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[...]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.
[...]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. [...]
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. [...]
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. [...]