Why President Trump’s trade tariffs might not work, a post by J. Dedrick, G. Linden, and K. L. Kraemer


Jason Dedrick, Syracuse University; Greg Linden, University of California, Berkeley, and Kenneth L. Kraemer, University of California, Irvine

The Trump administration’s tariffs on China have so far targeted mostly industrial goods like aircraft engines and gas compressors. But the administration has also threatened to slap tariffs on US$200 billion in other goods if the dispute continues.

No list of all the goods that might be subject to tariffs has been released, but it would have to include consumer electronics, such as smartphones, which is the largest single product category in China’s exports to the U.S.

One well-known product that might be affected is Apple’s iPhone, which is assembled in China. When an iPhone arrives in the U.S., it is recorded as an import at its factory cost of about $240, which is added to the massive U.S.-China bilateral trade deficit.

IPhone imports look like a big loss to the U.S., at least to the president, who argues that “China has been taking out $500 billion a year out of our country and rebuilding China.” One estimate suggests that imports of the iPhone 7 and 7 Plus contributed $15.7 billion to last year’s trade deficit with China.

But, as our research on the breakdown of an iPhone’s costs show, this number does not reflect the reality of how much value China actually gets from its iPhone exports – or from many of the brand-name electronics goods it ships to the U.S. and elsewhere. Thanks to the globe-spanning supply chains that run through China, trade deficits in the modern economy are not always what they seem.


Who really makes the iPhone?

Let’s examine an iPhone 7 a little more closely to see how much value China is actually getting.

Start with the most valuable components that make up an iPhone: the touch screen display, memory chips, microprocessors and so on. They come from a mix of U.S., Japanese, Korean and Taiwanese companies, such as Intel, Sony, Samsung and Foxconn. Almost none of them are manufactured in China. Apple buys the components and has them shipped to China; then they leave China inside an iPhone.

So what about all of those famous factories in China with millions of workers making iPhones? The companies that own those factories, including Foxconn, are all based in Taiwan. Of the factory-cost estimate of $237.45 from IHS Markit at the time the iPhone 7 was released in late 2016, we calculate that all that’s earned in China is about $8.46, or 3.6 percent of the total. That includes a battery supplied by a Chinese company and the labor used for assembly.

The other $228.99 goes elsewhere. The U.S. and Japan each take a roughly $68 cut, Taiwan gets about $48, and a little under $17 goes to South Korea. And we estimate that about $283 of gross profit from the retail price – about $649 for a 32GB model when the phone debuted – goes straight to Apple’s coffers.

In short, China gets a lot of (low-paid) jobs, while the profits flow to other countries.


The trade balance in perspective

A better way of thinking about the U.S.-China trade deficit associated with one iPhone would be to only count the value added in China, $8.50, rather than the $240 that shows up as a Chinese import to the U.S.

Scholars have found similar results for the broader U.S.-China trade balance, although the disparity is less extreme than in the iPhone example. Of the 2017 trade deficit of $375 billion, probably one-third actually involves inputs that came from elsewhere – including the U.S.

The use of China as a giant assembly floor has been good for the U.S. economy, if not for U.S. factory workers. By taking advantage of a vast, highly efficient global supply chain, Apple can bring new products to market at prices comparable to its competitors, most notably the Korean giant Samsung.

Consumers benefit from innovative products, and thousands of companies and individuals have built businesses around creating apps to sell in the App Store. Apple uses its profits to pay its armies of hardware and software engineers, marketers, executives, lawyers and Apple Store employees. And most of these jobs are in the U.S.

If the next round of tariffs makes the iPhone more expensive, demand will fall. Meanwhile Samsung, which makes over half its phones in Korea and Vietnam, with a lower share of U.S. parts, will not be affected as much by a tariff on goods from China and will be able to gain market share from Apple, shifting profits and high wage jobs from the U.S. to South Korea.

Put another way, research has shown globalization hurt some Americans while it made life better for many others. Putting globalization in reverse with tariffs will also create winners and losers – and there could be far more of the latter.

Why not make the iPhone in America?

When we discuss these topics with policymakers and the media, we’re often asked, “Why can’t Apple just make iPhones in the U.S.?”

The main problem is that the manufacturing side of the global electronics industry was moved to Asia in the 1980s and 1990s. Companies like Apple have to deal with this reality.

