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The Adam Smith Institute Blog

We gain from trade with China

Trade with China underpins other economic activity. Its factories add only $4 of value to every $150 30G Apple iPod they turn out.

By Alec van GelderGuest blogger / February 23, 2010

China makes iPods (like these iPod nanos on display in Beijing in 2008), but the value it adds is only $4 for a $150 Apple iPod. Is trade with China a bad thing?

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To protectionists and Sinophobes, the news of China recently surpassing Germany to become the world’s largest exporter represents yet another nail in the coffin for manufacturing in “[insert Western country]”. But China’s exports include Apple’s ubiquitous iPods and countless other products designed in the West.

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More than a reflection of China’s growing economic might, this is testament to the erosion of economic, political, physical and technological barriers to production. The fall of the Berlin Wall and the collapse of communism as a viable model, together with containerised shipping, GPS, just-in-time supply, and other technological marvels, has spawned a global division of labour and production that defies traditional analysis – and trade accounting.

Typically, Chinese producers are at the final node of an assembly line that snaps together raw materials (say, minerals from Australia) and components (say, microchips from Taiwan), using software developed by teams in Redmond and Bangalore, while implementing designs from Cambridge (Massachusetts and England); all thanks to capital raised by consortiums based in New York City and Sao Paulo.

Two important points are worth making: “Chinese exports” are underpinned by valuable activities elsewhere, and product assembly adds less value than other activities along the production chain. For example, a recent University of California study concludes that the Chinese value-added embedded in a 30G Apple iPod accounts for only $4 of the total $150 cost. The fearmongers see the entire $150 chalked up as a Chinese export, and miss the money flowing back to Cupertino in the USA.

One of many local examples that follow a similar production pattern is Cambridge Audio. Its products are designed by teams of well qualified and richly-rewarded engineers here in the UK and are assembled cheaply in China. This offers Western consumers better quality at cheaper prices and allows the company to invest more in product development, which will ensure competitiveness, promote innovation and sustain high value-added jobs in the UK.

Don’t be afraid of China’s booming exports. In today’s economy, we all have a stake in their success.

Alec van Gelder is Project Director at International Policy Network.

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