This is a blog by Pippa Malmgren. I met her through the good folk at Mallowstreet and she is my favourite economic commentator bar none. So I’m really pleased she’s agreed for me to republish this remarkable work here.
Britain’s future is brighter than the British realize. This is perfectly obvious to international investors but the British can’t believe it. Britain has been for some time the second most compelling investment destination after the United States. Investors from emerging markets like China and from the industrialized world alike are scrambling to buy assets in the UK, in spite of Brexit, and sometimes because of Brexit.
Note that FDI into the UK increased by 11% year on year just prior to Brexit. The US remains the biggest source of capital followed by China, India, Latin America (inbound investment was up by 240% from Latam yoy) and Central and Eastern Europe (their inbound investment was up 130% yoy). People worry that this will reverse post-Brexit. But it could also be argued that it will intensify. But Brexit isn’t the driver. The fact is that Britain is simply competitive again.
This is partly because China and most emerging markets are no longer as competitive as they were. Wages in China are higher by five fold in three years. Costs there are up too. Foxconn, the second largest employer in China is downsizing and moving plants to India and even the US. Meanwhile, quality control in the UK is outstanding as everyone knows who has followed the success of British auto manufacturing. Britain also excels at the creative industries that are so essential to growing the value of global brands. So, many manufacturing firms, including Chinese firms, have invested more in the US and the UK than anywhere else.
Of course there are other emerging markets which attract capital. Mexico’s wages are now 20% cheaper than Chinese wages but their quality control is far better. They are deeply integrated into the US economy as well. Today the most dynamic part of the world economy is the Mexico/Texas/Midwest corridor. This area has also emerged as the centre of “additive” manufacturing by which we mean 3D printing and high tech production. But the next most competitive location is the British Midlands from Birmingham to Manchester (which even the German engineering firms are investing in) and beyond plus the High Tech triangle that runs between Kings Cross, Cambridge and Oxford. Germany and Northern Italy probably come third.
The British are shocked to find so much interest in the Midlands. I hate to say it but to an American or Chinese person, Birmingham and these other cities are not very far away from London. They will be even closer if foreign investors are permitted to build HS2 and other transportation infrastructure, which they are dying to do. The Chinese have already put huge sums into Manchester Airport and Birmingham City Centre. Frankly, compared to just about anywhere in China, Birmingham is an incredibly luxurious place to live and work, as is Manchester.
What about tax? The British think that their tax rates are outrageously high. Everyone everywhere in the world seems to think this. Perhaps the Irish are the one exception. But the EU has just put them on notice with the Apple tax ruling. The message is clear – they want Ireland to harmonize their tax rates to EU levels – which the Irish will fight and the British will now be in a position to compete with both on tax. Frankly, thanks to Brexit, Britain has only narrowly avoided harmonization of EU company, and employment law, which the Commission tabled last year. Britain, especially in the aftermath of Brexit, can put their taxes and business policies wherever they like (within the constraints of the debt burden which I don’t want to underestimate).
Britain’s tax rates today are actually very competitive considering the lack of alternatives. Switzerland is no longer competitive. Their economy is small, interest rates are negative and privacy protection is only available to actual residents. Still, many worry that The City will collapse when the EU revokes “passporting” rights for the banks when Britain invokes Article 5. As a person who worked in the City for many years and who advised the US President on financial services, I know this: money will go wherever it finds the lowest tax rates and the least red tape and the most economic growth. The EU is pretty easy to beat on all these fronts. I think the City may be on the verge of a massive expansion, contrary to all expectations.
But what about losing the single market? Well, first of all, why is Britain doing so much of its business with a part of the world that isn’t growing and that offers its own citizens as much as nearly 50% youth unemployment? The rate of return on EU FDI is small. That’s why all foreigners chose Britain first. Now it’s rates of return on capital might be even higher if it does more business with places that are growing like the US, with Mexico, Australia and others. Also, Brexit has reinforced the exit movements in Europe – Frexit in France, Auxit in Austria, Itaxit (ironically) in Italy. As former Chancellor Kohl recently said, the EU itself needs to undergo much needed changes. If they can grow again, it would be great. In the meantime, Britain needs to cultivate profits not politics.
The greatest irony of all is that the British seem to gravely doubt their ability to write news laws. Perhaps they outsourced all that to Brussels for too long. The rest of the world believes that the picture of the Queen on the currency represents what Britain is most famous for – Rule of Law. I predict that many fortunes will be made in the British
legal profession as that community constructs the foundation for Britain’s future. The legal profession in Britain will cease to be about processing and instead become a place where philosophy is forged.
Keep in mind that Britain is divorcing the EU as it is currently constructed. It is not divorcing Europe. Most of us love Europe and want to see it thrive. The current EU leadership are now getting various warning shots across the bow and being told by their citizens everywhere that something has to change. For the sake of the EU and the European citizens, I hope they make changes that will allow the EU to compete with the US and the UK. I hope they address the serious problems in their banking sector so that European banks can re-enter the world economy as lenders instead of as beneficiaries of state-led policy largesse. I hope the youth of the EU stop needing to come to Britain because their is no work for them at home. It would be better to have to entice the young than to be offering them a place of economic refuge.
In the meantime, I suspect that Britain’s doors to high skilled, educated immigration will now expand now that the UK will no longer have to favour EU economic migrants over all others. But I also believe Britain is not going to kick people out or close their doors to those who are ambitious to work in this growing economy. Even refugees who arrive with no possessions but an able mind and a desire to build a new life will ultimately be permitted to find a way in even if that path is different from what EU law currently provides. That’s why I suspect the British Prime Minister has rejected the points based system. It is not because she is anti-immigration, but because it excluded too many of the kinds of immigrants Britain wants. Britain is set for a long and emotive debate about what kind of immigration is good for the nation and who should be let in. But the point is that Britain is not very likely to close the doors to everyone and to chuck out those who are already here. That may anger some but it will encourage most.
In the meantime, for all these reasons, the future is both British and brighter.
The original article was printed in City AM September 6, 2016. This is updated with news links.
Dr. Pippa Malmgren is author of Signals: How Everyday Signs Can Help US Navigate the World’s Turbulent Economy (Weidenfeld & Nicolson), former Presidential advisor, co-Founder of H Robotics.
@DrPippaM on Twitter and Instragram