The High Price of Complex Global Supply Chains

The High Price of Complex Global Supply Chains

Electronic companies say it is impossible to trace the source of minerals used in products. But, a dealer in Eastern Congo shows minerals from a rebel-held mine and non-conflict minerals. Photo: <a href="">Grassroots Group (flickr)</a>
Electronic companies say it is impossible to trace the source of minerals used in products. But, a dealer in Eastern Congo shows minerals from a rebel-held mine and non-conflict minerals. Photo: Grassroots Group (flickr)

To cut costs, some U.S. companies source and assemble materials overseas, which can make it hard to track a complex global supply chain. It also means that a product designed by a U.S. company but manufactured in China could be considered a Chinese export. For example, take the iphone, designed by the California-based company, Apple. The Wall Street Journal recently reported on findings from researchers at the Asian Development Bank that estimate the iPhone contributed $1.8 billion to U.S. trade deficit with China last year because technically, the iPhone is a Chinese export.

The problem, according to the Asian Development Bank researchers, is that the trade imbalances are determined through an outdated measurement system that doesn't really work for today's globalized economy. "[T]raditional ways of measuring global trade produce the number but fail to reflect the complexities of global commerce where the design manufacturing and assembly of products often involve several countries," they explain to The Wall Street Journal. According to the current measurement system, American products manufactured overseas can be categorized as as U.S. import.

Going back to Apple's iPhone, The Wall Street Journal explains how the current system gives China full credit for Apple Inc.'s iPhone, even though Chinese labor only accounts for 3.6 percent, or $6.50, of the total $178.96 estimated wholesale cost. Even WTO director-general Pascal Lamy agrees that the concept of country of origin as a way to measure exports has become "obsolete," according to The Wall Street Journal. Lamy adds that using a value-added approach would be more appropriate for today's globalized economy.

Mr. Lamy said if trade statistics were adjusted to reflect the actual value contributed to a product by different countries, the size of the U.S. trade deficit with China—$226.88 billion, according to U.S. figures—would be cut in half...If China was credited with producing only its portion of the value of an iPhone, its exports to the U.S. for the same amount of iPhones would be a U.S. trade surplus of $48.1 million, after accounting for the parts U.S. firms contribute.

But, the lack of transparency and inability of U.S. companies to accurately track their supply chains, prohibits a value-added approach from being used. This can create real-world consequences, explains The Wall Street Journal article, because political battles are waged on the basis of these trade figures.

Ambiguous supply chains are exacerbating other hot-button topics like human rights and fair labor issues. Consider Coltan, or tantalum, which is a metal used for various consumer products. Around 80 percent of the world's known coltan deposits are in the Democratic Republic of Congo, which is deeply entangled in a violent civil war that has claimed over 4.5 million lives since 1998 and is the deadliest conflict since WWII, according to The Calgary Harold. Militias fight for control of a number of resources to sell and use the profits to continue the violence. And utter lack of a system to track where minerals are coming from is a problem. Apple CEO Steve Jobs said it's challenging and problematic to trace origins of minerals to determine which are conflict minerals. In an effort to help companies better understand where their materials come from, Apple and Research In Motion (maker of Blackberry) recently met to discuss a program to help identify conflict-free smelters. This dialog shows that there is some action on the part of industry, albeit slowly, writes the The Calgary Herald.

If companies and their suppliers were able to keep better track their complex global supply chains, trade experts like Pascal Lamy from the WTO would be better positioned to follow a value-added approach to calculate accurate trade statistics.

It seems that with the incredible amount of innovation and design going into technology, surely someone could come up with a viable system to track these very complex supply chains? Isn't there an App for that?

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