Assuming that a new iPad imported into the United States registers as a $309 import from China (even though, again, little of that $309 cost is actually created in China), that means that over half of the iPad's final sales price is profit - profit going straight to Apple's employees and shareholders.

Impressive.

Given these facts, it's clear that anyone - like this guy - lamenting that a "made in China" iPad or the US-China trade deficit is somehow indicative of the "death of US manufacturing" (or the need to "get tough" on Chinese trade practices) simply has no idea how the global economy actually works or how modern global supply chains have rendered many trade statistics completely worthless.

As I've repeatedly stated, many campaigning politicians continue to cite the US-China trade deficit as some sort of "proof" that China is eating our trade lunch, even though the iPod/iPhone/iPad examples and global supply chains more broadly have been widely reported for years now.  So, once again, either these politicians are utterly clueless or they're being completely disingenuous.

I guess it could be both.

Is The Obama Administration Really This Clueless About US Companies' Global Competitiveness? (UDATED)

In Sunday's Chicago Tribune, Caterpillar CEO Doug Oberhelman explained why his manufacturing powerhouse has no plans to expand business operations in its home state of Illinois.  The whole op-ed is worth reading, but here are the money grafs:

Despite the fact that we announced plans for dozens of new factories in the last few years and our United States workforce increased by more than 14,500 in the past 10 years, we haven't opened a new factory in Illinois in decades. Our Illinois workforce is at the same level it was 10 years ago. Caterpillar recently informed several Illinois communities that they are not in the running for a new factory we will build in the U.S., ultimately adding 1,400 jobs — work that's now done in Japan. In that case, logistics was a key factor, but even if it were not the case, when Caterpillar and most other companies look to locate a new factory in the U.S., Illinois is not in the running.

It doesn't have to be that way.

About 10 months ago I wrote a letter to Illinois political leaders expressing my hope that the state would undertake long-term, fundamental reforms so Illinois could compete for jobs and long-term business investment that drives growth.

To date, we haven't seen much change.

The governor's recent three-year projection of state revenue and spending proves that even with the income tax increase, Illinois has not done what is necessary to balance its budget. Major credit agencies have downgraded the state's bond rating. The state passed some changes to workers' compensation last spring, but it wasn't enough. Illinois will still be among the most expensive states in the nation for workers' compensation insurance. Our own comparison of workers' compensation costs showed Illinois was far more costly than neighboring Indiana, which is consistent with a comparative study by Oregon, which also shows Illinois is much more expensive than Indiana, Iowa and Kansas in workers' compensation insurance rates.

What's the solution? For starters, Illinois needs to adopt a long-term sustainable state budget that relieves pressures on taxpayers. Unlike some, I do not favor an early rollback of the temporary tax increases in Illinois; but they should expire as planned. Keeping the temporary tax increases in place for now gives the state time to develop a multiyear plan that balances the state budget. In addition, the state needs to dramatically lower workers' compensation costs. Some say these changes are not politically possible in Illinois. But if Illinoisans put pressure on both parties to make these types of improvements, I think the state can become a place that can successfully compete for business growth and new jobs.

Let me be clear. Caterpillar is not threatening to leave Illinois. Rather, we want to grow our presence here. For Illinois to really compete for new business investment and growth, the state must address these matters.

In short, high taxes, fiscal profligacy and bad regulation - not the absence of state subsidies or other taxpayer-funded "incentives" - prohibit Caterpillar from both locating new business operations in Illinois and remaining globally competitive (a critical issue for the export-dependent company).  Mr. Oberhelman was speaking about state-level policies, but the principles he describes apply equally to national policy.

Unfortunately, the Obama administration does not appear to understand these principles and is instead cluelessly pursuing the exact opposite course.  I've already explained repeatedly how existing US regulations - and new ones like ObamaCare - are doing a number on American businesses' ability to compete on the global stage, so I won't get into that again tonight. [UPDATE: Brand new - and totally depressing - stuff from The Economist on how the United States "is being suffocated by excessive and badly written regulation."]  Instead, I'd like to review the administration's brand new budget plans and their impact on American corporate competitiveness.

In short, it ain't pretty.

