What is an economy for?

 

In the summer of 1991, when scandals were being revealed practically every day in the Japanese securities industry, a strange scandal was also unfolding in the earth-moving industry. Many of the competitors of the large Komatsu Corporation had been paying spies to provide secrets about Komatsu's master plan. The Nihon Keizai Shimbun reported, with a worried tone, that after the revelations "many [initially] thought confusion would reign in the construction industry." But, the paper said with relief, "it has been as calm as a lake in the morning -- nary a ripple."

One of the reasons for this camaraderie is the fact that the Japan Construction Equipment Manufacturers Association, the "club" of the construction machinery industry, has just been organized. Until the "club" was organized, the industry was one huge price war. And, if the war went on, no one would make a profit and all would lose. Sensing that they were cutting each other's throats, the industry finally got together. So Komatsu didn't want to ruin all that effort.

Once the industry had formed its cartel, everyone felt secure again.

 

In 1955 the American novelist Richard Wright, the author of Black Boy and Native Son, went to Bandung, in newly independent Indonesia, for the historic conference of the nonaligned countries. This was the first real postcolonial muscle-flexing by Asian and African countries, led by the likes of Jawaharlal Nehru, Gamal Abdel Nasser, and Sukarno. As a black American, Wright had gone expecting to feel fellowship with those who had been controlled by white colonialists. His book about the conference, The Color Curtain, reflected his increasing puzzlement over, and estrangement from, the nonaligned policies. Although he did not put it this way, mistrust of the market was one of the traits that struck him most.

Still another and, to the Western mind, somewhat baffling trait emerged from these Asian responses. There seemed to be in their consciousness a kind of instinct (I can't find a better word!) toward hierarchy, toward social collectivities of an organic nature. In contrast to the Western feeling that education was an instrument to enable the individual to become free, to stand alone, the Asian felt that education was to bind men together.

The point for the moment is that one economic system assumes that it does not have to make the largest decisions about national purpose except when the system is being attacked from outside, in time of war. The other assumes that the state always has a role in guiding the nation. It is the clash between these visions, rather than the rightness or wrongness of either of them, that creates current problems.

 

Borders and Borderlessness

 

IN Western economics it's hard to come up with a theoretical reason for concentrating on national economic well-being. In the Asian model this is not a problem at all; it's taken for granted.

 

In daily life there is no shortage of nationalistic spirit in Western countries in general or the United States in particular. The flag waves constantly in American TV commercials. Crowds chant "USA" at international sporting events. But the principles that guide economic policy in the Anglo-American approach avoid the concept of national interest except in strictly military terms.

 

Most Anglo-American concepts in fact treat national economic interests as if they didn't really exist. Companies move their plants overseas, because that is what business logic says they should do. When it comes to politics, we're able to explain -- but just barely -- why one person should be inconvenienced for the good of all. I pay taxes because I'm part of a political community, even though in any given year I may pay more into the government than I directly get out. In the Anglo-American model there really isn't an economic community that justifies anyone's paying higher prices than he absolutely has to, or preferring to deal with someone from the same country rather than buying from overseas.

 

This outlook seems advanced and tolerant from the Western, liberal perspective. The world should be "borderless." In the summer of 1990 Roger Porter, who was then President Bush's chief domestic-policy adviser, gave a speech about America's outlook on world trade. Some people, he said, clung to the "old notion of nations, companies, and markets rigidly defined by national borders." But in this modern age, he concluded, such a notion was "outdated and dangerous." Porter was making a partisan argument in behalf of the Bush economic program, but his assumption that consciousness of nationality was "outdated and dangerous" reflected an educated Western view that has nothing to do with party.

 

In the United States discussions of corporate nationality have stuck mainly to the realm of theory. According to American assumptions, it is only natural for businesses to operate in rootless, global fashion. Therefore most Americans assume that denationalization has already occurred. American discussion on this point has been heavily influenced by the writings of Robert Reich, who was a lecturer at Harvard's John F. Kennedy School of Government before he became Secretary of Labor in the Clinton Administration. Since the mid-1970s Reich has been proposing solutions to America's long-term economic problems, and his ideas about industrial policy (some of which were published in The Atlantic Monthly) have attracted a broad following. During the Bush years Reich wrote several influential articles in the Harvard Business Review and a subsequent book called The Work of Nations, which argued that corporations had grown past the point where they could sensibly be considered American or German or Japanese. With headquarters in one country, research centers in another, factories in yet other countries, and customers all around the world, Reich said, big diversified corporations could be loyal only to their own economic interests. Though Chrysler had its headquarters in Detroit and Matsushita was based in Osaka, neither would necessarily care about the government or labor force of its home country. Each would go wherever the money, the market, and the skilled work force drew it. In an age of global corporations, Reich concluded, a nation's well-being rises or falls with the skills of its workers. Therefore he vigorously advocated plans for improving American education and retraining American workers.