As the numbers we’ve cited make clear, there’s not much value to be gained for the U.S. economy or its workers from simply assembling iPhones here from parts made in Asia.

While it’s possible to do so, it would take at least a few years to set it up, cost more per unit than production in Asia, and require a lot of carrots and sticks from policymakers to get the many companies involved to do so – for example, like the potential $3 billion in subsidies Wisconsin gave to Foxconn to build an LCD factory there.

A flawed response to the challenge from China

There is, of course, plenty for the U.S. to complain about when it comes to China’s high-tech industry and policies, whether it’s the lack of intellectual property protection or non-tariff barriers that keep major tech companies such as Google and Facebook out of the huge Chinese market. There is room for much tougher and more sophisticated bargaining to address these issues.

But where trade is concerned, policies should reflect that manufacturing is now a global network. The World Trade Organization has already developed an alternate set of trade numbers that shows each country’s trade in value added terms, but the administration seems to have missed the memo.

Trump’s trade war is based on a simplistic understanding of the trade balance. Expanding tariffs to more and more goods will weigh on U.S. consumers, workers and businesses. And there’s no guarantee that the final outcome will be good when the dispute ends.

The ConversationThis is a war that should never have been started.

Jason Dedrick, Professor, Syracuse University; Greg Linden, Research Associate, University of California, Berkeley, and Kenneth L. Kraemer, Research Professor, University of California, Irvine


Notes to Pundits of the Trump-Russia Stories: If you were my students …

Sorry if this sounds patronizing, as you are stellar journalists and politicians, but if you were my students, writing a paper for a college class, what would I say?

teaching commons.stanford.edu

I would definitely give you points for effort, and creativity, but would mark your work down on its analytical precision. Happy for you to come in during an office hour, but briefly, let me give you a few examples of my concerns. Apologies in advance for these quick notes.

First, take your vague attributions, which change over time. Who is responsible for meddling with the 2016 US Presidential election? Is it hackers in Russia, Russian oligarchs, Russian nationals, Russians, government hackers, agent’s of the government, the government, the highest levels of government, or President Putin? Your essays keep veering across these various actors. You must see that it makes a difference, so you must be more precise to be credible.

Likewise, what did they do – what was the meddling? Did they hack into email of the DNC, RNC, John Podesta, or others; gain access to county voter registration files; change voter registration files; meet with members of the campaign; loan money (at some point in the past) to members of the campaign; compromise members of the campaign; pass material to WikiLeaks, or one or more of the above? Your discussions keep shifting from one to another accusation as if this were a shell game.

When did this happen? Was it during the 2016 elections, happening now, or is it something that is likely to happen in the future? When you sometimes veer toward the future, it undermines your case.

Where is the evidence? Is it simply based on authority, the intelligence agencies, all of whom happen to agree, even when they seldom or ever confirm or deny anything? Is there evidence beyond hearsay? [By the way, you should not equate the heads of intelligence agencies with scientists, or doubts over Russian interference with climate change denial, as the analogy so flawed that it further undermines your credibility.]

Finally, in line with a major problem with undergraduate writing today, is it something that you often just feel is right? As you would have heard me say in class time and again, your feelings don’t count.

So you can see that given all the possible permutations of who did what, when and where, and all without strong evidence, the essays end up in an analytical muddle. You’ve constructed a wicked problem out of a set of vague accusations that are not critically assessed.

This would be funny if your work did not have such serious consequences. [I should add you do get high marks for impact.] And the impact will last decades and shape governmental institutions in the US in major ways, such as with respect to the role of Congress in foreign policy.

Finally, it would have been good to focus on some things that could be done to avoid the risks you identify, such as shoring up cyber security in all aspects of campaigns and elections, and not moving to electronic voting – a plea that has been made for well over a decade. [See Barbara Simons’ work, for example, who has been warning people about the difficulties of securing electronic voting systems for decades.] You might also reinforce the wisdom of how decentralized voting systems are in the US, meaning that there is no one system, even in a single state, and the need to keep it that way.

That said, great effort, well written, and convincingly spoken, but I regret to say that I cannot give you high marks on your work. And apologies for not addressing every individual journalist and politician talking about the Trump-Russia story, as that would not be possible given the number of you that chose this topic. Nevertheless, as a group, try to focus on developing a more analytically rigorous argument, and ensure that your evidence drives your conclusions rather than the opposite.


