Who is more powerful – States or Corporations?

Who holds the power in international politics? Most people would probably say it’s the largest states in the global system. The current landscape of international relations seems to create this perception with talks of Russia’s “New” geopolitics, “Trump’s America First” and “The Rise of China” which seems to put state power back in charge after decades of globalisation.

Yet multinationals like Apple and Starbucks still wield phenomenal power. They oversee huge supply chains, sell products all over the world, and help mould international politics to their interests. I’m Kasim, this is KJ Vids and in this video we will look at who is more powerful, states or corporations?

A website called theconversation.com, compared States and corporations based on how deep their pockets are using calculations from Forbes Fortune Global 500 list and CIA World Factbook of 2017. With revenue and tax data from 2016, they ranked the 100 largest corporations and countries. Their findings were interesting.

They found that States occupy the top rankings, with the US first followed by China and Japan (the eurozone would rank first with more than US$5,600 billion if we treat it as a single political entity). But plenty of corporations are on par with some of the largest economies in the world: Walmart exceeds Spain and Australia, for example. Of the top 100 revenue generators, their ranking shows 71 are corporations.

They also found that the top ranked corporations follow the same nationality-order as states, for example, America’s Walmart is followed by three Chinese firms. There are already 14 Chinese firms in the top 100, though the US has 27. Overall, the data shows that besides the very largest states, the economic power of corporations and states is essentially on par.

Its undisputed that states and corporations are interdependent. Corporations rely on the state for the provision of security and the enforcement of property rights in order to be able to engage in business transactions. At the same time, states also depend on corporations for the employment of their citizens and as a basis for taxation. But the role of corporations in international politics is often overlooked.

Just think about the private and public power of global giants like Google or Apple. When Donald Trump met Apple’s chief executive Tim Cook in April 2018 to discuss how a trade war with China would affect Apple’s interests, it demonstrated that the leading multinationals are political actors, not bystanders.

There always existed big and powerful global corporations – For example, the Dutch East India Company dominated European trade in the 1600s and 1700s. But global corporations’ power position today is unprecedented in terms of sheer size and volume.

When did corporations get so powerful?

Following World War 2, the world was very state-centric, shaped by capital controls, fixed exchange rates and limited free trade agreements, the nation state was able to regulate the national economy often via corporatist arrangements as in Western Europe.

But this changed with the end of Bretton Woods in 1971 and major advances in information and communication technologies. The transformations in international patterns of production led to the breakup of obstacles for cross-border financial flows.

This profound structural change enabled corporations to internationalise: the flow of foreign direct investment (FDI) doubled from 1972 to 1975 and rose to unprecedented levels in the coming decades; the transnationalisation of production accelerated and Multi-National Corporations became a major force in the new era of financialised capitalism.

We’re now in an era in which the most powerful law is not that of sovereignty but that of supply and demand. As scholar Gary Gereffi of Duke University has argued, denationalization now involves companies assembling the capacities of various locations into their global value chains. This has birthed success for companies, such as commodities trader Glencore and logistics firm Archer Daniels Midland, that don’t focus primarily on manufacturing goods, but are experts at getting the physical ingredients of what metanationals make wherever they’re needed.

In 2008, after Lehman Brothers fell and the financial crisis and global recession began, the conventional wisdom was that we were entering an era in which government would take back power from business. After the financial crisis, the U.S. Congress passed the Dodd-Frank Act to discourage banks from growing excessively big and catastrophe-prone.

But in fact, just the opposite happened. While the law crushed some smaller financial institutions, the largest banks — with operations spread across many countries — actually became even larger, amassing more capital and lending less. Today, the 10 biggest banks still control almost 50 percent of assets under management worldwide.

Now businesses could go a step further, shifting from stateless to virtual. In 2013, Balaji Srinivasan, a partner at the venture-capital company Andreessen Horowitz, gave a much debated talk in which he claimed Silicon Valley is becoming more powerful than Wall Street and the U.S. government. He described “Silicon Valley’s ultimate exit,” or the creation of “an opt-in society, ultimately outside the U.S., run by technology.” The idea is that because social communities increasingly exist online, businesses and their operations might move entirely into the cloud.

