Out really means out – why Britain should reject the “WTO option” even under Hard Brexit

brexit-trade-barriers-810x521

The sheer amount of ignorance in British public discourse about how trade works is one of the most disappointing lessons from the whole sorry Brexit drama. As a Remainer I have no qualms in picking out the likes of Dan Hannan as an example of this, whose comprehension of the subject (and of economics in general) seems to have been plucked from half-remembered A-level text books, or, at a stretch, incidental discussion from reading History at Oxford. Amongst his favourite refrains is that which tells us that “at least we will still have WTO to fall back on”. Yet of all the options, this is probably the very worst. In the event of Hard Brexit, Britain should actually reject the WTO too.

This is not the place to get into the minutiae of what the WTO actually is or how it works. There are plenty of people who have written in easier detail that I can about this. Instead there are two common misconceptions about the WTO which need to be digested before we even get onto whether it is good for Britain or not. The first is that the WTO is not actually about regulating tariffs; its core notion is that of making sure that everyone abides by the Most Favoured Nation (MFN) principle, meaning that however you structure your trade (higher tariffs, lower tariffs, no tariffs) you must at least treat everyone the same. Clearly, this is a starting point on lowering tariffs but it does not actually reduce tariffs in and of themselves. Secondly, the WTO is not a single set of regulations, but rather applies to each country differently depending on their schedules of entry. In other words, upon joining the WTO, each country basically agrees to its own unique set of tariffs and commitments.

The blog referred to above gives the helpful example of shoes – a sector in which the UK happens to be an exporter:

8% is charged by the EU on shoes imported from all other WTO members (except under a free trade agreement, such as EU-Japan, or preferences on shoes from developing countries). The import duty rate in other countries will be different. The US’s import duties on shoes vary from duty-free to around 10% or higher. Japan charges 20%–30% duty on many shoe imports.

In other words, the WTO does not set monolithic rules, even at a lowest common denominator, as many casual observers seem to believe. The reason I highlight this is to emphasise that the WTO is not some magic bullet for providing a minimum level of trade freedom. It is merely a mechanism for getting countries to discuss ways to lower tariffs. How much each country has to commit to upon entry to the WTO is, much like any other trade deal or indeed any other non-deal trading relationship (which is how most trade is done), dependent on their economic strengths. A larger economy, offering both greater consumption power and usually some irreplicable exports, will always get a better “deal” out of the WTO as a whole (or any other trade negotiation such as an FTA) than a smaller economy. With or without the WTO, with or without an FTA. That is just the way life works.

Moreover, the WTO largely does not cover services, which matters for Britain. After all according to the ONS, British services exports constituted 44% of total exports in the 2017-2018 fiscal year, representing a trade surplus of +£107bn (+€124bn) compared to the trade deficit of -£139bn (-€161bn) in goods. Contrast this with Germany, France and Italy for instance who have a trade surplus in goods and deficit in services. Yet if you delve into the WTO’s website to look at something like architectural services, something Britain has had some success at, you will find the following wording:

Currently, architectural and engineering services, like all services are included in the new services negotiations, which began January 2000. Principles of trade in architectural and engineering services are contained, like for all services, in the GATS.

In other words, nothing has been agreed. The same wording applies to everything else including finance, law, advertising and so on. GATS itself, the precursor to the services agreement, is essentially toothless. As a result, you might have noticed that prior to the Brexit referendum in 2016 nobody anywhere had been talking about the WTO for almost a decade. Instead, partly in order to cover services, most countries have gone on to think about regionally integrated trade deals like ASEAN, the TPP, APEC, the East African Union, Mercosur and, er, the EU.

The problem for Britain is that the WTO is an unfinished project. People seem to forget that the intention for global “free trade” was supposed to be a multi-step process, starting with the trade in goods before moving onto the trade in services, tackling non-tariff barriers and eventually encompassing freedom of labour and capital. The trade in goods came first, naturally, because in the era in which the GATT discussions commenced, most economies including the OECD were still ones that made stuff. There was no real asymmetry in economic structure at that time and if anything, GATT and WTO were forecast to open up emerging markets to developed nation goods such as industrial equipment whilst the latter continued to develop their basic industries such as agriculture and natural resources.

However over the course of time this changed. The OECD became notably more services-based, including in their export mix. On the other hand the emerging markets, led by China, came to dominate the manufacturing industry not just at the low end but increasingly at the higher ends too – Korean autos for instance, Chinese industrial equipment and so on. It was therefore imperative that the next phase of global “free trade”, that of services, was completed – but it never was. The Doha Round, in the back of everyone’s memories, collapsed ignominiously. China’s accession to the WTO in 2001 on these ossified terms has probably contributed significantly to its rise and America’s comparative decline. It certainly led to Trump. If you are a modern economy, the WTO is probably bad for you.

We have not even touched on the specifics of how and whether Britain could easily join the WTO and on what conditions. The likelihood is that Britain could join pretty quickly – if it did so exactly on the current EU schedules (ie the 8% tariff for shoes above). But as noted, each set of schedules was designed to suit a specific economy and the existent schedules suit the EU as a whole. With a focus on protecting agricultural exports for instance, they are probably not ideal for Britain. If it wanted to join on a different, bespoke set of schedules, this would require agreement from all WTO members which would almost certainly throw up objections both legitimate (British government subsidy for financial services for instance) and illegitimate (Russia or Argentina purposefully creating trouble). Furthermore this would require time, unlike the replication of the EU schedules – the shortest period of time for a WTO accession has been several years.

This brings us to the central conclusion that if Britain goes through with Hard Brexit, it would be better to reject the WTO altogether and act unilaterally. The WTO as it exists today suits some countries like Germany and China and Japan, but specifically ill-suits the UK given the commitments Britain would have to make on accepting manufactured goods but getting no such commitments on services in return. Neither is Britain a big enough an economy to enter into renegotiations to remake the rules in its own favour, as the Quadrilateral could. Moreover, rushing into the WTO would actually undermine Britain’s ability to strike independent trade deals as most of what it has to offer – a market for consumer goods – would be given up already. Leverage in bilateral negotiations by trading goods access for services access, would be eliminated including with the EU.

