The New Mercantilism
Free trade is over. For some countries, like China, it was never really that meaningful anyway. For although Chinese exports have been driven by free trade, China itself was never slow in erecting barriers to trade and insisting upon local production as the price of market entry. Combined with their liberal use of espionage to fast forward their own product developments, most governments now realise that China has had it both ways for perhaps too long.
The UK Relationship with the EU, fraught with multiple tensions, is based upon the EU trying to use barriers to access the single market to restrain the liberal trading instincts of the British. The remarkable thing about the Brexit debate was the absence of an alternative vision of the future beyond the EU. Whilst there was much talk of emulating Singapore’s success, we are now starting to see what Singapore on Thames will look like. Within days of formally leaving the EU the UK applied to join the Trans Pacific Partnership. A strange club to join, given that a country could not be further from the Pacific than the UK. However, with major partners Australia, New Zealand, Japan, Singapore, Canada and likely the US, it is widely reported that this is about control of finance and the future of digital architecture. Between London, Tokyo and potentially New York there is little doubt that the alliance would be able to set the terms of global finance. Whilst control of the digital economy is partly about containing China and partly a realisation that control of both finance and the digital networks, that will determine how it flows, is to control the world.
Whilst in his recent budget, the UK finance Minister launched a new infrastructure investment bank, designated freeports and committed to developing new digital and green technologies. From the point of view of emulating Singapore the only major difference (as a first step) was the rise in profit tax. Deemed a necessary step to reduce soaring national debt it is unlikely to be sustainable. In a world of zero-sum competition, the UK is very likely to drop profit taxes as a means to suck in both investments and company listings. Think Ireland with the financial infrastructure of the City of London. The designation of 7 freeports is a first step in applying the Singaporean experience of linking low tax to an interventionist approach to developing infrastructure, such that industries of the future are drawn in.
At the European regional level competition for investment and technological advantage appears impossible to avoid between the UK and Europe. Money and tax will be a big part of how that game plays out. Whilst at the global level, the shift from American dominance to a multipolar world, where China and India start to assume political power commensurate with their rising economic status is already leading to the return of wider economic nationalism. For fast growing emerging economies, such as Romania, this is a disaster. As access to markets both fragments and becomes conditional growth will slow. The open world, that we have all become used to, may not last. As we see with the US restrictions upon Googles Android software in China, trade wars may give rise to new platforms, such as Huawei’s harmony OS. However, a totemic struggle is looming over States ability to control financial flows from digital banks like Revolut and cryptocurrencies. This has the potential to enable access to capital at the lowest cost available on the planet and to recyle global cash in the most efficient manner possible, which could lead to phenomenal economic growth. However, will governments be in any hurry to release such a powerful component of sovereignty?
Post-pandemic we are at a tipping point, where the future will be cast. It cannot be as it was before. So what comes next?