West Needs Champions

Davos Man is dying. No longer is the globalised economy based on the fierce but mostly fair competition between firms from all over the world. Instead, many governments openly do their firms' bidding at the expense of Western competitors. Western governments, though, cling to their belief in the old ways and are hurting their own companies as a result. As they look for ways to begin digging out of the pandemic's economic collapse, Western governments and their allies should collectively protect their top-performing businesses against Chinese rivals who don't play fair. Otherwise, it is precisely their top performers they risk losing.

Adam Smith's invisible hand is a remarkable thing. Thanks to it, a lowly Finnish paper mill named Nokia, founded in 1865, grew into a large paper and pulp company, and then turned to rubber boots, tires, and televisions before becoming a globally leading manufacturer of cell phones and mobile telephony infrastructure. Nearby, in Sweden in the 1880s, two young engineers started a repair shop for telegraphic equipment. Their firm, named Ericsson after one of its founders, subsequently began making telephones before turning, in recent decades, to cell phones and then mobile telephony infrastructure.

These two Nordic companies are now the world's second and third largest providers of 5G technology, with a 15 and 14% share of the market, respectively. They are beaten only by China's Huawei at 30%. China's ZTE comes fourth at 11%; then there is a gap until Cisco at 6%, Ciena (another US firm) at 3%, and Samsung of South Korea at 2%. Absent of Nokia and Ericsson, Western countries would hardly be in a position to turn Huawei away, regardless of how much they feared the national security risks of allowing China deep access into their communications infrastructures.

But here is the thing — Huawei only claims the top spot in the market thanks to its privileged treatment in China. Between 1998 and 2018, Beijing spent an estimated $75 billion aiding Huawei on its climb (assistance that helped the firm undercut rivals' prices by around 30%). Western governments did nothing to help their firms fight off the unfair competition. Canada's Nortel Networks went under but not before having been subjected to Chinese IP address theft. The Swedish and Finnish governments believed so much in globalisation that they left Ericsson and Nokia to battle with Beijing and Huawei on their own. Swedish mobile operator formerly named Teliasonera even gave Huawei its international break when, in 2009, it selected Huawei for its pioneering 4G network in Oslo.

In a Davos Man world, that is fine. Companies are supposed to fight and win (or fail) on their own merits. But as Beijing's support of Huawei—which also included bullying countries on its behalf—demonstrates, that world is gone.

Western capitals could have awakened to the new world and decide to stand up for their own champions. Instead, they did the opposite. In the case of 5G, support for Ericsson or Nokia has not been forthcoming from Western governments now benefitting from the fact that there are still credible alternatives to Huawei. On the contrary, in February, the German government announced it will spend $2.4 billion on funding alternatives to Huawei, Ericsson, and Nokia. Most of the money will be spent on firms working in the so-called Open RAN (or Radio Access Network) area, where 5G technology is supplied in pieces rather than one big package. The United Kingdom's government, in turn, wants to create a "5G club of democracies" whose governments will invest in 5G alternatives.

Superficially, the two governments' decisions make sense; they want to create a multitude of options that can compete with Huawei should Ericsson and Nokia get overwhelmed while also promoting a route toward creating government-owned 5G makers. The message they are sending though is Western businesses that are currently on the front lines are on their own. Today, it's Ericsson and Nokia. Tomorrow, it might be Airbus and Boeing, which are the only two viable Western alternatives to China's new aircraft manufacturer Comac (which has, aided by the Chinese government, stolen considerable amounts of IP from Airbus and Boeing).

There is also the problem that governments trying to spawn companies rarely succeed. And in the early 1990s, public unhappiness with government ownership caused scores of European governments to privatise.

But the West has plenty of firms that are already performing well, and Western governments should at least start standing up for them. All of these firms compete on the global market against Chinese rivals with unfair advantages. They should be treated as what one might call Western champions. Ferrari, AstraZeneca, Siemens, Saab, General Motors: there's a long list of Western companies that face competitors bent on stealing their IP while enjoying high subsidies. Within the Western alliance, these businesses should, of course, compete fiercely against one another. But in the face of distorted Chinese competition, they should get more support.

Selecting Western champions would not even need to be a formal process—and if it were, it would run afoul of the World Trade Organization. It could simply be an agreement to publicly support providers of critical goods and services. And every Western country has at least one enterprise that is competing against an unfairly supported Chinese rival. By banding together to protect them, they can fight off a collective challenge together.

If they don't, those firms might simply decamp for China or switch to a different sector. Because nobody backed the West's solar panel makers even as Chinese rivals unfairly undercut them, today most of them no longer exist, leaving the West dependent on photovoltaic cells made in Xinjiang. European stainless steel firms, makers of a distinctly unglamorous product that is vital to goods from surgical instruments to aircraft manufacturing, have had to contend with so much crooked competition from Chinese firms that it would be no surprise if they decided to switch to another sector and leave stainless steel to China.

Protecting national champions need not lead to the creation of a new military-industrial complex, against which US President Dwight D Eisenhower warned. Yet the world has radically changed since Eisenhower's time. Today, distorted globalisation presents such a fundamental threat to Western prosperity that a loose government embrace of vital Western enterprises in response to Beijing's full-blown support for Chinese firms may well be inevitable. Keep the invisible hand alive among the group of countries that operate fairly. Against other rivals, tilt the scales back.

It's been no bed of roses, but "I ain't gonna lose," as Freddie Mercury sang in "We Are the Champions." Surely, this should be the West's globalisation anthem.

  Source: Foreign Policy   

*He is a fellow at the American Enterprise Institute. Twitter: @elisabethbraw.