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THE UNITED STATES NAVAL WAR COLLEGE
COLLEGE OF DISTANCE EDUCATION
National Security Affairs
THEATER SECURITY DECISION MAKING (TSDM) COURSE
Multinational Corporations and the Shape of the Global Economy:
The Economic Dimensions of National Security
by Nikolas K. Gvosdev
April 2011
Drawing on earlier work by Professor Hayat Alvi and Commander Brent Boston, USN
TSDM 5-3
Version 5.0
1
In 2011 the London-based International Institute for Strategic Studies (IISS) released its annual
Military Balance report, and this year’s version highlighted the impact of economics on national
security.
[O]ne key theme stands out. Western states’ defence budgets are under pressure
and their military procurement is constrained. But in other regions – notably Asia
and the Middle East – military spending and arms acquisitions are booming. There is
persuasive evidence that a global redistribution of military power is under way. …
Many states are seeking to translate their economic strength into military power
which they may then use in support of national goals ranging from protecting their
energy supplies to asserting territorial claims. How quickly the global redistribution
of military spending and procurement will translate into useful military capability
will vary according to national circumstances. However, it is already clear that as a
result of shifts in the global distribution of economic power and consequently the
resources available for military spending, the United States and other Western
powers are losing their monopoly in key areas of defence technology, including
stealth aircraft, unmanned systems – and cyber warfare.i
Indeed, a country’s ability to project and sustain power rests squarely on economic foundations;
securing the raw materials, energy, finished goods and financial wherewithal needed to equip,
transport and pay for an effective military force. National security professionals in recent years
have become much more cognizant of the relationship between economics and security; Derek
Reveron, a professor at the Naval War College, relates how he asked a senior officer in SOUTHCOM
“why the military is involved in ensuring ‘a favorable investment climate’ in Latin America,” he was
told that “poverty underlies most of the region’s security issues” and as a result the military had a
vested interest in promoting economic development by creating incentives for investment.ii
In many countries, the backbone of the economy is the small and medium enterprise (SME)
sector—those businesses which have less than 500 employees. In the U.S., for instance, SMEs
account for 99 percent of firms in the country, and have been responsible for the creation of some
65 percent of the nation's jobs over the last two decades.iii However, in this reading, we will
concentrate on the large conglomerates, particularly the multinational corporation (MNC), that
have the ability to influence and affect the national security environment.
The World of the Multinational
The building block of the global economy is generally considered to be the multinational
corporation. A multinational corporation (MNC) is defined as an international business enterprise
with a centralized head office in a home country from which it coordinates global management as
well as offices and/or factories in at least one other country. . Sometimes an MNC is referred to as a
“transnational corporation.” Transnational corporations (TNCs) are similar to MNCs: A TNC is “an
enterprise comprising entities in more than one country which operate under a system of decision-
2
making that permits coherent policies and a common strategy. The entities are so linked, by
ownership or otherwise, that one or more of them may be able to exercise a significant influence
over the others and, in particular, to share knowledge, resources and responsibilities with the
others.”iv
Throughout much of the 20th century, most MNCs were American, Japanese or Western
European—encompassing such enterprises as Nike, Coca-Cola, Wal-Mart, Apple, Microsoft, Toshiba,
Honda, and BMW. While many of the top MNCs remain from the most economically developed
countries of the globe, what is striking, over the last decade, has been the emergence of MNCs from
the so-called “World Without the West”—especially from the rising powers of the global south and
east.[See the tables at the end of this reading for a list of the leading global companies.] The gap
between the “developed” and “developing” world is closing; as Thomas Barnett and Stephen
Deangelist point out, “emerging and frontier economies in Latin America, Africa, the Middle East
and Asia will outspend the West by almost two-thirds on future water, electricity and
transportation infrastructure. With all that construction -- roughly $40 trillion by 2030 -- global
supply chains will be further extended” allowing for economic power to be diffused over an even
greater portion of the world.v As a result, as economist Javier Santiso notes:
The corporate world has changed remarkably in the past ten years. New
multinationals are emerging in countries such as Brazil, India, China, South Africa
and Mexico. The entire global corporate chessboard is rapidly being altered.
In some sectors, such as steel or cement, the global leaders are no longer
corporations from developed countries. For example, in 2006, an Indian group,
Mittal, took control of its European based rival Arcelor and became the leader in the
steel sector while the Mexican company Cemex is in the same league as Lafarge
(French) and Holcim (Swiss). In early 2007, Tata Steel also completed a major
takeover of its UK rival Corus. With the takeover of the Canadian based company
Inco in 2006, the Brazilian minerals producer, CVRD, is now topping international
rankings along with the Anglo-Australians of BHP Billiton and Rio Tinto. The list of
emerging multinationals competing head to head with their OECD counterparts is
increasing fast, including Chilean based corporations like ENAP, public companies
like PDVSA from Venezuela and more often private ones like Petrobras from Brazil.
From South Korea, Samsung, LG or Posco are worldwide competitors while Russian
giants like Gazprom are increasingly willing to trespass their frontiers, following the
example of Chinese companies like Lenovo or Indian conglomerates like Tata.vi
Some multinationals have resources and capabilities at their disposal greater than many
governments. Indeed, “the awesome size and international scope of a handful of global corporations
has encouraged many writers to reflect how they have outgrown and dwarf national states. Alfred
Chandler and Bruce Mazlish have described them as the new Leviathans which ‘increasingly
challenges the power of the nation-states and of regional entities.’”vii As a result, MNCs are
influential in many ways. Corporations contribute to the creation of goods, services, and wealth on
an enormous scale. They add to the global exchange of ideas. They can introduce “best practices”
3
into a country and can also contribute to desirable change within a society. The “Sullivan
Principles”, for instance, adopted by U.S. firms doing business in South Africa during the period of
apartheid, committed those firms to create workplace environments that were color-blind and to
offer training and promotion opportunities to all employees regardless of race.
MNCs, however, can also be problematic for national governments. In particular, the
question of a firm’s “nationality” is becoming murkier. Harvard Business School professor Geoffrey
Jones observes that, “in the past, there were recognizable US corporations whose interests could be
identified with those of the United States … US - and other - multinationals were large, integrated
corporations with clearly defined boundaries, in which ownership and control lay indisputably in
the home economy.”viii Today, however, the situation may be far more ambiguous. An MNC might be
registered and incorporated in one country, have its headquarters in another country, have the
majority of its shareholders be citizens of other countries (or have its shareholders be sovereign
wealth funds, government-controlled entities), and undertake the bulk of its economic activities in a
completely different set of countries. Halliburton’s decision to move its corporate headquarters
from Houston to Dubai in 2007 and to seek to list its shares on a Middle Eastern exchange in
addition to the New York Stock Exchange raised concerns that the firm was “leaving” the United
States—but the company stressed it would continue “its legal incorporation in the United States,
meaning that it will still be subject to domestic laws and regulations.”ix But this concern that MNCs
may no longer be “good corporate citizens” of a particular country—and that an MNC
headquartered in the United States, for instance, may not automatically consider itself obligated to
promote American interests—is growing. R. Alan Hedley concluded:
Transnational corporations operate wherever in the world financial considerations
dictate. Because laws and standards governing corporate behavior vary from one
national jurisdiction to another, they form part of the decisional criteria on where
corporations locate, the type of business they conduct, and the relationships they
establish. TNCs are thus able to select from a broad array of regulatory frameworks.
Furthermore, they can sometimes avoid what may be perceived as “punitive”
government regulation by temporarily going “offshore,” or by forming short-term
strategic alliances with other corporations more advantageously placed with regard
to regulatory restrictions. Transnational networking arrangements have prompted
the United Nations Centre on Transnational Corporations to conclude that an
increasing number of “business activities are interlinked across national boundaries
in ways that leave them not fully under the control of a single corporate office
against whom national regulations can be applied.”x
Concerns about a multinational corporation’s “nationality” became very apparent when a private,
public-traded company (one in which ownership of the company is determined by the ownership of
shares which are openly traded on a stock exchange) acquires a new owner. For instance, when DP
World, a state-owned enterprise in the United Arab Emirates, was in the process of purchasing a
British firm, Peninsular and Oriental Steam Navigation Company (P & O), in 2005, questions were
raised about the leases that P & O had to operate port facilities in a number of U.S. cities, including
4
New York. Concerns were raised, especially in Congress, about the reliability of a Middle Eastern
government owning the company which controlled security for key U.S. seaports. Ultimately, in
2006, DP World sold off P & O’s U.S. operations to the American International Group (AIG)’s asset
management division.
Different countries utilize different strategies to address such concerns. In the United States,
the Committee on Foreign Investment in the United States (CFIUS), an interagency committee
chaired by the Secretary of the Treasury, is empowered to review foreign investment in U.S. firms,
especially to determine if there are negative national security consequences. Similar to the National
Security Act of 1947, the Foreign Investment and National Security Act of 2007 set down the
members of the Committee by statute, required that the Director of National Intelligence be an ex
officio member of the committee, and strengthened the Committee’s ability to review transactions
and to enforce “mitigation agreements” which would address any national security concerns that
would arise from the purchase of U.S. assets by non-U.S. entities. Other governments, in contrast,
set down very clear criteria for determining when a company is “controlled” by “foreign” elements
and then enact legal barriers to their activities: Russian law, for instance, defines a Russian-
incorporated company to be considered under foreign control when non-Russian citizens or
entities have the “capacity … to determine, directly or indirectly, decisions made by a commercial
organization of strategic importance, by means of instructing the votes” that are cast in the board of
directors.xi Companies so designated as “foreign” are therefore barred from involvement in certain
strategic industries in Russia, or from developing large natural resource deposits; in development
of Russia’s offshore natural resources, the government has also explicitly limited participation to
companies registered in Russia where the Russian state or Russian state companies hold at least a
50 percent stake.