On tax policy, the budget keeps the United States' corporate tax rate at one of the highest levels in the world, even though pretty much every other industrialized economy has lowered their rates (charts courtesy of AEI's Jim Pethokoukis):

Pethokoukis cites to studies showing how high corporate tax rates lead to lower growth, and then explains that President Obama's budget not only retains our sky-high 35% stautory rate but also "raise the corporate tax burden by some $350 billion over ten years."  This insanity includes $30 billion in new taxes on oil & gas companies, even though they are fueling (pun intended) the current economic recovery and already pay a much higher effective tax rate than other US manufacturers:

Smart.  Meanwhile, our northern neighbor (and a major global competitor) Canada lowered its corporate tax rate again to a jealousy-inducing 15% on January 1, 2012, making Canada the #1 country in the world to do business, according to Forbes Magazine.  Congrats, Canada.  You big jerks.  (As I said, I'm jealous.)

Ok, well, sure, that's just tax policy.  I'm sure that those taxes are being well spent in the Obama budget and making sure that the United States house is totally in order, right?  Wrong (again via Pethokoukis, who's clearly been on a roll this week):

Pethokoukis concludes that the President's Budget "makes no effort to deal with Medicare, Medicaid, and Social Security — the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House(!) chart shows. It just goes up and up and up — until the heat death of the universe or the economy is struck by a Greek-style debt crisis."  Holy souvlaki, Jim!

So the Obama budget kills US companies on regulations, taxes and debt, but how does the administration propose to help them?  Targeted subsidies for US manufacturing, of course.  The administration's "Blueprint to Support U.S. Manufacturing Jobs, Discourage Outsourcing, and Encourage Insourcing" pays lip service to broader tax reform, but never once actually provides even a hint as to what such reform would look like. Instead, it just provides a laundry list of new tax subsidies for US manufacturers - including expanding "domestic production incentives," a new "Manufacturing Communities Tax Credit," and temporary tax credits for "domestic clean energy manufacturing."  (The plan also proposes - in tellingly vague fashion - to eliminate tax breaks for "shipping jobs overseas," but we all know what a political joke that is.)

Unfortunately, the administration's manufacturing blueprint - which continues the President's long-held preference for manufacturing - is just as misguided as their broader tax and fiscal plans.  As I've repeatedly noted, the prioritization and subsidization of US manufacturing over other sectors of the domestic economy (like our expanding and globally dominant services sector) is completely misguided, especially as some sort of "plan" to solve the country's high unemployment.

But, hey, don't take my word for it.  The former Chair of President Obama’s Council of Economic Advisers (Christina Romer) thinks the same thing, recently arguing in the New York Times that Obama's "singling out of manufacturing for special tax breaks and support" was wrongheaded because none of the primary rationales for subsidizing the American manufacturing sector - market failures, jobs or income distribution - actually holds any water.  She concludes:

AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

As I noted when Romer's op-ed first came out, smart people on the right and left might disagree about the solutions to our current mess, but at least we they all can agree that the solutions do not involve targeted subsidies for the US manufacturing sector.  If only Dr. Romer had explained this obvious fact to President Obama when his office was a just few doors down the hall.

When Caterpillar realizes that Illinois' tax, spending and regulatory policies prevent it from competing in the global economy, it can - and often does - choose to simply move its operations to a state with a better business environment.  Indeed, the migration of American companies from poorly-managed, debt-ridden states like Illinois and California to leaner, meaner states like Texas is well-established.  Unfortunately, those migrating businesses won't escape bad federal policies so easily.  And if President Obama and his team don't soon get their fiscal and regulatory acts together quickly, Caterpillar and others might not be moving South to Texas but instead heading North to Canada and thus out of the country altogether.

Global Corporate Tax Revenues Are a Total Laffer

The Economist points us to a rather telling chart about the amount of revenue (as a percentage of total GDP) that major industrialized nations collect from corporate taxes:

The story accompanying the chart makes two very important points.  First, they talk about the impact of global tax competition on corporate tax rates, and what happens in a modern, globalized economy if a typical nation tries to tax its way to revenue abundance:

Two countries stand out from the top of the table – Australia and Norway. Both have the benefit of natural resources and can thus get tax revenue from “captive” companies. Other countries have to compete to attract manufacturing and service companies; their take from the corporate sector thus hovers between 2-4% of GDP. America is at the bottom of the range, although its tax take from this area is not as exceptional as for consumption. (An important caveat is that total tax revenue in the US is around 10 percentage points below the OECD average, so one would expect it to lag behind in individual categories.) Some will cite this table as an argument for taxing profits more heavily, by closing loopholes and eliminating tax breaks. The counter-argument is that companies have three options: to pass on the taxes in the form of higher prices; to offset the effect on their margins by employing fewer workers, or paying existing workers lower wages; or by moving to a more tax-friendly domicile.

