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.

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The modern Pudong skyline of Shanghai at night.

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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