What does "Made in ______" really mean? On Wednesday, we briefly discussed the idea of gross trade versus value-added trade in the context of the iPhone. The argument was that when the final assembly of the iPhone is imported to the US, its full value (say, about $200) is counted as imports from China to the US in the US trade balance. But really China's value-added is only about $6.50. The rest is made up of components built elsewhere, as well as design, marketing, and financial services that are carried out here, in the US. Scott Lincicome offers a nice graphical example showing how these vertical supply chains work, and where things are typically made from start to finish (I do have a minor quibble with him including the sewing machines in the supply chain, because those aren't really "components", but let's look past that).
The bottom line is that vertical FDI allows firms to specialize production of various stages of production in multiple locations to best exploit the gains from trade and comparative advantage.
We will talk more about the gains from trade and comparative advantage in Chapters 2-4 of the textbook, and more about vertical FDI in Chapters 5 and 7. However, the way that comparative advantage is exploited internally by the firm when it engages in FDI highlights the distributional impacts of trade along the lines of comparative advantage: For the country that is sending capital abroad, the shareholders who own the capital win, as do consumers; the workers who were once employed by that firm domestically lose; yet, the net effect is positive.
I think that the graphic provided really shows what a global economy we have and why international economics is so important. Clearly it would make sense for different parts of something like clothing to come from different areas in regards to a countries inclination towards its natural resources, such as cotton or steel. It makes sense that it would be more economical for a company to get steel from a country rich in the resource then one that is not.
ReplyDeleteOn another note why would a company like Apple want to produce the IPhone entirely in America when they can get the same quality or better at a far cheaper price outsourcing elsewhere and thereby gaining a higher profit margin and appeasing their stakeholders?
Patriotic arguments aside, while I am not arguing that Americans do not deserve a livable salary for working in say a factory, it just would not make sense for a business to pay that much more for the same thing just to brag that the item is made in the USA. If they did they would have to charge that much more for the product to meet their desired profit and then consumers would be complaining about the price and may be less inclined to buy.
Probably, early before Columbus started his expedition the FDI exists globally. Brilliant merchants exported abundant resources and imported rare goods to earn profit.
ReplyDeleteChina is a Apple manufacturing factory just because the salary there is cheap. Nevertheless, as the human resources cost growing, global enterprises such as Nike move their factories away from China to where benefit themselves more. For example, Pakistan.
China also invests the third world county. They built a lot of mine fields in Africa. Use technique and cash to exchange resource. But to be honest, American stockholders provide a better income to their foreign employees than what Chinese do to Africa.
What I mentioned before is to illustrate that FDI is a globalize behavior, and it affects every aspect of tangible and intangible products. Due to geography and location difference, FDI is the best way to allocate resources to the proper places.