Indeed in recognition of Britain’s place as a middle-sized economy, it makes more sense to try and protect certain industries, even at the cost of near-term price increases.  Whilst signing up to the WTO does not restrict Britain’s ability to lower tariffs, it would prevent the country from strategically increasing tariffs where necessary, for instance incubating industries struggling to find their feet after seventy years in the wilderness. The fact is that a vibrant SME sector really only exists in economies that have reached a critical mass in exports such as the US, Germany and Japan. For all other economies, creating national champions is a better guarantee of long-term economic survival (more of this in future posts).

Brexit is a political, not an economic, debate. That political choice should be made on its own merits, but decisions about trading relationships need to be clear-headed afterwards. Relying on the WTO sounds like a short-cut for preserving some stability for British trade, but it is a false friend. The reason why nobody else pays attention to the WTO anymore is the same reason why Britain must abandon it too – if indeed it actually ends up with Hard Brexit come 29 March.

Why the Hong Kong passport is probably better than China, the US or Britain

passport-grid

Various sets of passport rankings have recently come to my attention, for the most part offered by private wealth management firms discussing how best to migrate for asset protection. Looking at this carefully though reveals a great deal of lazy thinking which mostly show rankings like the following:

Henley rankings

Source: Atlas & Boots 2019

This kind of assessment has become confused in recent years given the slow evolution from full visas to visas-on-arrival and electronic visas, as the above table demonstrates. For me, a visa-on-arrival satisfies the “get on a plane right now” rule, whereas electronic visas, whilst making life much easier, does not. Even without these nuances however, it should be obvious that the major problem with this simplistic ranking is that not all countries are of equal attraction, and the fact that one has visa-free access to Belize probably should not be considered on the same level as visa-free access to the European Union.

To combat this problem, a few more useful rankings have been created, looking at exposure to GDP and exposure to population for instance (a full overview of the various rankings can be found here). Both are useful in their way, but neither tell the full story. Of these various systems though, my preferred one is that created by Simon Black on his investment and thought blog The Sovereign Man (a great name, I must say) which basically uses a formula of 50% GDP and 50% “attractiveness” based on various things like UNESCO World Heritage sites and so on. This produces a rather different ranking and one which makes a lot more intuitive sense:

Sov Man passport rankings

The heart of the matter, as can be seen in the central columns above, really revolves around who has access to both the US and China, of which there are very few. It is pretty clear that of non-tinpot countries, Japan and Singapore have the best passports by some distance and reflects the two countries’ substantial efforts to build the access network over the last few decades. Given their economic model, this does merit praise for the foresight and dedication – Japanese people are restricted only from Russia and some parts of the Middle East and Africa, with Brazil needing an e-visa. Altogether a very generous deal.

Japanese passport access as of 2018

Japan passport

Source: The Sovereign Man

Yet there is still an additional angle I would like to look at, which returns us to the “economic opportunities” component of such an analysis. Currently, a GDP-based ranking typically favours OECD passports since they have access to the US, the EU and Japan. But the problem is, this reflects the past, not the future: if you were a businessman, investor or entrepreneur today the historical economic clout of individual countries is not the important metric; rather it is the areas of future growth. To this end, I wanted to look at where global growth is coming from and the best proxy I have devised is that of the 5-year forward incremental GDP additions, as forecast by the IMF. In other words, how much more GDP is being added by each country over the next five years, in dollar terms. Furthermore, I also applied the IMF’s PPP adjustment to these, which as discussed previously on this blog, is I think a meaningful if imperfect way of looking at spending power. This is again relevant from the perspective of someone trying to understand where real economic opportunity might lie.

Therefore when looking at this “economic opportunity access”, a completely different picture begins to emerge. I do not have the resources to put all the numbers through for every nationality but below take a small sample to give an indication of my point:

Passport rankings

Note: 5-year forward adjusted for PPP; e-visas (eg India) are weighted at 50% access

I have looked at just four passports (China and the US, Hong Kong and the UK); and looked at the access to the ten largest countries of future opportunity. In this analysis, Japan and Singapore would of course again come out on top since they have access to almost every country on the list. China and the US, as the largest economies, are included merely for benchmarking. But looking at third party countries one can see that Hong Kong maintains quite an advantage. The UK for instance represents most of those countries in the OECD which “side” with the US; whilst Hong Kong represents many of those who do not. Based on the top ten future economies, a Hong Kong passport holder has visa-free access to an additional US$7 trillion of GDP growth in the next five years compared to the UK. In many ways, it is positioned for the future like few others.

I will finish with the caveat about all this offered by Simon Black, and which applies to my analysis also:

The only goal behind The Sovereign Man Global Passport Ranking is to assess each passport’s quality as a travel document. We did not attempt to measure the merits of being a citizen in any country. This means we didn’t account for any country’s political stability, wealth of its citizens, freedom of press and speech, ease of doing business, or any other factors. And we didn’t account for the ability to move to another country with the passport. For example, Portugal’s passport didn’t get any additional points because Portuguese citizens can freely move to any other European Union country such as France or Germany. The goal of this project was to assess each passport’s quality as a travel document only.

Nonetheless, even with this caution I believe it is an important way to look at this passport analysis over which so many fight so fiercely. From a business perspective, not all economic access is the same.

The Chinese New Economy: Alibaba as Sauron and why the old economy will be the winners

Sauron eye

Anyone familiar with the Chinese new economy will be aware of the rise of the internet giants of Alibaba and Tencent, along with their satellite businesses. Most will also be aware of the largely exclusive ecosystems within which Chinese online life is led – platforms that encompass everything from messaging to shopping to transport to payments and beyond.

It seems astonishing to remember that barely five years ago many commentators fretted over whether China could ever achieve real innovation. The Harvard Business Review for instance posed the question “Why Can’t China Innovate?”, baldly stating:

Can China lead? Will the Chinese state have the wisdom to lighten up and the patience to allow the full emergence of what Schumpeter called the true spirit of entrepreneurship? On this we have our doubts.

