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Abu Dhabi, UAEFriday 21 September 2018

Trump of all people should know that corporate patriotism is neither natural nor desirable

Free trade, once at the core of US nation-building, looks threatened by the president's attack on American companies, writes Rashmee Roshan Lall

US President Donald Trump speaks with Harley Davidson CEO Matthew Levatich last year. Nicholas Kamm / AFP
US President Donald Trump speaks with Harley Davidson CEO Matthew Levatich last year. Nicholas Kamm / AFP

US President Donald Trump is not the first politician to fulminate about the need for corporate loyalty to country above all else.

Mr Trump’s threats and imprecations against the American Midwest’s legendary motorcycle manufacturer Harley–Davidson for daring to send some of its production overseas, echoed the milder frustration about big business once expressed by his predecessor, Barack Obama.

In 2012, Mr Obama said US corporations that re-establish themselves abroad to avoid American tax liability are “economic deserters”.

Is there really such a thing as corporate patriotism? If so, is it a virtue and should it be depended upon?

These questions are worth pondering right now. On Friday, the US is due to activate new tariffs on Chinese goods worth $34 billion, and Beijing has threatened to inflict equal economic pain.

American and Chinese companies (and those from elsewhere too, because of the size of the two economies) will feel the effects of the ensuing trade war. Some will be embattled; others will profit. But most companies will simply fight just to stay in business rather than seeking to serve national interests.

That is right and proper. David Yosifon, a business law and ethics professor at Santa Clara University, once dryly noted: “The default rule under the most widely used corporate law in the United States, the Delaware General Corporation Law, is that corporations must be managed to serve the interests of the shareholders, and not any other stakeholder group.”

The reference to Delaware is instructive. It’s a relatively small US state but has more than half the country’s publicly traded corporations and more than 60 per cent of the Fortune 500. It is a magnet for companies, not because of bonds of blood or tradition, but because it provides conditions that make it easy and lucrative to be based there.

Delaware has made a virtue of being supremely tax-friendly to corporations. It allows people who aren’t US citizens or even residents to anonymously own and operate companies. In a sense, Delaware takes the emotion out of doing business, especially that which surrounds passports and political passions.

And yet politicians sometimes demand that business fly the flag rather than focusing on profit margins, bottom lines and balance sheets.

In the Harley-Davidson row, for instance, Mr Trump alternately blamed the company for its easy surrender and its mendacity. The company wanted to move production out of the US anyway, he said, and was using the tariff war with Europe as an excuse.

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He went on to threaten Harley-Davidson with crippling taxes and, finally, warned that his own voters, who loved the brand, would begin to take an active and market-altering dislike to the iconic motorcycles as a result of its perceived disloyalty.

In addition, Mr Trump remained unsympathetic to Harley’s explanation that it made business sense to manufacture bikes for Europe, in Europe.

The same argument is being heard from another prominent American motorcycle manufacturer, Minnesota-based Polaris. It has said it might start to manufacture some of its bikes in Poland rather than in Iowa, in order to sidestep European tariffs.

As a businessman, Mr Trump might have been expected to understand the logic of the balance sheet. As a former law professor, Mr Obama might have known that an American corporation’s tax residency status has little to do with patriotism and more to do with legal means of lowering tax bills.

Demands for corporate patriotism are at odds with recent mergers and acquisitions anyway – not least the creation of Europe’s second largest steel-maker. Thyssenkrupp Tata Steel is German and Indian, will be based in the Netherlands and its 48,000 employees will be spread across 34 sites.

On Monday, the bosses of both companies said joining forces would mean more security for workers in an age of uncertainty thanks to Brexit, US tariffs and other imponderables.

That is exactly what the expanded company should be concerned about. Its identity not contained in the passports of those who own it, run it, or work for it, Thyssenkrupp Tata Steel will rightly hew to its own self-interest.

Of course, corporate governance decisions must be reasonable and ethical, but only, as Professor Yosifon says, to the extent they are “rationally related to advancing the shareholder interest”.

This is why American giant General Electric’s 2012 decision to invest $800 million in jobs, products and manufacturing in the US was seen, not as an act of patriotism or charity, but as a good way to cut high transportation costs.

If it swings the other way now, that too is just business.

Adam Smith, often regarded as the father of economics, said three things make us more prosperous: the freedom to pursue self-interest, the division of labour, and freedom of trade. Right around the time Smith wrote that, America was embarking on its grand nation-building project, which would promote free trade.

A reversal goes against the American project and the logic of doing business. It begins to look like state control of industry. And doesn't that sound like communism?

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