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Multilateral Business and the President’s Unilateralism

By Jock O’Connell

Writing in the September 2 issue of Business Week, Jeffrey Garten, the dean of the Yale School of Management, opined that defeating terrorism would require "Washington and Corporate America to work more closely together than ever before.¨ While most Americans probably expect that formidable alliance will emerge, there is every reason to think that business might not be all that eager to share the foxhole the White House has been digging itself of late. At issue is not merely the business community’s customary apprehension over the impact gunfire may have on the efficient functioning of markets, the fluid movement of goods and capital across borders, and the overall cost of doing business in a world at war. Nor is it solely a matter of widespread doubts regarding the administration’s ability to foster economic growth, while also cutting taxes and sharply increasing expenditures on national defense and homeland security. These are unquestionably matters of considerable concern to business leaders. But what is likely to be the main point of departure between the Bush administration and what Garten anachronistically calls 'Corporate America' is the sharp clash of cultures pitting the former's unapologetically unilateralist foreign policy views against the more cosmopolitan, multinational, multicultural views of corporate leaders maneuvering in today’s global economy. How this fundamental conflict of attitudes and interests plays out over the next several months could very much influence the future of world trade and the entire process of globalization. Eighty years ago, Calvin Coolidge proclaimed that the business of America is business. Today, a very substantial share of that business involves foreign companies not only as competitors but as customers, suppliers, investors, and partners in developing, producing and marketing an unprecedented array of goods and services. Regrettably, the full extent to which the U.S. economy has become enmeshed in a global economy is not well understood by most Americans. One problem is that the relevant data typically involve figures that are either incomprehensibly large or seem unexpectedly small. Thus, for example, the fact that, between 1970 and 2000, the share of America’s gross domestic product attributed to the export of goods and services doubled to 10.8 percent seems a modest accomplishment. Conversely, reports that U.S. exports have climbed to the $1 trillion mark are hard to grasp. (It may help to know that a trillion dollars is roughly equal the combined economic output of the states of Oregon, Washington, Idaho, Wyoming, Montana, both Dakotas, Colorado, Utah, Oklahoma, New Mexico, Arizona, and Nevada.) Yet the value of direct exports pales in comparison with the amount of business U.S. companies do abroad through their overseas subsidiaries. In 1999 (the latest year for which numbers are available), these foreign affiliates enjoyed revenues of $2.2 trillion. Equally remarkable perhaps is the volume of trade that these foreign affiliates do with each other beyond the water's edge. In 1999, such intramural offshore trade amounted to $451.9 billion, an amount approximately equal to the combined economic output of Los Angeles, Orange, Riverside and San Bernardino Counties. While the overseas affiliates of American companies have been commercially active, so have the subsidiaries of foreign companies operating within the United States. According to the latest government figures, the gross product of these foreign-owned firms amounted to $522 billion in 2000, or 5.3 percent of America’s gross domestic product that year. They also accounted for some 22 percent of all U.S. merchandise exports. Even these figures provide only a partial sense of just how internationalized the American economy has become. Stunning advancements in transportation and communications technologies have so diminished the significance of distance as to permit the emergence of elaborate production and distribution systems known as global supply chains. A logical extension of the division-of-labor concept that has guided mass-manufacturing practices for over a century, these creatures of globalization enable the production process to be divided into separate tasks to be completed wherever in the world the work can be done most efficiently and economically. As a result, a fast-growing share of global trade now involves the shipment not of finished goods destined for consumer markets but rather of raw materials, parts, components, and semi-finished goods moving between the disparate elements of these far-flung supply chains. Not surprisingly, the products we eat, wear, drive or otherwise use are likely to have pedigrees as complicated as, well, the ancestral roots of most Americans. But this modern reality also means that the U.S. economy has become increasingly vulnerable to disruption at points too innumerable to defend. The events of September 11, 2001, prompted American corporations to review the status of their foreign operations as well as their dependence on international transportation systems. And in the immediate aftermath of the terrorist attacks, there was some expectation that U.S. firms would retrench to safer ground or at least relocate vital operations to the more secure confines of North America. Those expectations have not been borne out, though. Far from retrenching, U.S. multinationals have generally pursued their existing business strategies. Earlier this month, for example, Boeing -- the one company that more than others helped foster globalization -- announced plans to shift a greater share of its aircraft design, engineering, and production work offshore, to places including Russia and China. Intel likewise just announced plans to expand its high-end 32-bit microprocessor design and development operations in India, a country that only last summer went to the brink of a nuclear exchange with neighboring Pakistan. A number of other prominent California technology firms are following suit. According to recent press releases, Oracle, the business software company, will increase its software engineering presence in India; Avanex, a fiber optical equipment maker, will concentrate more of its manufacturing operation to China,; and PeopleSoft will augment its software operations in Malaysia. Interestingly, U.S., European and Asian corporations have continued to close down operations in a presumably safer Mexico in favor of relocating to sites in Asia. As the San Diego Union-Tribune reported earlier this month, as many as three-quarters of the 277 maquiladoras in Baja California that have been shuttered in the last three years saw the work they did transferred to plants in the Far East. This should not imply that multinational corporations are being callous or cavalier. Companies doing business abroad have a keen appreciation of the specific dangers they face and have devised methods for managing risk. To be sure, a fanatic swaddled in gelignite or a rampaging anti-American mob can do considerable damage. But not all the perils of doing business internationally involve thugs and zealots. As a recent SEC filing submitted by Hewlett-Packard explains: “The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted.” [Emphasis added.] There is mounting concern – voiced, oddly enough, by members of the president’s own party -- that America’s struggle against terrorism is losing focus as the Bush administration ramps up its singular campaign to oust Saddam Hussein. One immediate fear is that military action against an Arab leader could invite the spiral of terrorist atrocities and military counter-measures that has come to define life in Israel. Indeed, even in the president’s home state, the administration's belligerence toward Iraq has so unnerved local business leaders that the Federal Reserve Bank of Dallas reported this month that many of its contacts had “expressed concern that the [economic] recovery is very fragile and that war with Iraq or another major terrorist event could lead to declines in activity." Beyond this, though, lies the more far-reaching issue of whether America’s broader interests in an age of globalization are well-served by the administration’s disturbing brand of in-your-face unilateralism. Since taking office in January 2001 (and with the exception of a brief period following the September 11 attacks), the Bush administration has exhibited a contemptuous disdain for engaging the rest of the world on anything but its own terms. Its frequently jingoistic message may play well in the polls, but it also feeds a xenophobic, isolationist impulse that has long haunted American politics. Yet even more troubling than the succor unilateralism gives to those who would raise the draw-bridges, indulge in protectionism and otherwise keep the foreigners at bay is that the administration’s contempt for things foreign perversely plays into the hands of those opposed to globalization.

