Learning the tricky ropes of 'state capitalism'
Seattle's missions to China, our key trading partner, mean coping with a powerful new force in global economics: state-driven capitalism. Conservative politics and our state constitution often stand in the way.
Some years ago, Seattle Mayor Charles Royer sat down to dinner in Chongqing, China with his counterpart mayor for a welcome dinner. Chongqing had become a sister city a few years earlier and Royer was establishing what has become a very active relationship. The mayor of Chongqing informed our mayor that he wanted to conduct some business before the meal. He wished to order three brand new 737’s because they were starting an airline. He assumes that, as in China, Boeing worked under the mayor. Mayor Royer immediately took out his pen, opened his paper napkin to write up the order, and asked, "What color?”
On return to Seattle Royer called Bud Coffey, Boeing’s then vice president of government affairs, explained the sale and asked about the commission. Coffey explained at length that Boeing was well aware of the new airlines being created in China and thanked the mayor for his call. A few hours later, Royer was pulled out of a meeting because Coffey called back to ask the name of the Chinese city. It turned out it was new information and Boeing promptly sold three planes to what became China Southwest Airlines. Mayor Royer is still waiting for his commission.
The new airline was to be under the control of the government so that Boeing’s customer is a government entity. Welcome to what is called "State Capitalism." The January 21 issue of The Economist has an excellent section on state capitalism called “The Visible Hand.” The success of China has prompted many developing countries to adopt this approach for state-guided economic growth. The article calls it the melding of the power of the state with the power of capitalism.
The success in China has also reinforced socialist and labor parties in Europe and other countries such as Brazil to support a more active role in the economy. Assistance for new industries and government support for companies such as Airbus are examples. Global competition and the growing sophistication of American competitors make this trend difficult for our private business. We are selling in a global market where the competition is a government-owned businesses or a state agency. The laws and courts support sister state agencies.
Thomas Friedman, in a recent New York Times column entitled, “Made in the World,” describes the change in supply chains and why the retention of jobs is difficult when a global company sources materials and manufacturing in the best place for cost and quality and then sells everywhere. It becomes more complicated when your customer is a government entity and demands some of the work be in that country. Friedman observes that our elected representatives don’t understand what has happened but the U.S. public is beginning to understand. This has led to growing support for protectionism among the American public.
The Council on Foreign Relations recently issued a report titled, “U.S. Trade and Investment Policy.” Pamela Passman, representing Microsoft, was on the task force that oversaw the report's preparation and recommendations. The report advocates a more assertive trade agenda but notes the lack of public support and the requirement that jobs must return to the domestic economy before this happens. It also lists a series of government actions. The need for an active government role is what our national political debate is about and why the conservative wing of the Republican Party is in a box on this issue. They support free trade and an open market economy, but mobilizine public support for this agenda will require government leadership.
The Economist article details the quandary facing those who want government out of the economy but want jobs and competitive companies in their community. The new state capitalism is very sophisticated and growing very quickly. Countries are establishing national champions and developing industrial policy. The magazine notes that this is creating a difficult situation. “That raises some tricky questions for the global economic system. How can you ensure a fair trading system if some companies enjoy the support, overt or covert, of a national government? How you can prevent governments using companies as instruments of military power? And how can you prevent legitimate worries about fairness from shading into xenophobia and protectionism?"
How this all plays out is important to the future of our local economy. For example, suppose an airline is government owned or controlled and demands as part of the sale that a certain percentage of the work be done in their country to create jobs and support their industrial policy. How should we react? If other governments provide financing for their product sales, why are we having a debate on whether we should reauthorize the Export Import Bank, our financing agency? We have cut our U.S. Foreign Commercial Service while other governments are the sales force for their companies.
We bemoan that incentives to attract investment are unfair while our companies are lured with amazing packages of incentives from throughout the world. In fact, Washington state’s constitution, adopted in the populist era and because of bad experience with the railroads, is one of the most limiting in the country.
The Council for Foreign Relations report was prepared by business, labor, and academics. It calls for an active government role based on a strategic plan. It calls for the president to be given trade-negotiation authority. It has excellent recommendations that require Congressional support. Congress works based on political polls and public support. This takes us back to the role of government to make the American public support international engagement.
I recently read Ron Chernow’s new biography of George Washington. During his presidency, Washington had to contend with the policy debate between Hamilton and Jefferson on the role of the central government. Washington strongly supported Hamilton's notion of a strong central government, based on the general's experience with his difficulties in receiving support for his troops during the Revolution. The Continental Congress could not get the states to pay the bills. It is the same debate as today.
