Global reset – Economic decoupling (Part 5: Growing divergence between governments and MNCs)
Phuah Eng Chye (12 February 2022)
In the early days of globalisation, physical force was used to secure trade routes and colonies. Companies followed their country’s flag to extract the spoils of conquest. The imperialist model changed after World War 2 when many colonies gained their independence. The US spearheaded the creation of a global rules-based order and the establishment of multilateral institutions for trade, finance and development. The US provided the military, economic and financial umbrella to rebuild Europe and propagated their brand of market-driven capitalism. Global trade flourished under this umbrella with the East Asian countries relying on industrial export-led models to achieve economic success.
From the 1990s, the engine for globalisation, industry and commerce, was replaced by information and financialisation. The expanded connectivity and virtuality created a boundaryless global setting. Scott Lash[1] describes global transformation as “characterised not so much by a multiple of identities, but by an absence of identity. Its context is no context at all. Its difference is indifference. Airports and aeroplanes are indeed such generic spaces. So are the branded spaces of department stores…The internet is a generic space…Indeed networks are themselves by definition lifted-out spaces…The laboratory is such a generic space. The laboratory is lifted-out from normal life…the laboratory produces not goods, nor services, but knowledge; it produces research…Whether in Tokyo, Paris or Los Angeles people wear white coats. Laboratories are filled with similar equipment and the same scholarly and professional journals. In laboratories people must know English and be digitally literate”.
MNCs took decades to master the art and science of globalisation – straddling markets and regulations, and managing diverse employees and cultures. They gradually shed their national stripes; taking on board an autonomous global ethos and persona. Shareholders, management, employees, suppliers and customers comprised many nationalities. They competed, partnered and acquired MNCs from other countries and scoured the world for technology, data, assets, talent and capital.
The role of governments became minimised in this boundaryless global setting. Multinational companies (MNCs) (including state-owned, privatised firms) took the reins as the drivers and connectors of globalisation. They largely built the physical and virtual information infrastructure that facilitated cross-border flows – communications, logistics, tourism, technology, platforms, knowledge (standards, education, open source) and finance. MNCs fought battles over markets, data, network access and corporate assets such as intellectual property, eyeballs and brand recognition. Direct government intervention was eschewed in favour of strengthening market mechanisms – corporate governance and social norms – to foster business dynamism and market discipline. In fact, governments competed with each other to win over MNCs.
What changed?
MNC-led globalisation accelerated technology advancement and rapid economic growth; particularly in East Asia. In their search for profits, MNCs chose to disintegrate vertical production chains, with its high national linkages, and converted to global value chains (GVCs) which sourced the best processes and components from specialists around the world. The shift to GVCs deepened economic inter-dependencies among nations. In the process, GVCs led to the concentration of production and trade in China and the concentration of digital intermediation in global platforms.
The rise of China and of platforms posed a serious challenge to the traditional geo-political and social order. In a sense, a populist backlash against globalisation is not new. The expansion of US MNCs in the 1960s and 1970s triggered a European backlash and the rise of Japanese MNCs in the 1980s triggered a US backlash. While the Japanese MNCs (joined later by the Korean and Taiwanese) were formidable competitors, they operated under the US/European umbrella.
The rise of Chinese MNCs (and SOEs) from 2010 onwards pose a different challenge. Like the other Asian MNCs, Chinese companies started as domestic manufacturers of low-cost and low-quality products. In the initial stages of industrialisation, China lacked a private sector base and the government played a major role in nurturing national champions. Suddenly, in the past decade, Chinese MNCs demonstrated they could master innovation and globalisation and, combined with their other competitive strengths, and elbowed out US and European players in many sectors and markets. In turn, Western MNCs complained about China’s MNCs (including SOEs) benefitting from unfair rules, subsidies[2] and forced transfers or IP theft.
There was another difference between China and the other Asian countries. Western MNCs never really established many factories in Japan, Korea or Taiwan as they did in China. This created an inter-dependent and possibly even a dependent relationship between foreign MNCs and China. Mitsuru Obe explains Japan Inc. bargained “technology to China in exchange for access to the largest market in the world”. The drawback was “many Japanese industries have been sacrificed as Chinese companies turned around and used their technology to compete with them abroad. Japan’s motorcycle industry, high-speed trains, and, of course, electric appliances are some industries where Japanese investment in China created powerful international competitors”. He points out “is a game that they managed to stay ahead of for four decades, maintaining a technological lead over their Chinese competitors – albeit a shrinking one”. Nonetheless, they were unable to forsake China as “given its size and the pace of growth, there would be no choice but to develop products for that market”.
