The End of Entrepôts – why the future is big, not small

Lugard

Photo: Lord Lugard with the Legco in 1909

It is one of the most oft-repeated fallacies in modern politics that the future is destined to be ever smaller and fragmented. One only has observe the fetishization of breakaway movements such as Scotland or Catalonia and hear the accompanying, knowing murmurs telling us that in political terms at least, atomization is the way of the future – small is beautiful. Some still reach further back, summoning up the collapse of the Soviet Union as proof that all large entities must collapse.

This is completely at odds with reality, on a number of levels. First, recent history has, far from being driven by a narrative of devolution, instead been dominated by the rise of “big countries” which in turn are resurrecting their own brand of Great Power relations. The corresponding decline in relevance of smaller entities is pronounced – most noticeably in the shape of individual European nations which have seen their weight fall off considerably. The 2010 Copenhagen agreement, where Obama sidelined the Europeans to reach straight for emerging giants, was an early sign of this; the gradual extinction of the Quadrilateral in determining trade policy was another.

Indeed in my 2013 paper on China and multilateralism, I noted that the world is if anything heading towards a new “community of empires”, with both the foreign and domestic policies of China, Brazil and India joining the US and Russia in pursuing an unrelentingly imperial logic. In response, those outside of their orbit are banding together to form what are prima facie trade blocs, but which are in reality the beginnings of something much more. Whether the European Union, ASEAN or Mercosur, nation-states are ceding sovereignty slowly but surely for the express purpose of aggregating their power in the world beyond. Even in unexpected corners of functioning humanity such as East Africa, union is the name of the game. Status and size do not have a linear correlation; as one reaches critical mass, the relationship becomes exponential. A power ten times as large as its neighbours is far more than ten times as important.

At the heart of this is a simple thesis: in the long run, the power of any country will be determined by the size of its population (with a shared identity – more of that another time), somewhat adjusted for a country’s natural resource base. In the long run, all else is mere noise. Yes, certain countries or civilisations may exercise disproportionate power for a period of time, even centuries. This can have any number of causes but often it is because of temporary technological disparities – temporary because in the long run, all technology will permeate meaning that we arrive back at where we started: population. Any vision of a world where the largest population blocks are not the most important countries must be premised on a smaller, more nimble country actively and exploitatively keeping larger population blocks subject. This was a kernel of much of European colonialism of the 19th century (which should not be conflated with a general model of imperialism exercised in human history).

Now in the long run, as Keynes says, we are all dead. So does it matter? I would say yes it does, particularly for those living in and around the rising powers of Asia such as China, Indonesia and to a lesser extent, India. Because some of these changes are no longer concerns for the long term, but coming to maturity now.

One lesson is this: the age of entrepôts such as Hong Kong and Singapore is fast coming to an end. In the future, there will be no space for such outposts any longer, at least in their current form. This is because the very existence of such centres is a lingering post-colonial legacy, based on an economic system that is now no longer extant. City-states like Singapore thrive because they are a form of offshoring, and the offshoring they offer is reaching the end of its useful life.

We should be crystal clear that offshoring has two forms: there is offshoring for work a country does not want to do, and offshoring for work it cannot do. On the one hand, there is what we classically understand as “offshoring” where one jurisdiction offers a cheaper way of producing goods and services for a richer one – offshoring from below. Textiles in Bangladesh fall into this, as does the core of China’s economic rise during the 1990s and 2000s. The second form is what hubs such as Hong Kong, Singapore, Dubai and even London offer to an extent – offshoring  from above. They provide capabilities that other poorer, less developed countries cannot do themselves.

The problem is that much of the world is catching up. There is precious little that can be done in Hong Kong today that cannot be done in China; yet Hong Kong really only exists to serve the Chinese economy, much as some lament its progress to becoming “just another” Chinese port. Singapore is safer for the moment, but it is still implausible to imagine that Malaysia, much less Indonesia, will allow the island to remain an offshoring hub for high value-added industries such as finance. As with China, they will end up doing everything themselves. The post-colonial legacy of substantially inadequate skills and infrastructure will be bridged, if not today, then tomorrow. At that point, the city-states will have precious little left. This is a problem not faced by Bangladesh – but then no-one wants to be Bangladesh. There is a reason why entrepôts barely exist in the OECD and if they do, they service a tiny, marginal sliver of their neighbours’ economic life as Jersey or the British Virgin Islands do. It is because there is no room at the top.

