If the U.S. Doesn’t Control Corporate Power, China Will

Laissez-faire economics has left firms bending the knee to Beijing.

Employees work on the assembly line at a Foxconn plant in Shenzhen, China, on May 26, 2010. China is a parts supplier for many high-tech companies around the world, including Apple. (In Pictures Ltd./Corbis via Getty Images)
Employees work on the assembly line at a Foxconn plant in Shenzhen, China, on May 26, 2010. China is a parts supplier for many high-tech companies around the world, including Apple. (In Pictures Ltd./Corbis via Getty Images)

Last week, Bloomberg broke the news of a hack by the Chinese military of critical hardware assembled by an American company in China, affecting Apple, Amazon, and the U.S. Defense Department. While there is controversy over the story, no one doubts two key facts. Chinese hacking of Western corporations and governments is systemic, and China has a virtual monopoly over the manufacture of high-technology products, which it uses to its own advantage.

The same day as Bloomberg published the expose, U.S. Vice President Mike Pence gave a speech discussing China. Espionage, he said, was just one of a range of tricks China uses. Others include tariffs, forced technology transfers, arm-twisting of corporate leaders to lobby the U.S. government, and censorship of Hollywood through enticing Western media companies with promises of reaching Chinese audiences.

Pence was, in part, justifying President Donald Trump’s new tariffs on hundreds of billions of dollars of Chinese goods. But he went beyond tariffs, outlining a strategy that includes investment limits, military patrols, and requests to companies. Pence called on Google to stop developing its search and tracking technology for the Chinese market. He even argued that U.S. corporate focus on the short term, “the next quarter,” gave an advantage to China. In other words, a deeply conservative Pence sounded like liberal stalwart Sen. Elizabeth Warren in arguing the Chinese are using America’s own short-term-oriented financial system against it. Companies, he was saying, have moral obligation above shareholder value.

That’s a strange argument to come from a Republican vice president. But it points to how China is exploiting the laissez-faire model of industrial organization Washington has enabled for decades. As the consensus in D.C. shifts toward taking on an increasingly aggressive China, ideas about how corporations relate to the state will also have to change—or else undermine their new stated national framework.

Straightforwardly illegal hacking by China is common (although it’s hardly the only country to do it). For instance, in 2016, security researchers found that data on about 700 million Android phones and other devices programmed with Chinese firmware was being surreptitiously sent to China. Recently, Chinese state-backed chipmakers stole designs from Micron and Samsung. The Chinese have taken all kinds of intellectual property including information on smartphone-testing robots, Monsanto corn seeds, and the formula for the white pigment that goes into Oreo stuffing.

But just as common as and perhaps even more important than hacking are legal or quasi-legal methods. Chinese companies are, according to one Defense Department report, “flooding Silicon Valley with cash” to simply acquire secrets. Two years before hacking Micron, the Chinese tried to buy it. This year, Chinese automaker Geely secretly bought 10 percent of German carmaking giant Daimler, using shell companies to avoid detection, with U.S.-based Morgan Stanley doing the banking work for the deal.

Chinese state-backed companies have access to a massive legal budget, which affords them the ability to use U.S. courts to destroy American business leaders who challenge unfair deals. As a counterterrorism official pointed out in April, “When you go to a board of directors or a CEO and say, “Hey, I know you have two bids, you have Cisco or Oracle, and then you have the Chinese company which is 40 percent cheaper,’ it’s hard to explain to them and hard for them to explain to their constituents that they’re going to pay 40 percent more for a U.S.-based company because it doesn’t threaten national security.”

This exploitation of America’s corporate weaknesses is new. As Barry Lynn relates in his book Cornered, for much of the 20th century, the United States simply did not outsource production to its enemies or geopolitical competitors such as China or the Soviet Union, even if it was profitable to do so. Washington even made sure that friends couldn’t gain too much power over its political economy, ensuring that, say, Japanese allies did not gain a monopoly over flash memory.

But starting in the 1980s, U.S. lawmakers weakened the essential controls the state put on the financial system. This was not just led by anti-tax advocates like Grover Norquist and anti-government politicians like President Ronald Reagan, but also by a set of neoliberals in the Democratic Party led by President Bill Clinton, who used the theories of economist Lester Thurow to declare the era of big government over. Clinton promoted a vision of a globalized world with no nation-states impeding the free flow of capital and goods. This lack of assertive public power allowed private power to take its place, as corporations merged and organized trading flows without having to worry about the demands of public institutions.

This trade revolution built on top of an earlier intellectual revolution, one put forward by economists Milton Friedman and Michael Jensen, that shifted the basis of the American corporation to shareholder value as the prime goal of industrial organization. By focusing solely on shareholder value, investment bankers, economists, and a new breed of CEOs changed the commitment of corporations to environmental rights, workers, and local communities. They also made it so that U.S. companies felt no obligation to their own country’s national security goals. General Electric Co. Chairman Jack Welch reflected these new values in 1998 when he said, “Ideally, you’d have every plant you own on a barge to move with currencies and changes in the economy.” More recently, Google has backed away from working with the U.S. military, but it is happy to work with the Chinese government on censorship and tracking software for China’s citizens.

This lack of corporate commitment to national security didn’t seem like that big of a problem in the late 1990s, when U.S. businesses seemed impossible to dislodge. China was, after all, a poor country. But the Chinese, as Americans did in the 19th century, used this cost advantage to begin drawing large amounts of Western investment and know-how. Western companies, pressed by Wall Street, made China the factory of the world, especially for high-tech products. The strategy seemed to work for both countries, at least at first. Corporate profits boomed. China became a middle-income country, with exports of over a hundred billion dollars of computers and electronics to the U.S. annually. As investment flowed, the American state weakened, and Wall Street and the Chinese state strengthened.