In short, if a nation raises corporate taxes on "non-captive" manufacturing and service industries, the victimized companies will eventually just leave (and take their jobs and revenues with them).  And I'd be remiss to not mention the embarrassing little fact that the United States has the highest statutory (and effective) tax rate in the industrialized world:

It is simply unfathomable that this chart has nothing to do with the first chart, wouldn't you agree?  But hey:  We're number 1!  We're number... oh, wait.

Second, and on a very related point, the Economist highlights the extreme fallacy that global tax competition starves national budgets of sweet, sweet tax revenue:

Note, by the way, that there is a big difference between tax rates and tax take. The French complain about unfair tax competition from the Irish (the latter have a 12.5% rate) but the Irish actually get a higher proportion of their GDP in tax revenue than the French. And note also that there may not be scope to raise huge amounts from this area, unless you are as lucky as the Norwegians. Even if America were to move to the OECD average, that would only boost the tax take by around 1% of GDP, when the deficit is in double digits.

So much for the pervasive argument from those on the left that America's insane budget problems can be solved by just taxing evil corporations (and rich people), eh?  But here I'm a little confused: despite the great data showing that (i) global tax competition can have dire revenue consequences for countries with itchy taxing fingers; and (ii) lower corporate tax jurisdictions often raise higher amounts of total revenue, not once does the Economist mention the Laffer curve, which posits that higher taxes can (i) reduce work effort, (ii) cause other inefficient distortions, and (iii) reduce the size of the tax base (thus often reducing total tax revenues).  A generic representation of the Laffer curve is as follows:

Higher taxes can cause individual taxpayers to slack off or figure out ways to report less taxable income.  But most people don't make life decisions based only on tax rates, and only the wealthiest folks can up and leave a high-tax jurisdiction (at the national level, that is - New Jersey and Maryland, among others, are losing millionaires by the yacht-load).  Thus, the "tax elasticity" in the individual case is less severe.  Corporations, on the other hand, are far more rational (i.e., driven by the bottom line) and mobile, and they therefore can, and often do, vote with their feet.  The Economist's data make these facts abundantly clear (as do myriad studies on corporate taxes in a modern globalized economy).

I'll leave it to others to question why the Economist didn't bring up the Laffer curve when the evidence so strongly points to it.  Instead, I just have one, more pointed closing question:  Why on earth does the United States have such ridiculously high corporate tax rates?  Is it because we just have too many darn jobs and too much economic growth?  Or is our economy just too darn competitive?

Or is awful ideology standing in the way of obvious and much needed tax reform?

I think the answer there is as obvious as the charts above.

Mankiw: You Don't "Win the Future"

Greg Mankiw has a great op-ed in tomorrow's NYT about the wrongheadedness of trying to "win the future," as President Obama challenged us to do in his State of the Union Address.  Mankiw hits on several of the fundamental issues that I've discussed here, including the President's continued - and misguided - adherence to what I call "adversary economics."  I highly recommend the whole thing.  Here's a sample:

[C]alling on Americans to “win the future” misleads us about the nature of the policy choices ahead. Achieving economic prosperity is not like winning a game, and guiding an economy is not like managing a sports team.

To see why, let’s start with a basic economic transaction. You have a driveway covered in snow and would be willing to pay $40 to have it shoveled. The boy next door can do it in two hours, or he can spend that time playing on his Xbox, an activity he values at $20. The solution is obvious: You offer him $30 to shovel your drive, and he happily agrees.

The key here is that everyone gains from trade. By buying something for $30 that you value at $40, you get $10 of what economists call “consumer surplus.” Similarly, your young neighbor gets $10 of “producer surplus,” because he earns $30 of income by incurring only $20 of cost. Unlike a sports contest, which by necessity has a winner and a loser, a voluntary economic transaction between consenting consumers and producers typically benefits both parties.

