American investment into Asia continues – but with one domestic caveat
Op-Ed Commentary: Chris Devonshire-Ellis
Sept. 13 – Recent data showing that that old bug-bear, the U.S.-China trade imbalance, is diminishing is partially good news – not least for American politicians who like to defer domestic issues by pointing fingers overseas. “It’s all their fault!” is the world’s longest running, and possibly oldest human statement.
Yet what is really going on has, in my opinion, nothing very much to do with the trade imbalance – which, incidentally, declined from US$31.5 billion this past July to US$17.8 billion in August. Yes, the Chinese are placing more orders. Hooray! But let’s counter this by suggesting that this is more to do with restocking raw materials than any longer term domestic consumerism, although it does suggest some hope.
What is happening, from where we sit in Asia, is that Corporate America is turning up the heat for another wave of foreign direct investment, and that China, with India, and to some extent Vietnam, will be the major beneficiaries of this. Although political America – a rather different beast from its corporate sibling – is seemingly as diversified in views as ever over the past 10 years, corporate America is doing just fine. Statistics I obtained from Credit Suisse last week show that American cash and assets on hand are at a 51-year-high, as are profits. In short, there’s plenty of money sloshing around the United States.
But jobs remain a concern, and this regrettably is going to be a feature of the American economy for some time. There has been plenty of talk about the Chinese economy recalibrating from being an export-based economy to a consumer-based economy. Everyone agrees this is taking place, will take time, and it remains central government policy. In the democratic United States, longer-term policy is more difficult to assess. Yet market forces are dictating that America must change – it simply cannot retain such a large manufacturing base as costs in the United States are just too expensive. What were once manufacturing jobs must instead be absorbed into the service industry. The United States is moving, albeit slowly, and with not a little political drag, through this process.
Corporate America, ever mindful of the needs of its shareholders (and the American consumer) knows this. What it hasn’t been able to do, until the GFC ripples dissipate – is to plan when to place its funds. Here, we’re waiting for Europe to pull together and sort out its own debt restructuring, and while German politicians cannot agree (they’re having to fund much of the bailouts) the time taken to get the EU back and running lengthens. But I suspect that is going to be resolved, albeit with much zut aloring and “Scheisse!” before the end of this year. Not even Europe can wait for the politicians when global market recoveries beckon.
China of course, will still face the usual accusations of RMB manipulation, and I believe the trade balance decline to be a blip. But with the Chinese economy heading for a soft landing, it means that the domestic consumerism so long promised will begin to take effect. India too, that curious blend of pomposity and devotion, is also steaming ahead, and with growth figures about the same as China’s is an equal bet. That India – when Congress finally get their act together and pass the oft-delayed tax bill, and reduces corporate tax from 45 percent to 30 percent in one fell swoop – will overtake China in GDP growth seems to my eyes, inevitable.
Vietnam too, with its much vaunted “most favored nation” status, and cheaper manufacturing opportunities than China now possesses, will also come to the fore. All this, I believe, is not just crystal ball – it is current. The reason I can say that is that our firm has not only held that development strategy in place for the past five years and seen it develop, we’re also seeing more American clients invest in manufacturing facilities in Asia than at any time since 2008. A friend of mine in a blue chip American law firm suggests the same thing – his American clients are also investing more in China. Our practice in India, meanwhile, has just been enjoying its best ever year in terms of client billings, and our Vietnam practice has recently had to add more staff to cope with demand, much of it from American corporate investors. The money is being spent.
The New York Times just ran an editorial “Is (U.S.) Manufacturing Falling Off the Radar?” and the answer, while not quite as doom-laden as the title suggests, is that to some extent, this is true. Manufacturing is moving to Asia from the United States, quite simply, because it is cheaper to do so. The only question is whether American workers can be retrained, redeployed, and the engineering educational infrastructure redesigned to allow both current and future graduates more opportunities in R&D. America in fact can largely control the pace and direction of global manufacturing – if it invests in, and becomes the dominant player in R&D. That’s the service industry, right there. Let Asia manufacture, and as we’re seeing, let American businesses outsource, or even set up their own manufacturing facilities in China, India and Vietnam. The latter two represent, after all, significant domestic markets for American companies to sell too, and if America wants to sell to the world, it needs to get out there and do so. Vietnam meanwhile, services other global markets, including all of ASEAN, with Mexico convenient for North America itself. So far, so much we know. The difference this time is that the R&D development, the intellectual property that matters, and the know-how, will remain in domestic hands and will not be relocated.
America needs a service industry. The R&D sector will provide this. Keeping that local, while sending the manufacturing aspect to Asia, makes perfect sense. It is already becoming the new American investment trend.
Chris Devonshire-Ellis is the principal of Dezan Shira & Associates. The firm provides legal establishment, tax advice and business advisory services to foreign investors in China, India and Vietnam. Please email the firm at firstname.lastname@example.org, or download the practice’s brochure here.
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