In some cases, governments can assuage their concerns about a firm’s nationality by taking
a direct stake in a company. Beyond privately-owned MNCs, there are a growing number of
prominent state-owned enterprises (SOEs) which have become global players. An SOE is structured
like a privately-owned MNC (and may even trade some of its shares on stock exchanges) but a
government owns the controlling stake (although, in some cases, private investors are minority
shareholders, as is the case with Russia’s gas monopoly GAZPROM and the state oil company
Rosneft). Some SOEs are powerful industrial conglomerates, such as the Dongfeng Motor
Corporation in China. Others control vital natural resources, such as Endiama, the diamond
company owned by the Angolan state.
An important subset of SOEs is the “national oil company” (NOC). Today, some three-
quarters of all the world’s oil reserves are owned by NOCs; only 3 percent are owned by privately-
held MNCs (like Exxon Mobil, Royal Dutch Shell, or BP). Some of the key NOCs include Saudi Aramco
(Saudi Arabia), Rosneft and GAZPROM (Russia), CNPC (China), NIOC (Iran), Petronas (Brazil),
PEMEX (Mexico), PDVSA (Venezuela), the Abu Dhabi National Oil Company, the Kuwait Petroleum
Company, the Nigerian National Petroleum Company, the Oil and Natural Gas Corporation (India),
Petro Vietnam, and Petronas (Malyasia). In some cases, the NOC may be jointly owned by the state
and private investors; Petrobras, Brazil’s national oil company, is owned in part by the Brazilian
5
government (which controls 55 percent of the shares) but the rest of the shares trade on global
stock exchanges.
Another subset of SOEs that are quite relevant to the global economic order are sovereign
wealth funds (SWFs), defined by the International Monetary Fund (IMF) as “special purpose
investment funds or arrangements, owned by the general government.” Some SWFs were created to
invest revenues derived from the export of natural resources, as in the case of Russia; others
control the profits acquired from SOEs, as in China. It is estimated that SWFs have about $3.5
trillion at their disposal, with the SWFs of China, the United Arab Emirates, Saudi Arabia, Norway,
Kuwait and Russia controlling about 80 percent of that total. Ian Bremmer notes that these funds
“buy stakes in (and sometimes majority ownership of) domestic and foreign companies, including
hedge funds and leveraged-buyout firms. What makes them different .. is that those who manage
their investments don’t answer to shareholders. A sovereign wealth fund has one stakeholder: its
parent government.”xii
There are also hybrid firms, where governments may be one of several major stakeholders
in the corporation. A good example is the European Aeronautic Defence and Space Company
(EADS). Formed from the merger of Aérospatiale-Matra of France, DaimlerChrysler Aerospace AG
(DASA) of Germany, and Construcciones Aeronáuticas SA (CASA) of Spain, EADS is set up as an MNC
based in the Netherlands and is the parent company for Airbus, Eurocopter, Cassidian, and other
aerospace and defense firms.
Ownership of EADS is vested in a complicated partnership arrangement that binds both
private and state interests. A snapshot of the company in 2010 has majority control vested in a
Franco-German-Spanish partnership, which itself is comprised of both private companies and state
firms; both the French and Spanish governments own shares in EADS outright, as well as private
French and German companies; the German government is represented indirectly in a German
consortium that has both private and state shareholders.xiii The remaining 49.15 percent of the
shares “freely float” on six different European stock exchanges. At one point Russia’s state
investment bank VTB purchased about 5 percent of these shares; it sold this stake to another state
bank, VEB, with an eye to eventually having the shares be bought by Russia’s state-controlled
aerospace conglomerate United Aircraft Corporation (UAC)—with the idea to give Russia a
minority stake in a major European aerospace firm. Interestingly, EADS already owns about 2.5
percent of UAC, reflecting the growing interpenetration of defense contractors across national
boundaries.xiv
Another trend is the emergence of so-called “national champions.”In a 1999 article for the
Journal of the St. Petersburg Mining Institute, Vladimir Putin argued that the state should play a role
in facilitating the emergence of companies, which he labeled “national champions,” that would be
able to compete with existing Western multinationals and so would represent the country’s interest
in international commerce.xv Ian Bremmer describes such firms as follows:
National champions are companies that remain in private hands (though
governments sometimes hold a large minority stake) but rely on aggressive material
6
support from the state to develop a commanding position in a domestic economy
and its export markets. Bidding on state contracts is often rigged in their favor. They
have access to cheap financing from state-owned banks, tax breaks from central and
local governments, and near-monopoly control of entire economic sectors.xvi
Some of the leading “national champions” which have become global players include “Tata, Infosys
and Wipro in India, SABMiller, Sasol and Sappi in South Africa, Haier in China, Embraer and CVRD in
Brazil and Samsung in South Korea.”xvii But while “national champions” may be privately-owned,
they are expected to take state interests into account when making business decisions, and
sometimes to take on projects that might otherwise be rejected on purely business grounds. For
instance, during the economic slowdown in 2009, both Brazil and Russia put pressure on their
