Quarterly Capitalism Can’t Compete With China

Most countries today have some form of national industrial strategy to ensure the well-being of citizens rather than just shareholders, and the United States needs one, too.

Petra Péterffy for Noema Magazine


Rana Foroohar is CNN’s global economic analyst and the global business columnist and associate editor for the Financial Times. This is a modified excerpt from her latest book, “Homecoming: The Path to Prosperity in a Post-Global World” (Crown, October 2022).

In the United States, corporations capture the state. In China, the state rules corporations. It’s a One World, Two Systems paradigm that will continue to fundamentally change the global economy — and the way businesses everywhere must operate in the 21st century. There is no longer a single global paradigm for capitalism, but a collection of local and regional paradigms to which companies will have to adjust.

Both the United States and China have, in different ways, benefited tremendously from the last 40 years of globalization, financialization and neoliberal economic policy. And in both countries, tech companies have been among the biggest winners.

The intangible nature of their businesses — they traffic not so much in hardware, as in software, data and ideas — makes it very easy for them to offshore profits to favorable tax locales and pay less of their enormous wealth to governments as a percentage of revenue than other businesses. They also employ legions of lobbyists and lawyers to push the tech companies’ own narrow interests, and they crush those who get in their way. What’s good for Apple, it turns out, isn’t necessarily good for the United States or any other individual country, for that matter. And yet Big Tech firms also like to pretend that they are national “champions” of innovation that deserve protection from the U.S. government, even as they focus on maximizing shareholder value by trying to do as much business in China as possible.

The truth is that both Big Tech and China operate as monopolies — it’s just that the former exists in the private sector aiming at private gain, whereas the latter operates under the guise of a state clearly focused on maximizing collective national advantage. This disparity represents a crucial disadvantage for Western companies and countries. While Chinese companies have the protection and support of the state, U.S. and, to a lesser extent, European firms are either left to their own devices or even find themselves fighting the government of the country in which they are supposed champions.

It’s clear what the vectorial direction of China today is — toward more, not less, top-down control of what is already the world’s largest surveillance state. The United States, Europe and all other nations now face a choice: either be looped into the Chinese orbit or forge a new model for a post-neoliberal world.

Assuming the choice is the latter, both businesses and governments will have to change the way they operate. In a world in which we have to compete with state-run giants in China, which think on 50-year time horizons, quarterly capitalism simply doesn’t cut it anymore (not that it ever really did). Most countries today have some form of national industrial strategy to ensure the well-being of citizens rather than just shareholders, and the United States needs one, too.

“The United States, Europe and all other nations now face a choice: either be looped into the Chinese orbit or forge a new model for a post-neoliberal world.”

Consider, for example, the plight of Qualcomm, the U.S. multinational that designs the wireless chips that are the smartest thing in your cellphone — and whose story makes clear that companies can no longer fly completely above the concerns of the nation-states in which they operate.

For the last four years, Apple battled Qualcomm on three continents in an effort to reduce the licensing fees it charges for the designs that power the chips Apple needs for all its iPhones. Qualcomm has depended on that income, which in 2020 amounted to more than half of its global profits, to support its research to win the global 5G competition. Stymied by Apple, Qualcomm relied more and more on its profits in China. But because the Defense Department had deemed China the chief strategic adversary of the United States, this posed new security concerns, particularly as the Trump trade war heated up.

Qualcomm was a crucial source for next-generation technologies that would be essential to America’s future. Should China have access to these technologies, increasing the risk that it could hack into the United States’ critical infrastructure — or even to the chips made by one of the United States’ top telecom innovators (chips that powered any number of devices, which could in turn be compromised)? Suddenly, policymakers on both sides of the aisle were beginning to ask these questions.

To neoliberals, this was of no concern; multinational companies should be able to do business wherever they liked. (Although these same policymakers turned a blind eye to the fact that, as China’s size and status in the global economy had changed, the playing field for that business had become increasingly unlevel.) But as China grew ever more threatening to the United States’ global competitiveness, Washington began to reconsider. Perhaps the government should step in. But, of course, to think that way was to admit what it had long denied: that the government did indeed have a role to play in directing the national economy in the national interest. There was, as it turns out, a place for industrial policy.

Multinationals like Qualcomm, which once found themselves at the center of the era of neoliberal globalization, sit uncomfortably in the middle of this new world. And they raise key questions for the next era of capitalism: Can the fruits of a global corporation be harvested at home? Is it possible to be both global and local? I believe the answer is yes. But, in a world that will have at least two, if not three, separate tech/trade and digital tax paradigms, it will require a new social compact for business.

