Why The iPhone Adds $1.9 Billion A Year To Our Trade Deficit With China

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The iPhone is designed in America. It's built of parts made by companies based in South Korea, Germany, Japan, and the U.S., among other countries.

Those parts are assembled at a Chinese factory owned by a Taiwanese company. The cost of assembly is about $6.50 per phone.

But the entire manufacturing cost of each iPhone -- about $179 for each iPhone 3G, as of 2009 -- is counted toward China's export totals.

As a result, the iPhone wound up adding $1.9 billion to America's trade deficit with China last year, according to a new paper by a pair of Tokyo-based economists.

It would make more sense, the authors suggest, to calculate the trade deficit based on the amount of value added in each country. If we did that, the iPhone would no longer contribute to our trade deficit with China.

The broader idea here -- that trade figures are calculated using methods that haven't kept up with global supply chains -- has been around for a while now.

In a story today on the paper, the WSJ quotes from a recent speech by a Pascal Lamy, director-general of the WTO.

"The concept of country of origin for manufactured goods has gradually become obsolete," Lamy said. The WSJ continues: