What the iPod Tells Us About the World Economy

Hugh Pickens writes "Edmund Conway has an interesting article in the Telegraph where he analyzes where the money goes when you buy a complex electronic device marked 'Made in China,' and why a developed economy doesn't need a trade surplus in order to survive. For his example, Conway chooses a 30GB video iPod 'manufactured' in China in 2006. Each iPod, sold in the US for $299, provides China with an export value of about $150, but as it turns out, Chinese producers really only 'earned' around $4 on each unit. 'China, you see, is really just the place where most of the other components that go inside the iPod are shipped and assembled.' Conway says that when you work out the overall US balance of payments, it shows that most of the cash for high tech inventions has flowed back to the United States as a direct result of the intellectual property companies own in their products. 'While the iPod is manufactured offshore and has a global roster of suppliers, the greatest benefits from this innovation go to Apple, an American company, with predominantly American employees and stockholders who reap the benefits,' writes Conway. 'As long as the US market remains dynamic, with innovative firms and risk-taking entrepreneurs, global innovation should continue to create value for American investors and well-paid jobs for knowledge workers. But if those companies get complacent or lose focus, there are plenty of foreign competitors ready to take their places.'"

Comments

Not so fast

[Anonymous Coward]

Maybe the author of TFA could also analyze who makes th eprofits off the many counterfeit iPhones mfg'd in China:

"Illicit phones comprise a staggering 40% of Chinese firms' production, and 13% of the world's, according to iSuppli, a research firm. It reckons China will produce 145m of them this year, up by almost half since 2008. This has hit sales of legal phones."

I refuse to believe that imaginary property is an acceptable replacement for real manufacturing capacity.

Re:Not so fast

[betterunixthanunix]

Well on moral terms, globalized intellectual property essentially means that every country in the world has to enact the same laws as the countries that have intellectual property. Why should they? Some of those countries are democratic, but decided not to enact the same copyright, trademark, and patent system that the USA has -- should the power of the people be usurped just so that the US can balance its trade (on paper)?

On a more realist level, we have yet to convince every nation to take the same aggressive approach to copyrights/etc. that the USA takes, and we certainly have not convinced the citizens of those countries to respect such things. A quick trip to Chinatown reveals the problem: thousands of cheap clones of luxury brands, in many cases made of the same materials and with the same designs as the "authorized" versions, likely produced in violation of trademark and copyright agreements (perhaps from several companies, as in the case of knockoff iPhones). If these things were only being sold in China, it would be irrelevant, but they are being sold here in the USA -- meaning that someone had to buy them from China. Even if it was under the table, it still matters in terms of its economic impact.

So unless you have a way to convince the Chinese government to stop imprisoning people for practicing obscure religions and to start imprisoning them for infringing on American copyrights, I would agree with the GP: it is impossible to base our economy on "intellectual property." Real, tangible goods must form the backbone.

Low Tech Goods?

[ObsessiveMathsFreak]

And what about low technology good such as clothes, furniture, steel, glass, toys, and widgets? Where does the money flow there?

Misleading Conclusion.

[h4rm0ny]

TFA suggests that this means the financial hit of off-shoring manufacturing is actually small. Whether or not the article is correct on money making its way back to the US, there is an important factor. The money is making its way right back into the pockets of the company owners and rights holders. The people who would normally make their living in these manufacturing jobs are still stuffed. I don't think that any "trickle down" effect from returned profits is going to make up for that.

Re:Misleading Conclusion.

[Reziac]

I agree... and read the comments following TFA; they're much more on point. Once we export all our knowledge, what do we have left? manufacturing is long gone, and food production is going overseas too. What happens when we are purely a nation of consumers?

Tho sometimes one thinks that most businesses are already mainly selling marketing to each other, rather than selling an actual product.

We can't destroy our manufacturing base

[transporter_ii]

No matter how much money is made in America from items assembled in China, everyone can't work at Wal-Mart and Burger King and be able to afford said items. Don't get me wrong, those are real jobs and I even worked at a Wal-Mart many years ago, but in the past, service jobs were not the base of the economy. If everybody is making minimum wage with no benefits whatsoever, who can afford services? Thus a service-based economy isn't sustainable in the long run. Yeah, we will survive and life goes on, but we shouldn't just count the beans and proclaim everything is alright. We need to take into account several things:

How citizens are treated by the governments of our trading partners, for instance.