However, decoupling is creating tensions in the inter-dependent relationship. The European Chamber of Commerce recently pointed out the “blend of China’s conditional coupling, a vast state-aid apparatus and protectionism extended to national champions, and Beijing’s new-found self-confidence in its non-convergence with Organisation for Economic Co-operation and Development (OECD) norms and principles that is driving the current crisis of interdependence with China…Unfortunately, China’s response to this crisis of interdependence seems to be a redoubling of its drive to build self-reliance, and European companies in China report that this drive is different and more radical than in the past”.
Chinese MNCs are rapidly moving up the value curve and are posing a threat to OECD domination of global commerce and technology. This threat is sharpened by ideological differences and perceptions of an unlevel playing field. Decoupling is a manifestation of the skew towards nationalism which is driving a wedge between government policies and the global ambitions of corporations.
Widening divergence between governments and MNCs
The overlapping interests between governments and MNCs were illustrated by Charles Wilson’s 1950 quote that “What’s good for General Motors is good for the country”[3]. This is no longer apply a truism as corporate-driven globalisation is being blamed for domestic ailments such as the loss of manufacturing jobs and widening inequalities. In addition, globalisation is also diluting the national identities of corporations and therefore their loyalties as well.
It is at the geopolitical realm where the divergence of interests is most evident. Samantha Vortherms and Jiakun Jack Zhang note many senior US politicians and officials believe US firms were culpable of doing business in China as it was “aiding the rise of an adversary”. Decoupling reflects “the clear intent of US officials was to encourage the repatriation of US MNC operations and to encourage allies to disengage with China”. This view has gained traction “in European and Asian capitals about the challenge of Chinese industrial policy and the merits of investment screening”.
However, based on their analysis, Samantha Vortherms and Jiakun Jack Zhang found “US and allied firms were not more likely to exit China, suggesting that foreign direct investment outflows do not follow the flag. Instead, firm exit is determined by the balance of heightened political risks against the availability of firm-level and institutional resources to mitigate these risks”. In addition, “there is room for reasonable doubt about whether FDI will follow someone else’s flag. Indeed, MNCs from US allies might be opportunistic if they see a market gap created by tariffs that they do not face…Our finds suggest that the US government has been limited in its ability to coerce or persuade US firms into decoupling from China, its influence is even more limited with firms belonging to US allies”.
I would like to clarify several points on decoupling and the widening divergence between governments and MNCs.
First, hopes that decoupling would be temporary and its scope limited has been dashed. In fact, it is deepening with increasing spill-over effects across sectors and activities. The original intent of decoupling was to change China’s behaviour to ensure it complied with “global norms”. Except China hasn’t backed down. Mikko Huotari advises “European stakeholders should expect a China that is doubling down on non-convergence. They will meet a more offensive and less compromising China; presenting itself as a distinct alternative model, seeking to pre-empt perceived attacks and prevent criticism, more conditional in collaboration and retaliating against perceived misconduct by others…The biggest impact for Europeans will result from China’s steady shift towards extra-territoriality, the intent to proactively control behavior and narratives beyond China. China will claim and police formerly domestic red lines more forcefully abroad – leaving public and private sector counterparts torn between competing value imperatives…European businesses in China will need to further localize operations to comply with different rules and political pressures. Where this proves impossible, they will face hard choices about prioritizing or even choosing between key international markets”.
It not just China’s government that MNCs must face. Spontaneous nationalistic campaigns mean MNCs must manage public sentiment as though they are treading on eggshells. In the controversy over Xinjiang cotton. Li Xiaojun notes “Chinese consumers have been calling for the boycott of Western fashion brands…Alibaba responded by removing H&M products from its platforms while state media outlets and the Communist Youth League denounced the Swedish fast-fashion brand…Burberry, Nike and Zara were lambasted…The brands caught in the latest kerfuffle are merely new entrants to a growing list of international businesses that have encountered the ire of 1.4 billion Chinese consumers”. Recently, Intel and Walmart[4] were caught in a backlash and more foreign MNCs could be at risk.
Chip Tsao points out “the old playbook of apologise and wait it out that had worked so well during past boycotts in China may no longer work this time with enraged Chinese consumers demanding these firms to take a stand. But giving in to Chinese consumers could also anger foreign consumers…These mixed messages suggest that some brands may still attempt to cater to two different audiences, a strategy that could backfire when consumers expect nothing less than a firm position. The time may have come for international businesses in China to confront the difficult dilemma of choosing a side”.