 

In practical terms, Reich said in a 1990 article titled "Who Is Us?," published in the Harvard Business Review, this blurring of corporate nationality meant that the U.S. government should not try to help American-owned companies solely because they were American-owned. The government owed its loyalty to citizens and workers within its borders, and companies from Europe, Japan, Mexico, or anywhere else might have more to offer the American work force. When the U.S. government gave contracts to Boeing, provided bailouts to Chrysler, or negotiated on behalf of Motorola or Zenith, by Reich's analysis it might not have been helping American workers in any direct way. There was no telling where the companies would build the products that federal money was subsidizing. If Toyota was building plants in America and Chrysler was moving plants to Mexico, then Toyota should be considered at least as "American" as Chrysler.

 

As a theoretical matter, this proposition is sensible and appealing. Daily life abounds with cases that seem to confirm the point. American plants move to Mexico; Japanese and German plants open up in the United States. A large number of American commentators have embraced the "Who Is Us?" assumption, usually crediting Reich for having precisely defined the shift to a world in which corporations no longer have citizenship. Yet many of the specific illustrations on which this changed perspective is based turn out to be misleading. For instance:

 

In the summer of 1989 Reich published an article in The New Republic that provided a perfect illustration of the way a preference for home-based companies could backfire. U.S. trade negotiators, he said, had been hammering at the Japanese government to open the country's market to cellular phones made by Motorola. The irony, he said, was that in helping Motorola the government was doing little or nothing for American workers, because the phones Motorola wanted to sell were actually designed and made in Kuala Lumpur.

 

As a recent resident of Kuala Lumpur, I was surprised when I read this assertion, since I had known Motorola officials there and had never heard them say that they made cellular phones. As it turns out, they didn't. Motorola officials wrote immediately to The New Republic pointing out that the phones were made in the United States. James P. Caile, the director of marketing for Motorola's Cellular Subscriber Group, said in his letter that the telephones in question were designed and made in Arlington Heights, Illinois.

 

Half a year later Reich published his seminal article, "Who Is Us?" Once again he used Motorola as a main illustration of the difference between the welfare of American companies and the welfare of American workers. Motorola, he said this time, "designs and makes many of its cellular telephones in Kuala Lumpur, while most of the Americans who make cellular telephone equipment in the United States for export to Japan happen to work for Japanese-owned companies."

 

After this article appeared, Richard W. Heimlich, Motorola's director of international strategy, wrote to the Harvard Business Review, pointing out once more that the phones were made in America, not Malaysia. Heimlich's letter also questioned Reich's claim that some "Japanese-owned companies" were building cellular phones in America and exporting them to Japan. Heimlich's letter was published in the Harvard Business Review; Reich replied in the magazine about cellular telephones thus: "One of those [Motorola's] Southeast Asian plants, by the way, does make parts for cellular telephones, according to industry sources."

 

Heimlich also wrote directly to Reich, offering to discuss the issue further. Reich sent back an angry personal letter (which Motorola officials gave me when I asked for their side of the story), saying that he resented having his intellectual and academic integrity challenged. This letter referred Heimlich to a book by Edward Graham and Paul Krugman, which Reich said would substantiate his claims.

 

The book is called Foreign Direct Investment in the United States. I found when I looked at it that it says nothing at all about Motorola in Kuala Lumpur, and in a broader sense its argument is the opposite of Reich's. Its perspective is clearly internationalist, and one of its intentions is to rebut irrational American fears about the effects of foreign investment. Nevertheless the data Krugman and Graham examined show that corporate nationality does matter, and that it matters most for Japanese-owned firms.

 

At least in the United States, foreign-owned companies behave differently from American-owned firms in many ways. The biggest difference is that foreign-owned firms are far more likely to import their components from suppliers in the home country than to buy them locally. This difference is most pronounced for Japanese-owned firms. In December of 1991 Edward Graham published a comparison of Japanese-owned and American-owned manufacturing firms operating in the United States. He found that the Japanese-owned firms were less likely to produce goods for export from the United States, less likely to invest R&D funds in America -- and four times as likely to import components, instead of manufacturing or buying them in the United States.

 

In the Winter, 1991, issue of The American Prospect, Reich once again used Motorola to illustrate the borderless nature of the new, integrated world, and Heimlich once again protested in a letter to the editor. Later that year Reich published The Work of Nations. It included a full-scale presentation of the borderless argument, including "one example" that summed up the folly of the U.S. government's working in behalf of U.S.-based corporations -- the same example.

 

The power of the Motorola-in-Malaysia story depends on the assumption that it is one of many possible illustrations of a widespread trend. If there really were a large number of examples to choose from, it's hard to explain why an author would have stuck with such a troublesome case. After I made numerous calls to the Labor Department to ask Reich why he seemed so attached to this one story, he replied through a press representative at the department that he had "seen no evidence to change his mind" about the Motorola case.

