US investors went into this past weekend with severe anxiety, the major markets posting their worst week since January 2016. On Monday, however, the DJIA soared 669 points, the largest single day increase since 2008, while the tech-heavy NASDAQ jumped 3.3%
While there are plenty of experts offering an explanation for the wild turnaround, CNBC’s Jim Cramer suggests that China had a lot to do with it. And while that may seem like stating the obvious, Cramer does get China in a way few Americans currently seem to.
Having been a member of the American Chamber of Commerce in China for eight years, I can say with confidence that US corporations, as a group, have close to zero concern with China’s steel and aluminum exports to the US. Trump’s recently announced tariffs would hurt American allies, like Canada, far more than China.
And, of course, Trump knows this perfectly well. We often think of Trump as the first pure businessman to occupy the White House. But he’s not a businessman; he’s a real estate developer; and there’s a big difference. Perhaps more importantly, he is a man without any discernible economic or political ideology. He lives, in other words, for the deal alone.
In announcing the new steel and aluminum tariffs, Trump and his supporters suggest that he made a “successful” deal. He took on the Chinese when no administration in recent memory had the courage to. And he scored one, on the surface, for a core constituency that helped him to capture the White House in 2016.
But he has not fooled the Chinese. The Chinese know exactly what American business wants:
1. More protection for intellectual property (IP).
2. More access to the domestic Chinese markets for American companies in the tech, banking, and professional services sectors.
Everything else is just noise.
What happened over the weekend, according to Cramer and many others, is also pretty simple. China did not crush the American tech sector in response to Trump’s opening trade salvo on steel and aluminum. Investors breathed a sigh of relief and the markets soared.
The main thing to keep in mind, however, is that the Chinese did not pounce on the US tech sector for one very simple reason—they don’t need to. They have the upper hand.
Forget about President Trump’s relationship with President Xi Jinping. It is true that the Chinese put even more cultural, political, and business emphasis on relationships than their American counterparts do. But the emphasis is on the relationship, not the personalities involved. If China defers to the relationship it has with the US you can be assured it has little to do with the personal relationship between the two leaders. Chinese leaders do not have personal relationships.
The bigger issue is the amount of protection governments are willing to give to intellectual property. And here’s the really important news for US investors:
1. The US has the most individual-centric business culture on the planet. And Silicon Valley (SV) is the center of that universe. China, however, has a collectivist culture. The Chinese simply don’t view IP in the saw way that the SV libertarians do. (By the way, many Americans also believe that the government has gone too far in protecting IP rights for wealthy US tech companies. How can we say that Amazon ‘owns’ the one-click, which the US Patent Office says it does?)
The Chinese fully appreciate the role of IP in the West, and will ‘honor’ Western standards to the extent necessary to do business in the global arena. BUT, and it’s a big but, their heart will never be in it to an extent that will satisfy Wall Street or Silicon Valley. (Nor would most Americans want them to if they truly understood how far SV has pushed the concept for its own benefit.)
2. The IP debate is moot anyway. Now that Google and others have digitized the world, IP advantage has lost any sense of real long term value. Digital data is, by definition, discoverable. Security protocols like blockchains, while promising, are far from ready for prime time.
As a practical matter, therefore, digital technology, like water, will inevitably seek its own level globally. We can only slow it down. Which is why the US, China, Russia, and the EU should be focusing as much effort on how to deal with the military implications for global security as they are on grabbing headlines with revelations about teenage troll farmers.
3. The Chinese made a brilliant decision, but they made it decades ago. Unlike the US, which thought it could take over the digital world, the Chinese government decided from the beginning that the Chinese Internet belonged to the Chinese people for both economic and security reasons. At this point, as a result, neither China nor the Chinese people need Facebook. They don’t need Twitter or Instagram. They ‘like’ Apple because the Chinese like Apple’s products, the company employs a lot of Chinese, and Tim Cook has long agreed to play by their rules. (He was, coincidentally, in China over the weekend.) That’s not to say, however, that they are beholden.
Over the past weekend the Chinese government did announce that it would reduce the forced technology transfers previously required of US companies wishing to do business in China. But that train left the station a long time ago. The train I’m talking about, however, is not the one you might be thinking of. In the end, this concession will be of almost no practical benefit to US tech companies.
Following World War II, both Japan and Germany built advanced industrial economies on the back of their automotive industries – the tech companies of that era. And how did they do it? Both had national industrial policies that both drove the growth of car ownership (e.g. the Japanese paid substantial fines to drive cars more than a few years old) and protected the domestic industry, largely through incentives and non-tariff barriers.
The US has no industrial policy. None. At least not a public one. (If the US markets were truly free, as we are constantly told by our politicians, there would be no need for corporate lobbyists.)
China, like Japan and Germany, has a very transparent national industrial policy that it actively manages. (Tech, not surprisingly, is at the top of the list of priorities.) And, more importantly, now that China boasts the second largest economy in the world, and is home to 1.4 billion potential consumers, it has the domestic scale to make that industrial policy work. It doesn’t need our technology or our products. While the US tech companies need to push beyond US borders to achieve scale, the Chinese tech companies have no similar need to push beyond China’s borders in the short term. Advantage: China.
The bottom line is that if US investors had reason to be concerned about China on Friday, nothing has changed. If they are betting their collective futures on the world domination of the American tech industry, they really should be quaking in their boots.
Trump will continue to make his string of relatively insignificant deals. He will not take on China. And they won’t take him on. They don’t need to—and they know it.
At some point, however, the US would be far better off politically just accepting the reality that China is not the new global bogeyman that the Soviet Union once was. China is behaving entirely rationally and in the best interests of its people.
The US, on the other hand, appears insistent on sacrificing the American people at the altar of American corporate capitalism and its false dogma of absolute individualism. We should stop blaming the Chinese government for protecting its own interests and start asking the US government when they are going to start protecting ours.
photo credit above: iStock.com/sdlgzps
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