“national champions” not to downsize jobs and raise unemployment rates.xviii
Governments can use their powers to intervene and coordinate the work of private firms in
an effort to manage the economy and to pursue domestic and foreign policies. The keiretsu of Japan
and the chaebols of Korea are large integrated conglomerates which, although privately-held, work
closely with the government. In countries like Malaysia or South Africa, the government, via the
bumiputera program or the Black Empowerment Program, respectively, has worked to build up a
larger middle class comprised of the ethnic-majority population in both states, as a way to tap down
inter-ethnic clashes. Governments might also use their state capabilities—particularly their
intelligence services—to engage in corporate espionage on behalf of their SOEs and national
champions, a concerned that was recently highlighted when sensitive technical data was stolen
from the French automaker Renault, with many suspecting that Chinese entities might have been
behind the theft.xix
Security Challenges in the Global Economic System
Economic entities can often take actions, whether deliberately or simply by trying to
maximize profits, that can have a negative impact, from the perspective of the national security
professional, on the global environment. One consequence of private ownership combined with
globalization is that MNCs can work against a state’s interests. In pursuing its business interests—
especially corporate profits—MNCs might utilize offshore tax havens and move business activities
to other countries to minimize or avoid paying taxes and complying with a particular country’s
regulatory regime. An MNC might close factories and lay off workers in one country and move
operations to states with lower wage costs and fewer environmental regulations. As analyst Ian
Bremmer pointed out, “Witness the Indian firms that have relocated their operations to China in
order to take advantage of lower wages, a friendlier regulatory environment and more profitable
near-term opportunities. In the process, these firms bring proprietary technology and new
management techniques with them—to the advantage of their country’s primary economic
competitor.”xx
7
National security professionals have long been concerned that MNCs headquartered in their
own country or allied states might be selling equipment, knowledge, or technology with the
potential to strengthen a friendly or unfriendly actor—both other states as well as non-state actors.
Toshiba Machine Company, both in defiance of Japanese law and in opposition to U.S. interests,
illegally sold sophisticated propeller-milling machinery to the Soviet Union between 1982 and
1984. In conjunction with computers and software sold by Norway's state-owned arms company,
Kongsberg Vaapenfabrikk, these machines allowed the Soviets to produce quieter propellers that
significantly improved the ability of Soviet submarines to avoid detection by US surveillance
systems.xxi Moreover, when MNCs invest in other countries or create subsidiary firms, they might
transfer technology and expertise that strengthens the military-industrial capabilities of another
state.xxii These concerns are accelerating in today’s economic environment, given the budgetary
shortfalls in many Western countries combined with the desire of rising powers to acquire more
advanced military technologies. U.S. and European defense contractors may be forced to choose
between their own “bottom line” against the perceived harm to national security interests. Defense
contractors who in the past might have relied extensively on orders from the U.S. government, for
instance, for advanced technology products must begin to weigh whether or not to seek sales in
other countries. However, marketing products in other countries might improve profits but could
also help to lessen the technological edge that the U.S. has relied on to ensure its supremacy in the
battle space. The IISS report noted:
There is now a stark contrast between the contracting defence budgets of many
Western states and the growing military spending and arms procurement that
characterises the Gulf, the Asia-Pacific and Latin America. This fact has significant
implications for Western arms manufacturers. Faced with contracting domestic
order-books, military exports to other regions are more important than ever for US
and European defence companies.xxiii
Sometimes the business plans of companies clash directly with the government’s foreign and
defense policy objectives. In 2010, for instance, the State Department announced plans to fund the
development of “software and technologies that help people … circumvent Internet censorship” but
the reality is that “U.S. companies provide much of the technology used to block websites” to
authoritarian governments around the world. Indeed, U.S. companies noted that they would honor
the requests made by clients who asked for websites to be blocked, even if the U.S. government
might want otherwise.xxiv
MNCs can also use their international structure to get around national regulations that are
part of a country’s efforts to put economic pressure on other states. For instance, after the 1979
Iranian revolution, U.S. firms were barred by executive order from engaging in trade and
investment activities with Iran. In 1995, however, a U.S. firm, Conoco, announced plans to develop
several Iranian offshore oil fields. Since its Dutch subsidiary, Conoco Iran N.V., was going to handle
the project, and the oil produced would be exported to customers in Europe and Asia, not the
United States, the company argued it was not in violation of U.S. laws sanctioning Ira. These