What happens to our economy when nothing left but service jobs is another one.

When the trading partners are using the profit from us to build up armies to come back over here and kill us, should make the list as well.

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[account_deleted]

Comment removed based on user account deletion

Re:Perhaps a smidge short sighted?

[MemoryDragon]

That is the problem of the western economic journalism and generally also the western economists they have forgotten to think in long terms usually their memory lasts and foresight lasts only for the next 2 years without taking history into acocount.

IP is vaporware, production is also assembling of knowledge, and in the long run no producer needs any middleman once he has earned enough money he can provide the goods himself, also IP is fading if you do not produce it steadily enough. If you produce you have to do also do some research which means you build up your own ip in the long run and then you can cash in from the others (within the bounds of the system) so if you dont keep some core industries in the country as well as to try to build knowledge upon it you soon will be paying only without getting anything back.
The chines pretty much know that, but our western economits dream of clouds (jobless recovery, IP based economy etc... all of those constructs did not work out in the past, why should they now, the rule of the game does not change unless humanity changes)

The funny thing is, the stronger we try to build up our ip laws on a worldwide scale now, the more problem we will have in about 20-30 years to get out of the misery we are building currently for the sake of the quick buck.

Oh much the same way, HOWEVER

[SmallFurryCreature]

The article is a complete piece of crap. Because it never dives INTO the money flows. It doesn't show what that 150 dollars the chinese get MEANS. For instance the idiot who wrote this never touches on the most basic point. That 150 dollars to china is a LOT more then 150 dollars to the US. The average wages are completly different, based on a quick google it seems to be about 100 dollar vs 2000 dollars. So 1 iPod sales generates enough money to pay for 1 months work in china but only a ... few days in the US.

This is to say nothing about the effect on the workforce, in China, the jobs are spread out. You both need directors to run the factories and janitors to clean the toilets. In the US, far fewer people are involved. Especially in that section of the economy were the most people fit, the blue-color laborers, the factory workers. So a few designers and Steve Jobs are swimming in it, doesn't help the millions of unemployed, doesn't breath live into ghosts towns were the only jobs are handing out unemployment stamps. And where do these people who longer can find a job get the money to buy an iPod? They don't, they buy a cheapo MP3 designed in China, build in China.

Thank you Mr Idiot from the guardian, we KNOW how the economy works, the exact same idiotic posts were made about Japan. Don't worry, Japan will only take a tiny bit of cash at the bottom, all the real money will be earned by the west. Yeah, this worked SO well, that Japan is now conveniently lumped with the west. He happily lists that core components with lots of IP come from Japan so that those pesky chinese won't make a penny of it. Eheh, so what is China to stop from doing to Japan what Japan has done to the west? If his theory about IP holds up, then those IP could never have become possible in Japan.

If the iPhone was made in the US, the US economy would be richer by 150 dollars as well.

FLAWS:

• A dollar does not have the same value across the globe.
• This same argument was held for Japan as country with cheap labor and no IP, now Japan is suddenly listed as an example of a country with IP so that it is safe from cheap labor.
• Forgets that the shift of money has an effect not just on the whole of the economy, but on different sectors and in different ways, no more factory jobs in the US.

If you want to see the effect of the global economy, look around. I life in Utrecht, and that has an industrial park called "Lage weide". There is a LOT of distrubution activity, lots of shifting around of good but almost no production. One produces big metal thingies and the building looks ready to collapse and that is about it. Everything else is warehouses, with the contents, "produced in China". And warehouses are easy to automate. Hema (dutch retailer) has opened one of the most advanced warehouses in the world recently, yet fewer people working and the work there requires no skill (and therefor no pay and no security).

Look around, why do you think the economy is in the crapper? Because nothing is being produced anymore. The factory towns may not be glamorous but it is where the core of a country makes its living. Not the rich who rule the country, not the super poor, but the average worker who pays the taxes that allow the government to function, who deliver the soldiers for the army.

Empires collapsed before, the western empire will get a rude suprise sooner or later when China changes its tune. And no, I don't mean in an evil plot kinda way, I mean when China does what Japan did ages ago. Become an economic power with its own IP. Quick check, how many high-tech gadgets in your house are produced in cheap labor country Japan? PS3, Wii, Sony-Ericson phone and countless others where you might not even think they came from Japan? Ask your daddy what the China of their day was (or maybe your granddad if you aren't as old as me).

