The Apple iPhone shows that Trump is misreading trade deficits and what they mean

President Donald Trump's threat to impose steep tariffs on Chinese exports to the U.S. would probably inflict a lot more harm on American consumers than it would on China.

To see why, you have to understand how Trump's policy apparently misreads the reasons the U.S. runs a trade deficit in the first place.

"Last year, we lost $500 billion on trade with China," Trump said, erroneously, at a March 23 news conference. "We can't let that happen."

To begin with, Trump's math is off — by more than $100 billion.

A trade deficit occurs when the value of imports is greater than the value of exports, in terms of both goods and services.

Last year, the U.S. imported roughly $505 billion of Chinese goods and shipped about $130 billion back, a difference of around $375 billion.

And Chinese-made products like his Apple iPhone, for example, represent a big part of that deficit, even though many of its most valuable parts come from other trading partners.

Some $70 billion of the U.S. trade deficit with China is from shipments of cellphones. But that $70 billion is not an accurate measure of the value China added to the cellphones it shipped to the U.S.

That's because the accounting used in the "official" trade statistics hasn't kept up with the growth of global supply chains, which source parts and raw materials from multiple countries to make a single product.

"About two-thirds of world trade now is involved in value chains that cross borders during the production process," said David Dollar, a senior fellow at the John L. Thornton China Center, in a blog post.

Each country that adds a link in the chain also adds a little value to the final product. But those intermediate contributions are rolled up into the final export value that tallied when the product reaches its final destination. As a result, much of that $70 billion U.S.-China cellphone trade deficit really comes from other U.S. trade partners, such as South Korea, Japan and Singapore.

To better understand why that happens, all Trump has to do is take a closer look at his iPhone the next time he tweets.

Of the $1,000 retail price, about $370 represents the cost of making each phone, including parts and assembly costs, according to an analysis by IHS Markit. The most expensive part, the display, comes from Samsung Electronics in South Korea and represents about $110 of the final price of the phone.

Another $44.45, for memory chips, goes to Japan's Toshiba and South Korea's SK Hynix. Other suppliers, from Singapore to Switzerland, provide parts and components that are assembled by a contract manufacturer in China. But the value Chinese workers add by putting those parts together represents only between 3 and 6 percent of the retail price of the phone, according to the IHS Markit analysis.

When the assembled phone is shipped to Apple and its distributors in the U.S., though, the entire $370 cost of making it — including parts — is rolled into the "export value" and becomes part of China's total trade deficit with the U.S., even though much of the value was added by suppliers in other countries.

That also means any tariff on Chinese shipments of iPhones to the U.S. would also hurt the countries caught in the middle of that supply chain, as well as the American consumers who would pay more for the phone.

Discounts could evaporate

Companies that produce products globally aren't the only ones who benefit from these multinational value chains. So do the consumers of the much cheaper products that result.

Slapping large tariffs on the movement of goods and materials across borders would quickly drive up the prices of goods whose producers rely most heavily on global supply chains.

American consumers have enjoyed substantial discounts on these goods over the last two decades as the pace of globalization has picked up. With steep tariffs, those discounts would evaporate.

Trump's obsession with the trade deficit in goods made in China also conveniently ignores a widening U.S.-China trade surplus in services.

When a Chinese family travels to Disneyland on a U.S. airline or a Chinese student pays tuition to an American university, that adds to the trade surplus for the U.S. Last year, the U.S. services trade balance with China widened to $36.8 billion.

The growth in that trade surplus reflects a broader shift in the U.S economy away from manufacturing toward service industries.

And because fewer of those service providers rely on supply chains that cross borders, a greater share of the value they created stays within U.S. borders and benefits American workers.


Get the best of CNBC in your inbox

Please choose a subscription

Please enter a valid email address
Get these newsletters delivered to your inbox, and more info about our products and service. Privacy Policy.