Writing in the September 2 issue of Business Week, the Dean of the Yale School of Management, Jeffrey Garten, opined that defeating terrorism would require "Washington and Corporate America to work more closely together than ever before.¨ There is no question that such an awesome combination of industrial might, military prowess and innovative technology (much of it to be supplied by California firms) is as comforting to Americans as it is daunting to its foes. Nevertheless -- and the small army of former CEOs in the Bush administration notwithstanding, there are a number of reasons why 'Corporate America' ¦may not be especially enthusiastic about leaping into the particular foxhole the White House has been digging of late.

At issue is not merely the business community's customary concern with the impact gunfire might have on the efficient functioning of markets, the fluid movement of goods and capital acorss borders, and the overall cost of doing business in a riskier commercial climate. Nor is it just that most economists seem doubtful that the administration can foster economic growth, while also cutting taxes and sharply increasing expenditures on national defence and homeland security.

Rather, the real point of departure between the Bush administration and what Garten anachronistically calls 'Corporate America' is likely to involve a profound cultural clash between the former's unapologetically unilateralist foreign policy predilections and the more decidedly multiational, multicultural course modern corporations are charting in today¡¦s global economy. There is, in short, a very basic misalignment of interests and attitudes at play.

Eighty years ago, Calvin Coolidge proclaimed that the business of America is business. Today, a very substantial share of that business involves foreign companies as customers, suppliers, investors, and partners in developing, producing and marketing a phenomenal range of goods and services.

There are several ways to gauge the extent to which the U.S. economy has grown progressively more intertwined with the rest of the world. Between 1970 and 2000, for example, the share of America’s gross domestic product attributed to exports of goods and services doubled, to 10.8 percent from 5.4 percent. U.S. exports of goods and services amounted to $998 billion, while imports of goods and services totaled $1.36 trillion. These are mind-bending figures to be sure, but a trillion dollars does roughly equal the combined economic output of the states of Oregon, Washington, Idaho, Wyoming, Montana, both Dakotas, Colorado, Utah, Oklahoma, New Mexico, Arizona and Nevada.

Quite apart from direct exports is the enormous amount of business U.S. companies do abroad through their foreign affiliates. Whether they take the form of a computer chip fabrication plant in Ireland, a software design facility in India, or one of the 681 KFCs in China or 243 Pizza Huts in South Korea, these foreign affiliates comprise the world’s 12th largest economy, with revenues that totaled $2.2 trillion in 1999 (the latest years for which such figures are available.)

This new reality is reflected in the volume of trade between U.S. parent companies and their foreign subsidiaries. Few would be shocked to learn that multinational corporations dominate America's foreign trade, accouning for some 63 percent of all U.S. exports and around 37 percent of the nation's imports. What is perhaps not so apparent is that shipments between U.S. parent coprorations and their offshore affiliates account for 36 percent of all merchandise exports from the U.S. and 43 of goods imported into the U.S.

The foreign affiliates of U.S. firms conduct a good deal of commerce amongst themselves beyond the water's edge. In 1999, such intramural offshore trade amounted to $451.9 billion, an amount roughly equivalent to the combined economic output of Los Angeles, Orange, Riverside and San Bernardino Counties.

While the overseas affiliates of American companies have been commercially active, so too have the U.S. affiliates of foreign companies. According to the latest figures, the gross product of these foreign-owned firms accounted for $522 billion in 2000, fully 7 percent of America’s gross domestic product that year. They also account for roughly 22 percent of all merchandise exports from the United States.

Even these figures give only a partial sense of just how internationalized the American economy has become as thousands of U.S. corporations have assiduously woven themselves into the fabric of global commerce. Major advancements in transportation and communications systems have sharply reduced the significance of distance and permitted industries such as apparel and textiles, food processing, car making. and virtually every segment of the information technology sector, to create elaborate production and distribution systems known as global supply chains. A logical extension of the division-of-labor concept that has guided mass-manufacturing practices for over a century, these global supply chains enable the production process to be divided into specific tasks which are then completed wherever in the world the work can be done most efficiently and economically.

In addition to intra-firm trade, more and more U.S. companies are ‘outsourcing' the actual production of their products to independent contractors such as Flextronics, a Singapore firm that employs 70,000 workers at design, engineering, manufacturing and logistics operations in 28 countries on four continents. One student of the outsourcing phenomenon, U.C. Davis economist Robert Feenstra, claims that practice “has expanded dramatically over the last two decades.?

As a consequence of these global interactions, a growing share of global trade involves shipment not of finished goods destined for consumer markets but rather raw materials, parts, components, and semi-finished goods moving between the disparate elements of these far-flung supply chains. Not surprisingly, the products we eat, wear, drive or use are likely to have ancestries as complicated as, well, the ancestral roots of most Americans. But that also means that the efficient operation of the U.S. economy has grown increasingly vulnerable to disruption at points too innumerable to defend with confidence.

Last September’s terrorist attacks prompted American corporations to review the vulnerability of their foreign operations as well as their dependence on a fluid transportation system for moving goods among numerous stages of production and maintaining just-in-time delivery schedules. But the globalization process is being driven by powerful economic incentives that are not easily out-weighed by terrorist attacks. After all, it is a process that has withstood the predations of corrupt officials, intellectul property pirates, and a wide assortment of thugs.