loopholes were later closed by two executive orders issued by President Bill Clinton (12957 and
8
12959), which expanded the definition of firms affected by U.S. sanctions to include subsidiaries of
U.S. firms based in other countries.xxv
Changes in business practices can also have negative impacts on national security. The
process of globalization, aided and abetted by the United States, has taken as its guiding premise
the notion that international security is reinforced through economic interdependence between
nations. The adoption by many companies of the “just-in-time” (JIT) approach to manufacturing,
based on the philosophy that “inventory is waste,” discourages stockpiling and instead promotes
reliance on rapid transportation of resources and parts. But this presupposes that suppliers in
other countries can guarantee that their goods will reach market. In 2001, the CEO of Intel, Andrew
Grove, noted that any conflict in the straits between China and Taiwan that led to a break in trade
would be the “computing equivalent of Mutually Assured Destruction” because of the extent to
which the production systems of China and the United States had become intertwined and
interdependent. Economist Barry Lynn has concluded that “there is hardly a complex product that
rolls off an assembly line in the United States that does not contain multiple components from
China, the absence of which would paralyze production, at least temporarily.”xxvi
Indeed, natural disasters and political upheavals can lead to industrial crashes and
production interruptions. In recent years, the Taiwan earthquake of 1999, the shutdown of air
transport after 9/11, and the SARS epidemic of 2003 all had negative economic consequences.xxvii
More recently, Toyota automobile plants in the United States had to halt production of cars due to a
parts shortage caused by the March 11, 2011 earthquake and tsunami in Japan.xxviii
Access to vital resources is also a concern. In particular, what happens when a vital product
is controlled by a SOE? Office Chérifien des Phosphates, a Moroccan state-owned firm, controls half
of the world’s reserves of phosphates, a key ingredient for fertilizers (and a product of growing
strategic importance given rising costs for food and the role that high food prices have played in
destabilizing governments around the world, notably in Egypt in 2011). OCP tends to be guided by
commercial rather than political considerations, but there is no guarantee that an SOE or even a
privately-owned “national champion” will always be guided by business concerns in making
decisions. We have seen this with regard to rare earth metals—the elements crucial for high-
technology products including mobile communications devices and “smart bombs.” As Keith
Bradsher, a correspondent for the New York Times, observed:
Once little known outside chemistry circles, rare earth metals have become
increasingly vital to high-tech manufacturing. But … refining rare earth ore usually
leaves thousands of tons of low-level radioactive waste behind. So the world has
largely left the dirty work to Chinese refineries — processing factories that are
barely regulated and in some cases illegally operated, and have created vast toxic
waste sites. But other countries’ wariness has meant that China now mines and
refines at least 95 percent of the global supply of rare earths. And Beijing has
aroused international alarm by wielding that virtual monopoly as a global trade
weapon.
9
Last September, for example, China imposed a two-month embargo on rare earth
shipments to Japan during a territorial dispute, and for a short time even blocked
some shipments to the United States and Europe. Beijing’s behavior, which has also
included lowering the export limit on its rare earths, has helped propel world prices
of the material to record highs — and sent industrial countries scrambling for
alternatives. Even now, though, countries with their own rare earth ore deposits are
not always eager to play host to the refineries that process them.xxix
In particular, the growing competition for energy resources is an area of intersection between
companies and governments. Today, hydrocarbons (oil and natural gas) account for nearly 60
percent of the world’s energy consumption, and despite research into alternative technologies, it is
unlikely that “this figure will fall below 50 percent by 2030.”xxx
Some countries are not relying passively on the “free market” to ensure their energy
security, but are trying to coordinate economic and political actors in order to implement a strategy
of securing access to energy:
In 2002, around the time that Hu Jintao became general secretary of the Communist
Party, China formally adopted a "going out" (zou chu qu) policy of encouraging its
three major NOCs --the China National Petroleum Corporation (CNPC), the China
National Petrochemical Corporation (Sinopec), and the China National Offshore Oil
Corporation (CNOOC)--to purchase equity shares in overseas exploration and
production projects around the world, and to build pipelines, particularly to Siberia
and Central Asia. The goal of the "going out" strategy is to secure effective
ownership of energy resources and transportation infrastructure, measures that
China perceives as essential to improving the country's energy security. The
adoption of the policy was effectively a codification of long-standing practice, as
Chinese energy companies had already engaged in these activities since the 1990s.
China has pursued the "going out" strategy in a wide range of oil-producing regions,
including the Caucasus, Central Asia, East and South Asia, Africa and Latin America.