Personal information has become an increasingly important commodity, particularly in Europe and North America. But whereas one would have expected the state to collect such information in the past, today it is the corporation that is amassing such knowledge. Western populations have been relatively content – the fallout from the Facebook-Cambridge Analytica incident notwithstanding – to allow companies to learn vast amounts of information about them.

Over the last two decades, companies such as Facebook, Google and Amazon have become interwoven in the daily lives of Western citizens, and they have amassed extraordinary amounts of information at an individual user level for the purposes of targeted advertising. These developments have given technology corporations the ability to gain access to a degree of knowledge over individuals’ lives that a Western politician seeking election could only dream about.

But how does all this corporate power work in practise? State power did not disappear with globalisation, but it transformed. It now competes with corporations for influence and political power. States use corporations and corporations use States. Take the following two examples of offshore finance and transnational state-owned enterprises.

With offshore finance, Global corporations use different jurisdictions to avoid being taxed or regulated in their home country. Lost taxes due to profit shifting could be as high as US$500 billion globally. When states position themselves as tax havens, they undermine the ability of “onshore” states to tax corporations and wealthy individuals – a cornerstone of state power.

ExxonMobil, Unilever, BlackRock, HSBC, DHL, Visa—these companies all choose locations for personnel, factories, executive suites, or bank accounts based on where regulations are friendly, resources abundant, and connectivity seamless. Clever metanationals often have legal domicile in one country, corporate management in another, financial assets in a third, and administrative staff spread over several more. Some of the largest American-born firms — GE, IBM, Microsoft, to name a few — collectively are holding trillions of dollars tax-free offshore by having revenues from overseas markets paid to holding companies incorporated in Switzerland, Luxembourg, the Cayman Islands, or Singapore.

Besides tax havens, numerous EU governments have become notorious for offering “sweetheart deals” that reduce the tax burden for specific multinationals to an astonishing extent. A research group at the University of Amsterdam recently identified five countries who play an important additional role in facilitating tax avoidance: the UK, the Netherlands, Switzerland, Ireland and Singapore. Each enabled multi-nationals to shift investments at minimum cost between tax havens and onshore states.

States have also grown as global corporate owners in recent years. They now control almost one quarter of the Fortune Global 500. By investing in state-owned enterprises beyond their borders, states gain strategic leverage via other states or actors – Russia’s gas pipeline holdings via Gazprom in eastern Europe is a good example. This has led some observers to diagnose a potential transformation of the liberal world order through “state capitalism”.

This diagram shows the aggregated numbers of transnational state-owned enterprises owned by each country. The nodes represent states as owners: the bigger and darker a node, the more companies it owns outside its borders.

Notice the paramount position of China (CN), which controls over 1,000 TSOEs, including the likes of Sinopec and ICBC China. Countries like France (FR) and Germany (DE) are also prominent owners, but their connections to China highlight that they are targets of TSOE investment, too.

It starts to become apparent that international relations are anything but a one-sided story of either state or corporate power. Globalisation has changed the rules of the game, empowering corporations but bringing back state power through new transnational state-corporate relations. International relations has become a giant three-dimensional chess game with states and corporations as intertwined actors.

“By many measures, corporations are more central players in global affairs than nations, said Benjamin Barber who is an American author adding that “We call them multinational but they are more accurately understood as post-national, transnational or even anti-national. For they abjure the very idea of nations or any other parochialism that limits them in time or space.”

This transformation of the global environment is probably here to stay and even accelerate. Washington recently blocked the large Chinese telecommunications manufacturer ZTE from access to critical American suppliers, for example. It did this to gain advantage in trade negotiations with Beijing. The Chinese Sovereign Wealth Fund then withdrew its longstanding investment in the American Blackstone Group following Trump’s push for economic sanctions on China.

We live in an era where the interplay between state and corporate power shapes the reality of international relations more than ever. In combination with the current nationalist and protectionist backlash in large parts of the world, this may yet lead to a revival of global rivalries: states using corporations to achieve geopolitical goals in an increasingly hostile environment, and powerful corporations perhaps using more aggressive strategies to extract profits in response. If this is where we’re heading, it could have a lasting impact on the world order.