Lost in all of the furor over the trade war with China is a critical social and business distinction between the two countries. The US operates on a system that presumes the supremacy of the individual. China, on the other hand, operates on a system that presumes the supremacy of geography and ethnicity.
The best example of the difference is the way in which the two countries dole out citizenship to newborns. In the US, if you have a baby on US soil, whether or not the parents are US citizens, or even here legally, the baby has the rights to US citizenship. While that may seem to suggest geography trumps lineage, it reflects the supremacy of the individual’s rights; in this case the baby’s.
In China, on the other hand, it is the ethnicity of the mother that drives the baby’s rights. A baby born in Beijing to a foreign mother has no rights to Chinese citizenship. A baby born to a Chinese mother in Houston, on the other hand, does have rights to Chinese citizenship.
To understand the business implications you must appreciate that under US law, a corporation is a person. They hold all of the rights, save voting, of every US citizen. As a result, they have the right to free speech and they can own property, like intellectual property, in the same way an individual can.
There are many implications of this. The first is the fact that the US taxes the corporation, not its location. It’s far more complicated than I want to get into here, but suffice it to say that the US is one of only a handful of countries that has historically taxed the worldwide income of its corporations. Those corporations could defer that tax, however, which is why so many companies were holding large amounts of cash overseas. The 2017 Tax Reform Act provided for a one-time exclusion in order to encourage companies to bring that cash to the US, and it introduced a hybrid territorial tax system, but the basic idea of treating the corporation as a person remains intact. (They are distinguished from individuals in terms of the tax rates they pay, however.)
China, on the other hand, does not treat its corporations as individuals and regulates them, instead, based on their geography. To the extent that a corporation is doing business in China, be it a foreign company or a domestic one, it will fall under Chinese regulations.
The best example is the way China treats the Internet. Foreign technology companies, including the Silicon Valley tech giants, are not allowed to just reach into the market of Chinese Internet users without being subject to Chinese Internet regulations. And there are regulations in place to require that foreign companies operating in China keep their local data on local servers (in the interest of national security) rather than on servers at the company headquarters in Chicago or Palo Alto.
The basic perspective is that China belongs to the Chinese people. If you, as a foreign company, want to make money off of the Chinese people, that comes with certain obligations. And one of those obligations is to pay taxes that benefit the people you are making money from.
American multi-nationals often charge their foreign subsidiaries enormous fees for what is characterized as corporate support from the home office. This can take many forms—from accounting to engineering—but is generally based on the perspective of the US corporate parent that “I own you” and I can, therefore, do what I want with the money you make in China. “Not so fast,” say the Chinese, however. Before we will allow the Chinese company to pay those fees we want to make sure that those services are really provided and were, in fact, truly necessary. The reality is that many of those fees are for the provision of services that could easily be provided within China at much, much lower rates. (Which would mean more Chinese taxes to benefit the Chinese people.)
The bigger impact of this distinction has to do with all of the fuss you are hearing from President Trump and others about intellectual property. If an American company develops new technology at a research center in China, it believes that it owns that technology. And that’s a perfectly logical position for a corporation to take if you believe that corporations are people and that the US parent company “owns” the Chinese subsidiary.
That’s not so logical, however, if you have a more collectivist perspective. If new ideas are created by Chinese nationals working in China, in the collectivist view, those ideas should benefit the Chinese people. After all, those inventors benefit from their rights as members of the Chinese community. They go to Chinese-funded schools, drive on Chinese roads, enjoy the fruits of Chinese farmers, and the benefits of community funded police and fire protection.
Which is why there is so much fuss over the sharing of technology between US multi-nationals and their Chinese joint venture partners. (In certain strategic industries that the Chinese consider critical to the interests of the Chinese people, foreign companies must have a minority Chinese partner for their Chinese business.) The word “forced”, however, which Trump is tweeting regularly, is, in my experience, a gross exaggeration. It is nonetheless true that China does not want foreign companies manufacturing there to install antiquated production technology for purposes of skimming profits off of the Chinese economy. And it is true that this technology will eventually leak out, much as it did here in the US back when we were a manufacturing country.
