Assembled in China

The New York Times has an interesting article today that makes a nice bookend with my previous post on American manufacturing.

But often these days, "made in China" is mostly made elsewhere — by multinational companies in Japan, South Korea, Taiwan and the United States that are using China as the final assembly station in their vast global production networks.

Analysts say this evolving global supply chain, which usually tags goods at their final assembly stop, is increasingly distorting global trade figures and has the effect of turning China into a bigger trade threat than it may actually be. That kind of distortion is likely to appear again on Feb. 10, when the Commerce Department announces the American trade deficit with China. By many estimates, it swelled to a record $200 billion last year.

It may look as if China is getting the big payoff from trade. But over all, some of the biggest winners are consumers in the United States and other advanced economies who have benefited greatly as a result of the shift in the final production of toys, clothing, electronics and other goods from elsewhere in Asia to a cheaper China.

American multinational corporations and other foreign companies, including retailers, are the largely invisible hands behind the factories pumping out these inexpensive goods. And they are reaping the bulk of profits from the trade.

Yasheng Huang, an associate professor at the Sloan School of Management at Massachusetts Institute of Technology, explained: "Basically, in the 1990's, foreign firms based in America, Europe, Japan and the rest of Asia moved their manufacturing operations to China. But the controls and therefore profits of these operations firmly rest with foreign firms. While China gets the wage benefits of globalization, it does not get to keep the profits of globalization."

The real losers, it seems, are mostly low-wage workers elsewhere, like the ones at Hitachi who lost their jobs in Japan, along with workers in other parts of Asia who suffered as employers began relocating plants to China. Blue-collar workers in the United States have also lost out.
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Foreign expertise has been critical as manufacturing supply chains become increasingly complex, involving countries' each producing components that are then shipped to China for assembly. Such a system can render global trade statistics misleading, and some experts say that a more apt label would be "assembled in China."

"The biggest beneficiary of all this is the United States," said Dong Tao, an economist at UBS in Hong Kong. "A Barbie doll costs $20, but China only gets about 35 cents of that."

Because so many different hands in different places touch a particular product, Mr. Dong said, you might as well throw away the trade figures.

"In a globalized world, bilateral trade figures are irrelevant," he argued. "The trade balance between the U.S. and China is as irrelevant as the trade balance between New York and Minnesota."

Once again, free trade has benefitted all countries. The U.S. lost some blue collar jobs but on the whole, consumer prices were lowered and corporate profits (wealth creators) were raised. Each country is able to focus on what they do best. China provides cheap unskilled labor, the U.S. and Japan supply design expertise. Everyone benefits.