Re:Oh much the same way, HOWEVER

[smallfries]

So extracting the core of your argument from the long pointless rant that you've wrapped it in:
It's wrong to trade with poor countries, because they derive more advantage from it, and become rich countries.

Err, how is this a bad thing? Using your example of Japan, what the value of bilateral trade between the US and Japan immediately after the second world war, and what has that value risen to after decades of investment in their economy.

The best kind of world for rich industrialised countries to be in, is one in which their competitors are rich industrialised countries with similar production costs.

Re:Oh much the same way, HOWEVER

[rishistar]

Thank you Mr Idiot from the guardian

Interesting rant, but the idiot was from the Telegraph.

Re:Oh much the same way, HOWEVER

[h4rm0ny]

His post was in no way a "long pointless rant." It is accurate and factual. The only thing missing is a corrolary which would have answered your point. It is a bad thing for the developed country because the ownership of industry in in that country (the US) is not even close to equally distributed, but rather concentrated in the hands of a small and hideously wealthy minority. That means that when the manufacturing base is off-shored, this wealthy minority make even more money whilst the class of domestic people that had to work to receive a salary or wage are no longer needed and become poverty stricken. If wealth were more evenly distributed, then offshoring would be an overall good for the country. But in fact it merely increases the gap between rich and poor, pushing middle classes down into the poor and the poor trying to cling on best they can. This leads to a cycle of poor education, destruction of the country's own domestic industrial capacity (and IP capacity perhaps these days). That's the problem.

Re:Oh much the same way, HOWEVER

[dangitman]

But it exposes one of the uglier sides of the zero-sum economic thinking that pervades the left: one party's gain is another's loss, so we should keep other countries poor so they can't take our wealth.

What the hell does this have to do with "the left"? If you look at the whining about the Chinese "taking our jobs" it comes just as much, if not more, from the right. But left/right is just a smokescreen here. It's a populist thing, not a particularly ideological one.

I'd wager that you're just a partisan who treats "the left" as some sort of bogeyman without understanding the dynamics, or what it really means.

Re:Oh much the same way, HOWEVER

[smallfries]

Offshoring labour is a consequence of the different standards of living in China and the US. If the current trade situation does result in the enrichment of China then that barrier will disappear and suddenly American employees will become more attractive in the global manufacturing market.

The main issue with the trade imbalance at the moment is that the Chinese are holding down their currency by recycling their profits in the dollar market. Once that imbalance is corrected (probably by a massive devaluation of the dollar scaring the Chinese into withdrawing their assets) there will suddenly be an extra billion consumers in the world with disposable income.

Rather than answering my point you seem to have missed its most important consequence; China's main competitive advantage over the US is poverty. That is what has decimated US manufacturing, and that advantage is removed if China becomes rich. Lifting your rivals out of poverty is the best way to end your own destructive spiral.

Re:Oh much the same way, HOWEVER

[Anonymous Coward]

> Xenophobic claptrap
> if the iPod was made in the usa it would cost $750 and break within days. Just like the cars, which are rubbish.

How clever, you arranged for your first sentence to describe your second sentence.

Re:Ignarance is bliss

[LynnwoodRooster]

No, the author's point was that - because of the way trade deficit numbers are calculated - we only apparently have a $700 billion annual imbalance. Basically, the way trade stats are worked results in an iPhone showing a $140 deficit, when in fact it completely ignores the $160 of profit made on the product. China makes about $4 in profit.

.
To summarize, the author's contention is that it's not the gross dollar flow that matters, but the retained earnings - the profit - that matters. And in that case, the vast bulk of the money stays right inside the US.

More economists who can't do simple economics...

[nedlohs]

No a developed country can't run a trade deficit forever - thus it does in fact need a trade surplus (well dead even is fine too) to survive.

The US gets away with it simply because the US dollar is used as the reserve currency and trade currency for most commodities. Other nations get away with it due to China's games with the US dollar knocking on to their currencies.

What should happen is that the relative value of the currency of the country running a deficit will fall until it is no longer running a deficit. It's simple mathematics.

The rest of the world keeps printing money and buying US treasuries to stop this inevitable re-balancing, but it will happen at some point - it gets more and more unstable the longer the current situation is propped up. Of course humans can keep unstable situation balancing for much much longer than it seems possible (witness US real estate prices - a bubble that "should" have popped in 2003 but lasted much longer, and staill hasn't fully deflated)...