Boris Johnson wants to turn the UK into a low-tax, lean-regulation paradise attracting business from the continent. The plan won’t work, writes Joseph de Weck.
Joseph de Weck is a historian based in Paris. He works for a macroeconomic and geopolitical risk consultancy and was previously a trade negotiator with the Swiss Foreign Ministry.
As foreign secretary, Boris Johnson bragged to EU diplomats about his plans for reviving “buccaneering Britain”, that romantic vision harking back to the gold-hunting days of Henry Morgan and his raids on Spanish outposts in the Americas.
While France mustn’t worry about 21st century pirates streaming across the channel, Johnson is thinking about a more subtle kind of free-booting: He wants to chip at the EU economy by turning the UK into a global business hub with ultra-low taxation and light-touch regulation.
London embarking on a Switzerland-style policy can’t please Brussels. German Chancellor Angela Merkel warns that the UK will become “an economic competitor on our doorstep”. Paris insists any future free-trade agreement has to ensure a regulatory playing-field.
But Europeans should relax. Switzerland’s business model is not all it’s cracked up to be. And the UK is too big to effectively pursue so-called “arbitrage” policies.
Late to the party
For some, Switzerland is synonymous with bank secrecy. The practice shielded tax evaders and allowed Zurich bankers to charge fat margins. For companies, Switzerland is most famous for its low corporate tax rates and leaner business regulations than other EU countries, a combo that has seduced many multinationals to move their headquarters there – such as the once-British Cadbury.
Switzerland for example managed to become a major tobacco player, making nearly as much money from exporting cigarettes as cheese. The explanation: Bern permits the production of cigarettes surpassing the EU’s tar limits as long as they are exported. If you are lighting up a Marlboro in Cape Town, chances are high it is “Swiss made”.
And when you add to the mix its neutral foreign policy, Switzerland’s competitive advantage is peerless. Just ask Glencore, which evolved thanks to the Alpine nation’s willingness to do business with apartheid South Africa at a time Cape Town was teetering under international sanctions.
But no matter how keen starry-eyed Brexiteers are to break free of Brussels’s “manacles”, the reality is that London is ten years late to the party. Why? Because after a period of inordinate economic globalisation, political globalisation is catching up.
Lessons from the Crash
The 2008 financial crisis gave a turbo-boost to global efforts to harmonise business regulation, especially in finance. From derivatives trading to bank capital requirements, rule-setting is increasingly done on a global level. Regardless of whether you are an EU member or not, the room for regulatory arbitrage has become much smaller.
Scrambling for money, big countries have also increased the pressure on tax havens. Via the Paris-based OECD, the US and the EU forced Switzerland and Singapore to drop bank secrecy rules and terminate advantageous tax regimes for multinationals.
Global trumps local
Moreover, “Big Business” has become major advocates of global regulatory harmonisation.
Switzerland’s most successful companies, such as Nestlé or German-style Mittelstand champions, hate operating across jurisdictions. They prefer global regimes that offer legal security and low compliance costs to securing tiny regulatory advantages.
Take financial regulation. After the crisis, the EU beefed up investor protection rules, heavily increasing the burden for the industry. On paper, Switzerland’s banks are only subject to leaner Swiss laws, but in practice, the likes of UBS decided to implement EU standards anyway. Developing a separate client management system for Switzerland and the EU would have not been worth the money.
This explains why Swiss businesses associations routinely tell the government to simply copy-paste EU laws – be it regulations on chemical products or data protection rules. In 2015, the Swiss government concluded itself in an official report that regulatory arbitrage vis-à-vis EU laws simply doesn’t offer that many opportunities.
Similarly, having a neutral foreign policy is less profitable today. Washington and Brussels today ensure Switzerland complies or at least doesn’t try to circumvent their sanctions regimes.
Too big to Niche
The UK has another major disadvantage in pursuing niche strategies: its size. It is no coincidence that countries practising arbitrage strategies are relatively small.
First, big countries can’t win tax wars. The rationale for lowering corporate tax rates is that the loss in revenue from existing companies will be compensated by incoming firms. This bet however only works for small countries. The loss in revenue is small compared to the large pool of global companies you can attract.
Second, to pursue an arbitrage-strategy effectively you need an entrepreneurial government. Loopholes open and close and you need to be able to react and take quick decisions. Authoritarian states like Singapore or tight-knit communities like Liechtenstein can do this. But in a large democratic country like the UK with its pesky Parliamentary procedures, you can’t just rush through legislation.
Third, niche-playing countries’ most important competitive advantage is political stability. Singapore offers the rule of law in a region blighted by corruption and instability. Switzerland boasts a centuries-old safe-haven status. Its conservative business-friendly parliament and government date back to 1848.
But by voting for Brexit, the UK has squandered that image of political stability. Business can’t trust a country with such polarised politics. If Johnson pursues an arbitrage strategy, would a Jeremy Corbyn government follow suit? Or “freed” from EU rules, would Labour prefer to go on a nationalisation spree?
Lastly, Leave-voters will hardly profit from arbitrage strategies that target mobile capital. Singapore-on-Thames would yield good returns for a small number of people that are already well-off in locations that are already globalised. A Brexiting UK could for example drop the EU VAT on art imports. This would make London more attractive for the auction business, but yield no spoils for the North.
Take it easy
Tax and regulatory arbitrage proved to be a highly successful business model for a host of small countries, surfing the rim holes of unrestrained economic globalization. But it won’t help a country of 66 million people rebuild a middle class. Westminster privateers should think about another ruse. And Brussels shouldn’t worry too much about the British lion roaring again.