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Issue 37/ 8 June 2011

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Today’s Issue Includes:

1) Global imbalances and the paradox of thrift, by Max Corden Emeritus Professor of International Economics of Johns Hopkins University.

Max Corden

People critical of global imbalances often blame the surplus countries and their currency manipulation. This column introduces a Policy Insight that argues that the basic problem has been the inefficiency of the world’s financial sector, which led to unfruitful investment in the US rather than productive investment in emerging economies.

The global imbalances are widely seen as a problem, especially by the US government and US economists. Sometimes they are even seen as a cause of the financial crisis (Suominen 2010). Yet such imbalances – i.e. current-account surpluses and deficits – reflect international intertemporal trade, and there should be gains from such trade as from “ordinary” trade, on the basis of standard arguments for free trade (see Obstfeld and Rogoff 1996, Chapter 1). Furthermore, an advantage of the present system is that an international general equilibrium is established which yields a set of current-account imbalances that do not require international central planning or coordination, but which respond to particular circumstances in different countries. The system depends, of course, on a relatively free international capital market.

In this column I analyse the current global imbalances debate – for more detail, see my CEPR Policy Insight (Corden 2011). This approach might be called a neoclassical way of looking at the international system and has to be subject to qualifications. These qualifications provide possible rationales for the common concern with global imbalances.

A key issue is that funds from countries that are net savers called the savings-glut countries (where savings exceed domestic investment) have been lent to borrowers (notably the US) who have used these funds unwisely, namely for current consumption and for investment that is not “fruitful.” The main form of “unfruitful” investment has been in excess housing construction. The funds coming from the savings-glut countries should have financed fruitful investment in the US and elsewhere. Instead they have also been lent to the US government, financing a war and tax cuts. All this is well known.

The result is that the borrowing countries, notably the US, have failed to build up resources out of which interest, dividends, and necessary repayments can be made. Yet such debt service or returns from purchases of equity are an essential feature of intertemporal trade.

Above all, we have to explain why more funds did not go to finance fruitful investment, whether in the US or elsewhere, notably in developing countries. When we look at the build-up to the 2008 financial crisis, we can see what an important question this is. In developing countries there is often an aversion to incur current-account deficits for two reasons – namely the instability of capital inflows and the dislike of real appreciations. These are understandable motives, but have created a problem when there was a worldwide search for sound investments to place the funds coming from the savings-glut countries.

A useful concept, originating with Keynes, is the “paradox of thrift”. This idea suggests that an increase in savings motivated by the admirable Victorian virtue of prudence – which involves foregoing consumption today for the sake of more consumption tomorrow – does not necessarily lead to greater capacity to consume tomorrow. It may just lead to a current decline in aggregate demand. Extended to the world economy it helps to explain the common criticisms of those countries, notably China, that have had large current-account surpluses. But the increase in net savings by the savings-glut countries did not actually lead to a decline in worldwide aggregate demand, as the simple Keynesian approach would imply. Rather it led to borrowing for consumption and for unfruitful investment. Hence the effect was indeed adverse. The recognition of this adverse effect, as well as various well-known inefficiencies in the world’s financial sector, led to the world financial crisis.

The basic neoclassical model really requires increased net savings to lead – induced by the decline in the real interest rate – to borrowing for more fruitful investment. There was a failure of the world’s financial sector in turning increased savings into fruitful investment, and that meant -- to repeat-- that the savings glut led to a debt crisis. The crisis was thus caused by an interaction of the particular global imbalances that led to low interest rates and high credit availability with the failure of the financial sector.

Here we should just mention that if there had been an increase in US savings rather than in other countries, there would also have been a decline in world interest rates, but this would have actually reduced the US current-account deficit and thus reduced (and not increased) the global imbalances. The basic problem has been not the global imbalances as such, but rather the sharp and prolonged decline in real interest rates, when combined with the inadequacies of the financial sector.

Going back to what actually happened in the period that ended in 2008, we might then ask: “were net savings of the savings-glut countries too high or were sound, fruitful investments in the rest of the world too low?” The particular global imbalances caused by the increase in savings (plus declines in investment in some cases) in the savings-glut countries led to the decline in the world real interest rates and high credit availability. This provided an investment opportunity for the rest of the world. But the inefficiency of the world’s financial sector and other factors led to an inadequate response in fruitful investment in the rest of the world, notably the US. As noted above, one of the other factors was the reluctance of some developing countries with good investment opportunities to run current-account deficits. There could also have been more fruitful investment – notably in infrastructure – by governments, especially in the US.

