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If the U.S. Doesn’t Control Corporate Power, China Will

Laissez-faire economics has left firms bending the knee to Beijing.

October 11, 2018  |  by Matt Stoller
Read on Financial Power

Last week, Bloomberg broke the news of a hack by the Chinese military of critical hardware assembled by an American company in China, affecting Apple, Amazon, and the U.S. Defense Department. While there is controversy over the story, no one doubts two key facts. Chinese hacking of Western corporations and governments is systemic, and China has a virtual monopoly over the manufacture of high-technology products, which it uses to its own advantage.

The same day as Bloomberg published the expose, U.S. Vice President Mike Pence gave a speech discussing China. Espionage, he said, was just one of a range of tricks China uses. Others include tariffs, forced technology transfers, arm-twisting of corporate leaders to lobby the U.S. government, and censorship of Hollywood through enticing Western media companies with promises of reaching Chinese audiences.

Pence was, in part, justifying President Donald Trump’s new tariffs on hundreds of billions of dollars of Chinese goods. But he went beyond tariffs, outlining a strategy that includes investment limits, military patrols, and requests to companies. Pence called on Google to stop developing its search and tracking technology for the Chinese market. He even argued that U.S. corporate focus on the short term, “the next quarter,” gave an advantage to China. In other words, a deeply conservative Pence sounded like liberal stalwart Sen. Elizabeth Warren in arguing the Chinese are using America’s own short-term-oriented financial system against it. Companies, he was saying, have moral obligation above shareholder value.

That’s a strange argument to come from a Republican vice president. But it points to how China is exploiting the laissez-faire model of industrial organization Washington has enabled for decades. But it points to how China is exploiting the laissez-faire model of industrial organization Washington has enabled for decades. As the consensus in D.C. shifts toward taking on an increasingly aggressive China, ideas about how corporations relate to the state will also have to change—or else undermine their new stated national framework.

Straightforwardly illegal hacking by China is common (although it’s hardly the only country to do it). For instance, in 2016, security researchers foundthat data on about 700 million Android phones and other devices programmed with Chinese firmware was being surreptitiously sent to China. Recently, Chinese state-backed chipmakers stole designs from Micron and Samsung. The Chinese have taken all kinds of intellectual property including information on smartphone-testing robots, Monsanto corn seeds, and the formula for the white pigment that goes into Oreo stuffing.

But just as common as and perhaps even more important than hacking are legal or quasi-legal methods. Chinese companies are, according to one Defense Department report, “flooding Silicon Valley with cash” to simply acquire secrets. Two years before hacking Micron, the Chinese tried to buy it. This year, Chinese automaker Geely secretly bought 10 percent of German carmaking giant Daimler, using shell companies to avoid detection, with U.S.-based Morgan Stanley doing the banking work for the deal.

Chinese state-backed companies have access to a massive legal budget, which affords them the ability to use U.S. courts to destroy American business leaders who challenge unfair deals. As a counterterrorism official pointed out in April, “When you go to a board of directors or a CEO and say, “Hey, I know you have two bids, you have Cisco or Oracle, and then you have the Chinese company which is 40 percent cheaper,’ it’s hard to explain to them and hard for them to explain to their constituents that they’re going to pay 40 percent more for a U.S.-based company because it doesn’t threaten national security.”

This exploitation of America’s corporate weaknesses is new. As Barry Lynn relates in his book Cornered, for much of the 20th century, the United States simply did not outsource production to its enemies or geopolitical competitors such as China or the Soviet Union, even if it was profitable to do so. Washington even made sure that friends couldn’t gain too much power over its political economy, ensuring that, say, Japanese allies did not gain a monopoly over flash memory.

But starting in the 1980s, U.S. lawmakers weakened the essential controls the state put on the financial system. This was not just led by anti-tax advocates like Grover Norquist and anti-government politicians like President Ronald Reagan, but also by a set of neoliberals in the Democratic Party led by President Bill Clinton, who used the theories of economist Lester Thurow to declare the era of big government over. Clinton promoted a vision of a globalized world with no nation-states impeding the free flow of capital and goods. This lack of assertive public power allowed private power to take its place, as corporations merged and organized trading flows without having to worry about the demands of public institutions.

This trade revolution built on top of an earlier intellectual revolution, one put forward by economists Milton Friedman and Michael Jensen, that shifted the basis of the American corporation to shareholder value as the prime goal of industrial organization. By focusing solely on shareholder value, investment bankers, economists, and a new breed of CEOs changed the commitment of corporations to environmental rights, workers, and local communities. They also made it so that U.S. companies felt no obligation to their own country’s national security goals. General Electric Co. Chairman Jack Welch reflected these new values in 1998 when he said, “Ideally, you’d have every plant you own on a barge to move with currencies and changes in the economy.” More recently, Google has backed away from working with the U.S. military, but it is happy to work with the Chinese government on censorship and tracking software for China’s citizens.

This lack of corporate commitment to national security didn’t seem like that big of a problem in the late 1990s, when U.S. businesses seemed impossible to dislodge. China was, after all, a poor country. But the Chinese, as Americans did in the 19th century, used this cost advantage to begin drawing large amounts of Western investment and know-how. Western companies, pressed by Wall Street, made China the factory of the world, especially for high-tech products. The strategy seemed to work for both countries, at least at first. Corporate profits boomed. China became a middle-income country, with exports of over a hundred billion dollars of computers and electronics to the U.S. annually. As investment flowed, the American state weakened, and Wall Street and the Chinese state strengthened.

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