On Sanders, Trump, Apple, Economies of Scale, and Global Poverty

Here’s how much your iPhone would actually cost under Sanders’ or Trump’s plans.

CC BY Steven Depolo

UPDATE April 8, 9:15am: There are two revisions to this piece to better elaborate the actual argument I’m making; first, a rephrased conclusion for the iPhone price calculation section, and then an extended part for the global poverty aspect.

I expressed my concern on Twitter over Sanders’ comments regarding Apple’s manufacturing, which displayed once again the candidate’s preference for seeing things in simplistic terms when the reality is much more complicated. In this case, it also made me question Sanders’ insight in both global logistics and economies of scale.

I delved into the matter further; perhaps I had misunderstood Sanders’s position or proposals, here. However, the more I did so, the more I discovered that the unintended consequences of his plans on free trade agreements are downright concerning.

But first a step back. Jonathan McIntosh defended Sanders’ comments on Apple (aside: note the last word in his tweet), and displayed similar ignorance of the complexities involved in bringing his shiny Mac or iPhone to his door. Now, that sounds harsh, so I want to stress this first: I firmly appreciate the underlying argument and concerns made by Sanders, McIntosh, and whoever else, so I’m writing this to elaborate on the manufacturing problem from all the angles, with the nuance and care it requires — something ill-afforded by Twitter.

Manufacturing In America™

American manufacturing played a huge role in building up the moral and industrial fabric of this nation. The post-WWII era slowly saw a decline in these kinds of jobs as they were gradually shifted overseas, leading to increasing (and perfectly understandable, if misplaced) resentment towards immigrants among the Americans who lost their jobs as a result. Eventually, that resentment came to encompass much of the idea of corporations as well, with many seeing these huge companies as gutting the American economy with their offshoring of jobs.

All of those are legit concerns. I’m not arguing that there isn’t a problem here that needs addressing. I’m arguing that Bernie Sanders, Donald Trump (yes), and their respective supporters are seeing the issue too simplistically, and it’s leading them to support proposals that are naïve and poorly thought-through.

Comparing Apples to Teslas

Let’s compare Apple’s manufacturing needs with a company that proudly manufactures as much as possible here in the USA: Tesla. Obviously, a car is incomparable to an iPhone in many ways, but some aspects can still be compared to help shed light on this.

First, there is scale: Tesla manufactured 50,000 cars in calendar year 2015. By contrast, Apple has to manufacture more than 500,000 iPhones every day (and still fails to meet demand at times). While iPhones may be much smaller, a lot of manual labor is involved in addition to the robotic assembly and processing: 200,000 Chinese workers are assembling iPhones, and that’s ignoring Apple’s other product lines. Overall, Apple says it indirectly employs 1,000,000 people in overseas assembly and related work, but we’ll use the 200K of the iPhone for this example.

Second is skill: Tesla’s manufacturing is in a field America has a long and skillful history for; Apple’s manufacturing needs are not. They require skills no longer so readily available in the U.S. But, let’s imagine for a moment that it does, or that America decides to rapidly train 200,000 people to be sufficiently skilled for Apple’s manufacturing to happen domestically. What would that do to the price of an iPhone?

The Federal minimum wage is $7.25. We’ll use 8 hours a day, even though that’s unrealistic since in China they work many more hours (Apple forces its supplier factories to limit hours for employees to avoid exploitation of human labor; but, yes, they can still do more). Realistically, Apple would need far more than 200K workers domestically to meet production demand, further driving up the price. But, we’ll ignore that and stick to 200K:

200,000 ✕ 7.25 / hour ✕ 8 hours a day = $11,600,000

The Foxconn hourly wage was between $1.50 and $2.20 in 2012, but it’s been raised somewhat so let’s say it’s currently $2.50. That means where Apple now spends $4MM on assembly wages (if we’re limiting it to 8 hours a day, we have to do that both ways), it would jump to $11.6MM done domestically. The iPhone price goes up little over $15 — not so bad, right?

$11.6 mil domestic — $4 mil Foxconn = $7.6 million
$7.6 mil divided by 500,000 phones / day = $15.20 / phone

However, that’s assuming Apple can hire 200,000 workers at minimum wage. The current mean hourly wage for that kind of worker is actually well above that, at $20.50 / hour. That raises our price increase to $57.60 per iPhone:

200,000 ✕ 20.5 / hour ✕ 8 hours a day = $32,800,000
$32.8 mil — $4 mil = $28.8 million
$28.8 mil divided by 500,000 phones / day = $57.60 / phone

Of course, we’re a country with increasingly good healthcare and benefits for employees (a strangely Capitalist approach to human health, but I digress), so we have to add 20% to that for what it’ll actually cost Apple, further raising the price to $70.72:

200,000 ✕ 20.5 / hour ✕ 8 hours a day = $32,800,000
+ 20% Health & Benefits = $39,360,000
$39.36 mil — $4 mil = $35.36 million
$35.36 mil divided by 500,000 phones / day = $70.72 / phone

So at a bare minimum iPhones would cost $70 more just to break even on this change, and that’s still ignoring the additional jobs for managers and what-not driving up the price even further. But we’re not done yet!

To move this manufacturing and assembly domestically, Apple would need to either ship the materials and components from east Asia to the USA for processing and manufacturing here as well, adding to that cost picture significantly while probably creating even greater environmental impact than it’s causing now.

