Made in ?

by Russ Roberts on November 7, 2007

in Trade

Where a product is made has no informational content. It is simply a way for some people to  pretend that their well-being and yours is the same thing. Kristyn Birrell of the Foundation for Research on Economics and the Environment has a very nice essay on labels in the Bozeman Daily Chronicle. It opens this way:

If you had a label, where would you be made? I would be “Made in
Valencia” or “Made in California,” or, if we took a broader
perspective, I could have one of those little flag logos on my sticker
and it would say “Made in the USA.” But would either of these
identifiers tell the whole story? Yes, I was born in the U.S., as were
my parents and grandparents, but what about more distant ancestors? My
father’s grandparents were born in Scotland, Italy, England, and
Germany, while my mother’s were born in Denmark and the United States.
Look back only three generations, and already my label has gotten quite
complicated—“Made in Scotland (1/8), Italy (1/8), England (1/8),
Germany (1/8), Denmark (1/4), AND the USA (1/4).” My label is not an
anomaly; most Americans have similarly complex histories. Given this
mosaic of hominal origins, what should we make of products whose label
proclaims simply “Made in Mexico” or “Made in China?”

Read the whole thing. It’s excellent.

Hal Varian made a similar point citing a study by Greg Linden, Kenneth L. Kraemer and Jason Dedrick. The iPod is "made in China." But what does that really mean? It’s assembled in China. But the value comes from all over the world:

…let us look at the production process as a sequence of steps, each
possibly performed by a different company operating in a different
country. At each step, inputs like computer chips and a bare circuit
board are converted into outputs like an assembled circuit board. The
difference between the cost of the inputs and the value of the outputs
is the “value added” at that step, which can then be attributed to the
country where that value was added.

The profit margin on generic parts like nuts and bolts is very low,
since these items are produced in intensely competitive industries and
can be manufactured anywhere. Hence, they add little to the final value
of the iPod. More specialized parts, like the hard drives and
controller chips, have much higher value added.

According to the authors’ estimates, the $73 Toshiba hard drive in
the iPod contains about $54 in parts and labor. So the value that
Toshiba added to the hard drive was $19 plus its own direct labor
costs. This $19 is attributed to Japan since Toshiba is a Japanese

Continuing in this way, the researchers examined the major
components of the iPod and tried to calculate the value added at
different stages of the production process and then assigned that value
added to the country where the value was created. This isn’t an easy
task, but even based on their initial examination, it is quite clear
that the largest share of the value added in the iPod goes to
enterprises in the United States, particularly for units sold here.

The researchers estimated that $163 of the iPod’s $299 retail value
in the United States was captured by American companies and workers,
breaking it down to $75 for distribution and retail costs, $80 to
Apple, and $8 to various domestic component makers. Japan contributed
about $26 to the value added (mostly via the Toshiba disk drive), while
Korea contributed less than $1.

The unaccounted-for parts and labor costs involved in making the
iPod came to about $110. The authors hope to assign those labor costs
to the appropriate countries, but as the hard drive example
illustrates, that’s not so easy to do.

This value added calculation illustrates the futility of summarizing
such a complex manufacturing process by using conventional trade
statistics. Even though Chinese workers contribute only about 1 percent
of the value of the iPod, the export of a finished iPod to the United
States directly contributes about $150 to our bilateral trade deficit
with the Chinese.

I love that last line. As loyal readers know, Don and I don’t put much stock in the trade deficit as an economic indicator. That last sentence from the Varian excerpt is one more reason to ignore the trade deficit.


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