In the Middle East, China has employed the strategy in various ways with a number
of oil-producing states, including Algeria, Egypt, Iran, Libya, Oman, Saudi Arabia,
Syria, Sudan and Yemen. Beijing supports the efforts of Chinese energy companies to
win deals with regular high-level visits to and from regions in which the companies
are seeking access. China also follows up its network of energy deals by increasing
exports of manufactured goods and capital to countries where its NOCs are
operating. In some cases, the Chinese appear willing to put expensive packages of
side investments on the table in order to secure energy deals, as was recently the
case in Angola and Nigeria.xxxi
One feature today is for MNCs—both private and public—to link up with state-controlled NOCs on
energy projects. U.S. oil major Exxon Mobile is teaming up with Rosneft to develop energy resources
on Russia’s Black Sea shelf; China’s Development Bank is extending a ten-year loan to Petrobras, to
10
guarantee Brazil’s delivery of 150,000 barrels of oil per day (to rise to 200,000 barrels of oil per
day) to Sinopec for the duration of the loan. Sometimes, one group of MNCs may pull out of a
project, due to government pressure or protests of shareholders, but be replaced by others. This
has been clearly seen in the case of Sudan’s oil industry. When, as a result of the actions of the
Sudan government in Darfur, Western MNCs sold their stakes in the country’s oil sector, their assets
were purchased, in turn, by India’s Oil and Natural Gas Corporation, Petronas of Malaysia and the
Gulf Petroleum Corporation of Qatar.
It is also important to understand how economic actors can affect the financial health of a country,
particularly the United States. Since the end of the Second World War, the U.S. dollar has functioned
as the “world’s leading transactional currency, including for international oil trading. It also became
the world’s dominant reserve asset … and [the] best instrument for settling deficits in countries’
external accounts.”xxxii This has meant that there has been a constant demand for U.S. dollars,
creating an inflow of capital to sustain America’s current account (trade) and fiscal deficits. But
concerns about U.S. spending and the overall health of the U.S. economy is now causing other
countries’ central banks and their companies to hedge on the dollar. In 2010-11, there was a
noticeable steady decline in the value of the dollar against a basket of other currencies including the
euro. Observers expressed concern that “the fact that the shift occurred even as the world looks
more dangerous shows that the dollar has lost some of its sparkle, suggesting the day may come
when the dollar is no longer the place investors turn in times of trouble. That could have big
implications for the economy in the years ahead.”xxxiii One manifestation of the decline of the value
of the dollar is rising energy prices, which are denominated in U.S. dollars; a perceived decline in
the dollar’s worth causes producers to charge more.
Linked to this concern is the growing influence of non-U.S. financial institutions and
governments, and particularly sovereign wealth funds, to purchase U.S. assets. It is now estimated
that non-U.S. nationals and entities: own just under 50 percent of publicly traded Treasury
securities, 25 percent of U.S. corporate bonds, and 12 percent of U.S. corporate stock. By early
2011, China was the largest foreign holder of U.S. Treasury debt (at over $1 trillion). What happens
if economic entities controlled by governments—central banks, SOEs and SWFs—begin to acquire
more U.S. debt? Flynt Leverett, an analyst with the New America Foundation, notes:
Foreign government agencies—central banks and, more recently, sovereign wealth
funds, have surpassed private purchasers of U.S. assets as the most important
sources of financing for America’s twin deficits. Today, the central banks … seem to
be focused primarily on macroeconomic stabilization … But, looking ahead, there is
no guarantee that state-controlled entities will not base decisions about asset
allocations on strategic calculations as well as economic considerations.xxxiv
In other words, could economic actors wield leverage over the U.S. government by being able to
affect the health of the economy? These concerns have been raised, with some U.S. national security
officials concerned about “China's willingness to translate its massive holdings of US debt into
political influence on issues ranging from Taiwan's sovereignty to Washington's financial policy.”xxxv
11
This raises an interesting question: is there a national security imperative for the
government to become more directly involved in economic decisions? In 2005 Lynn recommended
that the bulk of the capacity for the commodities and products most critical for the functioning of
our economy should either be repatriated to the U.S. or at least be located in supplier nations that
the U.S. trusts or where it can reasonably guarantee continued access.xxxvi
No matter what policy options are chosen, however, the national security professional must
be aware of the ability of economic actors to constrain (or enhance) the military’s freedom of
action.
