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12/11/16

Is Tillerson a Timely Choice?

By Esfandyar Batmanghelidj (source: LobeLog)


Exxon CEO, Rex Tillerson

The announcement of Rex Tillerson as Trump's pick for secretary of state has led many to ask whether an oil executive is capable of advancing America's foreign policy interests. Although the Trump transition team didn't likely foresee the full potential of the appointment, Tillerson may offer a timely change of profile for the role of secretary of state-if we prioritize a long overlooked challenge facing American diplomacy.

Over the last few decades, dialogue between the secretary of state and the chief executive of a major multinational enterprise can be as consequential as his dialogue with a head of state. In fact, the relations between nation-states and the "private empires" of global enterprise may be more important than ever. Having Tillerson, a consummate global executive, at the helm in the State Department could provide an opportunity for this dialogue to take place between individuals who are essentially peers. Tillerson's understanding of the interplay between foreign policy and commercial realities could offer a unique opportunity for the United States to transform its framework of international diplomacy to better respond to the increasing friction between the international system of nation-states and the international system of private empires.

Whether this is a sufficient justification for his appointment is hard to say, particularly as the crises in Syria and Yemen, the destabilization of Venezuela, and the risk for conflict with Russia and China loom large. But at the very least, it is worth analyzing his full potential as secretary of state.

The Rise of Private Empires

Foreign direct investment is replacing trade as the "tie that binds" in the international system.

Trade flows are proving increasingly fickle. Headlines over the last month have declared a slowdown of global trade, worrying economists worldwide. Even prior to the slowdown, one impact of globalization was to make everything fungible. The neoliberal order of the 20th century was built on the idea that the developing world produced raw materials and the developed world produced finished goods. This is no longer the case. Everything is manufactured pretty much everywhere. Trade ties with any one country are less precious than before because the goods being traded are now accessible from many other markets. The takeaway is that countries can no longer count on trade ties to set a foundation for diplomacy. Not only is trade less inherently valuable in the globalized world, but it is far easier to alter economic allegiances than it used to be. Trade has become less influential as a diplomatic tool.

At the level of individual companies, the global economy is now dominated by "private empires," major multinational corporations that do not belong to any one jurisdiction. It isn't just a clickbait fact that companies like Apple have more financial clout than whole countries. These companies are so powerful that nation states are even beginning to exercise their global influence through a corporatist framework. Whereas 20th century corporatism was associated with the autarkic economic planning of fascist and communist states, today's corporatism is a product of globalization itself. The most important manifestation of Chinese foreign policy in 2016 was not the mobilizations in the South China Sea, but rather the fact that Chinese cross-border merger and acquisitions activity hit a record high, with deals totaling $207 billion in value. Importantly, the Chinese are acquiring blue-chip firms in the West, such as German robotic arm company Kuba and Swiss agribusiness giant Syngenta. Countries like Qatar and the United Arab Emirates have also secured an outsized global influence through such a strategy. In most cases, the acquisition targets are globally active companies that were nonetheless defined by their national identity. The new wave of foreign ownership is exposing the ruse that multinational firms are anything more than "private empires," through which countries are seeking to derive the influence that trade no longer offers.

Consider ExxonMobil, the textbook "private empire." It is easy to think that for a company like ExxonMobil, the oil trade is what counts. But actually, ExxonMobil's business is about foreign direct investment in large, expensive, immovable assets. The oil trade is dominated by trading houses like Vitol and Glencore, who purchase oil from ExxonMobil. ExxonMobil only started to explore establishing its own trading division this year.

According to the company's 2015 filings with the SEC, ExxonMobil has nearly 150 wholly or partially owned subsidiaries registered in 25 jurisdictions around the world. The company has exploration or production activities in 36 countries in total. This is the extent of the private empire that Tillerson has been overseeing. It is physical and valuable in ways not unlike traditional states, but it is inherently transnational.

Each of these subsidiaries represents an instance of foreign direct investment with its own geopolitical considerations. Tillerson sat at the helm of the world's largest oil company, and the oil and gas industry typically accounts for the largest proportion of global capital investment. In 2015, oil and gas investment values hit USD $113.5 trillion or 16% of the total. Tillerson cut his teeth in post-Soviet Russia, where the promise of capitalism hinged on the rise of foreign direct investment, which surged from an annual total of just $2.6 billion in 2000 to nearly $75 billion in 2008. Tillerson knows why foreign leaders like Putin need multinational enterprises to make investments, and he understands the leverage such investments can garner.

An Emperor at the State Department

Members of the policy community are rightly concerned that someone with no formal diplomatic experience and a track record of contravening U.S. foreign policy is set to be America's top diplomat.

While at ExxonMobil, Tillerson dismissed the notion that he was leading an American company. Steven Coll, author of the definitive history of the company, notes that rejection of a national identity has been a hallmark of ExxonMobil's outlook for decades. He cites Tillerson's predecessor at Exxon, Lee "Iron Ass" Raymond, who bluntly declared, "I am not a U.S. company and I don't make decisions based on what's good for the U.S." During Tillerson's reign, ExxonMobil notoriously ignored the clear demands of the State Department when it signed a lucrative contract with the Kurdistan Regional Government, weakening the claim of Iraq's central government to the region's oil wealth.