On its part, the US has chosen to escalate by imposing more trade restrictions and sanctions on various Chinese entities citing evidence of genocide and other human rights abuses. Global Times notes the recent Uyghur Forced Labor Prevention Act “will wreak havoc on thousands of multinationals’ global supply chains” because it is based on rebuttable presumption which assumes supplies imported from Xinjiang use forced labour unless proven otherwise. This shifts the burden of proof from US customs to importers and consumers. Li Ye, a lawyer, argues this “affects all Chinese supply chain’s exports”; “as long as the products are manufactured in China and resold to the US – regardless of whether China sold it to a third-country or a third-country using materials from China to make downstream products”.
The questions are “whether firms can achieve the compliance standards proposed by the US, and even if they can, how much they will have to pay in compliance costs”. For example, Li Ye notes the supply chain for photovoltaic panels “is very long, from quartz sand to silicon materials, then to silicon wafers and components, there are at least four or five procedures through which different factories are involved. So to what extent should the tracking process go?…Each photovoltaic panel has a bar code, and each bar code will finally be traced back to which furnace produced the silicon material. This is very cumbersome!” It is “unrealistic for US importers to remove Xinjiang photovoltaic materials, as virtually every solar panel shipped from China contains materials from Xinjiang – which is positioned at both upstream and downstream supply chains”. Global Times note the Foreign Affairs Committee of the National People’s Congress states “China will take firm and strong countermeasures if the US insists on acting arbitrarily”.
Second, decoupling should be viewed as part of a larger struggle between governments and MNCs, on the domestic and international fronts. Sidelined for decades by globalisation and MNCs, the darkening public mood of the past few years created an opening for political, military and nationalist stakeholders to recapture control of the national agenda. In addition, decoupling strategies fail if MNCs do not comply with their government’s dictates. As governments assert their authority, more MNCs are getting snarled by sanctions, coercions, retaliations and boycotts as pressure builds up on MNCs to either leave China or the US; to not export new technology; or to withstand home country pressures and comply with host country rules. The decoupling spill-overs are raising policy risks and compliance costs to extremely prohibitive levels. Added to that, more countries are become more pro-active in enforcing their rules against MNCs; particularly against the global platforms. Decoupling thus represents the widening divergence between the interest of governments that seek to pursue political and national goals and to over-ride the commercial imperatives of MNCs that consider globalisation as critical to their success.
Third, there is a question as to who should be responsible for dealing with the adverse effects of government-driven decoupling interventions. In effect, government policies (often prescriptive, blunt and rigid) to reconfigure global supply chains are causing mechanisms for globalisation – cooperation and coordination based on market responsiveness – to break down. Uncertainty about future policies and prohibitive compliance costs is increasing risk aversion – investment and financing hesitancy – among MNCs across the entire global value chain. At the macro level, the adverse outcomes are supply shortages and cost-push inflationary pressures while several MNCs are already suffering severe collateral damage from the geopolitical fallout. The MNC retreat, creates a vacuum that prompts even more government intervention.
In this regard, the pandemic has provided convenient cover for large fiscal – allocations to finance decoupling-driven industrial policy – and monetary stimulus. Governments are, in effect, setting themselves up for a fall as MNCs are now inclined to run to the government when they face a problem. MNCs will tap into government insecurities on relocation initiatives, supply shortages and inflationary pressures, and their desire to be seen to doing something (such as picking winners and losers) and manoeuvre them into offering protection, hand-outs and deals. In fact, the looming policy challenge of this decade for Western governments is how they are to manage the withdrawal of their policy interventions –the large fiscal and monetary stimulus. If a sustainable economic recovery is too be achieved, this means they need to position the private sector to be able to drive economic growth once the intervention is withdrawn.
Decoupling in an information landscape
In formulating strategies for geopolitical battles, it is important to grasp the end-objectives or visualise the victory. Historically, victory meant sending in troops and companies to conquer territories, colonising or forcing them to extract resources (and slave labour) and to open their markets. In contrast, it is difficult to make sense of decoupling strategies in today’s information landscape.
