ADBI Working Paper Series How the iPhone Widens the United States Trade Deficit with the Peoples Republic of China Yuqing Xing and Neal Detert No. 257 December 2010 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBIs working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. Suggested citation: Xing, Y., and N. Detert. 2010. How the iPhone Widens the United States Trade Deficit with the Peoples Republic of China. ADBI Working Paper 257. Tokyo: Asian Development Bank Institute. Available: http:/www.adbi.org/working- paper/2010/12/14/4236.iphone.widens.us.trade.deficit.prc/ Please contact the author(s) for information about this paper. Email: yuqing_xinggrips.ac.jp Yuqing Xing was a visiting researcher at the Asian Development Bank Institute from February 2010 to September 2010 and is currently professor of economics at the National Graduate Institute for Policy Studies in Tokyo. Neal Detert was a research associate at the Asian Development Bank Institute from July 2008 to July 2010. The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of ADBI, the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: infoadbi.org 2010 Asian Development Bank Institute ADBI Working Paper 257 Xing and Detert Abstract In this paper, we use the iPhone as a case to show that even high-tech products invented by United States (US) companies will not increase US exports, but on the contrary exacerbate the US trade deficit. The iPhone contributed US$1.9 billion to the US trade deficit with the Peoples Republic of China (PRC). Unprecedented globalization, well organized global production networks, repaid development of cross-country production fragmentation, and low transportation costs all contributed to rational firms such as Apple making business decisions that contributed directly to the US trade deficit reduction. Global production networks and highly specialized production processes apparently reverse trade patterns: developing countries such as the PRC export high-tech goodslike the iPhonewhile industrialized countries such as the US import the high-tech goods they themselves invented. In addition, conventional trade statistics greatly inflate bilateral trade deficits between a country used as export-platform by multinational firms and its destination countries. JEL Classification: F1 ADBI Working Paper 257 Xing and Detert Contents 1. Introduction . 3 2. How iPhones are Produced . 3 3. iPhones and US Trade Deficits with the PRC . 4 4. iPhone Production and the Appreciation of the Yuan and Other Asian Currencies . 6 5. Could the iPhone be Assembled in the US? . 8 6. Concluding Remarks . 9 References . 10 ADBI Working Paper 257 Xing and Detert 3 1. INTRODUCTION At the center of global imbalances is the bilateral trade imbalance between the Peoples Republic of China (PRC) and the United States (US). Most attention to date has been focused on macro factors, such as low savings in the US, insufficient domestic consumption in the PRC, and the PRCs exchange rate regime. A sharp appreciation of the PRC yuan, it has been argued, is an effective means of mitigating the Sino-US bilateral trade imbalance. Little attention, however, has been paid to the structural factors of economies and global production networks that have transformed conventional trade patterns and the way we look at trade statistics, particularly in calculating the value-added component of traded goods and differentiating between processed and ordinary exports. In this paper, we attempt to explore the effects of some of these factors and attempt to s