Where was your iPhone ‘made’? Modern commerce defies old-style measures.
FROM THE WALL STREET JOURNAL | OCTOBER 8, 2015
The 12-nation Trans-Pacific Partnership trade deal signed Monday is poised to become an election-year piñata as the Obama administration works to get it through Congress. Hillary Clinton, who supported the TPP when she was secretary of state, came out against it on Wednesday: “I don’t believe it’s going to meet the high bar I have set.” Sen. Bernie Sanders, her rival for the Democratic presidential nomination, issued a caustic statement: “It is time for the rest of us to stop letting multinational corporations rig the system to pad their profits at our expense.”
On the Republican side of the presidential-nomination race, Donald Trump and Carly Fiorina separately denounced the pact as an assault on American business.
Labor leaders in turn excoriated the TPP for accelerating the loss of American jobs, while companies such as Ford Motors came out against it because of the perceived lack of protection against currency manipulation.
The TPP is the definition of a Big Deal. The dozen countries involved, including Japan, Malaysia, Australia and Mexico, account for about 40% of global GDP. President Obama has made passage a priority, couching the pact in terms of who will write the rules of the new global economy, China or the U.S.
Yet much of the passion stirred by the deal is reminiscent of the wrangling over the North American Free Trade Agreement two decades ago—and feels about 20 years out of date. It isn’t simply that commerce has increased, regardless of tariffs and friction. Supply chains have evolved into an interlocking global lattice in which few countries are unaffected, and the ones left out tend to be the basket cases of the international system, from Afghanistan to North Korea.
The dispersion and complexity of supply chains has happened too rapidly for our statistical map of the world to catch up. Much of global trade today consists of companies shifting parts from factory to factory, country to country, to make a finished good. The result is that our centuries-old understanding of trade hardly captures its reality today.
Think of the iPhone. On the back of each handset, in print so tiny you may need a magnifying glass, it says “Designed by Apple in California. Assembled in China.” That is Apple’s way of communicating a complicated reality that, in the land of trade statistics and common understanding, is reduced to a simple formula: A product is made where it has undergone its last “substantial transformation.” The product is then assigned to that place, and hence an iPhone is, in trade terms, “Made in China.”
But it isn’t, really. The phone is assembled from parts made in multiple countries, and as researchers have found, only a small portion of its value comes from China or goes to China. In trade land’s calculation of imports and exports, however, all of that is moot. The same is true for thousands of products large and small that have multiple parts, from the Boeing 787 Dreamliner to the engine in your car.
The way things are actually made in the world today is largely invisible. But the correlations between the world today and trade pacts are all too visible. Since the General Agreement on Tariffs and Trade became the World Trade Organization in 1995, since Nafta and since dozens of smaller trade agreements in the period that followed, wages in the developed world have been flat and manufacturing jobs have evaporated at an alarming rate. Farmers, whose goods do indeed come from one country and one country only, have faced an uphill battle to maintain domestic prices protected only by tariffs. It is, therefore, easy enough to establish a simple logic that trade pacts cause wage stagnation and job losses.
But it’s much more complicated than that. Tracking the economic effect of the free flow of goods and ideas isn’t easy. (The TPP takes an antiquated approach to intellectual property that could impede the free flow of ideas by strengthening the enforcement of trademarks and copyrights.) A binary view of trade as countries making stuff and selling stuff overlooks not only the multiple-countries-of-origin problem, but also the vast trade in services that we struggle to measure and understand. Tourism and travel of foreign visitors to America, for instance, are counted as a U.S. export of services. And it is one of the major U.S. exports to the world today—at more than $150 billion, it accounts for nearly 9% of all U.S. exports.
Yet the trade debate primarily focuses on goods, because that is what most people think of when they think of trade, and because monthly Census Bureau trade figures by country report only goods. Over the past few decades, the U.S. has imported more and more goods, such as the iPhone, and exported more and more services, such as ideas and tourism. Millions of jobs directly relied on the old export of goods in traditional industries, but the new model of ideas and services employs fewer people directly and who-knows-how-many indirectly. We know how to count what has been lost; we have hardly begun to figure out what is being gained. That helps explain why so many associate more trade with fewer jobs.
The fight over the TPP is a 20th-century argument over who makes what and sells what across borders that are increasingly porous—and cannot contain the flow of ideas and commerce that will define the years ahead.