Britain suffers from many of the same issues. Plenty have lauded the supposed rebirth of the British automotive industry, and in a few instances, this is well justified. But for every Aston Martin or Morgan, where real value-add and R&D is achieved in the UK, there is a far bigger presence of Nissan or Toyota. The latter however, are essentially a little Bangladesh model – investment into the UK occurs not because of any inherent capabilities, but because we are marginally cheaper and have fewer regulatory restrictions (unionization etc) than regional neighbours. This is not much of a national dream.

The other side of the UK is that of the entrepôt. Here I am referring to her services exports – but not the headline-grabbing financial services sector, which will be pretty easily replicable elsewhere, but rather industries such as advertising, publishing, design and architecture which are more genuinely unique. And one can tell that they are unique, since whereas the UK can barely export any financial services to the big empire economies of the US or China, it sells large quantities of stylish design. The problem is, this is nowhere near enough to support an independent UK – the idea of the UK becoming a “Singapore of Europe” is beyond fanciful, as I have noted before.

Singapore has been conspicuous in how strongly it clings to and pushes for ASEAN. And the reason is clear: if ASEAN does not succeed in binding the region together, Singapore will soon have nothing to offer its larger neighbours. Only a union of sorts will allow it to continue holding a position of import. Hong Kong’s commercial residents have long acquiesced to the fact that it will have to be another Chinese city, albeit one offering some special rules and playing a specific role. Hong Kong’s flagship airline’s troubles reflect the decline of hub-and-spoke trade in favour of point-to-point, and are a microcosm of how the whole economy is developing. Dubai will play off the inability of regional giants to pull their weight (Iran, Egypt and Turkey) but if and when they do, it too will face the same problems of reinvention.

But the old model of “Singapore” is a complacent and condescending anachronism – and those pushing the model for countries like Britain are living a sheer fantasy.

Explaining the Umbrella and Sunflower protests

As a brief follow-on from my previous piece on Taiwan, I have done a quick and dirty analysis on what is driving youth discontent in Greater China, and specifically what has arisen in Hong Kong and Taiwan in recent years.

In this single chart, I believe I capture what I would call the “aspiration deficit” in being a young person in these two jurisdictions today. Here I have calculated the house pricing and rental in key cities as a multiple of graduate starting salaries.

Graduate salaries

Sources:

  1. Graduate salaries for PRC cities from Baidu News, as per 2017
  2. Graduate salary for Hong Kong from SCMP, as per 2016
  3. Graduate salary for Taiwan from Taipei Times, as per 2016
  4. House price and rental data from Knight Frank Greater China Property Market Report Q3 2017, based on Luxury Residential

The caveats: this is not designed to give any sort of rule of thumb about how long it takes to save for a flat, or how much is used up of income to pay for rent. I may even come up with a better methodology going forward – if the data allows. Instead, this exercise is simply a measure of what pressure there is on the dreams of those who newly come onto the job market, having been promised that their four years at university would lead them to a better life. This is why the luxury Residential market is I think an adequate metric on which to judge.

What is shows is quite how desperate prospects are for many of those in Hong Kong and Taiwan. Their earnings are stagnant, yet house pricing is going up. Welfare is better than in China, but the infrastructure is beginning to creak. The idea of looking after themselves – let alone looking after their parents – seems distant; and of course having children in this environment is ever less appetising. This is perhaps the single largest contributor to the upheavals experienced from students and other youth in the Umbrella and Sunflower movements – and it explains why so many young people see their future in China or elsewhere abroad.

To bring this back to politics, I wrote some time ago on the problems Beijing has had in relying on local tycoons to press their case in Hong Kong:

… less obvious has been how housing prices are preventing young local Hong Kong residents from starting lives properly, and in this as with much else the fault lies in a government that has existed to serve the tycoons – let us call them the Oligarchs – instead of the people. Beijing has been complicit in this since it decided to use the Oligarchs as a shortcut towards legitimacy after the handover. In colonial times, many tycoons were respected by locals as examples of being able to escape the unspoken racial glass ceiling, but since 1997 these Oligarchs have gone on to really take local people for a ride. Beijing is now paying the price for siding with the rich against the poor for so long. There is a limited amount of time that this can continue before Beijing must begin to change sides.

