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To: Mr. Rational
Oh, I don't think we ignored China. I was speaking to your post.

Perhaps it would help if you could further elaborate on what you mean by "the value of shipments (and ownership of intellectual content of those shipments)"? I take that to mean you put more value on the "intellectual content" over the raw material, manufacturing, and packaging. IOW, if we can claim the "IP" of aproduct and price that component somehow, that that value overwhelms all the manufacturing aspects. But I am not sure that is what you meant.

32 posted on 12/20/2005 4:40:06 PM PST by bvw
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To: bvw

To explain - you are using the term IP - which can be broadly or tightly defined. Tightly it might be a patent, broadly it would be the design knowledge/content.

I don't want to spend a day on this - so will give a very brief probably flawed but approx OK explaination.

Lets take an Apple Ipod. They are made in China. Apple designs unit and chips and software. Retail = $300. Best Buy keeps $100. Apple keeps $100. (Maybe more). China assembles $50 in parts with $30 in labor and sells to Apple for $100. This shows up as balance of trade as plus $100 for China. Yet results in China margin $ of about $20. Apple sees ZERO in trade - because the IP was shipped out of the US at no charge - they are just building to the Apple design. Yet Apple has $100 in profit margin.

So for every IPOD, China trade balance grows $100. China profit grows $20. US profit grows $100 (plus retail margin - but I'll drop that). Question - which business would you rather own? Which is more profitable? Yet this business creates huge negative balance of trade for US.

Now sell the same IPOD in Japan. Apple still gets their $100, for Apple Japan subsidiary. China ships $100, but Apple imports and sells in Japan - the Ipod never enters the US - so Apple makes again $100, China makes $20, trade goes China plus $100, US - no trade impact.

Lets make a DVD player (although this market is a bit passe). US designs a chip with $5 IP content on a $1 chip. Sells it into a DVD player for $10. Chip made in China. DVD player made and assembled in China. China makes $5 on the whole DVD player, US chip desinger makes $9 on their content. The $10 chip never comes back into the US, because it never left, as only the design left the US at zero value. The DVD player comes back to the US at $40ish/ China sees $40 in balance of trade, US sees -$40. China profit = $5, US profit = $9. (This is not so silly - if I remember correctly, all the little red diodes that were used for DVD lasers came from one company's IP (somewhere near San Fran) - they were making something like $4/diode for a $0.50/part per DVD player. It might have been a CD recorder, I can't remember.)

So it is a question of who is making money - not who is making balance of trade.

This is a strange new way of looking at trade, which is not accepted by economists in general. However, if you ask most economists to explain trade in the last few years - they would be dumbfounded. Remember - most expected the $ to drop significantly this year - it rose. Most expect that this "balance of trade" can't go on - yet it is 20 + years since first we were frightened with Japan Inc, now China inc. Our market keep going up.

This is approx what is going on in many sectors. So it becomes a question of "Balance of trade" vs "Balance of profit". I do not know the answer. I do know that the original writer of the article hasn't even stopped to consider these efffects.

It could be caused by the "imbalance" in margin in the modern world - traditionally everybody had maybe more similar margins. Now that some parts are so much more valuable than others, and trade is so international, the "balance of trade" thinking may not work correctly.

As for US mfg base, I leave it to others to explain how Honda can make a better car in Ohio than GM can make in Michigan. That is fodder for books, not emails.


33 posted on 12/20/2005 8:10:14 PM PST by Mr. Rational (God gave me a brain and expects me to use it)
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