Far from retrenching, U.S. multinations have pursued their pre-September 11 strategies. Boeing, the one company that more than others has helped foster globalization, announced plans this month to shift more of its aircraft design, engineering, and production work offshore, to nations including Russia and China. Similarly, a number of California companies have lately announced new foreign endeavors. Thus, Intel intends to expand its high-end 32-bit microprocessor design and development operations in India, a country that only last summer went to the brink of a nuclear exchange with neighboring Pakistan. Oracle, the business software company, has also announced an expansion of its software engineering presence in India. Avanex, a fiber optical equipment maker, announced it will concentrate more of its manufacturing operation to China. PeopleSoft likewise announced it would be expanding its operations in Malaysia.

In the immediate aftermath of the terrorist attacks, there was some expectation that U.S. firms would retrench to safer ground or at least relocate key operations to the more secure confines of North America. Things are not exactly turning out that way. Indeed, U.S., European and Asian corporations have continued to close down operations in Mexico in favor of sites in China and Southeast Asia. As the San Diego Union-Tribune reported earlier this month, as many as three-quarters of the 277 maquiladoras (foreign-owned assembly factories) in Baja California that have been shuttered in the last three years saw the work they did transferred to plants in China.

Ironically, U.S. corporations seem less troubled with terrorism than with the steps federal, state and local governments may take to thwart future attacks. The item foremost on the 2002 list of priorities of the National Foreign Trade Council, a group representing America’s multinationals, is not the defeat of terrorism but rather support for "public policies that foster an open international trade and investment regime."

This does not mean that corporations are callous or cavalier. American companies doing business around the world have developed a keen awareness of the specific dangers they face and have devised methods for managing risk. There is no question that a fanatic swaddled in gelignite or a rampaging anti-American mob can do considerable damage. But not all the potential impediments to doing business internationally stem from thugs and fanatics. As a recent corporate statement from Hewlett-Packard observed: “The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted.?[Emphasis added.]

Delays caused by enhanced security measures and the cost of higher business insurance premiums do diminish the bottom-line. But even if security-obsessed officials can impede the efficient working of the logistical systems the American economy depends on, the greater concern now lies with the possibility that the war on terrorism will lose focus while it escalates in ways that could invite the spiral of terrorist atrocities and military counter-measures that has defines the routine in Israel. Even in the president’s home state, the administration's stepped-up belligerence toward Iraq has unnerved local business leaders enough to prompt the Federal Reserve Bank of Dallas to report that “many contacts expressed concern that the [economic] recovery is very fragile and that war with Iraq or another major terrorist event could lead to declines in activity."

Of course, these are not the best of times for corporate leaders to speak out on any public policy issue, particularly one as politically and emotionally sensitive as the war on terrorism. Instead, the voices of restraint have found expression in the remarkable cavalcade of cautionary statements from such Republican Party luminaries as Henry Kissinger, Brent Scowcroft and James A. Baker III. Unfortunately, their concerns are expressed in the traditional vernacular of global politics, the Great Game of a former age.

Today's reality is that the U.S. economy has grown so inextricably enmeshed in a global economy that its interests are more vulnerable than ever before to disruptions caused by terrorists, war and prolonged civil unrest at too many different points around the world. There is no question of moving backward to more defensible positions; the only question is whether we can move forward.

The less lethal but arguably more far-reaching issue facing American companies is whether the administration’s penchant for framing policy issues in a starkly manachaen manner jibes with the infinitely more nuanced and multi-layered spirit of global economic integration.

If anything, the Bush administration’s disturbing brand of in-your-face unilateralism owes an intellectual debt (if that's an appropriate usage) to old-fashioned isolationism. The president who took office in January 2001 seemed determined to disengage from world affairs. The world, however, would not comply. So the compromise the White House seems to have worked out for itself is that, if the world wants us to engage it, it can only be done on our terms.

If the administration’s unilateralism gives succor to those who would otherwise prefer to raise the draw-bridges and indulge in protectionism and adopt illiberal immigration policies, it also plays into the hands of an anti-globalization movement desperate for a galvanizing political theme. All in all, the White House's proclivity for stark unilateralism stands in stark contrast to the needs of business in an age of globalization.