Globalisation is Down But Not Out

Vistra’s annual market research report, launched earlier this year and titled ‘Vistra 2020: The Uncertainty Principle’, put a spotlight on threats to globalisation and privacy in the trust and corporate services industry. Since the launch, Vistra has hosted roundtables in nine cities to discuss key findings from the report. In addition to the roundtables a series of articles on these key findings has been produced. Today we discuss the threat to globalisation and the effect it may have on international business. While it may be facing headwinds, the value of globalisation to international business and economic growth means it will be hard to completely reverse. Globalisation has taken a hit in recent months, with political campaigns in a range of markets around the world contributing to growing anti-globalisation sentiment. This is a troubling development for the international business community, which relies on the ability to conduct cross-border trade and commerce as a key driver of growth, efficiency and job creation.

The fate of globalisation is now increasingly under question, which represents a significant reversal in a world that has been moving towards trade liberalisation for 60 years. This is especially relevant for the offshore industry, which often suffers from the outdated misconception that offshore centres are used primarily for tax avoidance. Offshore forms the plumbing of the global business landscape and facilitates the interconnectedness of globalisation. It performs crucial functions in reducing cross-border ‘friction costs’ to facilitate the flow of capital. In this way, offshore serves as the necessary wiring of a modern and globalised world.

A recent survey of leaders in the offshore industry for the annual Vistra 2020 report showed that 21% of respondents agree globalisation is ‘very much under threat’; while 71% say it is at least ‘slightly under threat’. This is a dramatic change from the 2016 survey, which ended on a note of cautious optimism about the outlook for the industry. However, offshore is now facing increased uncertainty, including around the global economy and the stability of the EU, among other concerns. The US election, Brexit, the Italian referendum and the surprising popularity of candidates such as Geert Wilders and Marine Le Pen in Europe reflect the move towards a more populist, protectionist, anti-globalisation and anti-offshore attitude.

This shift in public appetite for cross-border flows unsettles an industry which is based on the robustness of globalisation, including free trade and cross-border investment. Compared to previous years, the most recent instalment of the Vistra 2020 survey found an increasingly heated debate around politics, wealth, taxation, trade, inversions, privacy and regulation. The percentage of respondents predicting the end of offshore by 2020 nearly quadrupled to 18%.

One cause for optimism is the ongoing debate within the industry about whether globalisation has in fact reached its ‘high-water mark’, or is merely suffering a temporary setback. On one hand we have growing anti-globalisation sentiment, which is impacting world elections and the cross-border flow of assets. The industry is uncertain about the potential impact of US tax and trade policies. This could lead to more sensationalist media coverage which misleads the public and drives excessive state intervention.

The other possibility is that this is a singular moment in time where inward-looking sentiment and a focus on major events, including Trump’s election and Brexit, has pushed a specific narrative to the forefront. In the latter case, we can hope that the push against globalisation is only a blip in the progression towards a more connected world.

One of the reasons we see that globalisation is unlikely to be derailed by these events is its importance to global business. Globalisation is essential, not just for the offshore industry, but also for any cross-border business which requires the infrastructure of global business to be in place. Globalisation is often considered from an economic perspective, however it also comprises the free flow of information and open movement of people.

With technology and the internet, it is increasingly difficult to stop the sharing of information. Companies and individuals are more global than they have ever been, including families, assets and property. This also makes it more and more difficult to erect barriers to the free exchange of information and resources. Offshore jurisdictions play an important role in the facilitation of investment, providing robust and familiar legal systems and professional infrastructure, including for emerging markets which may not be able to rely on their own legal frameworks. For example, Chinese outbound investment continues to rise, yet ahead of the full convertibility of the renminbi, offshore structures are needed to enable cross-border transactions.

Despite the headwinds facing globalisation, there will continue to be a need for international business and, subsequently, the offshore industry, which provides the necessary legal and administrative structure. The majority of respondents to the 2017 survey expect demand for international corporate services to be unchanged, with 20% even predicting an increase in demand.

Globalisation fuels economic and business growth. As we see some countries pushing for greater globalisation, such as China’s efforts to establish trade agreements and develop regional infrastructure, other nations may need to soften their stance on globalisation to avoid missing out. Even companies in countries which are currently experiencing a temporary wave of anti-globalisation sentiment will not be able to relinquish opportunities for growth, regardless of any concurrent political machinations. The views or policies of one government alone cannot stop the tide of globalisation.