 

Last year, after he became Labor Secretary, Reich presented another perfect example of the "coming irrelevance of corporate nationality." The example came in a memorandum he sent to President Bill Clinton on March 23, concerning trade and "competitiveness" strategies. "Our efforts should focus on opening foreign markets to American exports, rather than merely to U.S. products," he said, sensibly. American exports would employ workers in America; mere "U.S. products," for instance Coca-Cola sold overseas, might do little for America's work force. Then came the example:

Japan's agreement to purchase 20 per cent of its semiconductors from non-Japanese firms, for example, does not necessarily promote high-wage production in the United States. Close to 75 per cent of the chips which Japan purchased last year from U.S. firms were fabricated in Japan.

If true, this illustration would be even more powerful than the Motorola story in showing that corporations had transcended nationality. It would also mean that the semiconductor agreement had completely backfired, "forcing" Japanese purchasers, Brer Rabbit-like, into buying more output from factories based in Japan. But this account of the agreement's effects also turns out to be inaccurate. According to figures collected by the U.S. Trade Representative's office, the percentage of such American-brand chips that were made in Japan was 30, not "close to 75." The semiconductor agreement had in fact achieved its stated purpose: most of the American chips sold in Japan were indeed designed and made in the United States.

 

In the same memorandum Reich gave another illustration of the borderless paradox. The U.S. government at that time was evaluating how to get involved in the emerging technologies of high-definition television. The main decisions lay with the Federal Communications Commission, which was to decide which transmission system, among several competing proposals, should be the standard for HDTV broadcasts within the United States. At the time Reich wrote his memo, three business consortia were vying to have their standards selected. One was led by the electronics makers Thomson, based in France, and Philips, based in Holland. The other two were all-American, in that the main partners in them were all U.S.-based institutions: an alliance between Zenith and AT&T, and a group led by the Massachusetts Institute of Technology and the Chicago firm General Instruments. (A fourth group, led by Japanese firms, dropped out of the competition when it became clear that its analog transmission system would lose in competition against the digital systems proposed by each of the other teams.)

 

In his memorandum to the President, Reich said that the government should look beyond strictly technical issues to see "which standard is likely to generate the greatest amount of high-wage production in the United States." He added,

(Interestingly, the only consortium which has pledged to develop and manufacture its high-definition televisions in the United States is the Dutch-French group [Phillips-Thompson-Sarnoff] [sic]; the AT&T-Zenith group will not do so, because Zenith is moving all its television production to Mexico.)

Like the Motorola and semiconductor examples, this one seemed to show the folly of helping American corporations. But as with the other examples, the real facts of this case undercut the "Who Is Us?" argument.

 

The French-Dutch consortium did indeed plan to do the final assembly of its TV sets in America. Zenith planned to do its final assembly in Mexico. But this stage of the process boils down to "screwdriver jobs": final assembly is the bolting together of sophisticated, high-value components made somewhere else. Most of the value of an HDTV, which in turn means most of the sophisticated, high-wage jobs, would come from designing and producing those components. The most important and valuable components would be the many diverse semiconductors that would control the conversion and display of incoming digital signals. The high-resolution, large-scale picture tubes would be the next most valuable components. Where these specialized products were made, rather than where the sets were put together, would determine where the highest-value jobs from HDTV would end up.

 

If Thomson-Philips eventually leads the HDTV industry, the advanced semiconductors for its sets will almost certainly come from Thomson's factories in France. If the AT&T-Zenith group does, the semiconductors will come from AT&T in the United States. In a letter to Reich, Zenith's chairman, Jerry K. Pearlman, had emphasized that since the "American" consortium would make its advanced components in the United States, it would produce more highly skilled jobs for Americans than the European consortium would.

 

Pearlman is hardly an impartial observer, but his account of HDTV supply patterns conforms to most other accounts in the industry. It is "interesting," as Reich had said in his memorandum to the President, to speculate that the foreign-based consortium would create more high-value jobs within the United States, but this is probably not the reality. Most other evidence, both anecdotal and analytic, confirms the antique-seeming idea that corporations do their most valuable work in the country where they are based.

 

Them Against Us

 

ANGLO-AMERICAN theory instructs Westerners that economics is a "positive-sum game," from which all can emerge as winners. Asian history instructs many Koreans, Chinese, Japanese, and others that economic competition is a form of war. To be strong is much better than to be weak; to give orders is better than to take them. By this logic the way to be strong, to give orders, to have independence and control -- to win -- is to keep in mind the difference between us and them. This perspective comes naturally to Koreans when thinking about Japan, or to Canadians when thinking about the United States, or to Chinese or Japanese when thinking about what the Europeans did to their nations. It does not come naturally to Americans.

