NO CEO FOREIGN POLICY

CEOS DEPENDENT ON CHINA ARE HOSTAGES

A few months ago, the Biden administration and the U.S. Congress joined to pass into law bi-partisan legislation that will provide $280 billion for support of the U.S. semiconductor industry. At the same time, it banned sale of certain advanced semiconductors chips and chip making equipment to China.

This was a proper and necessary action to counter China’s strongly government directed actions aimed under its Made in China 2025 program, at overtaking and displacing the U.S. industry from its leadership of this critically strategic industry.

The leaders of the U.S. industry all hailed the U.S. government action at the time. This past week, however, several key CEOs and members of the conductor Industry Association called for the Biden administration not to broaden its ban on sales of technologically advanced chips and chip making equipment. It explained that the industry gains over twenty five percent of its total sales from China and that significant reduction of those sales would reduce the U.S. industry’s earnings and its ability to invest in R&D and new product development.

In effect, the industry is saying: “we are too essential to national security for the U.S. government to allow us to fail and therefore it needs to provide subsidies to be sure we stay ahead of the Chinese. But wait a minute. We need to sell stuff to the Chinese that maybe detrimental to U.S. national security. Too bad, but if we don’t sell to the Chinese we won’t make enough profit to develop further technology and stay at the cutting edge. Oh yeah, there is also our stock options and bonuses to think about.”

This all poses the question of why the brilliant CEOs of America’s top semiconductor and technology companies invested in significant production facilities in China to begin with and why Washington did not raise concerns about that until now.? It also poses the question of to what extent CEOs of U.S. corporations have the right to make decisions on their own that may well substantially impact U.S. national security.

I should mention that I traveled in China with then Intel CEO and Chairman Andy Grove in the late 1990s and early 2000s. As a refugee from Communist Hungary, he was extremely careful about dealing with Communist China and made no significant investments there during his reign.

However, other, less politically attuned and savvy CEOs in a wide variety of industries did. They did so partly because they saw China as a rapidly growing market that could ramp up their own growth. They were also encouraged to do so by the U.S. administrations of Ronald Reagan, George H.W. Bush, Bill Clinton, George W. Bush, and Barack Obama. These emphasized that the Cold War was over, that America and its democratic allies had won, and that despite murdering at least 500 of its own democracy seeking students at Tiananmen Square in June, 1989, China’s Communist Party was dedicated to “opening up” to international trade which would inevitably lead it to political liberalization and even to democracy according to W. His U.S. Trade Representative and Later Deputy Secretary of State Robert Zoellick intoned that America wanted China to be a “responsible stakeholder in the liberal, rules based, global trading and economic system.

There are two critical and deeply intertwined issues here. One is the flawed international economic doctrine that has dominated U.S. policy for the past seventy years, and the other is the proper role and concern of the CEOs of American corporations with substantial international operations.

As professor Erik Reinert notes in his landmark book, How Rich Countries Got Rich and Why Poor Countries Stay Poor, today’s neo-classical international economics based on the 19th century thinking of David Ricardo and today’s econometric models that assume away the value of labor along with floating exchange rates and economies of scale has turned the understanding of how to create wealth on its head. Reinert notes that all countries that have ever become rich (aside from oil or gold producers) have done so by dint of mercantilism. Yet, since the end WWII, Anglo-American economists have been declaiming against mercantilism and promoting untrammeled free trade and globalization while initially the Europeans and then the Japanese and then the South Koreans, Singaporeans, Taiwanese, and Chinese stayed with the old tried and true mercantilism to become rich.

In the case of China, U.S. sinologists as well as economists bent over backward to avoid seeing a mercantilist, industrial policy driven, and separatist China. I mean, the Great Firewall that divided the Chinese internet from the World Wide Web as built in 1998. Bill Clinton merely laughed and claimed it would never work because it would be like “trying to nail Jello to the wall.” Haha. Well the last laugh is on Clinton and on all the other wishful thinkers who assured Americans that transferring their jobs and skills and taxpayer funded R&D to China would be just wonderful, peaceful globalization. When China adopted its Made in China 2025 list of advanced, high tech industries and products, the U.S. sinologists, international economists, and foreign policy mavens smiled as they spoke of the new “flat world.”

Well, surprise. The Chinese meant it and proved very good at catching up with and surpassing the U.S. industries in a variety of advanced fields. Moreover, the world turned out not to be so flat as leading U.S. analysts had supposed. For example, by dint of protectionist tariffs on imports, subsidies for investment, and pursuit of major infra-structure projects, China displaced both the U.S. and Germany to become the dominant producer of solar panels and of the key components of solar panels. It did not invest in producing panels outside of China nor did it license its technology to potential foreign producers. Unlike the foreign corporations like Apple who closed their U.S. factories and flocked to move their production operations to China, Chinese corporations did not consider producing abroad and would not have been able to do so without the permission of the Chinese government and the Communist Party.

Now let’s look at U.S. corporations and ask ourselves what, if anything, should be expected of their CEOs beyond whining about Washington reducing their sales to China on national security grounds.

Most people are unaware that corporations can only be formed with permission of the state. In most countries, the state means the national government. In America, however, it means the government of any one of the individual states. The reason for this is that a grant of incorporation offers the investors in the corporation what is known as limited liability. This means that while the corporation may be liable for payments or damages, the individual shareholders will not be. Obviously, this is a great gift to investors. It is given or granted only because the state expects that the corporation is going to do something nice for the state and its citizens. Corporate executives, therefore, must be quite discerning about their deals and investments to ensure that whatever they do is indeed good for not only investors, but citizens of the state giving them this nice gift. If they go and invest in an enemy of the state or in something that may do the granting state harm, by definition, they are not in accord with their grant of incorporation and ought rightly to be shut down.

One wonders if the citizens of California (the state of Apple’s incorporation) were happy when the company shut down its manufacturing operations in California and moved them to China. One wonders about how the citizens of California feel about the fact that Apple maintains overseas earnings in tax havens like Bermuda, Ireland, and Singapore rather than returning them for payouts and/or investment in California and the rest of America.

The Semiconductor Industry Association is now telling Washington to limit its sales of strategic items to China no further because that might reduce their earnings. Never mind about American or free world security. Just imagine what might happen to our stock options, corporate jets, or tips to Davos. Or, holy catfish, we might have to draw down some of the overseas earnings we have stashed in the Cayman Islands.

Okay, maybe I am going a bit overboard with that. But there is an important point here. Should the CEOs of American corporations have the right to place production facilities in locations that may ultimately prove dangerous to America? Should they have the right to determine what is strategic and not strategic for America?

China is not the villain here. It has told us plainly and clearly that it means to beat us soundly at our own game. I may not like that China is doing that, but I cannot blame it for wrongdoing in any way.

The issue is us and our corporations and their hidden role in our policy making and political financing. The Biden administration just got done giving them a huge gift, which, by the way, I supported. We are in danger of falling behind in chip technology and that would be dangerous for America and dangerous for the free world. The Biden policy for support of chip production and development in the U.S. was and is the right policy. But the moaning of the Semiconductor Industry Association over the possible loss of sales in China is a bridge too far. In view of Made in China 2025 and 2035, they should realize that their sales in China will decline in any case. They have no business trying to tell the National Security Advisor how to do his job. For shame.