By Marc Chandler

About the author: Marc Chandler is chief market strategist at Bannockburn Global Forex, a division of First Financial Bank.

U.S.-China trade talks are focused on export controls and tariffs, but at a deeper level they are about the future of the Pax Americana formed after World War II. A corporate-driven globalization emerged as businesses adapted to U.S. hegemony, currency dominance, and protectionism. At stake now is whether China can follow the same path as the U.S., even while the American public begins to rebel against that model.

Pax Americana transformed global commerce through a distinct form of economic integration built on foreign direct investment, transfer pricing, and intrafirm trade -- the movement of components, services, and intellectual property among subsidiaries of the same corporation. As Europe and Asia rebuilt, U.S. companies found their exports threatened by a strong dollar and foreign protectionist measures. Their solution was to invest directly in foreign production facilities. Illustrating this shift, General Motors, Ford Motor, and IBM established manufacturing operations throughout Western Europe, reducing exchange rate challenges and trade barriers while maintaining corporate control. This approach prioritized ownership over traditional trade.

It also necessitated intrafirm trade. Today, about one-third of global trade flows within unified corporate networks rather than among independent entities, forming the hidden circulatory system of modern capitalism.

GM exemplifies this trend. Components designed in Michigan are manufactured in Ontario, assembled in Mexico, and distributed throughout North America. What would have been exports in earlier eras now move invisibly within GM. This operational flexibility is a structural resilience that export-focused firms cannot fully replicate, particularly in periods of exchange-rate volatility. The champions of corporate globalization have effectively insulated themselves from currency fluctuations.

Popular narratives about globalization focus on companies chasing cheap labor overseas. The evolution toward direct investment follows a more sophisticated logic. Most U.S. foreign direct investment flows to other advanced economies -- Germany, Japan, the United Kingdom, and Canada -- rather than low-wage destinations. These investments prioritize proximity to customers, market access, technological ecosystems, and stability.

This intrafirm trade created a governance challenge. How to price the transactions of transferring goods, services, and IP among related entities across different tax jurisdictions? The answer was transfer pricing, which determines the value of these internal flows, effectively distributing profits across national boundaries but within corporate structures. The arm's-length principle requires related entities to price transactions as if they were independent parties, though it struggles with the subjectivity of valuing intangible assets and integrated operations.

Japanese corporations in the 1980s also found themselves confounded by currency risks and protectionism. The 1985 Plaza Accord engineered a sharp appreciation of the yen against the dollar, with the exchange rate moving from 240 yen per dollar to JPY150 and reaching JPY80 a decade later. Simultaneously, the U.S. and Europe implemented export restraints, antidumping duties, and local content requirements against Japan's imports.

Japanese firms responded with a massive foreign direct investment campaign. Toyota Motor, Honda Motor, and Sony Group established manufacturing operations in the U.S. and Europe, transforming from exporters into global producers with distributed networks. Like their American predecessors, Japanese companies mastered intrafirm trade and transfer pricing to maintain competitiveness despite currency and trade challenges. Their expansion was particularly strategic in its geographic targeting, establishing production hubs that could serve entire continental markets while satisfying local-content requirements.

Global trade governance never fully caught up. The 1947 General Agreements on Tariff and Trade focused on reducing tariffs on goods among independent economies but struggled to address the complexities of multinational networks. The World Trade Organization replaced the GATT in 1995 with a mandate covering services, IP, and investment measures -- partial recognition that trade increasingly occurred within corporate structures.

There are two challenges now. The first lies in reconciling borderless corporate structures with taxation rooted in national sovereignty during an era of rising economic nationalism. Corporations operate globally; tax authorities regulate locally. Until that mismatch is resolved, intrafirm trade will remain a source of political and fiscal strain. This tension fuels skepticism about globalization, despite the efficiency gains and innovation that integrated production networks deliver.

The second involves China. The scale of its exports is destabilizing. Yet the U.S. is directly and indirectly blocking it from pursuing a comprehensive direct investment strategy. This may be a more meaningful containment of China than the more than 60 U.S. military bases in the region.

One might object that unlike Japan in the 1980s, China now is an adversary, meriting a strong response. But Japan's status then was less clear. John Maynard Keynes opposed the economic bleeding of Germany after World War I not out of any affection for Berlin, but out of an appreciation for the likely consequences.

One need not believe in the Thucydides Trap to see that trying to asphyxiate China isn't going to end well. It isn't about ideological compatibility or strategic competitiveness, but realpolitik.

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June 13, 2025 21:30 ET (01:30 GMT)

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