This of course is all rather a fading memory now. Innovation can broadly be divided into three areas: upstream (essentially, “how it works”), midstream (“how it’s made”) and downstream (“how it’s used”). For years, China as a manufacturing hub had made quite noteworthy progress on midstream innovation but most uneducated observers – including many in government – have an unhealthy obsession with upstream blue-sky invention. Yet as we can see with the likes of Berners-Lee, inventors are rarely rewarded and rightly so, since the real creativity and invention from the likes of Steve Jobs, Mark Zuckerberg and Jeff Bezos is in the downstream. Jobs was an arch innovator in how technology is actually used and therefore spread through an economy, with a vision of how lives are actually impacted and changed. Chinese companies, particularly through the big online giants, are clearly doing the same: modern life in China is now lived in quite an advanced but different manner to modern life in OECD countries. Alibaba and Tencent have contributed towards the creation of a real and organic Chinese modernity and technological innovation within China arguably outpaces even the US even leaving aside issues of theft.

So it is worth spending a moment to look at these two major ecosystems and how they really behave – who they are, as it were. First, there is a question of why ecosystems exist in China in the first place in a way which outside of China they do not. Amazon comes the closest of the American tech players to demand a closed ecosystem but even they seem to find limits. Western shareholders have always rewarded single-capacity specialization, and often find the idea of any conglomerate absurd, let alone a tech company offering bicycles and banking.

In China though, this has been natural, for two reasons. First, there is the historical socio-anthropological tendency within Chinese society to build a “closed loop universe” within one’s own family or clan, which has extended to the national level through the Communist Party and SOEs. My own preference for explaining this remains Karl Wittfogel’s hydraulic empire theory, which tells us that most ancient civilisations relied on centralized power to deliver water to its people, enshrining the principles of autocracy and top-down governance at the government and family level. This in turn typically leads to closed-loop systemic thinking since everything has to work together or else nothing works – diversity of thought is only bad news. Secondly though, and somewhat ironically, these ecosystems have become so broad precisely because they are making up for assurances which the Chinese government cannot offer. When you make a purchase on TMall, you have more faith in the Alibaba-backed guarantee that your products will be delivered and that your payment is safe, than one does with the disparate parts of the national banking, postal or legal system offered by the government. The tech giants had to offer a total universe, or else consumers would have been reluctant to actually engage with the new business model in the first place.

Chinese ecosystems (2)

Source: SCMP

So much for why they exist – the bigger issue is how to understand who they are, what their personalities and identities are and how they should be understood from the outside. One possibly analogy, given their conflict, is that of the Cold War. In this world, Alibaba are the Soviet Union – a sprawling empire with a strong centralized view on how things are supposed to be done. Tencent on the other hand are the United States, a beacon of freedom and inspiration but which has its own agenda focused on generating and owning consumption. JD.com are Britain: commercially-minded, focused on trade and fully acquiescent into the American (Tencent) world. Lastly you have Meituan – which owes its existence to Tencent, but like France to the US is entirely ungrateful and maintains the pretence of wanting an ecosystem of its own.

Upon reflection however, a new analogy came to me which may be a touch more accurate, which is Middle Earth. In this version of events, Alibaba are indisputably Sauron, the lurking, evil presence which looks across the lands of men with an unrelenting will to dominion. They provide you the tools to “help” only so that they can own them and you. They invest in you because they need to control your system from the inside. Resistance is futile; eventual subjugation can be the only outcome. The interesting one is Tencent, who I liken to the High Elves of Rivendell. The things about the Elves is this: they are generally on the side of good, and can facilitate it; but they are not themselves a force for good since they sit far away from the battle, detached from it all. They too provide tools, but they may not tell you how to use them; their attention is ultimately elsewhere. The forces of Men ranged against Sauron – let us assume these are essentially a proxy for traditional retail and consumer business in the region – ultimately have to find the solution for themselves, aided at times by the Elves but not reliant on them. If I were to stretch this analogy ad absurdum, perhaps this makes the Dwarves JD.com with their grubby focus on gold and commerce; whilst Meituan the slightly nobler Rohirrim, since they, er, move around a lot on delivery scooters like the horses of the Riddermark. Which start-up will be the valiant hobbit which destroys Alibaba, God only knows.

The serious point to all this is that for old economy companies, it feels like making a choice is inevitable. But the more one looks at the giants of the new economy, the more apparent it is that in the conflict of “internet+” vs “+internet”, it will likely be the latter – especially established asset owners – that win out. In particular, it is difficult to imagine that in this inflated global asset price environment, that the business which need, as Alibaba and JD.com especially are doing, to build out a network of physical infrastructure can be the eventual winner. Well, maybe one early mover can, but the world is not about to be flooded with online victors – by and large, the winners will be whoever of the old economy players adapts best to the new, rather than a new economy player.

And this then comes down to the vision thing. I have another analogy: I call it the “Physics & Philosphy” dilemma™. P&P is a little known but highly intellectual degree at Oxford (arguably the most esoteric of all) which combines two subjects that are not immediately connected. Yes, it is true that in the first term, courses such as Logic may play a part in both areas but then it would appear the two diverge. Yet we should see this like the rings of Saturn: you start off at one point travelling in two opposite directions on the ring, and whilst they move far apart to begin with in the end they meet again. In P&P, the questions at the other end of the circle see the two disparate subjects poetically rejoin on questions such as: what lies beyond the Universe? What happens if time stops? What if light bends? What is not obvious when you start the degree, become enormously obvious by the time you end it.

And seeing what is on the other end of this ring – what exists on the “dark side of the planet” as it were – is the very thing that marks out business geniuses from mere mortals. It took Amazon 14 years to become profitable, but there seems little doubt that Bezos had an idea of what lurked out of his sight in the distance. Likewise Jobs as he labored through various versions of Apple. But the point is, old economy companies can equally achieve this. We know the famous examples of IBM and Intel reinventing themselves based on their competencies; Apple itself did so. Further back in history are companies like Berkshire Hathaway and General Electric, and even Nokia who started life in rubber products. Reinvention is hard, but the world has not ended just because a series of new giants seem to own everything in sight. If the old economy is to learn anything, it is that with courage and vision, and a will to innovate internally if imperfectly, the future is still going to be theirs. For every Amazon which succeeds, there will still be a dozen Walmarts and Targets which make it, stronger than before.

