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Corpocracy & the Trade War

Author Gary Moreau, aka Avam Hale in fiction

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.

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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.

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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


My newest book, We, Ourselves, and Us: Creating a More Just and Prosperous America, is now available on Amazon in paperback (click here) and Kindle (click here) versions.

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.

The Survival Paradox

The expanding trade war between China and the US has dominated the news and the markets for several days now. I’ve said, however, for quite a while now, to be honest, much of what I have to offer on the topic. I can summarize as follows:

  1. Trump’s trade war with China will hurt American companies and farmers far more than it will hurt China. The time for a trade war with China was at least three decades ago. That horse is long out of the barn.
  2.  If American companies can’t compete without further intellectual property (IP) protection, as they claim, they have a much more serious problem than their need for the “rule of law” (ROL). The ROL promotes oligopoly and hampers market efficiency, as we are now witnessing in our own Silicon Valley.
  3. China has no desire to be the world’s steel or aluminum maker. Its focus is on clean energy and services.
  4. Yes, China has an industrial policy that identifies key industries for investment, as many Western companies complain. So do Germany and Japan. The US is the only developed country without one. (At least one that is transparent to everyone and not authored by corporate lobbyists.)
  5. While government owned enterprises in China enjoy certain benefits, as their American competitors complain, they also carry a lot of social burdens that those same US companies don’t.
  6. For Xi Jinping, saving face in this trade war with the US does not mean preventing any negative impact on the Chinese economy. He will have to clearly defeat the US to claim victory among his own people and Trump is clumsily forcing his hand.
  7. In Understanding China I strongly recommended that Americans try not to negotiate with the Chinese unless they have to. The rules of the game are different. However good a negotiator Trump may be in New York, he will not win in Beijing. It’s a certainty.

What I’d rather write about today, however, is the survival paradox.

There have been numerous books published recently that argue that the discontent the Western world witnesses on its newsfeeds each day is ill founded. Often written by statistical psychologists of one stripe or another, these authors typically provide page upon page of illuminating statistics relating to all the things we should be thankful for. (e.g., better health care, plenty of food, the absence of global war, etc.)

The message is consistent and clear: We need to “get over it.” Life is good in the West and if you don’t think so the failure is in your assessment, not the reality. While it is a message of hope at one level, it is an admonishment against juvenile self-preoccupation at another.

Fair enough.

But beyond the inevitable risk of using statistical averages to prove much of anything, the statistics offered as evidence of the things we should be thankful for are all measures of our survival; perhaps our happiness; but not our personal fulfillment. That I am healthy, have enough to eat, and own an iPhone is all well and good. Survival, however, is not the purpose of life any more than breathing is.

Personal fulfillment, of course, is much more difficult to define, much less measure, than mere survival. Artists have been trying since the beginning of time with little obvious progress. Judging by what is going on in the world around us, much less the fact that publishers and authors alike believe there is a substantial market for books admonishing us to get over our discontent, there is pretty strong evidence that all is not well on the Western front and there is, in fact, a crisis of confidence, if not genuine despair.

And, I increasingly believe, it is that very success in survival that the get-over-it authors refer to that is at the heart of the problem. Not because survival, by itself, is a bad thing, but because it does not exist in isolation. It is just one half of the many dualities that define human life and the universe.

Said differently, survival and fulfillment, the latter of which can be thought of as a sense of personal purpose, are the yin and yang of human life. They are complementary forces that cannot exist in isolation. When they are out of balance with each other, it is the imbalance itself that causes our despair.

In fact, I’ve recently concluded, there is a natural ‘echo chamber’ between survival and fulfillment not unlike the echo chamber created by social media that is the basic ‘scientific’ phenomenon behind fake news and the alt-whatever. The echo arises from the reverberation of the bias inherent in all information and what we misleadingly refer to as “truth.” It is caused by the gap between the reality of our survival on the one side and our personal fulfillment, or lack thereof, on the other.