APPENDIX
Top 50 Companies in the World in 2010
1. Wal-Mart (United States) $480 billion
2. Royal Dutch Shell (Netherlands) $285 billion
3. Exxon Mobil (United States) $284 billion
4. British Petroleum (Britain) $246 billion
5. Toyota Motors (Japan) $204 billion
6. Japan Post Holdings (Japan) $202 billion
7. Sinopec (China) $187 billion
8. State Grid (China) $184 billion
9. AXA (France) $175 billion
10. China National Petroleum (China) $165 billion
11. Chevron (United States) $163 billion
12. ING Group (Netherlands) $163 billion
13. General Electric (United States) $156 billion
14. Total (France) $155 billion
15. Bank of America (United States) $150 billion
16. Volkswagen (Germany) $146 billion
17. Conoco Phillips (United States) $139 billion
18. BNP Paribas (France) $130 billion
19. Assicurazioni Generali (Italy) $126 billion
20. Allianz (Germany) $125 billion
21. AT &T (United States) $123 billion
22. Carrefour (France) $121 billion
23. Ford Motor (United States) $118 billion
24. ENI (Italy) $117 billion
25. J. P. Morgan Chase (United States) $115 billion
26. Hewlett-Packard (United States) $114 billion
27. E.ON (Germany) $113 billion
28. Berkshire Hathaway (United States) $112 billion
29. GDF Suez (France) $111 billion
30. Daimler (Germany) $109 billion
31. Nippon Telephone and Telegraph (Japan) $109 billion
32. Samsung Electronics (Korea) $108 billion
33. Citigroup (United States) $108 billion
34. McKesson (United States) $108 billion
35. Verizon Communications (United States) $107 billion
36. Credit Agricole (France) $106 billion
37. Banco Santander (Spain) $106 billion
38. General Motors (United States) $104 billion
39. HSBC Holdings (Britain) $103 billion
40. Siemens (Germany) $103 billion
41. American Insurance Group (United States) $103 billion
42. Lloyds Banking Group (Britain) $102 billion
43. Cardinal Health (United States) $99 billion
44. Nestle (Switzerland) $99 billion
45. CVS Caremark (United States) $98 billion
46. Wells Fargo (United States) $98 billion
47. Hitachi (Japan) $96 billion
48. IBM (United States) $95 billion
49. Dexia Group (Belgium) $95 billion
50. Gazprom (Russia) $94 billion
12
NOTES
i Military Balance 2011 (London: International Institute for Strategic Studies, 2011), at
http://www.iiss.org/publications/military-balance/the-military-balance-2011/press-statement/ ii Derek S. Reveron, Exporting Security (Washington, DC: Georgetown University Press, 2010), 91.
iii Scott A. Shane, “Are Medium-Size Businesses the Job Creators?” New York Times, August 5, 2009, at
http://boss.blogs.nytimes.com/2009/08/05/are-medium-sized-businesses-the-job-creators/. iv Definition as provided by UNCTAD; see “Transnational Corporations Statistics,” UN Trade Conference on Trade
and Development (UNCTAD), 2002, at http://www.unctad.org/Templates/Page.asp?intItemID=3159&lang= 1. v Thomas P. M. Barnett and Stephen F. Deangelis, “The New Rules: Managing Global Supply Chains a Key U.S.
Advantage,” World Politics Review, March 28, 2011, at http://www.worldpoliticsreview.com/articles/8321/the-new-
rules-managing-global-supply-chains-a-key-u-s-advantage. vi Javier Santiso, The Emergence of Latin Multinationals, OECD Emerging Markets Working Group Paper 04/2007,
3. vii
Geoffrey G. Jones, Nationality and Multinationals in Historical Perspective, Harvard Business School Working
Paper 06-052 (2005), 3. viii
Jones, 4. ix
Clifford Krauss, “Halliburton Moving C.E.O. From Houston to Dubai,” New York Times, March 12, 2007, at
http://www.nytimes.com/2007/03/12/business/12haliburton.html. x R. Alan Hedley, “Transnational Corporations and Their Regulation: Issues and Strategies,” International Journal
of Comparative Sociology, 40(1999), 217. xi
See the Russian federal law “On Regulating Foreign Investment in the Economy”, April 29, 2008, at
http://www.rg.ru/2008/05/07/investicii-fz-dok.html. xii
Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (New York:
Portfolio, 2010), 70. xiii
Andrea Rothman and Rainer Buergin, “Germany Has „Intensive Dialogue‟ With France on EADS,” Bloomberg,
February 7, 2011, at http://www.bloomberg.com/news/2011-02-07/germany-has-intensive-dialogue-with-france-on-
eads-update1-.html. xiv
“Russia's Grand Plan To Restore Its Glory,” Business Week, September 18, 2006, at
http://www.businessweek.com/magazine/content/06_38/b4001064.htm. xv
Ivor Crotty, “The Stereotypical Champion,” Russia Profile, October 3, 2006, archived at
http://www.ocnus.net/artman2/publish/Business_1/The_Stereotypical_Champion_26101_printer.shtml. xvi
Bremmer, End of the Free Market, 67. xvii
John Battersby, “SA's role in a new world order,” SouthAfrica.info, August 8, 2007, at
http://www.safrica.info/features/new-order.htm. xviii
Bremmer, End of the Free Market, 67; Danielle Dsane, “Putin humiliates oligarch Deripaska,” First Post, June
5, 2009. xix
Helen Massy-Beresford, Peter Apps and William Maclean, “Special Report: Renault's electric spy scandal,”
Reuters, January 28, 2011, at http://www.reuters.com/article/2011/01/28/us-renault-spy-idUSTRE70R19120110128.