Big Questions and Big Issues for the US and Britain: A Discussion with Voices from Oxford’s Denis Noble and Sung Hee Kim

When visiting Oxford in early February for a conference, I was invited to speak with my two colleagues who, with my help, founded Voices from Oxford (VOX) in 2009. The discussion was held in Rhodes House, one of the most beautiful and historic buildings in Oxford. As befitting the venue, my colleagues asked big, challenging questions about major issues in Britain and the US, particularly around Brexit and the election of Donald Trump, very soon after his election. As noted on the VOX web site:

“The three original founder members of Voices from Oxford discuss and debate Brexit and the election of Donald Trump. Dr Sung Hee Kim, Prof Denis Noble and Prof Bill Dutton founded Voices from Oxford in 2009, and are reunited at Rhodes House in Oxford to discuss the monumental political events of 2016. They examine the reasons and background of the populism which led to Brexit and Trump, as well as looking at some possible ways forward for the people of the UK and USA. The role of the media and social media in both events is analysed, and they talk about perceptions of each event from the viewpoint of the other country. They then move on to a more global outlook, including the role of China and its role in East Asian and world affairs.”

The interviewers are not just good colleagues, but very prominent members of the Oxford community. Professor Denis Noble is one of the most distinguished professors I became acquainted with in Oxford. I met Denis at Balliol College, where he described for me his record of research on modeling the heart, with his models evolving in pace with the rapid evolution of computing. He remains as an Emeritus Fellow, but he also held the Burdon Sanderson Chair of Cardiovascular Physiology at the University of Oxford from 1984 to 2004 and was appointed Professor Emeritus and co-Director of Computational Physiology. Over lunches at Balliol, he and I and Sung Hee Kim began talking about the need to use new media to help bring Oxford to the larger world. Sung Hee Kim’s first career was as in broadcasting in South Korea, from which she went on to Oxford to earn her doctorate at Exeter College in the Faculty of English Language and Literature. She straddles the UK and Korea as a Visiting Professor at Seoul National University.

My major qualifications for addressing the issues we discuss are being old, and having lived in Britain for years, and only back in the States for a few years. Nevertheless, I was delighted to share my views, and would also welcome your comments and criticisms on what I said.

This is the United STATES of America: The Primaries are the Problem!

In the aftermath of the 2016 Presidential elections, the shock of Donald Trump’s surprising win has generated a flurry of initiatives to turn back the clock and rerun or overturn the election, such as Jill Stein’s failed attempt to recount the ballots in a number of key states. The most worrisome efforts – to me – have been calls to overturn the Electoral College. This worries me for two reasons. First, most critiques misunderstand the fundamental importance of the federal structure of the USA. Secondly, Electoral College reform is a red herring, since the focus should be on reforming the primaries for all political parties.

Regarding the Electoral College, the United States of America was not designed as a unitary direct democracy. We are not living in some People’s Republic of America. We have a federal structure that created institutions such as the structure of elections for the Senate and the House of Representatives, and the Presidency that reinforced and maintained the significance of the States. It is the brilliance of these institutions that enabled the states to come together in a single united nation.

The Electoral College works to ensure that candidates for President are well advised to take into account all the states, and not only the most populous states, or for that matter, only the most populous urban areas and neglected rural and less populated areas of the country. It is true that candidates focus increasingly on the so-called ‘battle ground states’, where the vote count is expected to be closest, but all the states count at the end of the day. Direct elections, based only on the popular vote, could virtually disenfranchise many states. If you think many voters feel alienated by the results of the 2016 election, I would imagine many more alienated by direct popular votes that marginalize the voters in their states.

Take the 2016 election, for example, where Hillary Clinton won the nationwide popular vote by 2,833,220 votes. However, she won California alone by more – by 4,446, 281 votes. So if you called the election by popular vote alone, California would have disenfranchised all those red states on the map of the USA. But it is not the state totals, so much as the way in which popular votes would focus all candidates on the major urban areas, and to dismiss the rest of the country. So the Electoral College is not antiquated by the progress of democracy, but brilliant in reinforcing the USA as a federal system designed to keep all the states feeling included. The legitimacy of our institutions, such as elections, is more important than the outcome of any one election.