The same, in a sense, is true of Taiwan, where the big business lobby has been allowed to get rich off mainland China, repatriate their earnings and create asset bubbles in Taiwan that put home ownership increasingly beyond the reach of locally based graduates. It is a death spiral for aspiration – and it is this, much more than any real impact on living standards – which diminishes the legitimacy of any regime.

The Handover Hangover – Britain and Hong Kong in the age of the New Normal

HK handover

The British media, between the endless coverage of the debacle that is Brexit, the May government and the spectre of Jeremy Corbyn, recently managed to find a little time for soul-searching over Hong Kong, on the twentieth anniversary of the 1997 handover. The hand-wringing tone over whether Britain had let the people of Hong Kong led the Guardian for instance to note that:

“Theresa May’s government faces a choice between upholding legal principle and democratic values, and its chronic post-Brexit need for Chinese trade and business at any price. No prizes, or yellow umbrellas, for predicting which way May and Johnson will jump.”

The torturous link to contemporary politics aside, these op-eds convey a tone of unfulfilled potential. Chris Patten weighed in with his own personal laments over what has slowly occurred since , self-flagellating over Chinese encroachment of the former colony.

Yet much of this seems rooted in misconceptions that still seem to pervade the British establishment. For a start, the very act of suggesting that Britain should “do something” about still hints, however much denied, that she is in a position to do so. This is unrealistic not only because of the relative imbalance but also the distance and relevance of the two countries, notwithstanding the occasional bravura peeks through, wishfully claiming that “China needs Britain more than Britain needs China“. This mismatch is true politically, culturally, socially and above all, economically.

In cold economic terms, it is not only the the imbalance that demonstrates relative strength – China incurred a US$37.6bn trade surplus in 2016 for instance – but also mutual insignificance. According to data, Britain is only China’s 9th largest trading partner, accounting for just 2.7% of Chinese exports, far from enough to move the psychological needle. Compare this with Germany, for whom the UK constitutes 7.1% of exports, or even the US at 3.8%. Britain and China are simply not that relevant to each other. China matters slightly more to the UK than vice versa, accounting for 4.4% of her exports (and arguably Chinese consumption of British goods such as high end cars is less easily replicable than in the other direction), but it is still not much of a basis for negotiations or threats.

Moreover, there appears to be a parochial misunderstanding about Hong Kong’s destiny as “just another Chinese city”. Critics will say that social and political life are not the same as economic life; to that I would say one necessarily follows the other. Consider a recent piece in the Financial Times about how the Hong Kong has changed since 1997. Two visuals stand out:

Hong Kong is increasingly no longer a regional hub but more of a China port. Yet this is not just a function of being on China’s doorstep, or even of China’s desire to integrate Hong Kong as some might imagine; it is rather a consequence of the fact that the old colonial entrepot model of corporate imperialism in Asia is gone. China is a self-sustaining economy of critical mass. The days of being able to “do” China from offshore, are as absurd as believing one can cover the US from London or Toronto. This is beginning to apply to other countries too, particularly Indonesia but also Thailand and increasingly, Malaysia. The concept of largely expat financiers and traders sitting in the comfort of the Victoria harbourfront whilst servicing these jurisdictions is faintly ridiculous; and this is a global emerging markets trend.

Asia has changed. The era when its leadership still had links with their former colonial rulers, such as the Cambridge-educated Lee Kwan Yew to Britain, is over. A telling moment was the closing in 2009 of the much-loved Far Eastern Economic Review, a deeply socio-political publication inhabiting a world where Asian leaders and western discourse still understood each other. Today, nothing could be further from the truth – as countries like China pass the “peak export” phase of their development cycle, their economies and leadership are inevitably more introspective. Each country must be engaged from a truly domestic perspective and cities like Hong Kong, and to an extent Singapore, are less relevant. There is nothing Britain can or should do about this.

At least Hong Kong, despite its comparative decline, still has a future bound up with a single large power. Singapore will soon come to find that its position as a safe haven for Indonesian and Malaysian investment and private wealth is under a more serious threat – which has led to their driving ambition behind ASEAN. London, in the end, will probably feel these winds of change too.