Next month, Seattle Mayor Mike McGinn will be leading a Chinese Garden delegation to Chongqing followed by a Clean Energy delegation organized by the Trade Alliance in partnership with the Clean Tech Alliance and the Washington State China Relations Council. Chongqing with a population of over 30 million, is our sister city and one of the biggest cities in the world. China has become the Northwest's most important business partner.
Relationships are important in Asia and visits like this are important. The mayor and party chair in a Chinese city are also the business leaders. The Chinese now understand the separation between government and business in the United States, so the mayor will not sell three planes. But he will continue building a relationship that is critically important for business and cultural understanding.
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Comments:
Posted Wed, Feb 22, 6:31 a.m. Inappropriate
The President had trade-negotiating authority until it lapsed several years ago at about the same time as President Clinton, having barely passed NAFTA with GOP support, essentially gave up on the global liberalization that had taken place since President Kennedy's Trade Expansion Act of 1962.
One unforeseen problem that cropped up after NAFTA: As a sweetener to labor and environmental groups with doubts about NAFTA, Clinton introduced for the first time into trade negotiations the issue of environmental and labor standards---i.e., that our trading partners not only would have to reduce tariffs and other traditional trade barriers, in dealing with us, but would have to meet our labor and environmental standards. Labor, in particular, liked this because it would be next to impossible for all but the most advanced economies to match our labor standards. (You can imagine what we would do if trading partners suddenly demanded that we align with their tax and antitrust policies, for instance, as the price of arriving at a trade deal with them).
Global liberalization, within the WTO, offers the best chance to reduce trade barriers in all economies, including China's, and to increase the volume of global trade. But we have stuck for a long period with negotiating bilateral deals, country by country, which by definition discriminate against countries outside these deals.
Global trade liberalization is not just a GOP or "capitalist" concept but was for many years the appropriate cornerstone of U.S. trade policy, supported by both political parties. If we implement a series of subsidies for domestic producers, we encourage counter-subsidies by trading partners---a kind of arms race which never stops. Companies such as Boeing, which already receive heavy subsidies, like them of course.
But the best interest of all domestic industries and workers is that
tariffs, subsidies, pernicious regulations, copyright infringements, patent violations, etc. be attacked systematically by all trading nations.
Industries, companies, states and localities will of course clamor for
government policies and subsidies which give them an edge over competitors.
But such policies and subsidies in one place only breed them in others, with the net effect over time of increasing the costs of products everywhere and, then, strangling trade altogether.
Posted Wed, Feb 22, 9:46 a.m. Inappropriate
Whereas is may be desirable for government to do what it can to ease the process of commerce, it's a mistake to get government too involved in commerce itself. That's the sure path to authoritarianism. Government is never satisfied to be the junior partner in any endeavor.
Posted Wed, Feb 22, 2:30 p.m. Inappropriate
I would have to disagree with Ted Van Dyk's comment: Clinton continued to push for free trade throughout the eight years of his administration. Full normalization of trade with China was a major accomplishment in the second term, with the politics very much parallel to the NAFTA debate of the first time. I don't think that the labor and environmental conditions in NAFTA have been especially significant. In addition, Clinton negotiated hundreds of trade agreements, many of which could be implemented without Congressional approval; most were bilateral and fairly minor in nature.
But Clinton did face the major obstacle of opposition. The main problem was labor, which was hostile to free trade on the grounds that it would put serious downward pressure on the job market. There was lesser but still significant opposition from the isolationist right. Of course, Seattle became ground zero for that opposition in 1999, shattering the public consensus, if there ever was any, to the process of globalization. While both of Clinton's successors have been supportive of free trade, I don't think that either of them can claim nearly as much success in that area.
The notion of state capitalism presents a serious ideological challenge in addition to the economic challenge. Since the onset of the Cold War, the Western bloc has generally assumed that freedom, democracy, and capitalism all went hand in hand; these were the characteristics that described the United States, Western Europe, and their allies, and were the opposite of what was to be found in the communist bloc. It would have seemed--Clinton seems to have believed so anyway--that Francis Fukuyama's thesis that history had approached an endpoint, characterized by liberal democracies, was the dominant view in the 1990s. But if the Chinese model demonstrates that economic success can occur outside of the context of liberal democracy, then there could be severe consequences for the entire globalization paradigm.
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