Paradigm shifts are challenging, but already COVID-19 has presented some very interesting new opportunities for reinvention. Start with what’s happening in the business sector itself. If there is a silver lining to the COVID-19 crisis, it is the remarkable creativity shown by the many businesses that thrived by transforming themselves in unexpected ways during the pandemic. There is the airport security company that made plans to launch a vaccine-tracking app after the travel business tanked. Or the mall and store owners renting out empty retail areas to schools that needed more space for students to socially distance during lessons. Or the in-person event companies that quickly transitioned to digital businesses.

“Industrial policy isn’t a silver-bullet solution to the economic woes of this new world, but it is a politically smart nod to the fact that we are in one.”

More new business applications were filed in 2020 in the United States than in any previous year on record — applications were up 24% from 2019. But 2021 was even better: Applications rose 42% in the first nine months compared to the same period in 2019. Yes, brick-and-mortar retail is still lagging, and the travel and tourism industry may never be what it once was, but areas like ecommerce, fintech and health care are positively booming. This kind of Schumpeterian creative destruction is just what you want at a time like this. But the rise of entirely new kinds of businesses also creates new challenges for both capital and labor. I’d point to three particularly pressing issues that will require more attention from policy makers.

First is the question of how to value and protect intangible assets, which, after the pandemic, will probably double as a percentage of corporate investment — assets like software, patents, digital data and the brains of the “knowledge workers” whom every country must now cultivate. Most big business battles today are over who owns what slice of the digital pie. Consider the court case between Epic Games and Apple over App Store commissions. Or the fight over pandemic exemptions to World Trade Organization rules around intellectual property to bolster vaccine production. Or Google and Apple battling it out with SAP, Siemens and BASF over patent protection in Germany. As the percentage of corporate wealth held in intangible assets inexorably rises, these types of conflicts will only increase. This underscores the desperate need for a 21st-century transatlantic alliance around technology regulation and digital trade rules. China is going its own way on many of these matters, but Europe and the United States must not. Regional unity can, and should, replace laissez-faire globalization that denies the incongruities of the One World, Two Systems paradigm.

The second big issue is that the expansion of intangible assets will probably mean fewer jobs in the short term, even as it creates new businesses and entirely different industries over the longer term. Neither the public nor the private sector in the United States is grappling fully with this problem. In the United States, for example, with the exception of groups like the Freelancers Union or the National Domestic Workers Alliance, the labor movement is focused largely on protecting traditional 40-hour-a-week work that comes with benefits. Companies are meanwhile trying to push more and more people into gig work and to replace as many jobs as possible with technology.

There are ways to bridge the gap. Portable benefits have long been proposed by politicians such as Sen. Mark Warner, a Virginia Democrat. They would allow independent contractors to carry health and pensions coverage with them from job to job, rather than having them tied to employment with a single company. I’m also a fan of the idea of taxing and redistributing some of the massive wealth captured by corporate data collectors. This includes not just the big platform giants, but many other types of companies, from online retailers to consumer goods brands. California Gov. Gavin Newsom has already proposed a “data dividend” for consumers, a version of which could be implemented in both the United States and Europe. The proceeds could go to workforce training or to improve public education. Both would act as a buffer against looming digital labor shocks.

Third, while antitrust action is desperately needed to ensure a level playing field in the age of platform monopolies, we need to stop looking for a silver-bullet solution on competition. I suspect there are going to be a lot of different solutions for different companies. A company like Amazon could easily be broken up into a retail platform and a logistics provider. Others, like Google, might be turned into tightly regulated public utilities, which would mirror the way corporate behemoths of the past, from railroads to telecom, were put in check when they became too large and powerful. Real-world rules and regulations must be made to apply to the online world as well. Otherwise, digital players can easily use regulatory arbitrage to jump around even the largest incumbents in the most powerful industries.

This process will require state coordination of public and private resources. That’s not about picking winners or losers, and it’s certainly not about becoming a top-down Big Tech-run version of the Chinese surveillance state. It’s simply about bringing a smidgen of strategic and long-term foresight to the way the U.S. economy is run. Indeed, the U.S. did successfully implement a mini-industrial policy with its COVID-19 vaccine effort. The federal government supplied about $14 billion worth of subsidies to pharmaceutical companies to produce a vaccine as quickly as possible. By guaranteeing massive orders up front and covering other costs (retrofitting manufacturing plants, for example), Washington eliminated most private-sector risk. This enabled corporations to throw everything at finding a rapid solution. The National Institutes of Health also supplied companies with much of the sequencing work and access to its vast databases. As a result, the country went from a virus sequenced in January 2020 to phase three trials by October of that year. In the history of medicine, nothing like this had been achieved. “This is a historic, unprecedented achievement,” Dr. Anthony Fauci told a think tank webinar in December 2020.