This example is not as special as it might seem. The gains from trade would be much the same if your neighbor were manufacturing a good — knitting you a scarf, for example — rather than performing a service. And it would be much the same if, instead of living next door, he was several thousand miles away, say, in Shanghai.

Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense....

The president is right that we should encourage a greater number of highly educated foreigners to migrate here. Because skilled workers pay more in taxes than they receive in government benefits, increasing their supply would reduce the fiscal burden on the rest of us. But if these foreign students decide to return home, as many do, we shouldn’t worry that they are competing against us.

Instead, we should view higher education in the United States as one of our most successful export industries. The United States has 5 percent of the world’s population but most of the best universities. Is it any wonder that students from many nations flock here to learn? And as they do so, they create opportunities for Americans — from the professors who teach the classes to the grounds crews who maintain the campuses.

When the foreign students head home, they take the human capital acquired here to become productive members of their own communities. They spread up-to-date knowledge, so it can foster prosperity everywhere. Some of this knowledge is technological. Some of it concerns business, legal and medical practices. And some is even more fundamental, such as the values of democracy and individual liberty. Nothing could be better for the United States than these thousands of American-trained ambassadors who have seen at first hand the benefits of a free and open society.

Good stuff.

Politicians' Misguided Reliance on Conventional Trade Statistics, part 47

One of this blog's many non-monkey-related themes has been the realization that 21st century global supply chains have rendered conventional trade statistics like the trade balance wholly unreliable indicators of the efficacy of current trade policy.  Economist Mark Perry points us to yet further proof of this fact from a fascinating article in yesterday's WSJ about a new study on the origins of the iPhone and its impact on the US-China trade deficit.  The WSJ story also hits on the political implications of this important research (emphasis mine):

One widely touted solution for current U.S. economic woes is for America to come up with more of the high-tech gadgets that the rest of the world craves.

Yet two academic researchers estimate that Apple Inc.'s iPhone—one of the best-selling U.S. technology products—actually added $1.9 billion to the U.S. trade deficit with China last year.

How is this possible? The researchers say traditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design, manufacturing and assembly of products often involve several countries.

"A distorted picture" is the result, they say, one that exaggerates trade imbalances between nations.

Trade statistics in both countries consider the iPhone a Chinese export to the U.S., even though it is entirely designed and owned by a U.S. company, and is made largely of parts produced in several Asian and European countries. China's contribution is the last step—assembling and shipping the phones.

So the entire $178.96 estimated wholesale cost of the shipped phone is credited to China, even though the value of the work performed by the Chinese workers at Hon Hai Precision Industry Co. accounts for just 3.6%, or $6.50, of the total, the researchers calculated in a report published this month....

The result is that according to official statistics, "even high-tech products invented by U.S. companies will not increase U.S. exports," write Yuqing Xing and Neal Detert, two researchers at the Asian Development Bank Institute, a think tank in Tokyo, in their report.

This isn't a problem with high-tech products, but with how exports and imports are measured, they say.

The research adds to a growing debate about traditional trade statistics that could have real-world consequences. Conventional trade figures are the basis for political battles waging in Washington and Brussels over what to do about China's currency policies and its allegedly unfair trading practices....

 

Breaking down imports and exports in terms of the value-added from different countries can lead to some controversial conclusions. Some U.S. lawmakers, for instance, argue China needs to let its currency rise significantly against the U.S. dollar in order to reduce the trade gap between the two nations. 

The value-added approach, in fact, shows that sales of the iPhone are adding to the U.S. economy—rather than subtracting from it, as the traditional approach would imply.

Based on U.S. sales of 11.3 million iPhones in 2009, the researchers estimate Chinese iPhone exports at $2.02 billion. After deducting $121.5 million in Chinese imports for parts produced by U.S. firms such as chip maker Broadcom Corp., they arrive at the figure of the $1.9 billion Chinese trade surplus—and U.S. trade deficit—in iPhones.

If China was credited with producing only its portion of the value of an iPhone, its exports to the U.S. for the same amount of iPhones would be a U.S. trade surplus of $48.1 million, after accounting for the parts U.S. firms contribute....

