Two Points on Businesses’ Foreign Operations

You can’t read a lot of opinion pieces about diplomacy or trade without two things leaping out at you about American writers. They are incredibly ignorant of American history and even more ignorant about other societies. That’s what struck me in Michael Schulman’s piece at Bloomberg on the “localized operations” set up in other countries by American companies:

There are many such examples of U.S. companies localizing their operations to target the Chinese market. General Motors Co. manufactures nearly all the cars it sells in China within the country. It even has a car brand, Baojun, developed for and only marketed to Chinese drivers. The vast majority of what the Procter & Gamble Co. sells to Chinese consumers is made locally. The company boasts nine manufacturing plants in China.

Such sales don’t directly factor into the bilateral trade data. Yet it most certainly adds to those companies’ bottom lines. GM and its partners sold one million more vehicles in China than in the U.S. last year. China is P&G’s second-largest market after the U.S. Only Americans eat more Oreos than Chinese do.

The local sway of U.S. companies is an indication of just how sophisticated and global they’ve become. With appealing brands and extensive international expertise, American firms very often invest and manufacture in foreign markets instead of exporting their products from the U.S. By contrast, Chinese companies, like those in emerging markets generally, tend to lack brand power and experience operating abroad. So they capitalize on their low-cost base to export to the U.S. and elsewhere.

That’s reflected in the great disparity of direct investment between the U.S. and China. Since 1990, U.S. companies have invested almost twice as much in China — $256 billion — as Chinese companies have in the U.S. And a huge chunk of China’s investment has been made in only the past two years. To a certain extent, the trade deficit is thus a mark of how much more advanced U.S. corporations are compared to their Chinese counterparts.

Of course, there’s been much hand-wringing over the loss of American jobs due to trade with China as factory work has shifted overseas. But in many cases, the plants constructed in China weren’t replacements for those in the U.S.; they were built to meet local needs. In certain industries, such as P&G’s household wares, shipping from far-off locales is expensive and impractical.

Fortunately, economies are never static and, over time, the disparity between the U.S. and China should narrow naturally. It’s almost certain that, barring a complete collapse of relations between the world’s two largest economies, Chinese companies will expand their presence in the U.S. market and hire American workers as they become more global.

Right off the bat is any of that familiar to you? That’s exactly what American pundits were saying 30 years ago about China. If only we wait long enough and liberalize our trade with them, China will naturally liberalize its politics. The only problem with that is that it was wrong. That hasn’t happened and it hasn’t happened because China is different from the United States. Why can’t Americans come to terms with the reality that other countries are, well, other countries?

Second, U. S. companies didn’t set up operations in France, Germany, Brazil, and dozens of other countries in order to tailor their products to local conditions. They did so because they were compelled to by the governments of those countries. We “localized” because we were forced to. That is the actual history and to deny it is absurd.

If we require the Chinese to do the same things they require of U. S. companies, that they accept U. S. “partners”, that they transfer their technology to those partners, and that goods sold in the U. S. should be manufactured in the U. S., will Chinese companies comply in order to increase their sales? Frankly, I doubt it. Their objective isn’t to maximize sales. It’s to maximize the number of jobs in China.