I think of it as the survival paradox. In surviving more comfortably and successfully we actually disturb the natural balance that has defined, if not human happiness or contentment, human acceptance, since the beginning of time. Such is the disruptive force of modern consumerism and Buddhist monks, of course, have understood it for millennia.

Not everyone, however, wants to live like a Buddhist monk. So what are we to do? And how is that relevant to a blog about China?

It’s relevant for two reasons. The first is that for the West in general, and the US in particular, we have found no way to successfully bridge the survival paradox. To date our only solution has been to double down on consumerism. And that’s why President Trump is now in a trade war with China that he cannot win.

The second reason is that as China has developed over the last thirty years the social divisions that the survival paradox naturally gives rise to have started to show. When outlining his plan to open China to free market forces and Western investment, Deng Xiaoping famously cautioned, “Some must get rich first.”

But, as we in the West know all too well, free market capitalism has a fundamental flaw: The rich don’t just get rich first. They just keep getting richer and richer. And some in China, as Trump’s rally attendees are here in the US, are demanding to know when their time will come.

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There is, however, a fundamental difference in circumstances. China has a collectivist culture and its leadership has shown beyond the shadow of any doubt its commitment to maintaining that orientation. (Ironically, the US has helped. The true individualists among the Chinese have largely emigrated over the last two decades—many to the US.)

American exceptionalism, on the other hand, has been built on a culture of uber-individualism. And our government, and the corporate forces it has merged with in the industrial and post-industrial eras, is in the process of doubling down on individualism in its response to the same survival paradigm.

The problem is that the information age in which we live is no longer compatible with fundamental individualism. Corporate consolidation, digital technology, and advances in personal mobility have made the world so small that it is virtually impossible to live as we did as recently as the Mid-20th Century. Life and the change inherent to it are unfolding at the speed of electrons and we can’t keep up if we insist on each piloting our own boat for our own benefit. (As would be the only reason to fight a trade war.)

This is, in part, why Western institutions of liberal democracy are crumbling. Donald Trump isn’t destroying them. Brexit isn’t destroying them. It is our refusal to acknowledge the survival paradox that is destroying them.

In all of history there have essentially been two types of government control—institutional and individual. And for much of the 20th Century the US was the paragon of the former and China, under Mao Zedong, was a visible example of the latter.

The roles have now reversed. China, while it has a strong personal leader, is governed by a collective institution ideally suited to address the survival paradox and the smaller, integrated world we have become. The US, on the other hand, has an individual leader who talks about collectivist ideals (e.g., Make America Great Again), but who operates outside of any institutional restraints.

One fights trade wars it has already lost. The other plans for a future in which trade wars will be unnecessary and counter-productive.

photo credit above: iStock.com/andriano_cz


My newest book, We, Ourselves, and Us: Creating a More Just and Prosperous America, is now available on Amazon in paperback (click here) and Kindle (click here) versions.

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.

Trade War

Author Gary Moreau
Author Gary Moreau

What will happen if President-elect Trump makes good on a central campaign promise and begins an aggressive trade war with China? With 100% certainty they will retaliate. And that could bring down the entire global economy.

Starbucks, Coca-Cola, General Motors, Apple, Microsoft, and many other elite US companies have all made huge investments in China. And they will inevitably suffer if the US does initiate a trade war. I don’t think the Chinese government has to do anything. The Chinese people just won’t buy from them. The level of nationalism in China is hard to over estimate and the entire population is wired together through Chinese social media. As I’ve noted before, they already tend to see the US as a bit of a bully due to recent friction between China and the US on hot button issues like the South China Sea. The Chinese won’t need much to turn away from our corporate front line if it is perceived that we are trying to curb the country’s rise to power.

While it is certainly true that the US lost good middle class manufacturing jobs twenty years ago when US corporations moved production overseas, the jobs issue is not as simple today. As the manager of a Chinese plant belonging to a US multi-national it is true that my Chinese company only provided direct employment to two Americans. But we helped employ dozens of US engineers, technical specialists, accountants, lawyers, bankers, and IT staff that supported us from the corporate offices. These are among the best paying jobs in any corporation.