 

But, again, it comes naturally in the Asian system. There are more examples from Japan than from the other countries, because Japan got there first; Korea, for instance, would love to be just as nationalistic, but under the current balance of power in Asian economies it doesn't have a chance.

 

Here are a few ways in which Asian economies are more nationalistic than ours.

 

Intra-industry trade. Theory seems to call for international trade to become more specialized by region as time goes on. Wine and cheese will come from France, magazine editors from England, cars from Japan, wool from New Zealand, and vodka from the Russian potato lands. Each country will develop its own national skill.

 

In fact just the opposite occurs. Since the end of the Second World War the fastest-growing type of international trade has been "intra-industry" trade. German car companies like Mercedes, Audi, and BMW make cars that are attractive to customers in France, Japan, and America -- but some people in Germany want non-German cars like Ferraris, Toyotas, Volvos, and Fords. Germany also has a very active auto-parts industry. It sells to other auto makers around the world, and its own auto makers buy parts from non-German makers, notably in the United States.

 

The result is that Germany actively sells automobiles and auto parts to the rest of the world -- and actively buys the same things. This pattern, of sales and purchases within an industry, is intra-industry trade. It is measured on a scale that runs from zero to 100. An intra-industry trade rate of zero means that trade in a certain industry all runs one way: a country only sells or only buys a certain product. (For instance, Saudi Arabia's trade rate for oil sales would be zero.) A rate of 100 means that a country sells exactly as much of a certain product as it buys.

 

Countries that have very low intra-industry trade rates are typically Third World countries or others with unbalanced economies. The classic banana republic would sell only raw materials and would import nearly all the machinery it used. The intra-industry trade rate in most developed countries is high and steadily rising. Depending on the industry, countries in Western Europe have recently had intra-industry trade rates in the low 60s through the low 80s. The U.S. rates are slightly lower than the European ones, which is not surprising, since the U.S. economy is bigger and less influenced by foreign trade.

 

Japan does not fit this pattern. First, its overall rate has been unusually low. Edward Lincoln, of the Brookings Institution, in his 1990 book Japan's Unequal Trade, calculated that Japan's overall rate was 25, which was one third the overall rate for France and far below that of any other industrial power. This means in practice that the Japanese economy buys only the goods it simply cannot make: fuel, food, raw materials, and certain advanced products (notably airplanes) in which its industries cannot yet compete.

 

Second, Japan's rate has rarely risen. For the rest of the developed world intra-industry trade has been the main engine of trade growth during the postwar years. Countries started with different rates, but all the rates went up. Japan's stayed low through most of the postwar era and, according to Edward Lincoln, rose only modestly in the late 1980s, when Japanese manufacturers moved some of their plants overseas. It is not necessary to say that Japan's low rate is wise, unwise, or some mixture: its effect is to divide the world into "us" and "them" production zones, and to keep as many industries as possible in the hands of "us."

 

Management. The board members of U.S. companies are still mainly American white men, but there are exceptions. For instance, in May of 1992 The Wall Street Journal provided a long list of executives of major American corporations who were born outside the United States. The computer industry is full of people who started in other countries. The magazine world is full of the English.

 

Most Asian countries have a far more nationality-conscious policy. It would be inconceivable for a non-Korean to run one of the major Korean enterprises. Although it is difficult to find reliable figures for the number of non-Japanese who serve on the boards of directors of major Japanese companies (Japan's big-business federation, the Keidanren, says it has "no information" on this subject), the number, as best I can determine, is in the single digits. Japanese firms doing business around the world had a much higher proportion of Japanese managers than American firms had of Americans, or European firms had of their own nationalities. At the end of 1991 the Nihon Keizai Shimbun surveyed Japanese-owned companies in America. It concluded, "Only about 5 percent of executives are American and delegation of authority to local companies just isn't happening."

 

Incoming investment. During the late 1980s Americans debated about the higher levels of foreign investment coming into their country, and whether it was racist to be concerned about investment from Japan rather than, say, from Holland. One answer to this question is that there was more of it from Japan. During the late 1980s Japanese investors overtook the Dutch to hold the second largest amount of U.S. assets. (The leading holders were the British.) In terms of new investments the Japanese were far ahead of everyone else in the late 1980s.

 

The real reason for the complaint about Japanese investment was that European investment did not seem profoundly foreign. European-owned companies in America were mainly run by Americans. Japanese-owned companies were to a much larger extent run by Japanese. During the 1988 campaign Michael Dukakis made a famous gaffe by denouncing foreign ownership at an auto-parts factory that turned out to be owned by Italian interests. The fact that on his visit he didn't notice that it was foreign-owned pointed up the underlying message: he would never have made that error with Mitsubishi.