How The iPhone Figures In The U.S.-China Trade Gap

Trade will be one of the big issues when President Obama and Chinese President Hu Jintao sit down to talk this week. The U.S. trade deficit with China is large and growing. But the numbers don't tell the whole story.

The Apple iPhone is an iconic American product, invented, designed and sold by a California company. But when trade figures are tallied, the iPhone is counted as a Chinese import. That means every iPhone sold here makes the U.S. trade deficit with China grow.

The iPhone is made up of hundreds of individual parts. Those components are made in the U.S., South Korea, Japan and many other places. But they are assembled into an iPhone in a factory in China.

Few if any of the important parts are actually made in China, but when the U.S. counts imports, it uses the fully assembled wholesale value of a product.

Mark Doms, the chief economist at the Commerce Department, acknowledges this approach has limitations but says there really isn't any other way to do it. "There's really no practical way to ask companies to break out the value of the goods by country of origin for all the individual components," he says. "That just isn't very feasible."

Instead, the total wholesale value of the iPhone — for the 3G model it was about $180 — goes on the Chinese import side of the trade ledger. As a result, says economist Rob Feenstra of the University of California, Davis, "The U.S. trade deficit with China tends to be exaggerated."

Right now that annual trade deficit is more than $275 billion. How much of it can be traced to the iPhone?

In a much-talked-about paper, Chinese economist Yuqing Xing took a stab at the figure. "If you look at the manufacturing costs, China's contribution is $6.50."

He says that figure represents the actual cost of assembling each iPhone. And he concludes that if that number were used instead of the entire wholesale cost, the U.S. trade deficit with China would shrink by roughly $2 billion.

Some economists dispute his figures, but there's little doubt that the real trade deficit with China is less than the number that shows up in the headlines.

Doms acknowledges that but adds that even if you strip away the inflated value of some Chinese imports, it won't change the fundamental fact: The U.S. trade deficit with China is increasing.