The technology giants will go down in history mostly as the midwives of change, delivering the new baby to their old economy counterparts. We are already seeing them do this, below the surface as Alibaba and JD.com start to crystalise value in real businesses where they can (finance, technology etc rather than the core e-commerce platforms which have rarely made money for anyone). In many ways they are merely pioneering the examples of what the future looks like, so that old economy companies can learn from it but probably implement it better – the Chinese O2O supermarket businesses are a case in point. Indeed the cheerleading nature of the new economy player’s roles in businesses like retail, ahead of its time, loss-leading and ultimately doomed as a standalone business, begs another more controversial comparison. The tech giants are St John the Baptist, crying in the wilderness; the old economy players are Jesus.

Why commentators like Martin Wolf are still firmly thinking inside the box on China

aging-population

China’s rise is not about following the conventional economic norms, and the reality is that an ageing population is probably better than a young one

China has always been a black box. For the whole of my professional life, companies (investment banks being amongst the worst) happily hire someone – anyone at all – who claims to know the Chinese market if they can make even a sliver of money. Consequently, these people are given free rein to build their own silos. For boards in London or New York, China remains “a faraway nation of whom we know nothing”. It is from this mysterious, exotic ignorance that reliably insightful commentators, from publications which should know better, produce some tired answers to tired questions. Sad to say, amongst them was a recent piece from Martin Wolf at the Financial Times titled The Future May Not Belong to China.

Now, the future may very well not belong to China. Much of what Wolf outlines from his Capital Economics report (rather too much from one source for my liking) is unarguably true: the over-investment, the under-consumption, the increasing corporate debt and reliance on exports. But they only change from fact to “problem” when seen through the same old prism of economic development. China though has been disrupting the whole framework through which one sees these issues, confounding a whole mini-industry of untiring China bears. Who can forget the inflation crisis of 2010 – 2011? The Chibor crisis in the summer of 2013? The stock market crisis in 2015? The capital outflow crisis over 2016 – 2017? In each of these and many others besides, China was to be “found out”; it never was, not because the facts were inaccurate but because the basis for observation by outsiders was so incomplete (although to be fair some of the facts were also inaccurate). The fact that the naysayers and doom-mongers have been consistently wrong may be a cheap point to make, but it is worth making nonetheless. The only laws of economics, it seems, are the ones amateur journalists derive from their undergraduate readings of Adam Smith, Ricardo and Keynes.

china bears

A non-exhaustive list of China bear headlines since 1990

However I would submit two additional unrelated and possibly more controversial theses. The first is that the way China encounters these perceived crises is actually a mark of its success in terms of being on a pathway to global power, rather than a failure. There is a reason why China encounters “difficulties” where Japan, during its own precipitous rise in the 1970s, did not: China is actively trying to change the world it is living in. These crises are the tremors generated by moving tectonic plates, as Chinese objectives grate against the rules and outcomes it is being measured against. Currency and capital flows, interest rates, debt and the banking system – these are all examples of Chinese policy that do not make macro-economic sense until you factor in that it wants to change the system and if it plays its cards right, it probably can. We are faced with the first occasion since the United States back in the 1840s, where the world may have to accommodate a new power, and accordingly the rules will change. For China, this friction is good.

japan china gdp

Source: The Economist (2010)

To run through just one example of this, let us look at capital outflows. The reason capital outflows seem like a “crisis” is that the Chinese government wants to control the currency rather than let it be determined by the market. To pay for this, it must use foreign exchange reserves to keep the exchange rate stable. This becomes a huge cost when the environment is weak – except that the reason China does this is to try and make the RMB a regionally accepted trade and reserve currency. This could be done through just trade alone, but in China’s case it will also be done through the crypto-imperialism of the Belt & Road and other initiatives. If it succeeds, it will both eat into America’s ability to project power through the dollar, as well as ultimately encourage greater consumption of Chinese-made goods which in turn once again brings capital flows back into balance. It is a risky and expensive, all-or-nothing gamble; but unlike merely acquiescing into the current world system, if it succeeds it will have changed the regional financial and trade landscape. A price, some would say, worth paying.

The second thesis focuses on the cliché that China may be facing the middle income trap – that it may “get old before it gets rich”. This is typically paired with the curiously British trait of enthusiasm for India as an alternative story. Yet I would argue that with the coming of automation, China is actually on the right side of history on this and that far from fearing age, the adage should be turned on its head: for many comparable countries it is youth, not age, which will be a great peril; and these countries may be too young to ever get rich.

We have for some decades been fed the neoliberal trope that a younger population is good for the economy, and that pursuit of youth, through birthrates or immigration, is a Good Thing. Yet we are fast approaching the point where this notion is being exposed, because automation is actually a process which will eat into youth employment rather than any other. China’s workforce is actually declining and has been for some years, just in time for robots to start taking over.

The process of classic industralisation is just one of various models for a country to develop. But in this particular model, families can contribute labour rather than capital in order to obtain greater earnings, and thereby over time accumulate household assets. For many countries though, this industrialisation may never now be possible. The Economist noted as much when opining that the pathway of development exhibited by the China + ASEAN axis is probably irreplicable by anyone else including markets in Africa and South America. Goods may be manufactured in some of these economies, but it will be robots that do most of it and young median households will never cross either the asset-owning or educational thresholds required to survive automation before it hits.

Now, it may be that these countries find other models to become rich, but I doubt it. Agriculture or resource extraction will be possible for only a precious few. The mercantile model is not stable or sustainable. Services, as we have seen, actually produce a lower return on labour than industrialization does since jobs are often of a lower quality. In any case one of the stark lessons of 2016 was the fact that in 29 out of 50 states in the US, trucking was the single most common form of employment – and this, more so than manufacturing, is where automation will first hit.

us job types

Source: NPR (2015)

The fact is that to weather automation, median family assets need to reach a critical mass enough to be “invested” into the economy such that they can be gainers from robot productivity rather than victims. The most obvious if questionable form of asset-ownership would be home-ownership, but in an ideal world it would take other forms. China’s urban population has just about caught this train (financial income growth has far outstripped wage growth in recent years), but younger populations in India or Vietnam may not make it. Young people inevitable have fewer assets having had less time to earn; if their family does not reach this critical automation-neutralising financial position, they face eternal unemployment. OECD economies mitigate this conundrum somewhat through welfare transfers, but welfare is another privilege of long term asset accumulation by Society – a privilege emerging markets do not have. It is a race against time and any country that fails to achieve this will be left without a chair when the music stops.

