Two Ships Passing in the Night

Picture this – a majestic cargo ship, “The United States” (The US) steams out of port to the rest of the world with its cargo – billions of dollars to invest in far away lands.  Another majestic cargo ship, “The Republic of China” (The China) steams out of port to the rest of the world with its cargo – trillions of dollars to invest in far away lands.   Its first stop is the United States where it hopes to unload billions of dollars of its cargo.

 The captain of The US is told to unload his cargo, wait for factories, manufacturing facilities, fabricating facilities, call centers and so forth to be built and then load his ship with the products and services made and come home.  When home the products and services are “unloaded” and millions of dollars are loaded on The US and it is sent out again so “payment” for the products and services is made.  With enough product, the owners of The US shut plants in the US and lay off workers as they are not needed and are more costly than those overseas.  And the owners of The US add to their treasure.

The captain of The China does not have specific orders.  Look for investments and make them as soon as possible he is told.  Simply wait and the cash starved politicians (mayors, governors, economic development concerns, etc.) and societal leaders will rush to you with many offers and many deals. 

It will happen, in part, because of the orders received by The US.  These investments will be real estate, manufacturing, technology, transportation, raw materials, etc.  The final order?  When empty come home for more, but see if the owners of The US need help taking more “cargo” from the United States to China.

A far fetched story?  Maybe part of it, but most of it – not so far fetched.  What I don’t quite understand, but continue to constantly search for answers, is why U.S. companies, sitting on trillions of cash, do not invest in the U.S, but overseas.  And why, at the very same time, the Chinese can’t seem to invest enough in the U.S.  Why are these worlds so far apart?

There are a few explanations.  The Chinese see in the United States a very stable economic and political system that usually equates to reduced political risk.  The U.S. also has a very weak economy so it’s a “buyer’s market” – the deals are plentiful.  This weak economy has led to financial difficulties in state and local budgets, so cash is king and the Chinese are spending cash.  The dollar is incredibly weak right now so investments in the U.S. are not only bargains, they are bordering on steals simply based on currency.  Finally, these investments are easy ways to acquire various technologies that took America years to develop and also exposes raw materials to export to China.

I cannot imagine Chinese investors are coming here for the job creation solely since the cost of American labor is much higher than Chinese labor both in direct cost and indirect cost.  Indirect costs include regulation, labor laws and taxation policy.  So it must be ROI – return on investment.

So let’s look to the U.S. side of the equations.  Why don’t American firms invest in America?  Normally investing overseas with a weak dollar makes no sense as costs go up exponentially; unless the labor costs, direct and indirect, more than offset the weak currency.  The other questions are: have regulation costs and taxation structure become so burdensome that overseas investment, no matter the loss of some control still leads to greater ROI?  They must be since overseas profits cannot be brought back without U.S. taxation and many a foreign subsidiary of a U.S. parent company elects to keep profits overseas.

Certainly no one can blame the Chinese for coming to our shores to invest.  They are only acting like we Americans did following the industrial revolution.  And I don’t “pick” on China in this commentary; I only use them since they are the fastest growing economy and the biggest threat to U.S. economic domination in the future.  It simply is to point out the seemingly strange situation that currently exists that has one scratching one’s head.  It seems to make no sense – there seems to be no logic.

The bottom line though?  WE, the American public, the average Joe, are the owners of The US and the ones who have abdicated the responsibility to others in giving the captain his orders.  We can point to the barons of industry that closed factories, laid off employees, shifted whole industries overseas and sent investment and subsequent profits to other lands – out of our reach.  But how?  WE are the owners of these companies through our pension funds, our 401k’s, our mutual funds, our banks, our brokerage houses, our hedge funds, our public pension funds and our private investments.  So many times we abdicate our votes via proxy or otherwise to let someone else vote for the captain of the ship and the direction.

Unless and until we take control of our destiny this will continue.  And secretly we want it to continue since the only gauge we measure these “captains” of The US by is ROI.  But what is total ROI?  If a company has an overseas subsidiary and fails to return profits to the U.S. due to tax regulations, are we forgoing substantial dividends – our personal ROI? 

If we allow our neighbors and relatives to be laid off, to lose their job security, does our personal ROI go up through our investment, but our societal ROI go down?  And how does societal ROI go down?  We have to pay for unemployment, maybe job retraining, the cost of family financial distress and sometimes break up or divorce, foreclosures, personal and corporate bankruptcy and higher taxes to make up the differences in lost revenues.  The costs can get steep, and most of the time not measured.

I don’t endorse nationalism or protective behaviors.  I do promote real free trade (a topic to be taken up in later commentaries).  But I also discount the many sources that compare the current Chinese investments to those of the Japanese in the early ’80’s and how American’s fear of China is unfounded.  Such commentaries are dead wrong.  There are similarities but also many significant and substantial differences in these situations (also to be addressed in subsequent commentaries).  I endorse REAL free trade and investment with China.

To quote a young Chinese entrepreneur in a recent New York Times article: “we are not ideological.  We are patriotic, we are nationalistic.  But then, who doesn’t love their country?”  So what’s wrong with Americans being patriotic and nationalistic – you know loving our country?  Until we stop abdicating our responsibility to others and take control – you know, being captains of our ship – we are destined to allow others to make these choices and we should stop whining about the consequences.

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