I would also add here that the reluctance to run current-account deficits by various smaller economies – whether Latin American, Asian or European – is thoroughly understandable when we take note of the instability of capital inflows that have caused so many crises, notably the Asian crisis of 1997-98 but also the current European ones. And this instability is yet another manifestation of a weakness in the world’s financial sector.


Corden, M (2011) Global imbalances and the paradox of thrift, CEPR Policy Insight No 54.

Obstfeld, M and K Rogoff (1996), Foundations of International Macroeconomics, MIT Press.

Suominen, Kati (2010), “Did global imbalances cause the crisis”,, 14 June.



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2) How the iPhone widens the US trade deficit with China, By Yuqing Xing Professor of economics and the Director of Asian Economic Program at the National Graduate Institute for Policy Studies, Tokyo

Yuqing Xing

What can the iPhone tell us about the trade imbalance between China and the US? This column argues that current trade statistics greatly inflate the value of China’s iPhone exports to the US, since China's value added accounts for only a very small portion of the Apple product's price. Given this, the renminbi’s appreciation would have little impact on the global demand for products assembled in China.

At the centre of global imbalances is the bilateral trade imbalance between China and the US. Most attention to date has been focused on macro factors and China’s exchange-rate regime. Little attention, however, has been paid to the structural factors of economies and global production networks that have reversed conventional trade patterns, transformed the implications of trade statistics and weakened the effectiveness of exchange rates on trade balances.

Today’s trade is not that experienced by the British economist David Ricardo two hundred years ago (Grossman and Rossi-Hansberg 2008). It is almost impossible to define clearly where a manufactured product is made in the global market. This is why on the back of an iPhone one can read “Designed by Apple in California, Assembled in China”. In this column, I use the smartphone in your pocket to argue that current trade statistics have distorted the reality of the Sino-US trade imbalance and the appreciation of the renminbi would have little impact on the imbalance.

How iPhones are produced

The iPhone is designed and marketed by Apple. Apart from its software and product design, the production of iPhones primarily takes place outside of the US. Manufacturing iPhones involves nine companies, which are located in China, South Korea, Japan, Germany and the US (Table 1). All iPhone components produced by these companies are shipped to Foxconn, a Taiwanese company located in China, for assembly into final products and then exported to the US and the rest of the world.

By any definition, the iPhone belongs to high-tech products, where the US has an indisputable comparative advantage and China does not domestically produce any products that could compete with it. However, the iPhone trade pattern is not what is predicted by either the Ricardian comparative advantage theory or the Heckscher-Ohlin theory. The manufacturing process of the iPhone illustrates how the global production network functions, why a developing country such as China can export high-tech goods, and why the US, the country that invented the iPhone, becomes an importer.

Table 1. Apple iPhone 3G’s major components and cost drivers

table 1

Source: Rassweiler (2009)

iPhones and the Sino-US trade imbalance

The shipment of the ready-to-use iPhones from China to the US is recorded as China’s exports to the US. Using the total manufacturing cost $178.96 as the price of the iPhone, China’s iPhone exports to the US amounted $2.0 billion in 2009. Assuming that the parts supplied by Broadcom, Numonyx and Cirrus Logic, valued at $121.5 million, were imported from the US the iPhone alone contributed $1.9 billion trade deficit to the US, about 0.8% of the US trade deficit with China (Table 2).

On the other hand, most of the export value and the deficit due to the iPhone are attributed to imported parts and components from the third countries and have nothing to do with China. Chinese workers simply put all these parts and components together and contributed only $6.50 to each iPhone, about 3.6% of the total manufacturing cost (e.g. the shipping price). The traditional way of measuring trade credits all $178.98 to China when an iPhone is shipped to the US, thus exaggerating the export volume as well as the imbalance. Decomposing the value added along the value chain of the iPhone manufacturing suggest that, of the $2.0 billion iPhone export from China, 96.4% is actually the transfer from Germany ($326 million), Japan ($670 million), Korea($259 million), the US ($108 million) and others ($ 542 million). All of these countries are involved in the iPhone production chain.