In this context, I have little time for those who argue, as Wolf does, that India is “the most interesting other economy” (Americans I have noticed, tend to use Vietnam as their preferred example). As one of my friends commented, “the human race will probably be extinct before India has an airport like Pudong”. Taken individually, each of these points (China’s extra-economic rise and youth being a greater concern than age) have huge implications about the rules and framework for emerging market development theory. Taken together however, they may represent a perfect storm which leading to an inflection point in global economic development. In this case, being wedded to the old ideas, commentators like Wolf are probably missing it.

Why Britain could demand asymmetric labour access to the EU – and why it might be best for both sides

Freedom of movement

The disputes over Brexit negotiations have mostly been premised on the idea of reciprocity – or rather, retaliation. If we do not give them rights, they will not give them to us. This has been particularly true when discussion freedom of movement, possibly the single most important driver of Brexit voting in 2016. On the face of it, there seems to be logic in the EU demanding that EU nationals be allowed to freedom of movement into the UK if the UK wants the same thing in return. However this may belie the reality, which is that asymmetric access is perfectly viable and indeed valid.

To give one example of where this makes sense, let us examine Chinese policy with regards Hong Kong. Here, Hong Kong residents have an almost unhindered access to the Mainland and its economy, not only in terms of movement and residency, but also asset ownership including real estate and businesses. Chinese Mainlanders on the other hand face extremely stringent rules on coming to Hong Kong and particularly for settling here. Work visas are required almost exactly as they are of any foreigners. Yet this is essentially just one country with ultimately one government. And yet it suits both sides.

Why? Well there are two main reasons for allow one-way borders. The first is when one area needs skills the other has. This was historically true of Hong Kong and the services it provided to mainland China in terms of capital and skills, although today this is no longer so relevant. In the case of Britain and the EU, there are arguably skills which those across the channel, all things being equal, would prefer to have. Banking and finance might be part of this, but it seems unlikely. Much more relevant is that Britain is far more innovative than the rest of Europe and particularly so compared to the larger countries. In the European Commission’s innovation rankings for instance, Britain comes fifth but well ahead of Germany, as well as France, Italy and Spain. This is something the EU would surely rather not lose: startups and business ideas which could change the world but which need a large market to be tested and improved. For this reason, one-sided migration would be net positive.

European countries ranked by innovation

European innovation

Source: European Innovation Scoreboard 2018 (European Commission)

The second reason is the defensive one and relies on a resource Britain has an abundance of: parochialism. One of the reasons China has no particular fear of opening the border to Hong Kong is that there is very little chance that people will want to cross the border and stay there. Oddly enough, Britain is in the same boat, since Britons have historically been far less likely to move to another European country than many others, especially those of a working age. If we look at northern European migrants to other northern European destinations (in other words, intra-EU migration which strips out the retirement population) Britain figures as one of the least mobile populations behind even France. Only Germany is marginally behind and this is due to its outstanding export economy.

Total intra-Northern European emigrants as a percentage of total population

Intra-European migration

Source: People on the Move (Bruegel Jan 2018)

This reflects only “rich” Europe; if eastern and southern Europe were included the numbers would be even more stark. This peculiarly British parochialism can be seen in everything from the lack of language learning in British schools through to the reluctance of British footballers to move to European leagues which are better for their career. In other words, the British are much more disinclined to move and settle in the EU than the other way around, so that offering asymmetric access will only help business without causing any employment displacement.

This is a classic and enjoyable case of hidden asymmetry, the defining theme of this blog. The simple fact is that just because access is unequal does not mean that it is imbalanced or not beneficial to both sides. Reciprocity may seem “fair” on the face of it but may not actually be relevant – when there are cultural asymmetries as in this case, there is a good case to argue that reciprocity is not needed. Unless indeed retaliation is the core objective.

The hidden costs of parenting – why PPP could become PPPP

stress-cost-of-kids

Purchasing power parity or “PPP” has for many years been as good a proxy as any for allowing comparability between figures such as different countries’ GDP. China’s economy, for example, has a nominal GDP of just US$12 trillion, compared to America’s US$19.4 trillion. Yet when re-based on PPP, China’s GDP is actually US$23.2, making it the largest in the world. I for one accept that this is a useful indicator of economic strength, in the sense that China as a country is able to mobilise more economic resources than its nominal GDP would strictly suggest, since labour and capital there are cheaper. Likewise, a preferred measure of living standards is that of GDP per capita at PPP, or sometimes (better) average wages at PPP. In this way, some comparability may be afforded which accounts for street food in China appearing so much cheaper than in the West for instance.

Yet a friend of mine recently noted that in a sense, PPP-based comparisons of wages and living standards were very much geared towards the individual. A great leveler, he reckoned (as a relatively new parent complaining about the costs of the endeavor) was the arrival of children into his life. Because whilst in theory a basket of goods for PPP calculation includes items needed for raising children, in reality behavioral differences distort its reality. PPP, he felt, did not reflect the full costs of parenting and its effects seemed most intuitive to a single person. When considering where to live, PPP in his life could and perhaps should be re-adjusted to Parental PPP or “PPPP”.

There are three main buckets to consider in making any such adjustments:

1. Direct additional costs of education
2. Consumption choices
3. Real estate costs

The theory here is as follows: wherever you live in the world, the likelihood is that you will as a parent attempt to make up for the deficiencies of the world around you as best you can, in the interest of your children. This comes out of your own resources, and actually in many countries where life is “cheap”, when it comes to raising children those expenses shoot right up again. For instance, as a single person one may choose to drink tap water; as a parent one begins to invest in water cleansing machinery or bottled water (especially in Asia). Education is an important element too, since although many countries provide free universal education, parents recognize their limitations and will correspondingly pay for tuition and other aid. A surprisingly large selection of countries such China actually see parents effectively paying for education despite it being notionally free – and this is before getting to the issue of boarding schools paid for by expats. Lastly, real estate requirements are different and in some parts of the world rents / price counter-intuitively increase with the size of a property, commanding a premium due to restricted space.