The latest results are broadly similar to analyses made by the Personal Computing Industry Center at the University of California, Irvine, of the trade and manufacture of another Apple product, the iPod. That research also found that Chinese labor accounted for only a few dollars of the iPod's value, even though trade statistics credited China with producing its full value....

Awesome.  The new study is available here, and it adds to a growing number of studies which show, as I've chronicled extensively over the last two years, that globalization - in particular global supply chains, multinational specialization, cross-border investment and realtime logistics - has rendered old school trade stats increasingly worthless for everything except raw materials/foodstuffs and the most basic industrial goods.  This latest work is especially cool because it shows that the United States derives almost twice as much as China from the actual manufacturing of the iPhone - a little tidbit that should quell some (misguided) criticisms of an earlier iPhone study which showed that, of the iPhone's $600 retail price, the United States derived $360 "only" from services (design, engineering, marketing) and profit, as opposed to manufacturing. (China got only $6.54 for assembly.)

Unfortunately, as the WSJ article mentions, many American politicians and so-called "experts" still rely on these obsolete data, in particular bilateral trade balances, to justify their trade policy demands, whether it be for Chinese currency appreciation or solving global "imbalances" or any other policy prescription that could have massive ramifications for the global economy and, in many cases, create serious new conflicts with some of our largest trading partners.  For example, on the same day that the WSJ published this story, Sen. Ron Wyden (D-OR) released a new "report" breathlessly complaining about evil Chinese "green" protectionism and demanding that the Obama administration take action to "combat" China's policies.  And Wyden's only proof of foul play?  Yep, the US-China trade deficit in green goods:

“It has become clear to me that China’s aggressive and targeted industrial policies are giving its producers and exporters of green goods an unfair leg up on the competition, so much so that our green good trade deficit with China grew even while our overall trade deficit in these products shrank,” Wyden said, Chair of the Senate Finance Committee’s Subcommittee in International Trade. “Even in a good year, American workers and producers in Europe and Japan are falling prey to what appear to be unfair practices employed by China. A unified approach is needed to combat these challenges and I urge Ambassador Kirk and Secretary Locke to make clear to China that the U.S. places a high premium on a fair market for green goods.”

The report shows that the U.S. trade deficit with China in green goods grew by almost 60 percent, to $954 million in 2010, even as the U.S. green goods trade deficit with other countries shrank. The report also shows that the U.S. exported more green goods in 2010 than at any time in the previous five years. Despite this growth, U.S. exporters continue to lose market share to the Chinese in the biggest and fastest growing markets.

So to recap: on the same day that the nation's most-read newspaper published a big story about how global supply chains have (i) completely ruined conventional statistics on trade in high-tech goods and (ii) seriously undermined policies based on said data, Sen. Wyden released a new report advocating a fight with America's second-biggest trading partner based solely on the very trade stats that the WSJ article has just debunked.

You simply cannot make this stuff up.  And it's just further proof that in the 21st century, using the trade deficit to plan US trade policy makes about as much sense as using astrology to plan your retirement.  It might've been what they did in the old'n days, and it might've even worked for a few people, but it sure as heck ain't the best way to ensure a reasonable return on your investment.

All humor aside, this little coincidence also raises a very serious point.  Since the original 2007 UC-Irvine study on the iPod and global supply chains, there have been many scholarly analyses revealing the obsolescence of conventional trade statistics like the US-China trade balance.  Cato's Dan Ikenson has written several very good policy papers on this issue (including one we co-authored back in 2009); smart, widely-read bloggers like Mark Perry (and, to a much lesser extent, your humble correspondent) have repeatedly highlighted this important work; and newspapers like the WSJ and NYT have reported on the issue several times over the last few years.  So, while the ADB's new iPhone study is certainly interesting and worth noting, it's not like it's really groundbreaking stuff.  These issues have been widely-known, even in the mainstream press, for several years now.

Yet politicians like Sen. Wyden (and trust me, he's not alone) still rely on the trade deficit as some sort of accurate barometer for US and global trade policy.  Indeed, the statistic is often the only basis for their calls for greater protectionism or more aggressive unilateral/multilateral trade "enforcement" actions - things that would dramatically alter, if not implode, the global economy.  At some point, mustn't we ask whether our duly-elected representatives are acting not out of somewhat-humorous ignorance, but instead out of willful and pernicious blindness to the realities of globalization and the dangerous implications of their mind-numbingly absurd plans?  I mean, at some point, don't we have to stop giving Wyden and his cohorts the benefit of the doubt and start demanding that they immediately cease and desist with the silly, dangerous trade deficit demagoguery? 