So let’s say that, instead, Apple tries to source as much of the raw materials as possible domestically, too: this comes at the domestic rates for that, which are significantly higher than they are in Asia. Getting financial numbers on this is hard without a huge amount of insider knowledge, but let’s assume these costs are at most 30% of the manufacturing price of an iPhone itself, which is estimated at $236. That’s another $70.80 on top. Now your iPhone costs $141.52 more to make.

There are still other logistics costs and who-knows-what that I’m not including (who’s going to pay to build these new assembly & manufacturing factories? Who’s going to pay for the required training of 200,000 workers?), but for the sake of argument let’s say they don’t add up to that much more, and round this all up to a nice $150.

$150 dollar price increase on a $750 device. That’s 20%.

Oh, and add taxes to that, instead.

Now let’s imagine that a hypothetical President Sanders does cut these trade agreements, or a hypothetical President Trump raises tariffs on imports from China. This won’t affect just Apple, this will affect every product that is imported, included the resources, materials and components used in the domestic manufacturing and assembly (be it currently or under this hypothetical future where Apple assembles domestically).

You’re not just looking at your iPhone becoming a lot more expensive, you’re looking at almost everything becoming a lot more expensive, by at least 20%. And at there being a lot of angry nations unhappy with the USA. This protectionism would likely inspire similar protectionism in other countries, putting us back in the position we were in during the Great Depression — a position the United Nations was deliberately formed to prevent from happening again, as it played a role in leading to World War II.

Of course, the minimum wage increases and new jobs may be enough for the lower and middle class to compensate for this dramatic increase in costs of goods from domestic manufacturing. What is less clear is whether this new global protectionism will not lead to massive price hikes on other goods from Europe, which it likely will. There is also the concern for ripple effects on adjacent industries that rely on consumer markets to consume heavily, not just at the bare minimum rate it can just about afford.

And of course, having people making products be paid the fair wages they deserve is obviously a good thing. But the question is who do we actually pay fair wages to, why, how, and what are the consequences of moving all that work back to the U.S. for other countries?

Looking Beyond China (UPDATED)

A lot of manufacturing for the iPhone happens outside of China. Several of the components are already made in the USA, while others are made elsewhere in Asia, as well as Europe. This global trade is not a simple deliberate scheme by corporations to exploit cheap labor around the world, but rather a deliberate global partnership by governments who willingly and intentionally have added a level of economic dependence on each other in order to discourage war breaking out. This is why the United Nations exists.

So whether it’s Sanders’ plan to cut trade agreements or Trump’s plan to raise huge tariffs on imports from China, it would not “simply” make corporations manufacture here. It would take years to build up the new infrastructure and logistics that are needed for that, and it would make America play very much not nice to its allies all around the world. That has repercussions.

But that’s not even the most concerning impact. While it would indeed be great to bring a lot of new jobs and infrastructure investment back to the U.S., the costs to the rest of the world would be tremendous, as Zack Beauchamp points out over on Vox:

If Sanders wins, and is serious about implementing his trade agenda, he will impoverish millions of already-poor people.

The United Nations Millennium Development Goals Report of 2015 shows that:

Developing countries as a whole are playing a growing part in world trade. Their share of world merchandise exports increased from 31 per cent in 2000 to 44 per cent in 2014; their share of world trade in services grew from 24 per cent to 30 per cent over the same period.

The report also shows that global poverty worldwide, but especially in developing nations, has steadily decreased as a direct result of these trade agreements. There are, however, hundreds of millions of people around the world who live just above it, or even comfortably above it, whose incomes would disappear were these manufacturing jobs brought back to the U.S.

The member states of the G20 have specifically committed and agreed to reduce protectionist measures, in the aftermath of the 2008 financial crisis, but it’s important to note that they have not done this completely: there is still a 77% gap in measures introduced that have not yet been rolled back. This is an area where a Presidential candidate should focus on, but there’s more.

The choice seems like it comes down to this: help the American lower and middle class with a return to the manufacturing levels of the 1950’s while throwing the world’s poorest into economic disarray, with possibly huge costs to the entire global economy as a result? Zack Beauchamp is not convinced by Sanders’ vision for it:

Sanders’s war on trade might be aimed at helping the American working class. But if he were really serious about it, the damage to the world’s very poorest would be astronomical.

(This is one of the reasons why I support Hillary Clinton, the candidate who is consistently willing to look at such incredibly complex situations with nuance and restraint, who is unwilling to make the politically convenient, but realistically problematic, hardline promises that display more ignorance than foresight.)

The reality is that we should pay more for our iPhones and other goods, because the people making our goods are being paid sufficiently, but not well. We also should keep pushing for corporations to be less exploitative of cheap labor, and this is one area where Apple is leading the charge but can still do much, much more.

But more importantly, we should also find common-ground solutions to the problem Americans are facing, which is stagnant growth or even decline in a large number of jobs across various sectors. Government incentives to certain opportunities that are better suited here in the U.S. can play a role in that, such as the renewable energy sector (who donate most to Hillary Clinton, it should be noted). Some manufacturing can obviously move to the U.S. without impacting the world, but to do so we don’t need to cut trade agreements nor impose huge tariff spikes.

The reality requires a nuanced, carefully considered approach, and not the simplistic hardline stances Senator Sanders and Donald Trump like to take.