So a comprehensive, scientific adjustment to PPP would require a sophisticated model which includes all these factors. To test it though, I instead looked at a simplistic account using only one factor that I could readily find, HSBC’s analysis of how much parents pay for their children’s education in several countries:

Cost of parenting
Source: HSBC – The Value of Education report 2017

Using this data as a rough proxy for all-in childcare costs (imperfect, but it is all I have to hand) I then readjusted the standard PPP index as provided by the OECD. The assumption I have made is that one-third of a parent’s income is used on children, a figure broadly in-line with statistics also published by the OECD. Thus I left two-thirds of income adjusted on the official OECD PPP basis, whilst the remaining one-third I have adjusted using a new index created by comparing total childcare spend. The results look like this:

Value of 30000

Basic and clumsy though this analysis is, it shows some interesting trends. First, as my friend suspected, the “real” living costs for a parent in places like China and India may be in fact higher than initially assumed, due to a surprisingly high need for private spend. But even more notable is how much value is added by the welfare societies of France and the UK, where the median family does not spend anything like as much for education particularly at the tertiary level. Median wages go a lot further in Europe and Canada than in the US under this system – and indeed US$30,000 almost matches the value of US$30,000 in China. The same kind of logic no doubt applies to issues such as universal healthcare. Assuming my calculations are even remotely accurate, life is fundamentally as cheap in Europe as it is in China, whilst life in the US remains the most expensive.

This methodology is very preliminary, full of assumptions and no doubt lacking. I would be happy to hear opinions on how best to improve it. However the basic theory is strong, namely that PPP may have a simple underlying flaw due to not accounting for changes in life cycle; in some cases PPP probably needs to become PPPP to be meaningful for public policy and for investment purposes alike. Essentially, single life remains localised whilst parenthood is becoming globalised. Since parenting costs are only going to increase as we go forward, the issue becomes particularly prominent. PPPP could be the future.

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For those keen to see the underlying data, below is the table of calculations:

PPPP table

How all politics really works – in one simple chart

Introducing the General Theory of Government 

The events of 2016 were curious because of their dichotomy: on the one hand, they were such a shock to the political classes, on the other hand they were also entirely predictable. Yet the commentariat both then and since appeared to miss (or simply forget) the most basic and obvious premise of how all politics works: namely that the ruler has to offer the ruled a mixture of both material and psychological well-being. The desire for identity is as legitimate a concern as any amount of wealth, and any government that fails to provide one or the other over a long period of time will suffer the occasional revolt. Understanding this explains Brexit, Trump and any other examples one might care to mention.

I do not claim this to be revolutionary, but given its lack of profile and given the impending elections in the US which will doubtless cause another round of soul-searching, I think it is useful to visualize this concept in a simple, easy to comprehend model. With no further ado therefore, all politics can be represented in this single chart:

General Theory - basic model

The Wealth-Identity Trade-off Model

It should be easy to see where I am going with this. Into the x-axis goes all those things which politicians want to focus on: taxes, welfare spending, the cost of living. Into the y-axis are all those things politicians seem not to think exist anymore such as ethnicity, religion and language. And, in a democracy at least, any government which consistently offers too little of one or other of these parameters, will find themselves cast out. We have for perhaps too long been living in a world where the governing classes have not only mistaken how to deliver W (Sanders, &c), but completely ignored i (Trump, Farage &c). Political parties across the spectrum have spent the last few decades obsessing over the x-axis whilst assuming that the y-axis will tend to itself. Rectifying this will be, as I have alluded to before, the dominant theme of the next two decades at least in the West.

I would hope this is all intuitive enough not to need vast amounts of explanation, but in a series of posts I intend to outline the basic premise of the General Theory and specifically its core idea, the Wealth-Identity Trade-off Model (WITM™). I will go on to examine how and when a society ceases to function properly; what a society really comprises within the model (“Median Man”, or “MM“); and lastly look at some applied examples in the world today and perhaps yesterday.

What I am proposing is not in itself, I think novel; however like all good things I believe this theory synthesizes simple, intuitive ideas which have at best not been expressed before in such a manner, or perhaps may not have been coherently identified. To anyone who disagrees with this, or who have contrary opinions, I look forward to hearing them. Additionally, since these are blog posts which may one day find their way into a book, I will not footnote everything in detail. However I trust that enough is articulated to allow the reader to comprehend what I intend.

The Kavanaugh debacle

Let me humbly offer my view on what has happened here on Kavanaugh. It’s only a theory but I am pretty convinced of it.

The GOP went for a pretty extreme originalist in picking Kavanaugh (see the positioning below). Unlike Gorsuch, he is far from unimpeachable as a jurist; unlike Amy Barrett, his backstory is not popular. He is a party hack who’s real scandal is not this sexual one but rather his role in the Bush administration in 2003, for which any half competent opposition could have hung him out to dry. Therefore, he was not an easy win for the GOP.

Why then did they do this? I think because they saw the midterms coming and decided on a gamble of enormous proportions: put up a controversial figure and dare the Democrats to vote him down. If he somehow got through, they got their man in (and not just a conservative judge like Gorsuch, but an actual partisan); if he failed or the process was dragged out, it would be the catalyst needed for their midterm turnout which was threatening to be flat.

What they did not count on was the ensuing sexual scandal, which whilst allowing the Democrats to get all excited was not obviously a partisan consolidating issue. The Democrats had a real chance to derail Kavanaugh’s nomination without suffering a backlash. However, the other thing the GOP did not factor in was the total incompetence of the Democrats in taking this easy path rather than the correct path to blocking him.

The Democrats have consequently managed a thing of genius – treading the only narrow, delicate path they could to somehow come out of the Kavanaugh debacle even worse than the Republicans (various recent polls show a closing of the generic congressional voting polls and in Trump’s own approvals, despite the fact that Trump has almost nothing to do with any of this). The GOP had to make another gamble in the end: namely that they, even as a stupid party, were still not the stupidest party in the room. The Democrats managed that honour, and the Republicans’ last gasp gamble seems to have worked.

Extraordinary from all sides.

Critics of the film Crazy Rich Asians don’t really understand it

Family

I will admit it: I liked Crazy Rich Asians. In fact, I liked the movie so much that I went to watch it twice at the cinema. This does not appear to put me in good company, since most of the film’s fans seem to fall into the lobby of trite Asian empowerment, whilst normally thoughtful commentators are calling it a “disappointment” and a “missed opportunity”. Inevitably, it has also fallen victim to those saying it is not representative enough of the Singaporean society it aims to depict.

