The Economist - USA (2022-03-12)

TheEconomistMarch12th 2022 Business 51

Thesenewinvestmentsmaydolessto
boostthebottomlinethanwasthecasein
thepast.Inrecentyearsforeigncountries
havecontributeda decliningshareofcor­
porateearnings,notjustbecausedomestic
profits have soared but because foreign
oneshavestagnated.Inthethirdquarterof
2021 allAmericancompanies(bothlisted
andunlisted)earned18%oftheirprofits
abroad,comparedwith24%three years
earlier(seechart3).
Manyfactorsinfluencea multinational
company’sperformanceabroad,including
acountry’srecoveryfromthepandemic
andthestrengthofthedollar.American
firmsarewatchingtoseeifgovernments
advancea globalminimumcorporatetax—
morethan40% oftheirforeigndirectin­
vestmentisheldintaxhavens.Mostim­
portant,perhaps,geopoliticalriskscanno
longerbeignored.
StartwithRussia.Companiesthathave
announcedtheywillleavenowfacethe
difficulttaskofactuallydoingso.Exxon­
Mobilhascautionedthatitwouldbeun­
safesuddenlytoabandontheoilprojectit
operatesinRussia’sfareast.Somebosses
fearthat MrPutin will retaliateagainst
Westerncompaniesbyseizingtheirassets
in Russia. American companies can re­
structuretoholdtheirRussianbusinessin
a foreignjurisdiction,notesDavidPinsky
ofCovington&Burling,a lawfirm.That
mayletthemchallengeanystatetakeover
in international arbitration, rather than
putthemselvesatthemercy ofRussian
courts. SomeWestern firms may worry
thattheir exitcould hurtordinaryRus­
sians.ThesuspensionofVisaandMaster­
cardpaymentshasmadeit harderforthose
members of Russia’s middle class who
wanttofleeMrPutin’sregimetopayfor
ticketsoutofthecountry,forexample.
Companies’problemsinChina,a more
powerful autocracy, are less acute but
moreconsequentialinthelongterm.Chi­
na’seconomyisroughlytentimesthesize
of Russia’s. Tariffs imposed by Donald
Trumpduringhispresidencyremaininef­
fect—andineffective.TheEconomistesti­

matesthatmorethan$100bninChinese­

madegoodsmayhavedodgedAmerican

tariffslastyear.MrBidenhasbeenslowto

putforwarda newstrategy.Heintendsto

announcea frameworkforstrengthening

economictieswithothercountriesinAsia.

However, there is little support among

DemocratsorRepublicansfora multilater­

al trade deal. Fornow,many firmsfind

themselvesplayingbyChina’srules,both

withinthecountryandbeyond it.They

facestate­backedgiantsthataccountfor

27%oftheworld’stop 500 companiesby

revenue,comparedwith19%a decadeago.

Othercountrieswitha historyofeco­

nomic nationalism are dusting off old

ideas. India’s prime minister, Narendra

Modi,hasechoedMahatmaGandhi’scalls

forself­sufficiencyandimposedtariffsto

support local manufacturers. MrModi’s

governmentisdesigninganopen­source

platformfore­commerce,inparttochal­

lenge Amazon and Walmart’s Flipkart.

Mexico’sgovernment,ledbyAndrésMa­

nuelLópezObrador,hasbailedoutPemex,

thestate­ownedoilcompany.Lastyearan

American energy firm, backed by kkr’s

private­equitybarons,wasclosedatgun­

pointbyMexicanauthorities.

Evenmany lessnationalistic govern­

mentsaregettingbackintothebusinessof

shoringupindustriesdeemedcrucialto

national interests. South Korea, the eu

and,withbipartisanbacking,Americait­

selfwanttosupportdomesticproduction

ofsemiconductors.America’sSenateand

HouseofRepresentativeshaveeachpassed

a billaimedathelpingAmericacompete

globally. It brims withhandouts for re­

search,training andfavoured industries

(includingover$50bnforchipmaking).

Thenewprotectionismincludessticks

aswellascarrots.Thebillpassedbythe

House ofRepresentativeswouldimpose

capital controls, authorising the com­

mercedepartmenttoblockAmericancom­

panies’ investments in China. Europe’s

pursuit of“digitalsovereignty” seeks to

protect citizens’ data, crack down on

American tech firms andadvance local

competitors.Britainattractedone­fifthof

American companies’ foreign deals last

year,tothedismayofsomeBritishpoliti­

cians. In February Nvidia, an American

chip­designer, abandoned a $40bn at­

tempttobuyArm,a Japanese­ownedone

based in Britain. American trustbusters

feared the combined group’s effect on

competition; their British counterparts

worriedaboutnationalsecurity.

Americancompaniesaretryingtoad­

just.ToreducerelianceonChina,compa­

nies are increasingly sourcing products

and inputs from Taiwan, Thailand and

Vietnam.TheshareofAmericanimports

from other low­cost Asian countries

climbed from12.6%in 2018 to16.2%in

2020,accordingtoKearney,a consultancy.

Ordersofrobotsandotherautomatedsys­

temsinAmericahavesurpassedtheirpre­

pandemicpeak,suggestingthatmanufac­

turersareusingautomationtolowerpro­

duction costsathomeas atightlabour

marketraiseswagecosts.LastyearGeneral

MotorsfollowedTesla’sexampleandin­

vestedina lithiumprojectinCalifornia,to

boostsupplyofa commodityessentialto

itselectric­carstrategy.Americancarmak­

ersarebothrespondingtoandemulating

China’s state­backed firms, which have

longvaluedsecurityovermereefficiency.

Reconfiguringsupplychainsis,how­

ever,neither straightforward nor cheap.

Few countries can match China’s vast

pools of skilled workers, notes Stewart

Black of insead, a business school, so

Americancompaniesarelothtoabandon

itcompletely.Intel’sboss, PatGelsinger,

saidinJanuarythathewasseeking“adu­

plicityofsupply chainsavailable across

theglobe”.Thatincludesmanufacturingin

richcountrieswithhighercosts.“Youneed

eitherredundancyorresiliencybuiltinto

yoursystems,”saysDavidKostinofGold­

manSachs.Thealternativeistokeephigh­

erinventories,whichmakesfora lesseffi­

cientuseofworkingcapital.

Companies would,ofcourse, happily

acceptgovernmentlargessein exchange

forinvestments.Buthandoutsarenotthe

Greenerpastures?

UnitedStates,stockmarketindices

January1st2016=100

Source:Bloomberg

1

300

250

200

150

100

50

2221201918172016

S&P5ForeignRevenueExposure

S&P5

Geopolitical stakes

United States, net acquisition

of foreign-direct-investment assets*, $bn

Source: Bureau of

Economic Analysis

*Asset/liability basis

†To Q3

2

600

400

200

0

-200

2000 05 10 15 21†

Home, sweet home

United States

Source:BureauofEconomicAnalysis

3

45

30

15

0

3

2

1



2005 10 15 21

Quarterly corporate profits

$trn

Foreign profits

% of total

Foreign

Domestic