Looking forward to the follow up!

Interesting posts so far.

The study found that China is actually not doing much of the manufacturing. In fact, it is mainly assembling the various parts of the iPhone into the final product and then shipping that to the United States.

That wouldn't surprise me. The wave of FDI into China got its start in foreign corporations using China as a kind of "final assembly" point, so the fact that that is continuing isn't surprising.

Why then, doesn't America make the stuff it says it ought to be good at making?

I figure it's a cumulative process of returns to skill and high productivity in these sectors in Japan and Korea, that started when they took advantage of a technological revolution in computer technology at the right time. Some of Japan's export sectors have very high productivity (particularly compared to much lower productivity in much of their Service Sector).

...and a good place to start is this blog (I filtered out his posts on manufacturing):

http://mjperry.blogspot.com/search?q=manufacturing

Remember, a trade deficit is just another way of saying that the rest of the world has a capital investment surplus in America -- they have to do something with all those dollars they make off of us and most foreigners lend their dollars right back to us.

Another great blog for trade basics is "Cafe Hayek":

http://cafehayek.com/

Don has just been ripping apart Ian Fletcher.

I am glad that you hanged the various myths about China making the iPhone. Also, I found this excerpt on Michael Pettis' blog, about China's impending economic rebalancing act, which I thought might be helpful in explaining the current situations of Korea and Japan regarding their lead in capital/tech-intensive industry:

"The good news for China is that raising the RMB shifts income from the tradable goods sector to households, and so lowers the trade surplus. The bad news is that if this happens too quickly, and results in an increase in domestic unemployment, as export companies experience financial distress or move abroad, gross household income might actually decline. The rebalancing would still take place, but it would take place very painfully.

So how would China respond? Almost certainly by stepping up investment and lowering real rates. This effectively shifts wealth from households to borrowers, and allows the capital-intensive sector to take up the slack created by the contracting tradable goods sector (and of course there is a lot of overlap between the two)."

This sounds like what happened to Japan in particular, to a tee. Japan saw its investment-driven growth strategy hit a wall, revalued the yen quite rapidly, and ultimately ceded much of its labor-intensive manufacturing sector to countries like China and Vietnam, while picking up the slack (albeit painfully and slowly) in industries like semiconductor manufacturing. The industrial shift made even more sense in light of Japan's declining workforce, which is also a problem for Korea and is rapidly becoming a problem for China. Japan and Korea used to stoke growth with investment binges and labor-intensive industry, before hitting a wall that required an economic reinvention; this seems like an inevitability for China, too.

If I had to venture a guess, I think America is in a bind in large part because of the dollar. Countries whose currencies are predominant reserve currencies almost always run account deficits. Furthermore, their attempts at altering the exchange rate of said currency is always a controversial matter because it jeopardizes the forex holdings of account surplus countries: just look at QE2, and China's complaints that Bernanke is routing their $2.7 trillion stash of USD.

Compared to the yen, the won, or the yuan, the dollar is still relatively expensive, and will only become more so if and when the bubbles in gold, oil, and silver burst. Far from being a benefit, the USD as reserve currency is a curse that is holding back America's trade strategy.

After a long time, a brilliant article based on fact, illustrated in a simple language that every reader can udnerstand and touching most important part of American foreign Policy! International Trade in technological products!

Keep it up!

I can't wait to hear the reason so I'll take a stab at the answer myself.

Making devices like the iPhone and its component parts calls for the most rigorous and dedicated attention to detail; an obsession with the highest quality and the ability to turn out such items on a massive scale. It calls for the human quality that America is fast losing: discipline! Workers need to do what they are told and do it fast and do it well.

As the Hip-Hop generation moves into the workplace and, even more significantly, into management positions, they bring along with them their values: instant gratification, cultivated "attitude", "freedom!" and a rejection of authority and, most of all, the concept of discipline. For employers, these people represent a nightmare and, as a one time manufacturer myself, I shudder at the thought of having to constitute a coherent team here in the West today.

Asia, whose children are still lean and hungry, has not yet been spoiled as we have and there the work ethic survives - for those of you who have flown on one of the East Asian airlines and been able to compare the service to a Western one, this will be totally obvious.

The difference therefore is discipline and hard work and that's why iPhone isn't made in America.

There is definitely little value add in China, but that is really just looking at one side of the bookkeeping because the real input is higher. The reason it doesn't appear much is going to China, is because of their currency. If we compared human effort, it would be higher. And as the US dollar continues to fall, it is human input that will underscore the balance of payments.