Apple’s wildly successful iPhone line is a bright shining testimony to American design and engineering. Can it really be that such a great American product is actually adding to the United States’ trade deficit with China? Given the current way trade deficits and surpluses are calculated, the answer is Yes.

Original Equipment Manufacturers (OEMs) like Apple construct supply chains that provide them with what they determine provide the best combination of quality and cost effectiveness. Management is trying to execute their fiduciary responsibility to “maximize shareholder value” by creating great products that are affordable. This is the reason that iPhones are not assembled in California. They could be assembled in California or other US locations, but the assembly cost would drive the final retail price up to a point that Apple has determined would limit sales and not maximize shareholder value.

When Apple and other US OEMs choose China for the final assembly, how does it affect the US trade deficit with China? This excellent article from the Wall Street Journal explains exactly how this works. The article makes a strong case that the simple way trade deficits are calculated no longer reflects the complex way in which products are brought to market.

I predict that after much debate and wrangling, a new method of calculating the trade deficit will eventually emerge. This will not happen quickly or painlessly, but should reflect more accurately the way products are actually manufactured.