And we exported almost none of our production to the North American markets. Almost all of our production was sold in Asia, so we had virtually no impact on our US plants. In fact we only shipped to the US when there was a temporary lack of capacity here and the company would otherwise have to walk away from additional sales opportunities.

Would the US plants see incremental opportunities to sell in Asia if the China plant didn’t exist? No. Even if the product could be made at the same cost as that of a Chinese competitor, the transportation alone would make the idea impractical.

And the reality is that the US industries whose jobs were hit the hardest have already moved out of China due to rising wage costs. The production of furniture, textiles, and shoes has already been moved to other emerging countries in Asia and Central America. Other industries, such as steel, are sure to follow as China attempts to reign in its pollution problem. (The government, in fact, is already encouraging steel makers to relocate capacity out of China.)

The US President-elect actually has the problem upside down. While Trump’s solution may have helped twenty years ago, it is outdated today. The biggest problem facing America’s economy today is not cheap exports from China, but US access to China’s growing markets. In many key industries, where US companies might enjoy a significant competitive advantage, foreign companies continue to operate at a significant disadvantage to their Chinese competitors due to non-tariff barriers that often have little to do with central government regulation.

Understanding China is now available at Amazon in paper and electronic formats.
Understanding China is now available at Amazon in paper and electronic formats.

In terms of return to the US economy, in other words, Trump would be better served pushing for unfettered access to the Chinese economy than slapping tariffs on products that China no longer relies on anyway.

Unfortunately, the tide is working against the President-elect. As China strives to move its economy up the value chain and away from cheap, labor-intensive exports, there is an understandable tendency for government officials to want to support emerging Chinese companies. Trump’s trade war would only give them the ammunition they need to justify it. And they will; make no mistake about it.

But if Trump really wants to boost the US economy I think he would be better served to concentrate on US exports to China rather than US imports from China. China is already the US’s third largest export market and could easily be number one or two.

Perhaps the biggest constraint, which never came up during the campaign, is that the US has strict limits on the products and technology that US companies can sell to China. These are the products the Chinese are most interested in and would pay top dollar for. And the products that are least impacted by the cost of transportation.

The controls, of course, were initially justified on the basis of national security. It’s a good cause, for sure. But a restrictive ‘list’ is a blunt instrument, particularly when drawn up by politicians and bureaucrats with local constituencies and agendas.

I can tell you from first hand experience that our US-owned plant in China was prevented from buying very simple machines from US suppliers for the simple reason that they had electronic control systems that fell within the restrictions. And I can assure you that this technology had no military application whatsoever and was no better than that which was available from Chinese suppliers.

The policy is all quite disingenuous in this Internet age anyway. Trade secrets are not exchanged the way they used to be (by reverse engineering). It’s impossible to seal the border from the flow of information. It just can’t be done. And technology doesn’t have to be obtained illegally (by hacking, for example). There is nothing illegal about a foreign university graduate returning to their home country after they have had access to some of the best technology the country has to offer.

Obviously, there should be limits. But they should be carefully thought out. And I don’t believe they have been. If we were to do no more than review the list of products and technology that can be sold to China and elsewhere I am confident it would have an immediate and material positive impact on the US economy – and create more high paying jobs.

The US economy has two primary advantages in terms of global trade – efficient capital markets and an ability to innovate. The Chinese and others are catching up fast on both counts. But they still represent our best chance of promoting economic growth and the creation of good jobs.

China understands this, which is exactly why they are trying to pivot away from the kind of manufacturing jobs that we lost twenty years ago. It would not be prudent for us to simply trade places with them. We will only end up where they were twenty years ago, not where we were.

Contact: You may reach the author at understandingchina@yahoo.com

Just for fun. A Giant Panda cools off from the sweltering heat of summer on a block of ice at the Beijing Zoo.
Just for fun. A Giant Panda cools off from the heat of summer on a block of ice at the Beijing Zoo.