Even if you should want to reform the Electoral College, it would take a constitutional amendment and be ridiculously irrelevant to the 2016 Presidential election. Ergo, some otherwise reasonable people have argued that electors should exercise their right not to vote for the candidate chosen by their state electorates. I have followed debate over the Electoral College for decades and it has been discussed time and again with the one most concerning issue being that the electors in many states are not legally bound to vote for the candidate that their state sent them to elect. Books* have been written about the potential of these now called ‘faithless electors’  upsetting the results of the popular vote in states, but the possibility has been largely ignored by the realization that this would be inconceivable, tantamount to an elector determining that their judgment is better than the judgment of the voters in his or her state. Voters do not vote for a slate of electors to exercise their personal judgment as a trustee.

Yet highly respected public intellectuals, like Lawrence Lessig, are arguing that electors should do just that. I suspect it is an ends justifies the means argument. In my opinion, this would be a far greater blow to the democratic process of the USA than any election result imaginable. If you worry about the US being divided now, I cannot imagine what the reaction would be to set of Electors choosing to take the election in their own hands. Arguments that the interference of a ‘foreign power’ justifies such an action, citing allegations that that Russians hacked the members of the DNC and RNC,  is ludicrous, as it is no more than a conspiracy theory before any evidence is provided. It does not take state of the art state sponsored cyber warfare to hack into John Pedesta’s email, since he was not cautious about his passwords etc. It also reflects the degree that those harmed by leaks routinely demonise the messengers, such as WikiLeaks, to deflect attention from the message. Did claims about Debbie Wasserman Schultz, the Clinton Foundation, or Russia throw the results? This is one of many debates flourishing in hindsight.

That said, the most important concern I have is that fishing for some constitutional fix to the 2016 election is a red herring. The real problem has been the dysfunctional primary elections orchestrated by all political parties. The most significant fact of this past election is that the major parties nominated candidates that had high unfavorablity ratings. Whichever candidate had won, many voters would have been upset. Could something be wrong with the ways in which the political parties choose their candidates for office? Yes, this is blindingly obvious.

There are many symptoms of this. The parties have been declining for at least the past two decades, while partisanship remains strong, such as in the degree people vote on the basis of their partisan identification. So a shrinking, less trusted, but increasingly powerful group of party members organize the primaries, and do so quite poorly. This is a problem, illustrated by the exposure of favoritism by the head of the Democratic National Committee (DNC), Rep. Debbie Wasserman Schultz, having her ‘finger on the scales’ (to put it in the kindest way possible) from the earliest days for Hillary Clinton, and against Bernie Sanders. Thanks to WikiLeaks, we know about this tilting of the playing field. th-1

This led to her resignation, but did not prevent her re-election to the House, and it does not correct the fundamental problem with how to hold a fair and successful primary that recruits the best talent to enter the primaries.

Another key problem with the primaries, tied to the decline in party membership, is the failure of many states to let independent voters participate in the primaries. The contest between Bernie Sanders and Hillary Clinton was clearly shaped by which states did or did not allow independents to vote in the Democratic Primary, with Senator Sanders doing far better among independents, who were not registered Democrats.

All parties seem to have failed to organize primaries that encouraged the most talented individuals to put their hat in the ring and compete on a level playing field. The fact that the Green Party candidate, Jill Stein, received about 1% of the vote, but remains the head of the Green Party, is an illustration of these problems continuing even in the marginal parties. What are they thinking?

It does not take a Constitutional Amendment to reform the primaries across the USA. And meaningful reform could be done within the coming four years. Instead of fighting the last election, and focusing on red herrings, and impossible reforms, those upset by the election process should focus on the primaries. The party primaries need to be reformed, and they can be reformed.

Have elementary schools stopped teaching basic civics? The number of pundits that seem not to have a clue about the federal structure of our nation, and the rationale behind the Electoral College, is amazing. But you don’t need to be a political scientist to see the real problems of our primary systems within each of our major parties. This should be the focus of reform.

[Postscript: It happened. Faithless Electors emerged.  Two electors were faithless to Donald Trump, and 5 were faithless to Hillary Clinton. This made no difference to the outcome, defied expectations of defections benefitting Hillary Clinton (no ‘revolt’ against Trump), and raised questions about trusting Electors in the future, as this was the first time since 1948 that there has been more than one faithless elector.**]

*For example, Robert M. Hardaway (1994), The Electoral College and the Constitution: The Case for Preserving Federalism.