Yet all of this rather miss the point, and misses the film’s genius. Yes, Crazy Rich Asians contains a charming if generic tale of the poor-girl-conquers-rich-family; yes, the film gives uneducated audiences Asia’s own Lifestyles of the Rich and Famous, of which many would be unaware; and yes, it is a glorious exposition of pan-Asian pride and “arrival” – the film’s opening sequence in a London hotel almost seems an almost gratuitous assertion of the changing balance of power between Asia and the West. Yet all of this represents only a superficial comprehension of the film, and mostly, one seen through an inherently western lens.

Rather, Crazy Rich Asians is a profound social commentary about the state of the Chinese diaspora, its diversity and depth, and the gravitational forces that are pulling it apart. What Jon Chu (and author Kevin Kwan) have done is brought into focus the central question vexing much of Beijing, Kuala Lumpur of Los Angeles: who owns Chinese identity? To understand the real meaning of this film is to understand the transcendent nature of what it means to be part of the Greater Chinese world.

There are, at heart, two main stereotypes of this Chinese diaspora, and two Chinas, being juxtaposed against each other (at this point I am going to note that I use various monikers with caution, and expect the reader to understand the general thrust of the label rather than be unhelpfully bogged down by the minutiae of definitions).

OCs

The first, represented most prominently by Eleanor Young (rather than, I think, by her own mother-in-law) is that of the historic “overseas Chinese” community, who by and large left China before 1949 and in the largest numbers during the upheavals of the 19th century. These are the communities which populated India, Burmah and Malaya, before sometimes going on to Britain or further afield. The Chinese of Singapore, where Crazy Rich Asians is set, and Malaysia, where it is partly filmed, are central to this, as were the former Chinese communities in Bombay, Calcutta and Rangoon amongst others. Families of this ilk regard themselves immutably as the guardians of true Chinese culture as handed down by millennia of history prior to the 20th century. Their China is “China”; all else, whether the contemporary Mainland or the migrants to America, is ersatz.

The second group, depicted principally by Rachel Chu, is that of the classic American-born Chinese (“ABC”), somewhat unfairly maligned in the film as a “banana”. But this term hides a multitude of sins, since there are plenty of families of Chinese descent in the US who are far more traditional and in-line with Eleanor Young than is the protagonist here; really the story is of Rachel’s mother Kerry, whose story is not explicit in the movie but who can readily inferred as being one of the post-1980 New China emigres (as indeed related in the books). This cohort, whilst being “Chinese”, were already Chinese of the post-Cultural Revolution era and bear all the rootlessness of that. Their story of emigration is far different to that of the pre-1949 generation and it is telling in attitude, outlook, habits and behavior of their children. This is particularly true of the US where assimilation is most culturally demanded, but also to a lesser extent in Canada and Britain. For them, there is not a lot tying them to the China their parents escaped.

ABCs

The film also adds a few other Chinese ingredients into mix. The Mainland is barely mentioned, presumably in order not to offend the new owners of Hollywood studios and allow the movie a chance to be shown in the world’s second largest market. Instead though, Hong Kong (through cousin Eddie Cheng) is used as a proxy for the Mainland’s gauche, parvenu ways – and ironically, since Hong Kong is rather more brash and arriviste than they would like to think, the proxy is rather fitting. This is perhaps a nuanced little dig at all those Honkie elites who think so much of themselves. Next the grandmother, Shang Su Yi (again not named in the film but in the books) is a veiled reference at the legendary domineering of Shanghainese women. Taiwan indeed is probably the largest omission from the storyline, being referenced only in passing. Lastly there is Singapore itself which, although portrayed as a centre for overseas Chinese is actually a modernity unto itself, as represented by the Goh family of nouveau riche ah beng’s and ah lian’s. Much of Singapore is barely recognizable for the traditional Chinese of London or even KL; in terms of real Chinese culture, Malaysia is what Singapore thinks it is – thus making the filming location even more poignant.

Neither the Young’s or the Chu’s reside in China today, but the conflict between them raging everywhere from Singapore to San Francisco, is deep, passionate and fierce. The overseas Chinese community of pre-1949 are both proud and condescending precisely because the China of their heritage is still so dominant. Crazy Rich Asians is fundamentally a homage to, and the story of, this peculiar overseas Chinese world and the enormous struggle it has faced in being the bearer of the one true Chinese light, whilst being weighed down on one side by the magnitude of Mainland China and on the other by the dilution amongst ABCs. Even for western audiences, this is obvious: the stereotype of the thrifty family that keeps the plastic wrapping on the dining room chair set (think Fresh Off the Boat) is real – but it is also specific to southern Chinese families who went overseas. Northern culture, which now dominates middle class life in Beijing and even Shanghai, is not thrifty but rather garish spendthrifts who will throw money at anything. Not for them the lessons of trauma and hard work. And as a final insult, we are now in a world where Simplified Chinese characters, by sheer scale of the PRC’s importance, is now the default Chinese – no foreigner today would dream of learning anything Traditional.

I would be inclined to make the lazy assertion that those who do not get Crazy Rich Asians are just too shallow to appreciate its many levels. Yet I cannot, because the true beauty of the film is precisely that such people are a part of the story; the very fact that they do not fully comprehend it is part of the greater contradiction which Chinese are posing to each other. This movie is aimed at multiple audiences, and satisfies each in its own way. Its enduring strength is the way each audience will respond differently and no-one really finishes with the same viewpoint on who they sympathise with and support – Eleanor or Rachel? Indeed many Chinese may not think any of the story is relevant to them; but it is more so than they may ever realise.

Being myself from a Chinese family of southern provenance who arrived via Calcutta to Britain, my instinct is to agree that our true culture is that transmitted through the strict guardianship of overseas Chinese communities. But having spent the greater part of my life in the Mainland and having had the rare privilege of knowing Beijing as far back as the 1980s, I understand also where New China comes from and its impulses. These Three Chinas – the PRC, overseas Chinese and ABCs – are all locked in the kind of conflict which is characterized by the (Anglo-American) maxim of being “separated by a single language”. The reason the film is so successful is that it stirs so much in each of these various China’s, but does so both severally and collectively. Just one example is the soundtrack, which includes everything from the Shanghai jazz scene of the 1930s to the world of 1970s Cantopop covers, to Chinese contestants on The Voice. The sheer range of the music, its roots and influences, is a story of Chinese culture through the ages.