Seems like a no-brainer to me.

Sunday Quick Hits

Lots going on over the last week, and I'm traveling today, so let's just get right to it:

• Economist Ray Fair explains in detail why he believes that RMB appreciation will be a net negative for the US economy.

• Ever wonder why so many politicians campaign with impunity against free trade in Democrat primaries?  Well, this fun new survey suggests that they're just playing to their target audience. (Snicker snicker.)

• Chinese officials assert that American legislation (or administrative action) to attack China's currency policies through US anti-subsidy laws would violate WTO rules.  As I've already noted, they are probably right.

• In one quick little blog post, Paul Krugman finally admits that (a) he doesn't understand global trade rules; and (b) he just doesn't care about them.  Krugman disregarding the rule of law?  Shocking, I know!  Of course, he could've read this helpful blog entry and saved himself the embarrassment.

• The Bush Institute's Jim Glassman hosts an interesting video debate on "Doubling Exports - Rhetoric or Reeality?" between Cato's Dan Ikenson and Public Citizen's Lori Wallach.

• Speaking of Ikenson, he provides the "Charts of the Week" - maybe even the month - which clearly and concisely demonstrate just how critical import competition is for American families and businesses.

• And then Ikenson's colleague Dan Griswold unpacks the most recent US trade data to explain how - assuming you're a sane, apolitical person (I know, I know) - the stats argue against attacking China's currency.

• More on ObamaCare and America's global competitiveness: here's a handy listing of all the US companies that have announced tax hits (and the amount of the hit) because of the new US healthcare law.  Ouch.

• The Peterson Institute's Gary Hufabauer and Theodore Moran explain how the recently-passed American Jobs and Closing Tax Loopholes Act will destroy American jobs and hobble US exports.  They show that the legislation's "tax measures would cost $14 billion over 10 years for the foreign operations of US-based multinational corporations."  Awful.

• And speaking of awful American fiscal policy, Art Laffer explains how the seemingly-inevitable tax increases in 2011 (when the Bush tax cuts expire) will crush any US economic recovery, while Mark Calabria shows that Obamanomics is already doing a number on the struggling US labor market.  Oh, goody.

• Finally, the Atlas Institute's Tom Palmer explains free trade in under 3 minutes in the following video.  A little basic for readers of this blog, but a nice thing to share with family/friends who don't obsess about this stuff like I do.

ObamaCare and America's Global Competitiveness

As part of my ongoing examination of the effects of American healthcare "reform" (aka ObamaCare) on the United States' global economic competitiveness comes this interesting news out of Raleigh, North Carolina:

Blue Cross and Blue Shield of North Carolina is testing a plan that would outsource some information technology work to India.

The state's largest health insurer is looking for ways to reduce costs as the recession has slowed membership growth and health reform looms. This week, Blue Cross started a "small pilot project" with Keane, a Boston-based information technology firm, to extract and analyze data from the insurer's massive electronic repository. Some of the work will likely be handled at a Keane facility in India, said Blue Cross spokesman Lew Borman.

"It does not affect any current jobs, but I can't speak to down the road," Borman said. "We're looking at a variety of ways to operate more efficiently and keep premiums affordable. It's about costs and cost savings for North Carolinians."...

Outsourcing or offshoring has been a trend in corporate America for years, but has come under fire from lawmakers and other critics as unemployment remains stubbornly high. When any company does it for the first time, there's the potential for a backlash from consumers and others, said Jim Johnson, a professor of strategy and entrepreneurship at UNC's Kenan-Flagler Business School....

[H]ealth reform is forcing many medical companies to find ways to cut costs, Johnson said. Reform will also bring a host of data-management challenges. Last year's federal stimulus bill included billions of dollars to entice physicians, hospitals and others to adopt electronic medical records, which can improve efficiency and reduce errors.

As some companies hire outside firms to handle that work, they have to look to global information technology providers with operations in cheaper countries. "The cost differential is just too wide," Johnson said....

