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Asian companies must not be fooled by 'Made in America' mirage

Appeasing Trump by switching manufacturing to the US must not dominate thinking

| North America
U.S. President Donald Trump, left, and Foxconn Chairman Terry Gou attend the groundbreaking ceremony for the Taiwanese technology group's new manufacturing facility in Wisconsin on June 28.   © Reuters

Donald Trump may be the Art-of-the-Deal president, but Terry Gou recently schooled him on how it is done.

The Taiwanese tycoon does not do small. His Foxconn Technology Group is Apple's main iPhone assembler, one of the biggest employers in China and savior of Japanese corporate icon Sharp. Now the 67-year-old is turning his sights to an economy Trump claims to be making great again.

On June 28, Gou joined Trump in Wisconsin, shovel in hand, to break ground on Foxconn's sprawling new facility. Price tag: $10 billion. Well, make that $6 billion, at least where Gou's shareholders are concerned. American taxpayers will pick up about $4 billion of the tab with tax breaks and other perks.

Dealmakers might call it a win-win. The "America First" president gets to claim as many as 13,000 new jobs. Gou, though, would seem the real victor. He got a great deal on a production base for goods being sold in America, a means of circumventing Trump's trade war with China, and a surefire escape from the rants of the tweeter-in-chief.

But what if Gou is getting it all wrong? What if Foxconn, and parent Hon Hai Precision Industry, is betting big on an American workforce that Trump's retrograde economic policies will leave worse off for years to come?

This question takes on greater resonance as other top Asian CEOs climb aboard the "Made in America" bandwagon. None garner more attention than SoftBank's Masayoshi Son, who accompanied Gou to Wisconsin and pledged to deploy $50 billion in the U.S. thanks to Trump's "passion" and "energy." Now add Taiwanese giant Advantech, the biggest maker of industrial computers, to the list.

There is obvious logic to rethinking production strategies when Trump's tariff arms race with Beijing is putting trans-Pacific supply chains at risk. In an interview with the Nikkei Asian Review, Chaney Ho, executive director of Advantech's board, called Made in U.S.A. a "mega-trend." Asia, he said, was "entering a new era that business owners have to at least move some production close to big markets such as the U.S. and India, and reduce dependence on China."

The efficiencies inherent in providing locally sourced components for Amazon, Cisco Systems, General Electric and other U.S. giants could serve shareholders well. Asian-run production bases in the U.S. already operate efficiently, as Toyota Motor and Samsung Electronics have proved.

Meanwhile, ramping up production in India, the world's second most populous nation and a fast-growing economy, makes sense. With a young workforce, India is an attractive regional export base. Advantech began pouring resources into Bangalore a year before Prime Minister Narendra Modi launched his "Make in India" campaign in 2014.

But the truth is that bigger element in Advantech's strategy -- the push into the U.S. -- is a problematic bet. Far from revitalizing the American economy, most of Trump's "passion" and "energy," to borrow Son's words, has gone into pulling the U.S. back to the past.

China is investing trillions of dollars to lead sectors from software to renewable energy, biotechnology, self-driving vehicles and higher value-added manufacturing.

Trump, meantime, is making coal great again. He seeks to halt the immigration flows that drive productivity and innovation. He is lowering Detroit's emissions standards, essentially taking America out of the global auto market. His assaults on the health care industry, factory safety and schools management do not lend themselves to a healthy or well-educated workforce, let alone one ready for the threats from automation and artificial intelligence.

Nor does Washington's debt trajectory leave much cash to finance a credible Made in U.S.A. campaign. On top of a giant $1.5 trillion tax cut, Team Trump wants to cut capital gains levies and throw other perks at the wealthiest 1%. By the time his term ends in 2021, Washington's $21 trillion debt could be well on its way to $30 trillion. Private borrowers could be crowded out.

Not surprisingly, foreign direct investment into Trump's America is plunging -- by 40% in 2017 from 2016. "The falloff," says Adam Posen of Peterson Institute for International Economics, "is a result of a general decline in the United States' attractiveness as a place to make long-term business commitments."

The Council on Foreign Relations rightly called the "Made in China 2025" push a "real existential threat to U.S. technological leadership." Why, then, would Trump make it so easy for Beijing by handicapping American companies?

But the U.S. won't stick to this self-destructive course for long. The conventional wisdom in Asia that Trumpian protectionism is here to stay ignores the likely backlash from American consumers as prices rise and job losses mount. The Congress and the leadership of both major U.S. parties also broadly support open trade. In other words, expect a course correction before, or when, Trump's term ends in 2021. "The principle of protectionism," says Anatole Kaletsky of Gavekal Research, "is always popular until it is put into practice."

It is important that Asian governments not follow Trump down this rabbit hole. That means staying focused on developing vibrant domestic economies. The short-term priority is battening down the hatches for a potentially unpredictable couple of years ahead as Trump and Chinese President Xi Jinping trade barbs. With targeted fiscal support and active monetary policies, Asian neighbors can safeguard top-line growth.

This is no time to forsake structural upgrades. China needs to get bubbles in credit, debt and property under control. It must accelerate efforts to take state-owned enterprises down a peg and make room for smaller enterprises focusing on technology and services. In Japan, it is high time Prime Minister Shinzo Abe puts more structural reform wins on the scoreboard. The best antidote to threats emanating from Washington is to reduce regulations, loosen labor markets and use tax tweaks to catalyze a startup boom at home.

Trump's full-front trade assault also highlights a need for some economic heavy lifting. India, Indonesia and the Philippines must narrow the current-account deficits making currencies and financial systems vulnerable. They also must accelerate efforts to improve infrastructure, education and industrial policy to win bigger shares of global manufacturing business.

Governments should follow Tokyo's lead and engage with countries beyond the U.S. Despite strong ties to Trump, Abe helped save the 11-nation Trans-Pacific Partnership from collapse and signed a free-trade deal with the European Union. Once sanity is restored to global trade flows, Asia will be ready to resume its upward trajectory.

Some Asian companies might be wise to follow Advantech in using Trump to their own advantage. Given the U.S. president's desperation for quick economic wins, it makes sense to bank taxpayer-funded subsidies for investing in what is still the world's largest economy.

But given the wreckage Trump could leave behind, companies might consider more of a North American regional strategy. Moving production to Canada and Mexico could be a way to maintain access to the U.S. market, without getting overexposed to political chaos. It will be important to hedge against the growing odds that the U.S. labor force will eventually get restless. In the long run, made in Asia will still trump Made in America.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.

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