Soon, however, problems appeared in this the frictionless commercial utopia. China acquired a virtual monopoly in the supply chain of high-tech goods and became much more powerful politically and financially. Toward the end of the 2000s, the Chinese government shifted its strategy from seeking investment from Western companies to displacing them. After the 2008 financial crisis undermined Western credibility, the Chinese began wielding power over Western corporations, which by now had to do business in the country.

This was unveiled in a series of brusque displays of raw power. In 2010, China arrested four executives of Rio Tinto, until the company’s CEO went to Beijing and provided a discount on the price of iron ore. China forced Glencore to transfer a Peruvian copper mine to a Chinese company and grabbed intellectual property from Qualcomm. In 2014, Chinese anti-monopoly regulators brought in-house lawyers from 30 large companies—including GE, IBM, Intel, Microsoft, Siemens, and Samsung—to a meeting. Half the companies were under investigation for monopolization, officials said—without saying which ones. In this show of force, Chinese officials demanded confessions. Apple CEO Tim Cook, one of the most powerful business executives in the world, had already been forced to apologize to Beijing for minor complaints about the company’s warranty policy. The Chinese state was making it clear who was boss.

This created a dilemma for Western companies, which are increasingly dependent on China. Corporate leaders did not want to risk their short-term profits by upsetting the Chinese state and Wall Street. Yet if they handed over the corporate crown jewels to China, they risked long-term profits and control. At the same time, they did not want to strengthen the weakened U.S. public state, which could then turn around and regulate their behavior.

The ascension of Chinese President Xi Jinping has heightened the dilemma. Xi is far more authoritarian than his predecessors and has used nationalism to tame domestic opposition. His rule since 2013 has been marked by crackdowns on civil society, Muslims, and foreign companies, including for perceived slights. Earlier this year, Daimler apologized to China after using an innocuous quote from the Dalai Lama in an Instagram ad, even though Instagram is banned in China. Marriott fired an employee in Nebraska at China’s request because he had  accidentally liked a post from a Tibetan separatist group that praised Marriott for naming Tibet as an independent country in a survey. Airlines worldwide renamed Taiwan as “Taiwan, China” after threats from Beijing.

The logic of the pre-1980s political economy strategy now seems obvious, given the failures of the new approach. The hack exposed by Bloomberg has its roots in the legal context of both monopolization and offshoring. The company affected, Supermicro, like many electronics companies, does its manufacturing on a contract basis in China and has a strong market position. “Think of Supermicro as the Microsoft of the hardware world,” one former U.S. intelligence official told Bloomberg. The national security problem, in other words, is a result of a legal framework for corporate behavior that enables concentrated offshored supply chains for key goods.

So Trump’s new China strategy of ending reliance on the Chinese manufacturing base couldn’t come soon enough. Trump, Pence announced, was finally standing up to China, with tariffs, more military spending, and freedom of navigation patrols in the South China Sea. The message is clear: Western companies should begin moving supply chains out of China.

While the speech was timed perfectly with revelations of the hack, it’s hard not to see a basic disjunction in the way the U.S. government weakly relates to Western corporations, which in turn prioritize short-term thinking that advantages China. After all, much of what Pence called out was simply what companies do voluntarily. Technology transfers are done for profit, and selling into China is lucrative. General Motors sells more cars in China than in the United States. China is now the second-largest market for the iPhone. Even though the country bans Facebook, Chinese ad buyers, including the government, are collectively the largest spenders of advertising on Facebook in Asia, adding $5 billion to the company’s bottom line.

And Trump, with his aggressive anti-China rhetoric and tariffs, hasn’t really changed corporate behavior. Nor have open threats by the Chinese that they will cut off key supply chain inputs, or even threaten specific companies, including and especially one of the crown jewels of the globalized economy, Apple. According to Apple’s 2017 annual report to investors, Apple has increased its amount of long-lived production assets in China by nearly 30 percent since Trump came into office. Broadly, the trade deficit with China under Trump is going up, not down.

The only way to organize a system resilient to Chinese intrusions is to make it clear that the era of big government is back, and that Wall Street is no longer able to force companies to think short-term. If China is using U.S. corporations to lobby and control the American state, then weakening the ability of corporations to lobby is the only answer. If China is using American divisiveness against Americans, then the only answer is to make America less divided. The U.S. government, not short-term-focused financiers, has to be the boss. The era of big government must come back.

While this seems like a radical proposition, this would simply return the United States to its roots. In truth, much of what China is doing is simply what America used to do. Before the 1970s, the United States used its commercial power to protect its security. As the first U.S. treasury secretary, Alexander Hamilton, understood, an easy way to lose a war is to have a foreign enemy control your supply lines. This is as true for anti-corruption measures as industrial ones. As legal scholar Zephyr Teachout points out in her book Corruption in America, many of the original reasons for domestic checks on power and corruption—such as preventing foreigners from offering gifts to U.S. government officials—had national security rationales.

So, Trump and Pence are right on China. But given the links between the Trump administration, Trump’s own ties to networks of global corruption, and potential Russian involvement in U.S. elections, Trump is the wrong leader to make this strategic pivot. The Trump administration can see the problem that a short-term financialized corporate system opens up when paired with Chinese aggression. But because the administration thrives on the weakness of public institutions, it cannot correct the problem without wounding itself. A different congressional majority or future administration, however, can. In other words, restructuring the Western corporate commons so it cannot be exploited by bad actors is one of the key national security challenges of our era.

Either way, it’s clear that the era of strong private corporate power is over. Public power is being reasserted over U.S. corporations. The only question is whether the public power that assumes control of Western corporations, and thus Western society, is American or Chinese.

Matt Stoller is a Fellow at the Open Markets Institute. He is writing a book on monopoly power in the 20th century for Simon and Schuster.