Tag Archives: political economy

Foreign Business Inside the PRC

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The Qualcomm’s acquisition of NXP Semiconductors is supposedly in jeopardy as the People’s Republic of China threatens approval of the acquisition in its prosecution of its long-term trade fight with the US.

But wait—Qualcomm is an American company, and NXP is a Dutch company.  Why does the PRC even have a say in this?

[The PRC] is the last of nine markets where Qualcomm and NXP need approval from competition authorities….

There’s a perfectly straightforward way around this.  The two could stop doing business in the PRC, which is not a business-friendly nation, anyway, what with the nation’s demands that foreign companies give up their technology to domestic “partners” and that they install backdoors into their core softwares so the PRC government can go in and poke around at whim.

Certainly, there would be large initial costs from walking away from such a large market, and there would be market share reduction in the middle term from ceding that market to competitors.  But what would be the costs, really?  Less anticompetitive restrictions on the combined company’s operations, less government sanctioned—even demanded—theft of proprietary and intellectual property, saddling the PRC albatross to those competitors anxious to fill the “gap.”

And real gains from quitting the PRC market: more efficiencies from better focus on the other eight markets, and a better ability to keep and expand the combined company’s technological edge over its competitors by not having to give up that edge to the PRC.

Auditors and Regulators

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American regulators regularly inspect American auditors—particularly the Big Four accounting firms, Ernst & Young, Deloitte & Touche, KPMG, and PricewaterhouseCoopers—in order to give confidence to investors and the market at large that the auditors are giving accurate and balanced reports on balanced and accurate audits of the companies they audit.

Inspecting the auditors in the People’s Republic of China is a different matter.

Big Four accounting firms use their Chinese and Hong Kong affiliates to do significant work on the yearly audits of dozens of US companies doing business in China, including Walmart, Pfizer, and 3M, according to regulatory disclosures the auditors recently made for the first time.

Those “affiliates” actually are separate entities, and the PRC won’t allow those auditors to be checked up on by our regulators.  That’s a problem, as The Wall Street Journal put it:

The arrangement could leave investors in some of the world’s largest multinationals feeling like they can’t have full confidence that the auditors who scrutinize the companies’ finances have themselves been fully vetted by US regulators. And the regulators have no way of knowing whether those companies’ tens of billions of dollars of Chinese business has been subjected to outside scrutiny to help prevent errors or fraud.

It’s not small potatoes, either.

Walmart, which has more than 400 stores in China, is primarily audited by the US arm of Ernst & Young, but Ernst & Young’s Chinese affiliate did 10% to 20% of the work on the company’s latest audit, according to an EY filing with regulators. Pfizer, which got 7% of 2017 revenue from China, is primarily audited by KPMGs US firm, but KPMG China did 5% to 10% of the work.

Obviously, the PRC’s block needs to be an item of “discussion” in trade talks between the US and the PRC.  In the interim, the regulators should think—hard—about requiring companies doing business in the PRC that are audited, at least in part, by PRC auditors to report the details of those PRC auditors’ audits.  That way investors and the market at large could have some idea, at least, of the quality of the books of those American companies’ PRC branches.

Auto Tariffs Revisited

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EU Trade Commissioner Cecilia Malmström says the EU will respond to any increase in US tariffs on imported autos and auto parts with its own tariffs on autos and parts imported from the US.

And,

The EU cannot offer a bilateral deal only on autos, Ms. Malmström said, to address Mr Trumps complaints about the 28-member bloc’s 10% car tariffs—which are quadruple the US rate.

Never mind that applying its own auto and auto parts tariffs to imports from the US is precisely such a bilateral action.

In the meantime, Malmström, along with the rest of EU governance, continue to studiously ignore an offer already on the table: no tariffs at all on auto and auto parts imports.

Get Rid of Fannie Mae and Freddie Mac?

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Fed Chairman Jerome Powell thinks it’s a good idea.

I think it is really important for the longer run that we get the housing finance system off the federal government’s balance sheet.  I think it is very important for the economy longer term.

Treasury Secretary Steven Mnuchin agrees.

I am determined that we have a fix to the GSEs and that we don’t leave them in conservatorship for the rest of time[.]

But this doesn’t go far enough.  It’s insufficient to kick these Government Sponsored Entities out of conservatorship.  Left as GSEs, they’d still be able to dip their fingers into our pocketbooks; Fannie Mae wants another $3.7 billion of our tax money already.

No.  These GSEs need to be released into the wild and left to stand or fall on their market merits in the economy.

Auto Tariffs

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Auto makers, parts suppliers, and dealers are joining forces to push back against the Trump administration’s proposal to apply tariffs of up to 25% on vehicles and components imported into the US….

The auto industry is aiming at the wrong target.  The German auto industry and the US have already agreed in principle to a regime of no auto tariffs at all.  It’s the German government that’s waffling and the EU that’s ignoring the matter altogether.

These domestic execs need to be asking the German government and the EU why they’re so disinterested instead of whining about domestic matters.