The American Interest

The American Interest

by Pininvest Analysis

Exposure to US-China Trade on pininvest.com

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Pin-insights

For decades, American business interests have flourished in synchrony with America national interests

In the era of globalization, this mutually beneficial alignment has been skewered and, while the fault lines between business and national interest are still papered over, the contradictions can no longer be ignored

Engaged in persistent lobbying efforts, behind the scenes because US business holds its American pedigree dear, global industries, linked by supply chains stretching the world, share business outlooks which do not mesh any longer with the politics of national interest

The confrontation is hardly in the first innings and a very long time from being resolved : business is reluctant to fiddle with an immensely successful model which has been years in the making and American politics are not prepared to take on the challenge of a national industrial policy 

Things may have to get worse... but the die is cast and China's unrelenting advance calls for hard decisions

Defensive measures, tariffs and export controls, do not measure up against the challenge 

 

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Through the ages, victorious armies have been bringing along in their bandwagons the trappings of civilian power – from Rome’s roads and amphitheaters all over Europe to Napoleon’s codes and regulations dictated to former kingdoms and principalities

All roads lead to Rome credit FineArt 121 Pinterest 

From 1945, America’s pervading influence across Europe and Asia, in step with its global military victories, surprised no one as gum-chewing, Coca-Cola drinking, jazz-crazy GIs were seconded by American industry, multi-facetted businesses strengthened by the war effort and hungry for growth

credit History of Coca-Cola 1941-1959

In a way, the fascination exercised by the American way of life in impoverished Allied and former enemy countries alike became integral part of American business' pre-ordained dominance

Making ‘things’, machinery and consumer products in all shapes and sizes, and acquiring globally the resources to make still more, American trade was on a roll – doing good in the reconstruction effort and staking out world market dominance along the way

Not even a piece of paper would have fitted between national interest and business interest in America, and more often than not, business was the trailblazer and sometimes, as in energy-rich Middle-East, the sapper undermining whatever might stand in the way of extended American dominance

In a perfect alignment, business was confident in doing good for America while doing well for clients, employees and shareholders

International trade may have gained in complexity to an extent inconceivable in these early days but we suggest that, at America’s largest firms, the Apple’s, IBM’s, Boeing’s and Qualcomm’s of our times, absolute faith in acting for America by enhancing their reach across the world never went away

 

Is this deep belief still truly in line with the American interest today?

Could it be that the global push stretching US companies deep in foreign quarters has become the end, rather than the means to strengthen the US economy?

Could it be that the American interest, taken for granted for decades, has turned into a myth, the crumbling front of antiquated symbolism, badly in need of overhaul to confront US business leadership with the demands of world power?

 

No free lunch

The fault lines between US business interests and American power, projected by its economy and its military, have of course been years in the making

And even today, the course of trade negotiations hardly suggests anything might have gone awry in America’s industrial heartland

Still…there is no free lunch and, after thriving for decades on America's economic and financial dominance, US business is called to account

 

Supply chain have been going global, linking providers in ever more complex cross-border iterations, a reality the US Trade negotiators had to finesse on behalf of the US car industry in revamping the trade agreement with Canada and Mexico in 2018

Industries have been transferred wholesale to low-cost countries in every sector where labor was the critical competitive factor – singling textiles out as primary example

Setting aside labor expense, sheer volumes of Chinese low-priced exports serving the world  have been shutting US domestic production out of their traditional markets, year after year, with no respite and no backtracking, ever

High volume production and sales, combined with low labor costs, are supporting a stream of R&D investments on a scale US competitors can hardly hope to tackle, with catch-up ambitions a mostly unrealistic delusion

Not to be outdone, US retail chains, pushing relentlessly for price cuts, have been cheerleaders of the holing-out of American industry for decades, the ‘Buy American’ of lore safely buried, resurrected only on occasion as a marketing gimmick...

