Saturday, October 1, 2016

What’s so great about free trade? Money? Profitability? iPhones?

Trump’s hostility toward free trade might have killed the iPhone

 Image result for iPhone images

 What’s so great about free trade?

It’s a hard question to answer, one reason Republican presidential nominee Donald Trump has gained traction with voters by haranguing free-trade deals with China, Mexico and other nations. When a US factory closes and the jobs move overseas, it’s pretty clear that open borders are harming everybody who just got axed. Free trade is supposed to generate benefits that compensate for such harm, and leave Americans better off overall. But the upsides of trade tend to be intangible, incremental and difficult to pinpoint.
Free trade has almost certainly brought enormous benefits to the US economy, however, including the creation of whole new industries that might not exist if the United States had the sort of closed economy Trump seems to prefer. “Manufacturing is not disappearing, but the kinds of things the United States makes are changing,” says trade economist Peter Schott of Yale University. “When a given product goes offshore, the dynamism of the economy lets the United States produce things it may not have otherwise produced.”
Schott and other trade experts point to the iPhone as a groundbreaking product that might never have existed under a more closed economic system with the kinds of trade protections Trump favors. By the time Apple (AAPL) launched the iPhone in 2007, there were well-established supply chains in Asia, mostly in China, able to churn out high-quality electronics at a fraction of the cost of producing them in the United States or other developed countries.
The key to the iPhone’s profitability
Apple already assembled computers and its hit iPod music player in China, so it had detailed knowledge of supply chains there. China also was a member of the World Trade Organization by then, which meant Apple knew it could count on the economics of cheap Chinese production well into the future, instead of worrying that Congress might grow testy over some issue and pass legislation disrupting the trade relationship, which can’t happen under WTO rules. That kind of certainty let Apple CEO Steve Jobs know he could invest billions in the iPhone with minimal risk of disruptive supply shocks.
The iPhone went on sale in 2007, priced at $499 for the cheapest model. That was steep for ordinary consumers, yet the iPhone went on to become the most profitable product in Apple’s history. It’s impossible to know if Apple would have made the iPhone if it had no choice but to manufacture it in the US, with American labor and American parts. Undoubtedly, however, that would have shifted the whole economic equation for Apple and made the iPhone less profitable or perhaps unprofitable. It would also have raised the price for consumers.
There’s a wide range of estimates for how much it would have cost Apple to build the iPhone in America—from a relatively modest $65 in added cost per phone to a much larger tab that would have exceeded Apple’s annual profit at the time. Some Apple executives have said the company couldn’t have built the iPhone in the United States no matter what the cost, because regulations were too onerous, labor rules too restrictive and engineers too scarce. Chinese suppliers, by contrast, could muster all the workers necessary on short notice and meet a surge in demand with few hiccups.
Apple likes to point out that its products are “designed in California,” a sort of reminder that Apple does employ about 75,000 people in the United States, which isn’t shabby. And it claims the “ecosystem” for its products has created an additional 1.4 million jobs. That number may or may not be accurate, but it is self-evident that a whole new industry of app developers, communication services and digital startups has benefited from the runaway success of the iPhone and other mobile devices.

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