“Neoliberal thinking decrees that state involvement in the economy is verboten. But that’s actually antithetical to America’s origins.”

And yet, the United States has a long way to go to regain its muscle memory about how to achieve broader goals for industrial policy. The neoliberal thinking that has defined globalization in the West since the ‘80s decrees that state involvement in the economy is verboten. But that’s actually antithetical to America’s origins. Until very recently, the United States itself did exactly what China today does — funnel capital to the most productive places, connect the dots between job creators and educators and link the public and private sector to pursue goals in the national economic interest. That’s industrial policy — which has been a dirty word in the United States for decades now, but it wasn’t always.

Alexander Hamilton, one of the founding fathers and the first U.S. treasury secretary, supported the creation of a national bank, which he viewed correctly as a “political machine of the greatest importance to the state.” He also started a public-private partnership to provide cheap water power and financial capital to investors in the early republic. Subsequent administrations — from Lincoln to Roosevelt, Eisenhower and Kennedy — took pages from his book. The U.S. auto industry, for example, was a crucial part of the rampup for World War II. Public- and private-sector actors worked together on economic strategy geared toward preparing for battle. Bill Knudsen, then president of General Motors, was tapped by Franklin Roosevelt to lead the retooling of civilian industry for wartime production. The production lines that were created not only helped win the war, but also increased productivity and bolstered growth and competitiveness in the postwar period.

You can draw an invisible line directly from this strategy back to Hamilton’s own “Report on the Subject of Manufactures,” published at the end of 1791, which outlined why manufacturing had an importance to the nation that went far beyond security: it would not only protect citizens, but help them diversify their own industrial efforts, raise productivity and wages as a result and bolster investment. That’s exactly what China does so successfully today, using industrial policy and state subsidies to protect industries, investors and workers and moving people and infrastructure where it makes the most sense.

This strategy has always made sense for the United States, which is a large economy with plenty of food, fuel and consumer demand. It makes sense for China, too (which doesn’t have access to as much of an agricultural base as the United States, but which has bought farmland and ports in other countries to ensure its own security). It makes less sense for smaller nations like the United Kingdom, birthplace of Adam Smith and David Ricardo, the father of today’s neoliberal trade theory. Ricardian economics has shaped today’s trading system. But it’s arguably not the best formula for a bigger, more self-sufficient nation like the United States or China (or even a region like the European Union, which can essentially act as a large self-sufficient bloc). In a world that is more regionalized, there are inherent tensions within the Ricardian model, and cracks that are only just now beginning to show. Industrial policy, which is increasingly supported by politicians of both stripes, isn’t a silver-bullet solution to the economic woes of this new world, but it is a politically smart nod to the fact that we are in one.

Biden, for his part, has been trying to reboot the U.S. industrial base, and a big part of that has been about reshaping the narrative and moving it away from a half century of neoliberal received wisdom. In June 2021, the head of the president’s National Economic Council, Brian Deese, gave a speech laying out how the Biden administration plans to build more supply chain “resilience” by using the purchasing power of the federal government (and its allies) to drive private-sector investment into four key areas: semiconductors, large-capacity batteries (like the kind used in electric vehicles), rare earth minerals needed for electronic devices and most tech equipment, and key pharmaceutical ingredients. It was a truly historic shift, a return to industrial policy in a way we haven’t seen for decades — one that, as Deese put it, rests on the fundamental belief that creating more shared and equitable growth is necessary not just for the economy but for saving liberal democracy. This should involve allies who will help bolster demand and also innovation across a newly revamped ecosystem that will make everyone less reliant on Taiwan, where most of the world’s high-end chips are produced.

If anything, the U.S. plan isn’t radical enough — yet. We could do more to help build back better, stronger and faster; one way to cut through the bureaucracy would be to appoint a resiliency czar who would answer to the president. Such a person could bring together all the various departments across government faster, addressing things like the most-needed critical infrastructure, connections between the public and private sector and areas where there is low-hanging fruit to be plucked to create more resiliency. Industrial policy, by its very nature, requires action at the top, but the process shouldn’t become too cumbersome or involve too many different budget-line sheets or vested interests, lest it drag along too slowly to do any good.

China has made quite clear its aims to be independent of Western technology. The West must now focus on building its own digital ecosystem. That means investing in production capacity in strategic industries like semiconductors, green batteries and the like. It means making sure that large U.S. incumbents don’t crush innovation. It means providing the educational reform is desperately needed to train workers for jobs where they will not be displaced by robots. And it means thinking more carefully about how to balance foreign and domestic concerns when thinking about trade policy. We can best bolster growth by investing in our own industrial commons and creating a 21st-century digital ecosystem that supports, rather than degrades, liberal values and democracy.