Misgivings about the strategies chosen by America’s companies might be discussed behind closed doors, but the hope to just keep doing business as usual is entrancing

  • Turning back the clock is improbable, marginal at best to earn a few brownie points of governmental goodwill
  • The most successful US industries, scaled for world production and closely knit in global supply chains, are as dependent on international markets as China's upstarts, with no fall-back option

 

Atonement

The public discourse remains focused on China’s unfair trade policies, the practice of State and provincial subsidies, technology transfers and dumping practices

The breach of China's 2001 WTO commitments will continue to fester because the bet of Western powers, led by the US, to grant unfettered  access to world trade in order to achieve full integration of China in the global economy has not paid off

Looking back, the goals set almost 20 years ago may appear overblown or naïve

A broadly accepted practice for emerging economies, the industrial policies set by China's central and provincial governments, supported by ad hoc regulations, subsidies and State Owned Enterprises, remained essentially a one-way street, favoring the country's exporters at every turn - in clear violation of WTO rules, year after year

Unanticipated by the Western negotiators, the global ambitions of China's industrial policies met eager demand in developed economies, blowing past the most dramatic projections without letting go of State support,  further enhanced by technical barriers, weak intellectual property protection and a cottage industry of discriminatory measures

However beguiling in a political discourse to  whip up the crowds, China bashing helpfully draws the attention away from short termism,  poor diversification and flagging investment in many home-grown industries

The scapegoat   W.H. Hunt  credit Wikipedia

In sum, to atone for imprudent industrial strategies, weakening business foundations in America, a Chinese scapegoat will not do ...

 

American industrial policies

The warning signals have been many and the poor performance of US companies cannot be laid wholesale at China’s doorstep in the name of unfair practices

To name a few, in most sensitive technology industries,

  • from commercial drone technology, entirely dominated by DJI, as one-time US hopeful 3-D Robotics entered in a partnership with DJI in July '17, integrating their Site-Scan software on China-made drones
  • to Hikvision, world's largest supplier of video surveillance (and until recently preferred supplier of the US Administration as well as US Military…)
  • and Huawei, a model in telecom infrastructure
    • As nexus of the Chinese competitive challenge, telecom is uniquely significant, confronting Western clients with advanced 5G technology
    • Chinese infrastructure may – or may not – be supporting ‘backdoor’ spying as the American administration asserts but the lack of competitive Western alternative providers is striking

Dependance on Chinese orders to keep sales growth targets on track is no less worrying

The sub-text of these companies' successful presence in China looks very much like a hollowing-out of research in industries central to national security for some, to growth potential for all

Probably a ringing indictment of America’s proudest technological companies and a call for political action ?

 

On a knife’s edge

The firms are looking into the abyss

US technology, companies of any size at the sharp edge of research, as well as their financial backers, should recognize a ‘new reality’ where any outcome of the current US-China trade negotiations will be deeply transformative of their own future

  • Business should not expect to carry on, picking up the threads where they left off
  • R&D should not be shared as a matter of course – and as proof of good will
  • Sale of advanced equipment should be vetted internally as well as at the behest of the Administration
  • The net of regulatory approvals leveled at foreign stakes should be tightened

There is still time to pull back if hard choices are confronted, at the cost of side-lining sales opportunities in China

  • giving preferential treatment to US R&D development
  • supporting fully the US restrictions on foreign stakes, mergers and partnerships as defined by the FIRRMA legislation (against which US companies lobbied persistently) – as well on sale of dual-use, military and civilian, equipment (of which Boeing gave a sorry example)
  • tightening the terms of Intellectual Property sharing with Chinese counterparts, a wide-spread and implicitly required practice

Because a level playing field is central to global trade, China should be expected to live up, albeit belatedly, to the rules to which it committed upon entry in the WTO – a low bar indeed, but one that still appears to be ‘negotiated’ today

In sum, while the US expects China to become more business-friendly on its domestic market, American business should be prepared for a treat of China-like regulation from the own Administration