Apple execs (like everyone else) overlook global exchange rates

Charles Duhigg and Keith Bradsher have a justly buzzed-about article in the New York Times this week on how the production of the iPhone (and Apple products more generally) has become almost completely globalized. A quick but important addition to their story, though, is the role of exchange rates. Yes, I’m getting boring on this topic, but, exchange rates are by far the single most important determinant of U.S. trade performance, so if the question is “why isn’t X made in the US anymore,” it’s very likely that the answer remains “the dollar is overvalued.”

And, strikingly, even the Apple-specific timeline fits the data regarding the biggest exchange rate development – China’s mammoth intervention in international currency markets to keep their own currency from rising vis-à-vis the dollar. This is how Duhigg and Bradsher write it up:

“In its early days, Apple usually didn’t look beyond its own backyard for manufacturing solutions. A few years after Apple began building the Macintosh in 1983, for instance, Mr. Jobs bragged that it was “a machine that is made in America.” In 1990, while Mr. Jobs was running NeXT, which was eventually bought by Apple, the executive told a reporter that “I’m as proud of the factory as I am of the computer.” As late as 2002, top Apple executives occasionally drove two hours northeast of their headquarters to visit the company’s iMac plant in Elk Grove, Calif. But by 2004, Apple had largely turned to foreign manufacturing….”

So, after 2002 Apple more and more turns to China for manufacturing? Huh. Not surprising – the graph below shows that the pace of Chinese accumulation of U.S. reserves (which leads inexorably to rising pressure on the dollar’s value, keeping Chinese products more competitive in U.S. and global markets) coincides with an accelerating increase in the U.S./China trade deficit around this time as well.

There is, after all, a reason why economists harp on the importance of the exchange rate – it drives lots and lots of hugely important economic decisions. As China intervenes to keep the value of its currency from rising against the dollar, this gives them an ever-increasing cost advantage versus the United States. The result is lots and lots of individual firm-level decisions (like Apple’s) to produce in China rather than the United States (because the exchange rate makes it cheaper) and the sum of these individual decisions cumulate to a huge aggregate trade deficit. The macro downsides of this trade deficit have been documented plenty of places, but if you’re writing about any feature of the US/China economic relationship and not mentioning this currency issue, you’re essentially writing Hamlet without the prince.

It’s frankly kind of amazing that Apple executives quoted in the article tell stories about how their global sourcing shifts are really about American skills, while managing to not mention global exchange rates. After all, there is an obvious trend in exchange rates and currency intervention that hamstring American competitiveness vis-à-vis China in the early-to-mid 2000s – but it’s awfully hard to make the case that American workers just got a lot dumber at the same time. But maybe blaming American workers can get some government subsidies for Apple to hire and train people in the U.S., while pointing out the effect of exchange rates might just lead to calls to rebalance the status quo U.S./China trade relationship – a status quo that has served Apple (and many other global manufacturers) very well.


  • Anonymous

    Josh,
         Thanks for your excellent note. The virtual absence in America today of any focus on the exchange rate as a key driver of important economic decisions and developments is simply appalling. You and Rob are doing a great job trying to correct this serious blind spot.
         I would suggest, however, that we should examine not only the misalignment of China’s currency, but that of the U.S. dollar as well. According to the latest data from the Peterson Institute, the dollar today is roughly as far out of line with its fundamental equilibrium rate as China’s currency is.
         Why is it that even serious economists, seem to think that, when exchange rates are out of line, the problem lies with currencies other than the dollar? They act as though the dollar is still the center of the monetary universe.
         Much like the men in pre-Galilean days who thought that the sun revolved around the earth, they act as though all other currencies revolve around the dollar. And like the doting mother watching the cadets on parade, convinced that everyone but her son is out of step, when a currency misalignment exists, analysts in America today claim that the dollar’s value is just fine, thank you. The other currencies — like the yuan — must adjust to the dollar.
        For more on the dollar’s still-serious misalignment and what should be done to fix it, please see my recent comment on Rob’s excellent note on Obama’s State of the Union address.
    Regards,
    John Hansen, PhD
    World Bank (retd)