Mercantilists are simply wrong.
The are mistaken in arguing for the "currency valve" policy option to address global ‘imbalances’. That’s because these mercantilists read or interpret trade as operating simplistically in an “aggregate” manner.
Yet as this study based on the iPhone’s business process shows, trade hasn’t been that simple.
Trade has been swiftly evolving in such a way that has deepened the role of specialization (division of labor) and national comparative advantages which has affected how “imbalances” are being shaped.
To add, current statistical aggregates tend to overlook many important data points which have been used for policy analysis. This makes many of these politically sensitive data unreliable.
Illustration from Wall Street Journal Blog
The following conclusion from Yuqing Xing And Neal Detert on their paper “How iPhone Widens the US Trade Deficits with PRC” (all bold emphasis mine)
In this paper, we use the iPhone as a case to show that even high-tech products invented by American companies will not increase US exports, but to the contrary exacerbate US trade deficits.
Unprecedented globalization, well organized global production networks, and low transportation costs all contribute to rational firms such as Apple making business decisions that contributed directly to the US trade deficit reduction.
Global production networks and highly specialized production processes apparently reverse trade patterns: developing countries such as PRC export high-tech goods—like the iPhone—while industrialized countries such as the US import the hightech goods they themselves invented. High-tech products such as iPhones in this context do not help increase the US exports, but instead contribute to trade deficits.
In addition, conventional trade statistics greatly inflate bilateral trade deficits between a country used as export-platform by multinational firms and its destination countries. In the case of iPhone trade, China actually contributed only 3.8% of the United States’ US$1.9 billion trade deficit, the rest was simply a transfer from Japan, Korea, and Taipei,China.
If the US high-tech companies, such as the Apple, are willing to share their profits with low skilled American workers by keeping assembling jobs in the US, it would be more effective in reducing the US trade deficits than targeting the exchange rate policy of PRC.
University of Michigan Professor Mark J. Perry has a nice illustration of the composition or breakdown of revenues of the iPhone per location/geography as shown above.
He also notes that
“only about $6.54 (a little more than than 1%) of the full $600 retail price of an iPhone goes to China and more than 60% goes directly to Apple and other American companies (see chart above), according to a "teardown report" by iSuppli that was featured in a July New York Times article. It also doesn't mean that your purchase of an iPhone contributed very much to the U.S. trade deficit, even though that's what the government trade statistics tell us.”
So despite being assembled or "made in China" most of the profits still accrue to the US.
Bottom line: Globalization equals “imbalances”. That’s because of the fast evolving supply chain platforms or networks which has been determining the trading patterns globally.
Yet interventionist policies based on easy fixes are likely to backfire since they do not address the business and micro realities of trade.
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