Is Buying an iPod Un-American?
We own three iPods at my house, including a recently purchased iPod Touch. Since many of the iPod parts are made abroad, is my family guilty of allowing our consumer spending to “leak” abroad, depriving the American economy of the consumer stimulus we are told it so desperately needs? If you believe the “Buy American” lectures and legislation coming out of Washington, the answer must be yes.
Our friends at ReasonTV have just posted a brilliant video short, “Is Your iPod Unpatriotic?” With government requiring its contractors to buy American-made steel, iron, and manufactured products, is it only a matter of time before the iPod—“Assembled in China,” of all places—comes under scrutiny? You can view the video here:
In my upcoming Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, I talk about how American companies are moving to the upper regions of the “smiley curve.” The smiley curve is a way of thinking about global supply chains where Americans reap the most value at the beginning and the end of the production process while China and other low-wage countries perform the low-value assembly in the middle. In the book, I hold up our family’s iPods as an example of the unappreciated benefits of a more globalized American economy:
The lesson of the smiley curve was brought home to me after a recent Christmas when I was admiring my two teen-age sons’ new iPod Nanos. Inscribed on the back was the telling label, “Designed by Apple in California. Assembled in China.” To the skeptics of trade, an imported Nano only adds to our disturbingly large bilateral trade deficit with China in “advanced technology products,” but here in the palm of a teenager’s hand was a perfect symbol of the win-win nature of our trade with China.
Assembling iPods obviously creates jobs for Chinese workers, jobs that probably pay higher-than-average wages in that country even though they labor in the lowest regions of the smiley curve. But Americans benefit even more from the deal. A team of economists from the Paul Merage School of Business at the University of California-Irvine applied the smiley curve to a typical $299 iPod and found just what you might suspect: Americans reap most of the value from its production. Although assembled in China, an American company supplies the processing chips, a Korean company the memory chip, and Japanese companies the hard drive and display screen. According to the authors, “The value added to the product through assembly in China is probably a few dollars at most.”
The biggest winner? Apple and its distributors. Standing atop the value chain, Apple reaps $80 in profit for each unit sold—an amount higher than the cost of any single component. Its distributors, on the opposite high end of the smiley curve, make another $75. And of course, American owners of the more than 100 million iPods sold since 2001—my teen-age sons included—pocket far more enjoyment from the devices than the Chinese workers who assembled them.
To learn a whole lot more about how American middle-class families benefit from trade and globalization, you can now pre-order the book at Amazon.com.
Springtime for U.S. Trade Policy?
In a Cato paper to be released on April 28 (here’s a link to related policy forum), Scott Lincicome and I explain how President Obama can help restore the pro-trade consensus in America. “How?” is one question, but a skeptic might also ask: Why would the president want to do that given his anti-trade campaign rhetoric and the preferences of many fellow Democrats in Congress for a moratorium on trade liberalization and a focus on enforcement?
The answer is quite simple: we believe the president understands the importance of both trade and U.S. trade leadership to the broader objectives of economic growth and good will among nations. Since he is inevitably going to alienate some of the constituencies who helped get him elected by embracing trade openness, he could be forgiven for his perceived apostasy if he can articulate his rationale convincingly.
The most comprehensive and convincing articulation would begin with the moral case for free trade: that every American has the right to transact with whomever he chooses, regardless of the nationality or location of the other party. Voluntary exchange between consenting parties is inherently fair, while government coercion in that process on behalf of some citizens at the expense of others is inherently unfair, inefficient, and subversive of the rule of law. We are not holding our breath that this president will make this principled case for free trade. But his articulation of other pro-trade arguments, after so many years of hyperbole, myth-making and fear-mongering from his colleagues on Capitol Hill, could go a long way toward correcting and reversing Americans’ artificially-induced aversion to trade.
Why are we so sure that President Obama is going to embrace trade openness? Well, we’re not so sure, but it’s more than a hunch. Here are two broad reasons:
First, like all presidents in the modern era, Obama takes a national perspective on economic matters, and not a local or regional perspective, as most members of Congress do. Unlike a candidate or a member of the opposition party in Congress who is free to criticize the incumbent administration’s policy errors without having to seriously consider the pros and cons of the alternatives, the president has to concern himself with the consequences of policy changes. It’s potentially his mess to clean up. As a senator and presidential candidate, Obama promised to aggressively pursue remedies to China’s alleged currency manipulation. As president, Obama declined to act accordingly when given the explicit opportunity, knowing that provocation in that regard would inject more uncertainty into financial markets and could spark retaliation. A protectionist measure that briefly benefits producers in Illinois (which is why a Senator Obama might support it) could have consequences that penalize an array of interests across the country (which is why a President Obama might oppose it).
Second, President Obama—like all Democratic and Republican presidents in the post-WWII era—sees trade policy as a tool of foreign policy. And from his early trips abroad, Obama has learned that to many countries around the world, U.S. trade policy is the most consequential aspect of U.S. foreign policy. So a president who appears determined to repair the damage caused by eight years of unilateralist foreign policy can only embrace trade openness.
In our paper, Scott and I present several other reasons why we are “audaciously hopeful” that the president will help restore the pro-trade consensus. But some nascent support for our audacity can be found in the following examples:
1. President Obama spoke out against the protectionist Buy American provisions in the original “stimulus” package, and Congress subsequently removed its most egregiously protectionist aspects.
2. The president has encouraged Congress to resolve the Mexican trucking ban and bring the United States into compliance with its NAFTA commitments.
3. The Obama Treasury declined to label China a currency manipulator in its first semi-annual report on the topic
4. The president informed Mexican president Calderon last week that he did not think NAFTA would need to be reopened—contrary to his campaign rhetoric.
5. The president said as much to Canadian PM Stephen Harper back in February.
6. There are increasing signs of interest and promise from the White House and Congress that the long-frozen bilateral trade agreements with Colombia, Panama, and South Korea could start moving soon.
The pro-trade environment is not certain, and it could be fleeting, but there’s a case to be made that it’s not as dire as some predicted it would be. If the president intends to facilitate a liberal trade agenda, he should start laying the groundwork with strong pro-trade arguments now.
The Chinese Currency Issue Is No Longer
In its first statutory, semi-annual report on foreign currency practices, the Obama Treasury Department refrained from designating China a “currency manipulator,” further affirming the view that an aggressive, sticks-only approach to the bilateral trade relationship advocated (mostly) by campaigning politicians is simply untenable. After serving more than 5 years as a great source of bilateral trade tension, the Chinese currency issue is dead.
Senator Obama and presidential candidate Obama both talked tough about Chinese currency practices, identifying an undervalued yuan as a source of unfairness to U.S. producers and an important cause of the bilateral trade imbalance. Treasury Secretary-designate Geithner, during his confirmation hearing in January, reiterated President Obama’s commitment to dealing with the issue before the Senate Finance Committee:
President Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency. President Obama has pledged as President to use aggressively all the diplomatic avenues open to him to seek change in China’s currency practices. While in the U.S. Senate he cosponsored tough legislation to overhaul the U.S. process for determining currency manipulation and authorizing new enforcement measures so countries like China cannot continue to get a free pass for undermining fair trade principles.
Those who relied on hyped-up media accounts of Geithner’s testimony, which generally homed in on the terms “aggressively,” “tough,” and “enforcement” in the above passage to imply that Obama would take action against China on this matter, are probably utterly surprised that Treasury balked yesterday. But those who read the rest of Geithner’s response to the question may have noticed this broad canvas for inaction:
The question is how and when to broach the subject in order to do more good than harm. The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.
Those last two sentences of Geithner’s response contained the answer—nearly three months beforehand—to the question of whether Treasury would label China a manipulator. And, taken in its entirety, the response is a perfect summation of the distinctions between criticizing policy as a challenger and being responsible for policy as the guy in charge. You can talk tough as a challenger because you don’t have to account for the consequences of your actions. But when you are responsible for the consequences of potentially incendiary policy changes, circumspection is a rediscovered virtue.
As President Obama knows by now, the consequences of simply labeling China a “currency manipulator” (let alone attempting to do something remedial about it) would undermine broader U.S.-China relations, invite recriminations, inspire potentially adverse policy changes in China, and would inject heaps of uncertainty into global currency and financial markets. Besides, as yesterday’s Treasury report concludes, the yuan continues to appreciate against the dollar, the government’s accumulation of foreign reserves has decelerated, and policies are in place to encourage greater domestic consumption in China and to reduce the economy’s reliance on exports.
I remain hopeful that this distinction between Obama the president and Obama the candidate will become and remain evident in U.S. trade policy more broadly.
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