In decoupling, there are no major military conquests of territories at stake. Initially, decoupling was headlined by the trade war – the imposition of tariffs intended to correct US’s massive trade imbalance with China and to open up China’s domestic market. Most economists acknowledge trade wars hurts both deficit and surplus countries and have minimal impact on reducing trade deficits. In addition, the country imposing the tariffs ends up damaging their own international competitiveness due to the cascading of costs and self-imposed restrictions on their ability to tap external resources and markets. But political sensitivities and China’s unwillingness to make concessions makes it difficult to withdraw the tariffs. Further escalation cannot be ruled out. But the spotlight is shifting from trade, which suggests it is not the main theatre of conflict, to technology, human rights and border disputes.
Within the context of an information landscape, the role of the military and significance of a trade war is substantially diminished in the contest for global leadership. In the modern era, decoupling can be construed as a multi-dimensional contest for strategic advantage. The primary target is for control over global supply chains. Hence, decoupling is aimed at untangling the global supply chain inter-dependencies that have paved China’s advance to the extent it would eventually overtake the US as the world’s largest economy. The inter-locking relationships is also an obstacle to the US taking more drastic actions (e.g. military, broadening sanctions) against China. Decoupling policies to advance US and allied country objectives of supply chain resiliency are a prerequisite to potentially more aggressive actions.
The contest for geopolitical leadership covers many “soft power” elements such as the contest for control of info-geographical space (information infrastructure such as networks, laws and currency) and knowledge space (information ownership such as patents, manufacturing capability, technology, research and education). The race for technology leadership, which is regarded as critical to economic and military leadership, and for national security, is intensifying. New roadblocks are being placed on US-China cross-border flows of investments, students, products, services, capital and technologies while there is a race to lead the setting of the global rules and technology standards.
Overall, the US operates at a disadvantage in that it enjoys less policy degrees of freedom, it has to untangle the tightly-woven inter-dependent global relationships. This requires it to continually give instructions, make threats and compromises to keep allies and MNCs aligned. The flaw, in its strategy to squeeze China’s space, is the lack of an expansionary plan to offset contractionary losses from decoupling.
In contrast, China enjoys greater policy degrees of freedom. It is a middle-income country with market potential that few MNCs are willing to ignore. Generally, China will choose to expand inter-dependencies to counter US attempts to contain it. Large global inter-dependencies prevent the US from resorting to drastic actions like cutting China off from SWIFT or military interventions. China can lean into containment to implement painful domestic reforms, use geopolitical tension to accelerate progress in targeted areas and tap external resources it needs. China’s approach to decoupling is thus selective and pragmatic – targeting those it thinks needs to be “taught a lesson”. As decoupling deepens, China no longer feels bound by existing international norms and will become more assertive in its search for a winning global strategy.
Finally, in the absence of a military conflict, great power competition occurs at the corporate level. MNC successes and failures are crucial to their countries. In this context, decoupling can be viewed as a two-prong spatial strategy aimed at restricting China’s global space. One prong is to hinder the international expansion and technological advancement of Chinese MNCs. But this looks futile. For example, while technology blockades can buy time in the short-term, technology becomes obsolete and can eventually be by-passed in the long-term. Countries gain leadership by “moving fast and breaking things”. China can move quickly to build new 5G and 6G ecosystems without bothering about compatibility with Western technology standards. The US have been recalibrating its policies to prevent Chinese firms from acquiring Western tech firms and technologies, but over time talent and patents could shift to more neutral “offshore” centers to loosen the American claims. It is also be over-reach to think technologies have nationalities.
The other prong is to get MNCs to withdraw from China to reduce its role in global supply chains and to get countries[5] to reduce Chinese MNC access in their economies. Asking Western MNCs to retreat is a strange strategy. Western MNCs are the main beneficiaries of globalisation and it follows they have the most to lose from decoupling. If Western countries in the 19th century had “decoupled” from China, the retreat would have diminished their ability to project global power. In addition, while decoupling policies appears aimed at Chinese MNCs, the same policies could eventually be directed against US MNCs[6]. In contrast, China is well-positioned because their MNCs are not as globalised yet and it continues to open up to foreign companies; with leading technology-manufacturing icons given preferential treatment. In my view, global contests are won by opening up and not by building walls.
In addition, it should be noted that in the process of globalisation, most MNCs have diluted their national identities such as through globalisation of incorporation (in offshore centers), ownership, brand, management, employees, locations, suppliers and customers. It is even more complicated at the level of subsidiaries – which could be a joint venture, an acquired foreign company or a company acquired by foreigners. The controversies over Tik-Tok and China listings on the US market illustrate the difficulties of defining a Chinese company. Actually, Chinese MNCs appear willing to restructure to satisfy requirements from any governments or even “Westernise” themselves. But Western governments do not appear too willing to accept them – in the process revealing the implicit racial spillover risks.