So whilst Crazy Rich Asians can come across as pedestrian to the uninitiated, the complicated and nuanced realities which the showy aesthetics overlay are equally important. I am sure that Jon Chu set out to tell this very story of divergence and disruption, knowing that each of his audiences would find something different to enjoy (and criticize it for). But even if he did not, for those who truly understand the complex tapestry that forms the world of the Chinese diaspora, he has created a masterpiece that repays watching, and poses socio-cultural questions of us which will not only not go away, but will only become more prominent. This painful dilemma is the challenge being faced by tens of millions across the world, parents, grandparents and others, who this film is designed to represent and tell the story of. To look at Michelle Yeoh is to feel the grip of generations over our Chinese souls and on some level, to think, “I understand why she is us, and we are her”. It speaks powerfully about our identity, and forces us to contemplate what it is to be without it. This is a seminal work of Chinese cultural existentialism, cleverly wrapped in pop culture – it is an Asian Banksy; it is MC Hotdog expressing Hegel.

It is not so much about “seeing ourselves on screen”, so much as “what is to become of us?”. Perhaps in the next installment, we will be told.

In defense of football managers

Mourinho Pochettino

Last night was one of those glorious Spurs nights which, under Pochettino’s reign, rank alongside last season’s win at Stamford Bridge in terms of “announcement”. Therefore I would love to dwell on it – but I will not. Instead I want to make a different point in support of Jose Mourinho, a manager I have not much liked over time but who I perceive to be somewhat victimized.

A lot is leveled against the Manchester United manager these days: bullying of his players, attention seeking, shortness with the media, finding excuses about the talent in his team and directing criticism onto the Board. Yet amongst all this analysis, I often find that there is a disjuncture between commentators and fans, with commentators – the typical “chattering classes” as it were – frequently focusing on the coach a lot more than supporters.

Take last night. I woke up to the news that Mourinho had walked over to the Stretford End stand in what appeared like a valedictory farewell with a few hardcore fans. This turned out to be fake news – as Gary Neville pointed out on Monday Night Football in listening to Mourinho’s post-match interview, one can tell he simply wanted to applaud some fans who had remained to the end. Of course, to media commentators, who have been aiming for Mourinho for some months now, it seemed obvious that the fans should be fed-up. After all, who else is there to blame, when the manager has spent more than £300 million net on transfers since his arrival? In their view, those in the stands must be onboard with the media agenda too, of laying the blame squarely at the feet of The Special One.

But football fans are much more likely to blame the players, who they sometimes see as not pulling their weight or trying hard enough to bleed for the team, and always see as overpaid; or direct their ire to the club ownership who they feel are not investing enough or only there for the profits. Yes, there are certain managers who get up the nose of their own support, such as the way Alan Pardew consistently did. Sometimes this is because of “playing style” such as during Sam Allardyce’s short-lived sojourn at Everton; other times there are much overt clashes such as Mick McCarthy’s fiery relationship with the terraces at Ipswich. But as witnessed with Arsenal fans for the last two seasons or with Moyes’ brief stint in charge of Man Utd, tolerance for managers is actually quite high. They are not paid as much as players usually, and are reckoned as having a bit of a tough job treading between preening athletes and cynical club executives.

So why this disjuncture? As usual, the blame lies in with the media being limited, insular and lazy. First, they rarely think outside the box – listening to Henry Winter, the much-lauded Times football correspondent (five times Football Journalist of the Year, no less) offering up his analysis was painful – “he has lost his touch” was the stumbling insight offered on Radio 5Live. Secondly, they are being played as part of a game they seem to have no idea about. These days few players and even fewer owners speak to the press freely. Post-match player interviews are generic and pointless, to the extent that even I have to laugh at the BBC’s Dead Ringers when the mimic my beloved Harry Kane. From an early age, professionals have been coached to say as little as the public announcements of a listed company. Meanwhile, getting words from clubs owners is rarer than seeing ketchup in canteen of a Premier League training facility – when David Sullivan gave an interview in 2017 on the back of poor results for West Ham, journalists did not seem to know what to make of it.

Managers, by contrast, are the only figures who are both obligated to speak to the outside world (Premier League post match press conferences are obligatory at the risk of fining), and often have something interesting to say. Therefore football commentators focus incessantly on the managers of clubs and to an extent allow managers to define club identities in a way that real fans do not see it. Media talking mainly about managers is nothing short of navel-gazing. For the outside observer, it is actually players who embody a club, and who have the agency to change a team’s fortunes. This may not actually be true in this age of advanced tactics and hyper preparation, but it is what is felt. Since journalists are lazy though, they rely on these moments of managerial interaction for almost every reading of the tea-leaves.

Consequently when the media, in their one-dimensional world, get the bit between their teeth about a manager, they are often surprised to see – and then usually ignore outright the fact – that fans do not follow suit. When Moyes was at his nadir, a banner flown from a plane was met with at best mixed reaction from fans, much to the media’s bemusement since they assumed all supporters must agree with them. Even Wenger for years had higher levels of support and trust from those in the ground than he did from outside, even until the bitter end.

Last night as the numbers at the Stretford End began to be revised upwards, it seems like maybe a couple of thousand Manchester United supporters stayed to the end to support and chant for Mourinho. The manager, in turn, recognized this. Supposedly, around the director’s box, a good sliding tackle from Spurs defender Toby Alderweireld in the first half caused fans around them to look up to Woodward and make the point that a lack of these signings were the cause of problems – in stark contrast to the coach. In the end, the planned (and once again inept) plane banner for next week is targeted at Woodward, not at Mourinho. When Mourinho failed in his second stint at Chelsea, the fans directed their anger at those perceived as not trying hard, such as Hazard, Diego Costa and Fabregas. The fans do not like prima donnas.

I would make the cheap and obvious political point here about how the chattering classes miss what people are really thinking and arrogantly assume that the view being disseminated are the ones which encapsulated public opinion. But with Tottenham having won a magnificent victory last night, no need for that at this point …