What's most interesting about this news is that, unlike those billions in new tax costs that US companies were forced to incur (and report) after ObamaCare became law, the moves by BCBS are not in response to actual higher costs, but only the threat of such costs in the future.  Yet each demonstrates a clear pattern: ObamaCare is placing more artificial burdens on American companies and workers - already some of the most heavily burdened in the world.  These tax and regulatory burdens reduce America's global competitiveness and, where those costs outweigh the benefits of staying onshore (i.e., the "tipping point"), companies and/or jobs are forced offshore.

Of course, one of the biggest criticisms of the US healthcare "reform" legislation was that it would actually increase costs for health insurers and American businesses, so BCBS' response here is totally and utterly expected - it's what good businesses do to, you know, stay in business.  Nevertheless, you really must wonder how many other insurers and other companies are already researching and or/employing similar cost-saving measures in order to absorb ObamaCare's current or future burdens and remain operational. 

And it's all to the detriment of American companies, workers and the overall economy.

Protectionists Cling To Their Atari 2600s While The Rest Of The World Plays Wii

There's a fantastic op-ed in today's Korea Times by Cato Institute expert (and co-author) Dan Ikenson and the International Policy Network's Alec van Gelder on the archaic folly that is protectionism in today's globalized economy.  In the piece, Ikenson and van Gelder use examples of actual multinational manufacturing processes to inform G20 leaders on why protectionism is nonsensical in an era of global supply chains (read the whole thing here):

...  To quell the anger and gain a constructive focus in Pittsburgh, leaders must recognize how outdated it is to view the world in terms of ``us" versus ``them." A crash course on the global economy is in order.

The largest "American" steel producer is the majority-Indian-owned Arcelor-Mittal, which has headquarters in Luxembourg and Hong Kong, and is listed on the New York Stock Exchange and five European stock exchanges.

The largest "German" producer, Thyssen-Krupp, a conglomerate with 670 companies worldwide, is investing $3.7 billion in a carbon and stainless steel factory in Alabama, which will create 2,700 permanent jobs there.

California's steel industry consists almost entirely of rolling mill operations that process imported carbon steel slabs from Brazil, Russia and other countries.

The Californian finished products are disqualified from President Obama's Buy American procurement rules for failing to meet the statutory definition of American-made steel. This illustrates the impossibility, futility and harm of attempting to define producers by national characteristics.

Today, the factory floor is no longer contained within four walls, one roof and national borders. Instead, the factory floor spans the globe, allowing firms to optimize investment and output decisions by matching production, assembly and other functions to the locations best suited for those activities.

Nokia is a Finnish brand but produces most of its components and performs most of its assembly in other countries.

Lenovo is a worldwide Chinese computer brand, but it maintains headquarters in Singapore and the U.S., operates research centres in the U.S. and Japan, and assembles products in India, Mexico, Poland and China.

Apple's ubiquitous iPods are designed in labs in California then assembled in China, drawing on labor and components from South Korea, Taiwan, Singapore and Japan.

This is true not only for big business but many of the goods now considered essential to our daily lives ― from roses to screws to coffee. ...

This global factory has changed the old ``us versus them" characterization of international trade for good ― and for the good.

Trade is increasingly the process of importing a good, adding value to it, and then exporting it to another producer further down the production chain. These complicated production and supply chains rely upon the rapid flow of goods and services across borders....

Banning containerized shipping (perhaps the most important technique in 20th-century trade) or broadband Internet connections (which have paved the way for millions of call-center jobs) would clearly be ridiculed.

Yet, it is equally ludicrous for governments to promote ``temporary" tariffs to shelter ``domestic" industries, or subsidies for ``local" producers, or ``environmental" regulations that would hobble foreign competitors.

World leaders need to understand this in time for Pittsburgh. The only real stimulus the global economy needs is to continue the reforms that have guided the past 30 years of unprecedented global expansion: reduce trade barriers and remove the regulations and administrative burdens that prevent people from maximizing their potential in the global economy.