However, judging by early endorsements from the likes of Robert Gates and Condoleezza Rice, Tillerson will approach his new appointment as any patriot would and will accept his responsibility to identify and exercise what is in the American national interest. Moreover, Suzanne Maloney of Brookings has also argued that a person with Tillerson's background could very well have the skills necessary for the position. Maloney cites the challenges of foreign direct investment as a marker for Tillerson's competencies:

The energy business is not a get-rich-quick scheme. It entails complex operations, often in environments that pose political challenges, with time horizons that stretch over decades and billions of dollars at stake. To succeed requires integrating technical, financial and political acumen over a long period.

Taking Maloney's analysis further, the novelty of the appointment is that Tillerson might see a geopolitical map more reflective of the actual global terrain. During his tenure, Secretary Kerry has highlighted China, India, Venezuela, the United Kingdom, Cambodia, and many other countries as "trading partners" in order to indicate the essential strength and necessity of the bilateral diplomatic relationship, and thereby to justify the U.S. ability to seek cooperation or compel a change in policy. Tillerson will probably find the notion of "trading partners" insufficient or obsolete for the reasons discussed above. As a result, he may be in a unique position to establish a new paradigm of American diplomacy that better reflects the realities of the globalized economy.

Cleavage in the International System

The irony of the free trade mantra of neoliberalism is that trade is never truly free; it is subservient to the nation-state. Trade is only free insofar as states create an attendant international legal order. Trade is also measured and ordered in terms of balances between states. Two things are happening to this order right now. Anti-globalist rhetoric is rising, buoyed by Brexit and Trump's win. But at the same time, the order is diminishing in importance because global trade has reached a critical level of fungibility. Neoliberalism became a victim of its own success and states lost control of the global economy they sought to contain by the rule of law. Economist Dani Rodrik puts it succinctly, "The era of trade agreements is over." Company revenue, shareholder value, and company policy have superseded trade policy as the critical factors for the operation of global finance.

The State Department has been struggling with this reality. As first outlined by political scientist Ian Bremmer in 2015, the recent phenomenon of the "weaponization of finance" is a rare bipartisan tool of diplomacy. Sanctions are the final attempt of the nation state to control global trade and thereby maintain leverage in interstate relations. But with trade flows totally fluid, new financial sanctions were developed to target capital. Iran was the test case for these innovations. By focusing on the definition of companies as "U.S." or "non-U.S." in order to determine the extent of an extraterritorial regulatory prohibition on financial transactions, policymakers at the Department of State and Treasury have tried to make ownership (the outcome of direct investment) the fulcrum of enforcement. It was necessary to move beyond the mere flow of goods impeded by an embargo, because trade-focused sanctions had limited bite. Aside from caviar and Persian carpets, Iran's primary imports (foodstuffs, machinery) and exports (oil, gas) were perfectly fungible. Iran simply shifted the focus of its trade to China, India, and Japan. The later financial sanctions did have an effect on Iran, but they also had an effect on major multinationals who had made foreign direct investments into Iran, and hence the policy approached overextension.

The senior executives of the affected multinationals have complained about the impact of sanctions on their operations, particularly in the case of the lingering effect of US sanctions in the aftermath of European sanctions relief tied to the implementation of the Iran nuclear deal. Companies like Airbus, Total, Renault, Daimler, and Siemens have all struggled to launch planned investments in Iran and have leaned on their economic and foreign affairs ministers to make this a point of diplomatic contention with the US. Major banks like BNP Paribas and HSBC have also been targeted, moves that "stoke anger in Europe," as Bremmer puts it. European states view these companies as national entities. But the most salient reason for the governmental intervention has been that in Europe, state ownership remains far more common than in the United States. For example, in France, the value of state ownership is equivalent to 10% of GDP. European multinationals are somewhat less "private," and so the leaders of nonetheless global companies can lean harder for political support.

Meanwhile, because of the purported success of the Iran sanctions, the United States and Europe imposed new financial sanctions on Russia in an attempt to curb Putin's aggression on Europe's eastern border. Once again, multinationals suffered. Notably, ExxonMobil's project with Rosneft, which could be valued as high as $300 billion, remains on hold due to US sanctions.

The implication is that sanctions policy, in trying to reassert state control over the "too-free" global economy, has actually put the state system into conflict with the system of private empires. Tillerson, having been mired in this conflict, does not like sanctions. He declared at a July 2014 shareholder meeting that "We do not support sanctions, generally, because we don't find them to be effective unless they are very well implemented comprehensively and that's a very hard thing to do."

In this way, Tillerson's appointment brings into relief what may be the most important foreign policy question of the next decade. How will the state system adapt to the new corporatism of the international order? What we might be witnessing is a cleavage in the international system. The operation of nation-states, governed by their political imperatives, is no longer dominant over the operation of global capital. The private empires, which control global capital flows, are operating with greater independence and influence than ever before. Unlike in the era of trade agreements, the state is struggling to adequately legislate or regulate the extent of this influence. Tillerson's unique contribution in office would be to try to tackle the question of what this means for the United States, and how exactly nation-states and global enterprises will find a constructive coexistence.

About the author:


Esfandyar Batmanghelidj is the founder and organizer of the Europe-Iran Forum, a leading economic conference. He is also a researcher on Iranian political economy and social history.

... Payvand News - 12/11/16 ... --



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