In particular, they note: “intelligence and security experts expect government-linked corporate espionage and data
theft to increase in coming years. They say a lack of dividing lines between the state and corporations in countries
such as China or Russia, coupled with the fact that digital technology makes stealing huge volumes of information
so much easier, increase the risks companies face. In France, a country which has its own Economic Warfare
School, companies like Renault may have even seen this coming years ago. France's industry minister Eric Besson,
while careful not to point the finger at any country, underlined the case's importance to Paris by calling it a victim of
"economic war".
Companies have always tried to steal secrets from each other. Carmakers and other manufacturers regularly buy up
new models from rivals so they can study technical advances, a process known as reverse engineering. Sometimes
they go further, poaching staff or persuading them to come across with key intellectual material, buying corporate
secrets from third parties, even infiltrating their own spies into rival companies. …
13
Western firms, some with their own history of stealing secrets and uncomfortably close relationships with state spy
agencies, face a particular threat from China and Chinese companies, security experts say. Many firms in Europe
and the United States already deal with regular cyber attacks and other attempts at intelligence gathering, many of
which appear to begin in China. Not every attack or infiltration is government-backed, the experts say. But some
believe the threat is big enough that western firms will inevitably seek their own state protectors, raising the stakes
again. …
Defense firms are most at risk, followed by resource and energy companies and software firms. … "China's
intelligence services focus more on business and technology intelligence than on political intelligence," Stratfor said
in a 2010 report. "And Chinese companies have no moral qualms about engaging in business espionage whether
they take orders from the government or not." The same can be said of some western companies -- and capitals.
During the Cold War, western intelligence agencies often tried to steal Soviet secrets for delivery to their own
defense firms, and had no qualms about spying on allies. Even today, continental European governments suspect
Britain and the United States sometimes use their powerful signals intelligence networks to spy for business ends. …
European government and defense firm officials sometimes avoid using BlackBerry smartphones because their
traffic passes through servers in Britain and the United States. …
xx Ian Bremmer, “Thinking Beyond States,” National Interest, 83 (Spring 2006), 66.
xxi David E. Sanger, “Wider Sale to Soviet Disclosed,” New York Times, October 23, 1987, at
http://www.nytimes.com/1987/10/23/business/wider-sale-to-soviet-disclosed.html?src=pm. xxii
See, for instance, Shirley A. Kan, “China: Possible Missile Technology Transfers from U.S. Satellite Export
Policy – Actions and Chronology,” Congressional Research Service report 98-485F, updated September 5, 2001. xxiii
Military Balance, op. cit. xxiv
Paul Sonne and Steve Stecklow, “U.S. Products Help Block Mideast Web,” Wall Street Journal, March 28, 201,
at http://online.wsj.com/article/SB10001424052748704438104576219190417124226.html?mod=googlenews_wsj. xxv
This is discussed in Nikolas K. Gvosdev, “Congress and the Executive Branch: Sanctioning Iran,” Case Studies
in Policy Making, 12th
edition, eds. Hayat Alvi and Nikolas K. Gvosdev (Newport, RI: Naval War College, 2010),
314. xxvi
Barry C. Lynn, “War, Trade and Utopia,” National Interest, Winter 2005-06, 31. xxvii
Lynn, 32-33. xxviii
Jerry Hirsch, “Toyota to halt some U.S. production because of parts shortages,” Los Angeles Times, March 24,
2011, at http://articles.latimes.com/2011/mar/24/business/la-fi-toyota-production-20110324. xxix
Keith Bradsher, “Malaysia Makes a Big Bet on Crucial Metals,” New York Times, March 9, 2011, B1. xxx
Bremmer, End of the Free Market, 55. xxxi
Flynt Leverett and Pierre Noel, “The New Axis of Oil,” National Interest 84 (Summer 2006), at
http://nationalinterest.org/article/the-new-axis-of-oil-1145. xxxii
Flynt Leverett, “Black is the New Green,” National Interest, January-February 2008, at
http://nationalinterest.org/article/black-is-the-new-green-1925. xxxiii
Neil Irwin, “U.S. dollar, usually world‟s safe haven, declining despite plenty of global turmoil,” Washington
Post, March 24, 2011, at http://www.washingtonpost.com/business/economy/us-dollar-usually-worlds-safe-haven-
declining-despite-plenty-of-global-turmoil/2011/03/24/ABlrFiRB_story.html. xxxiv
Leverett, “Black is the New Green,” op. cit. xxxv
“China US bond purchases decline for 3rd month,” Agence France Press, March 15, 2011, at
http://www.google.com/hostednews/afp/article/ALeqM5gYWuI0Xh6pk4PB6ovEN-Esy6h9UQ?docId=CNG.ea7c289bc2e02432c2ceb3e9e0b7d793.91. xxxvi
Lynn, “War, Trade and Utopia,” 38.