If China’s iPhone exports were calculated based on the value added, i.e., the assembling cost, the export value as well as the trade deficit in the iPhone would be much smaller, at only $73 million, just 3.6% of the $2.0 billion calculated with the prevailing method (Table 2). The sharp contrast of the two different measurements indicates that conventional trade statistics are inconsistent with trade where global production networks and production fragmentation determine cross-country flows of parts, components, and final products. The traditional method of recording trade has failed to reflect the actual value chain distribution and painted a distorted picture about the bilateral trade relations. The Sino-US bilateral trade imbalance has been greatly inflated.

Table 2. iPhone trade and the US trade deficit with China

table 2

Sources: * Hughes (2010); ** Rassweiler (2009)

[1] When calculating trade deficits between PRC and the US in iPhones, we assume that all parts supplied by Broadcom and Numunyx were imported from the US.
[2] The parts provided by Broadcom and Numunyx are shipped back to the US within the ready-to-use iPhones. They are “round tripping” exports, which should not be considered as actual exports in the value-added approach.

iPhone trade and the appreciation of the renminbi

Many believe that appreciation of the renminbi would be an effective means to solve the Sino-US trade imbalance. Appreciation proponents ignore the fact that the appreciation can only affect a small portion of the cost of made/assembled-in-China products. If the renminbi appreciated against the US dollar by 20%, the iPhone's assembly cost would rise to $7.80 per unit, from $6.50, and add merely $1.30 to the total manufacturing costs. This would be equivalent to a 0.73% increase in total manufacturing costs. It is doubtful that Apple would pass this $1.30 to American consumers. Even a 50% appreciation would not bring a significant change in the total manufacturing cost, as the appreciation would only affect the assembling cost. Therefore, the expected pass-though effect of the renminbi’s appreciation on the price of the iPhone would be zero and the American consumers’ demand on the iPhone would not be affected. The appreciation of the renminbi would have little impact on the Sino-US trade imbalance.

Could the iPhone be assembled in the US?

There is no doubt that US workers and firms are capable of assembling iPhones. If all iPhones were assembled in the US, the $1.9 billion trade deficit would not exist. There are two possible reasons for Apple to use China as an exclusive assembly centre for iPhones. One is competition, the other is profit maximisation.

The gross profit margin of the iPhone was 62% when the phone was launched in 2007, then rose to 64% in 2009 due to reductions in manufacturing costs (table 3). If the market were perfectly competitive, the expected profit margin would be much lower and close to its marginal cost. The surging sales and high profit margin suggest that the intensity of competition is fairly low and Apple maintains a relative monopoly position. Therefore, it is not the competition but profit maximisation that drives the iPhone’ s assembly to China.

Table 3. Profit margin of the iPhone

table 3

Sources: iSupply, and the authors’ calculations.

An interesting hypothetical scenario is one where Apple had all iPhones assembled in the US. Assuming that the wage of American workers is ten times as high as those of their Chinese counterparts, the total assembly cost would rise to $68 and total manufacturing cost would be pushed to approximately $240. Selling iPhones assembled by American workers at $500 per unit would still leave a 50% profit margin for Apple. In this hypothetical scenario, the iPhone could contribute to US exports and reduce the US trade deficit, not only with China, but also with the rest of world. More importantly, Apple would create jobs for US low-skilled workers.

In a market economy, there is nothing wrong with a firm pursuing profit maximisation. Governments should not restrict such behaviour in any way. However, corporate social responsibility has been adopted as a part of corporate values by many multinational companies, including Apple. Employing American workers to assemble iPhones may be an effective way to practice corporate social responsibility.

Concluding remarks

Due to the limitations of the data, it is not possible to outline a more detailed distribution of the iPhone’s manufacturing value chain across all countries involved. However, adding additional countries and parts into the analysis would not change the bottom line – the value added created by Chinese workers accounts for only a small portion of a ready-to-use iPhone, so current trade statistics greatly inflate the value of China’s iPhone export to the US as well as the corresponding trade imbalance. Given this, the renminbi’s appreciation would have little impact on the global demand of the products simply assembled in China.


Grossman, Gene M and Esteban Rossi-Hansberg (2008), Trading Tasks: A Simple Theory of Offshoring, American Economic Review, 98(5):1978-1997.

Hughes, N (2010), Piper: 15.8M US iPhone sales in 2010, even without Verizon Apple Insider, 6 January.

Rassweiler, A (2009), “iPhone 3G S Carries $178.96 BOM and Manufacturing Cost, iSuppli Teardown Reveals”iSuppli, 24 June.



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