The Real Parallel to Donald Trump is not Bernie Sanders: Its Hillary

Time and again, pundits draw parallels between Donald Trump and Bernie Sanders as the non-establishment, populist candidates. It is a very weak analogy – actually wrong. Senator Sanders has been in office for over thirty years. Both are popular among a segment of the general electorate, including independents, but popularity does not make them ‘populist’ candidates in any serious use of that term. It is amazing that this parallel keeps getting repeated, although it is apparent as a means to undermine the credibility of the candidates.

What is more amazing is that no one draws the real parallels between Donald Trump and Hillary Clinton. Think about it: Hillary in politics is the political equivalent of Donald in business. Its obvious. For example, consider the following:

Donald Trump’s candidacy is based on his experience in business. Hillary Clinton’s candidacy is based on her experience in politics. Note that Trump’s success in business is contested, as is Hillary’s in politics, such as in voting for the Iraq war.

Donald Trump’s message is ‘making American great again’, while Hillary Clinton’s is ‘keeping America great’. One is pessimistic about the current directions of American policy and leadership. The other is optimistic. Likewise, both candidates anchor their policies around the Obama Administration. Hillary mainly defends and aligns with President Obama, while Donald Trump takes a critical perspective on most of the President’s policy decisions. They are the flip sides of the same coin.

The public feels like they know Donald Trump and Hillary Clinton. It is well known that one of the major factors that shape how people vote is whether a person feels like they know the candidate. This psychological dimension was part of the dynamic behind the success of Ronald Reagan, Arnold Schwarzenegger, and other stars who have gone into politics. Donald Trump is known from reality television; Hillary is known from her years in the public eye as First Lady, Senator and Secretary. Bernie is relatively unknown, and increasingly liked as he has come into the public eye.

Donald is relatively new to public policy, while Hillary is steeped in policy – often called a ‘policy wonk’, but neither has a systematic framework or what some have called a ‘big idea’. Both develop policies that are responsive or at least appealing to their respective constituencies. In this respect, both candidates are more ‘whack a mole’ problem-solvers than driven by a core ideology or core idea. Those who follow them just believe their experience in business or politics, respectively, will lead them to the right solution.

This is one factor that dramatically differentiates Bernie Sanders from both Donald Trump and Hillary Clinton: Bernie has a big idea, which drives his positions on other policies and solutions to a wide range of problems. This even gives him problems when responding to ad hoc questions and issues. He has to think about how such issues resonate with his core ideas.

I could go on, but if you consider real comparisons of the candidates, and don’t uncritically accept the imgrespronouncements of pundits, you might well see that Hillary Clinton is a mirror image of Donald Trump. Bernie Sanders is not the Donald Trump of the Democratic Party. I know it is heretical, but it is Hillary!


No More Tweedledum and Tweedledee

Remember when everyone was complaining about voters having no real substantive choice among candidates for office? We were faced with a problem of deciding between Tweedledum and Tweedledee, two characters from Lewis Carroll’s Through the Looking Glass (1871). I’ll post John Tenniel’s illustration. No one could tell them apart and they became a common refrain of those complaining about how all politicians moved toward similar positions to appeal to the most voters.


These days seem to be gone, at least for now. The differences among the GOP Candidates for the Republican Presidential nomination are ‘huge’, to quote Donald Trump, and the differences between the Republicans and Democrats, even more so. Of course, Bernie Sanders, Martin O’Malley, and Hillary Clinton are also very different in personality, career paths, and policy positions. Across Europe, you can see the same pattern, with populist canidates from the left and right emerging as serious contenders for seats, such as between Nicolas Sarkozy and Marine Le Pen in the 2015 regional elections.

Many are worried about the rise of populist candidates, such as Donald Trump, but isn’t this what we asked for in complaining about lookalike candidates? If we trust democratic processes, might we assume this will begin to engage more people into learning about the candidates and voting in elections? Do we trust democracy?

Perhaps the viewing records for the US primary debates are symptomatic of greater voter engagement. And this makes the debates and all other aspects of the electoral process ever more critical to the future of governance in the United States and abroad. May the debates focus on generating real debates among the candidates, and not a set of serial interviews and gotcha moments, as I and Tracy Westen have been discussing in previous blogs, such as in our low grading of the Fox News-Facebook debate.