Plus ca change? Yes! And mostly for the better

Trade wars, Brexit, climate change, and job-stealing robots. It is easy to think that the world is descending into chaos. But while there are genuine reasons for being concerned, there are also reasons to be optimistic. For the savvy investor, there are opportunities aplenty.

Let us start with the bad. Arguably, top of the list is President Donald Trump’s trade “war.” Like real wars, trade wars are mutually harmful. Following the Smoot Hawley Act of 1930, the U.S. raised tariffs on 20,000 imported goods from an average of 40.1 percent to 59.1 percent. Many other countries responded by raising their own tariffs. These tariffs raised costs, reduced competition, and thereby exacerbated the Great Depression. By contrast, the gradual decline in tariffs that began with the Reciprocal Trade Agreement Act of 1934 and accelerated after the 1947 Global Agreement on Tariffs and Trade, helped drive the unprecedented global economic growth seen over the past 60 years.

So far, Trump’s tariffs have been modest in comparison with Smoot-Hawley. In 2016, average tariffs on dutiable imports to the U.S. were around 5 percent – and the majority of imports were tariff free. In January, Trump imposed tariffs of 25 percent on steel, 10 percent on aluminum, and 20 percent to 50 percent on washing machines. In response, China, Canada and Mexico introduced “retaliatory” tariffs. And, in response to China’s new tariffs, Trump announced additional tariffs on $200 billion of imports from that country. Meanwhile, as the tariffs on steel and aluminum begin to affect the costs of automobile producers, and following a threat by the EU to introduce tariffs on U.S. automobiles, Trump has talked about introducing new tariffs on vehicle imports.

Some see Trump’s tariffs as a strategic exercise intended to seek concessions. Maybe that is the intention but notwithstanding an offer from China in May to purchase an additional $200 billion in U.S. goods, there is little sign that it is working. And there is clearly the potential for this trade war to escalate. As Dan Ikenson predicted in the last issue of Cayman Financial Review, the most likely pretext for U.S. escalation is “some bogus national security rationale.” And by bogus, let us be clear: it would be counterproductive. When countries are embedded in a nexus of trade relationships, they have less incentive to engage in actual war with one another.

The Brexit mess is also a cause for concern. U.K. Prime Minister Theresa May seems to have thrown away a golden opportunity to reframe Britain’s relationship with the EU and the world. The latest proposal would require British goods manufacturers to comply with EU product regulations, limit Britain’s ability to negotiate trade agreements with other countries, tie Britain to decisions from the politically-motivated European Court of Justice, and leave unclear the status of the financial industry (though with a clear statement that financial passporting in its current form will end). As Daniel Hannan wrote, “Is the proposed deal better than no deal? Just about.”

Whether the EU will accept Britain’s proposal is unclear. If not, Britain will be left with the choice of an even worse deal or no deal at all. Under those circumstances, the no deal option would clearly be superior, as the U.K. would then trade with the EU as a member of the WTO and could eliminate tariff barriers not only with the EU but with the rest of the world too, while also reducing protectionist regulatory burdens that currently undermine its competitiveness.

More tomfoolery from Britain came in the form of legislation that would force British Overseas Territories to create public registers of beneficial ownership by the end of 2020. Since all the BOTs already have agreements in place to share information with government authorities, the main effect would be to allow journalists and others with less legitimate interests to scour the registries. That is bad news for the thousands of people who legitimately use companies registered in BOTs to protect their privacy, including wealthy individuals and those residing in authoritarian jurisdictions who have good reasons to fear the disclosure of their interests. As Colin Riegels observes, “The fact that this occurs during the month when the [EU’s] General Data Protection Regulation launches specifically to protect the privacy of sensitive personal data is deliciously ironic.” The legislation is likely to be subject to legal challenges but what happens next is unclear.

The push for the establishment of public registers of beneficial ownership is part of a larger agenda to limit tax competition between jurisdictions. Central to this agenda is the OECD’s “base erosion and profit shifting” (BEPS) project, which as the name suggests is intended to prevent corporations from domiciling in locations that attract lower corporation tax rates.
It is ironic that the OECD should be spearheading this campaign, as economists are in broad agreement that taxation of capital – and hence of corporations – distorts capital allocation and thereby undermines development. Indeed, as Diego Zuluaga argues, well-regulated offshore financial centers with low or zero corporate tax rates facilitate efficient allocation of capital, spurring global economic growth, to the benefit of all. Such growth also generates additional tax revenues from income and sale of goods and services in onshore jurisdictions.

Economic cooperation and development would thus be better served by encouraging corporations to domicile in jurisdictions with low or zero corporate taxation. Not only would this raise growth rates – and fiscal revenue – but it would also encourage jurisdictions with high corporation tax rates to reduce those rates. Indeed, that is precisely what has happened; as shown in the table above, the average worldwide top marginal rate of corporation tax has fallen by around 18 percent over the past 30 years.

Top marginal tax rates have declined since 1980

The OECD’s BEPS project could have other counterproductive effects, as Adam Michael and James Roberts note, it calls for bulk exchanges of information which, if implemented, “will largely end financial privacy and would lead to increased identity theft, industrial espionage, and political suppression of opposing views.”

In spite of these various potential politically-driven headwinds, the future for humanity looks increasingly bright. Contrary to the claims of many Cassandras, John Tamny argues that robots will free us up to pursue the activities we love – including work that best fits our natures – rather than having to pursue the jobs we must. And, of course, there are huge potential profits to be made from investing in artificial intelligence and robotics, as well as fun to be had figuring out which of those investments to make.

As several authors note, blockchain-based technologies continue to evolve, creating opportunities for whole new classes of investment, as well as democratizing the investment process. And as Wulf Kaal notes, blockchain-based smart contracts create both challenges and new opportunities for lawyers. While caution is highly advisable when making investments in this relatively new area, better regulatory frameworks are being developed, with Anguilla recently establishing a framework for utility token offerings.

Finally, while last year’s hurricanes had calamitous effects in much of the Caribbean, the evidence suggests that climate change is not leading to more or worse hurricanes. Indeed, hurricane activity seems to follow fairly regular cycles and, as Judith Curry notes, we now seem to be entering a phase of reduced activity. Based on various factors, Curry argues that the Atlantic hurricane season this year is expected to result in “below average” economic losses. Moreover, as Curry notes, there have been dramatic improvements in the quality of short term forecasts, which should better enable people to prepare for hurricanes when they do occur.

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Julian Morris

Julian graduated from the University of Edinburgh with a Masters in economics. Graduate studies at University College London, Cambridge University and the University of Westminster resulted in two further masters’ degrees and a Graduate Diploma in Law (equivalent to the academic component of a JD). 

Julian is the author of dozens of scholarly articles on issues ranging from the morality of free trade to the regulation of the Internet, although his academic research has focused primarily on the relationship between institutions, economic development and environmental protection. He has also edited several books and co-edits, with Indur Goklany, the Electronic Journal of Sustainable Development (  

Julian is also a visiting professor in the Department of International Studies at the University of Buckingham (UK). Before joining Reason, he was executive director of International Policy Network (, a London-based think tank which he co-founded. Before that, he ran the environment and technology programme at the Institute of Economic Affairs, also in London. 

Julian Morris

Vice President, Research
Reason Foundation

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