Gone are the days when the United States could "punish" another country or "help" an American company by slapping tariffs on foreign imports.  To put it simply: now that everything is made everywhere, protectionism just doesn't make sense anymore (although one could reasonably argue that it never made sense, but that's an issue for another time).  Such senselessness was certainly evident in the President's recent decision to restrict Chinese tires under "Section 421" of US trade law.  Because most US tire producers also made tires in foreign countries (including China), the "protected" actually opposed the "protection." Crazy, huh?

Of course, even though protectionism has become archaic and pointless doesn't mean that it can't still be extremely costly.  Today's WSJ has a great piece highlighting these costs and the utter silliness of trade barriers in an age of "global factories."  In the article, the author describes the absolutely ridiculous (and expensive) lengths that Ford Motor Company goes through to avoid a decades-old 25% tariff on all imports of trucks and commercial vans entering the United States:

Several times a month, Transit Connect vans from a Ford Motor Co. factory in Turkey roll off a ship here shiny and new, rear side windows gleaming, back seats firmly bolted to the floor.

Their first stop in America is a low-slung, brick warehouse where those same windows, never squeegeed at a gas station, and seats, never touched by human backsides, are promptly ripped out.

The fabric is shredded, the steel parts are broken down, and everything is sent off along with the glass to be recycled. ...

The seats and windows are but dressing to help Ford navigate the wreckage of a 46-year-old trade spat. In the early 1960s, Europe put high tariffs on imported chicken, taking aim at rising U.S. sales to West Germany. President Johnson retaliated in 1963, in part by targeting German-made Volkswagens with a tax on imports of foreign-made trucks and commercial vans.

The 1960s went the way of love beads and sitar records, but the chicken tax never died. Europe still has a tariff on imports of U.S. chicken, and the U.S. still hits delivery vans imported from overseas with a 25% tariff. American companies have to pay, too, which puts Ford in the weird position of circumventing U.S. trade rules that for years have protected U.S. auto makers' market for trucks....

Foreign auto makers have long crossed swords with the chicken tax. Toyota Motor Corp., Nissan Motor Co. and Honda Motor Co. took the straightforward route and built plants in the U.S. ...

With the globalization of the auto industry, American companies have joined the game. Until recently, Chrysler Group LLC imported Dodge Sprinter vans made in Düsseldorf, Germany, by former owner Daimler AG. The engine, transmission, axles and wheels were removed, allowing the truck bodies to cross the border as auto components, which aren't subject to the tax. Daimler then reassembled the vehicles at a factory in Ladson, S.C....

The [Ford] vans leave Turkey on cargo ships owned by Wallenius Wilhelmsen Logistics. Once they arrive in Baltimore, they are driven into a warehouse, where 65 workers from the shipping company's WWL Vehicle Services Americas Inc. convert them into commercial vehicles amid the blare of rock music and the whirring of industrial fans.

On a recent afternoon, a handful of vans passed through the warehouse unmolested as passenger wagons. But the vast majority were lined up to have windows pulled out, and they all had their rear seats removed....

The story is a remarkable, and likely common, example of the perverse business decisions that multinational corporations make in order to provide consumers with the best and most affordable products possible - an absolute necessity in an increasingly competitive and global market for most products.  Unfortunately, it's also a prime example of the damage that protectionism inflicts upon US businesses and consumers, as well as the economy as a whole:

• First, while these Ford trucks are no doubt cheaper because of the company's sneaky move to avoid the 25% tariff, they're also undoubtedly more expensive than they would be in the tariff's absence.  As such, American businesses must pay more for their (fitted-then-gutted) vans and trucks, and they pass these costs on to the consumer or absorb them, leaving less capital for expansion, investment and hiring.  As such, the truck tariff is a large, but mostly hidden, tax on US businesses and consumers.

• Second, the 25% tariffs force a huge misallocation of finite resources, thus making both Ford and the overall US economy worse off.  Ford is wasting money, manpower, raw materials and energy in order to equip trucks with seats and windows and then gut them once they clear Customs.  It's not difficult to think of ways that Ford could better allocate these resources, to the benefit of the company, its shareholders and employees, and the overall American economy.

So to recap: in today's global economy, protectionism is simplistic, outdated and pointless.  It's the functional equivalent of playing Pong on a black-and-white TV (minus the retro-hipster coolness) while everyone else is playing Tiger Woods 10 on their 50" HDTV.

Only one very important difference, of course: protectionism is really, really expensive.