Conclusion
Decoupling is purely a geopolitical dimension of the global reset. It doesn’t provide answers to challenges such as pandemics, climate change nor address the growing inability of governments to fulfil social needs at home. And, it damages global cooperation to address these challenges. Decoupling is unfortunately a race that will never be won and, worse still, may never end. Nobody has described what victory, defeat or détente will look like. It is not even clear whether decoupling will help or hurt US efforts to hold onto global leadership and whether it can stop China’s advance.
Government policies to advance decoupling require support from MNCs to achieve their goals. But at the end of the day, the MNCs are the ones bearing the brunt of the costs. Decoupling thus pits governments against MNCs. Victory or defeat for governments will not necessarily translate in victory or defeat for their MNCs. In this context, globalisation has detached MNCs from countries, MNCs are more answerable to shareholders – largely institutional including index funds – rather than governments. MNCs are dragging their feet and holding onto their global territory and reluctant to follow their government’s flag-waving call for them to come home. In fact, MNCs vastly prefer to compete and collaborate with each other across markets and are more concerned by the rising levels of government intrusion into commercial space. Decoupling will lead to more government-driven nationalism and suppress MNC-driven globalisation. MNCs will need to adapt to a deglobalizing world.
References
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Mitsuru Obe (10 February 2021) “Decoupling denied: Japan Inc. lays its bets on China”. Nikkei Asia. https://archive.is/Ha1SV
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society. http://www.amazon.com/dp/B01AWRAKJG
Phuah Eng Chye (11 May 2019) “Critique of information”. http://economicsofinformationsociety.com/%EF%BB%BFcritique-of-information/
Phuah Eng Chye (9 November 2019) “Information and organisation: China’s surveillance state growth model (Part 1: China’s state model)”. http://economicsofinformationsociety.com/information-and-organisation-chinas-surveillance-state-growth-model-part-1-chinas-state-model/
Phuah Eng Chye (23 November 2019) “Information and organisation: China’s surveillance state growth model (Part 2: The clash of models)”. http://economicsofinformationsociety.com/information-and-organisation-chinas-surveillance-state-growth-model-part-2-the-clash-of-models/
Phuah Eng Chye (7 December 2019) “Information and organisation: China’s surveillance state growth model (Part 3: The relationship between surveillance and growth)” http://economicsofinformationsociety.com/information-and-organisation-chinas-surveillance-state-growth-model-part-3-the-relationship-between-surveillance-and-growth/
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Phuah Eng Chye (18 December 2021) “Global reset – Economic decoupling (Part 1: China’s socialism big bang)”. http://economicsofinformationsociety.com/global-reset-economic-decoupling-part-1-chinas-socialism-big-bang/
Phuah Eng Chye (1 January 2022) “Global reset – Economic decoupling (Part 2: China’s global discourse for the 21st century)”.
Phuah Eng Chye (15 January 2022) “Global reset – Economic decoupling (Part 3: US decoupling – Costs, flaws and revising the strategies)”. http://economicsofinformationsociety.com/global-reset-economic-decoupling-part-3-us-decoupling-costs-flaws-and-revising-the-strategies/
Phuah Eng Chye (29 January 2022) “Global reset – Economic decoupling (Part 4: US in the 21st century)”. http://economicsofinformationsociety.com/global-reset-economic-decoupling-part-4-us-in-the-21st-century/
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[1] Some highlights from his book “Critique of information”.
[2] Simon Evenett and Johannes Fritz for a detailed review on the controversies over corporate subsidies.
[3] See Daniel Strohl for background on this famous quote.
[4] See Global Times.
[5] Alicia García-Herrero notes “the European Commission has just announced two types of defensive measures, first against foreign subsidies hampering the good functioning of the European single market and, second, actions to ensure the resilience of the European supply chain. In both cases, the hidden target is China.
[6] This follows the Chinese military strategy of “Borrow the road to conquer Guo”. During the warring states period, the state of Jin requested safe passage from the state of Yu to attack Guo. Jin was given safe passage and succeeded in conquering Guo. On their way back, they stopped to conquer Yu. See http://wengu.tartarie.com/wg/wengu.php?l=36ji&no=24