For GM, for example, China is now its single biggest market, and it makes a lot of money there. And it has a minority Chinese joint venture partner. And while I know nothing privileged about the inner workings of GM, I’m sure that they deploy their latest production technology there. Otherwise, they could not compete, the Chinese government would not have allowed China to become GM’s largest market, and after all, it is their largest market. And I’m equally sure GM is concerned about the rising Chinese automakers having access to their technology.
But that is the same concern they have here in Detroit. All of the Big Three automakers use essentially the same supplier base, frequently trade employees, and back engineer each other’s products extensively. Can you tell the difference between a Ford and a Chevrolet at first glance? Why should it be any different for a Chinese automaker? If anyone has a legitimate beef about design and technology leakage it’s probably the Germans—and the culprit is the US, not China.
As a related aside, the Chinese brand of collectivist thinking tends to infuriate US companies who are accustomed to assuming all of the rights of citizenship. They don’t like being told what to do or how to think. And that arrogance, in turn, has not ingratiated the US corporate community to Beijing. And it is that conceptual friction that is, in the end, contributing greatly to a lot of the US corporate angst toward China that Trump is currently tweeting on behalf of.
Make no mistake, however; the current perspective of US multi-national corporations is NOT “the American way.” This is a very recent development in the US, coinciding with the ongoing incorporation of America. At the time of the Founding Fathers, there were no multi-national corporations and corporations did not enjoy the rights of corporate personhood. Corporations were licensed for very specific purposes, such as building a canal, for a very specific and limited period of time.
As recently as 1900 the average factory in the US employed fewer than ten people, the economy was very localized, and the role of corporations in American life was largely limited to providing employment and supporting the local community. It is only in the latter half of the 20th Century that US corporations were able to achieve the scale and the power they have today. (And from a corporate insider let me assure you that US corporate power today is far greater than you fear.)
The US government, to be fair, resisted the incorporation of America until the rise of the conservative movement in the 1980s. They did it largely through antitrust regulation that promoted healthy competition and protected American consumers and citizens from the dangers of corporate monopolies and oligopolies.
The corporations, aided greatly by the banks and Wall Street, however, ultimately won, and it wasn’t a fair fight. The politicians, after all, have no power if they can’t get elected, and in order to do that they need money. And since the courts ultimately eliminated any restriction on corporate involvement in politics, it’s no surprise that the deepest pockets ultimately took control of the American political process.
As a result, the US is no longer a democracy; it is a “corpocracy.” Conceptually, the American corporation now plays the same role that the church did in Medieval Europe. The kings may wear the crowns, but it is the corporate “popes” that are really calling the shots.
The incorporation accelerated greatly during the dot-com 90s when young entrepreneurs were preaching disruption and libertarianism. It is ironic, indeed, that this “common man” perspective has now produced among the biggest and most powerful corporations the world has ever known. And they pulled it off, quite impressively, while the anti-trust regulators stood by and watched. (Why would they complain, the politicians were benefiting as much as the entrepreneurs.)
Although Trump is a willing water carrier for American corporate interests, the American corpocracy is ultimately unsustainable. It will implode and the Trump revolution, ironically, is ample evidence that the implosion is already underway. (One of the many contradictions of the Trump era and the man himself.)
Perhaps the ultimate twist of history, however, is that Trump would never have been elected, and the trade war with China would never have been necessary, if the US had, just a few decades ago, adopted the collectivist perspective the Chinese are now applying. We sold our souls; we shouldn’t expect others to do the same.
photo credit above: iStock.com/400tmax
If you read any of my books and like them I would greatly appreciate it if you will take the time to post a review on Amazon, Goodreads, or whatever book site you enjoy. Thank you in advance.