Map by Ali Zitan Released into the public domain under Creative Commons CC0 1.0 Universal Public Domain Dedication
You can get a quick intimation of what your market is going to look like in the future with a simple look at the map above. You can also determine what each market’s tax policies, including AEOI and BEPS, are going to be by looking at the same map.
If your market is not experiencing a growth in population then you will find business gets harder over time. For two hundred years, demographics have worked in favour of the business person. Growing populations meant more business. Now, the Middle East and Africa account for almost all of the world’s population growth. Business can no longer depend on mere population growth to carry it forward. As the next graph indicates, world population is reaching a point where it should become static in the future after which it will slowly decline.
If you are in a country such as Singapore or Dubai you must be thinking “does this guy have any idea of what he’s saying?” Well, yes, I do. Don’t be deceived by your local situation. There are a few places where populations have been growing substantially and quickly. Not only small, hot-house economies like Singapore and Dubai have experienced rapid growth in a short period of time. Many cities around the world are growing much more rapidly than their countries. The U.S. and Canada continue to grow their populations as a result of their liberal immigration policies. Each of these trends marks something different in terms of long-term sustainability.
The Rise and Fall of Cities
Cities such as the coastal cities and provincial capitals of China have experienced phenomenal growth. That was to be expected as workers from the hinterlands flocked to the cities to provide the cheap labor for new factories. Dubai and Singapore have had high population growth as a result of temporary labor that has come to fill vacant jobs. But the jobs are artificial and result from temporary laws and regulations.
Population growth, in other words, has not been organic. It has been brought about by external forces that have been of immediate benefit but there’s no internal foundation for them. Such economies are far more fragile than they may seem. As they seek an even playing field, protectionist pressures of Europe and North America will make jobs disappear almost as quickly as they came. The cities of tomorrow that dot the Asian landscape would quickly hollow out.
China. It’s Always China
China’s situation is a case in point. Anyone whose business is in any way related to China is sitting on a time bomb.
China is so successful with its exports for three unsustainable reasons:
- First, it subsidises its manufacturers by providing virtually no enforcement of either environmental policy or labor rights.
- Second, it pegs the Yuan to a price significantly (up to 20%) lower than the price the market would naturally support, and
- finally, it directly subsidises its manufacturers, making it possible for them to manufacture at or below cost and still make a profit.
China’s unbalanced approach to trade drives populist movements in Europe and America. You can bet that Donald Trump will act to create a balanced trade system starting on 20 January, 2017. The consequences for much of Asia are going to be dire over the short and medium term. Given China’s positive economic presence in every Asian economy, every country will be affected.
Demographics are not the Whole Story
There are three trends that will modify the consequences of the decline of population growth:
- The Rise of the Robots
- Distribution of the fruits of success
- Economic rise of the many
Each of these is worthy of a separate discussion. For the moment I’d like to discuss the interplay of the final two.
Wealth Inequality Drives Economic Collapse
Under our current distribution systems, there is a link between the work you do and your ability to consume. Your work may entirely beneficial, as with a health worker. Or your work may be pernicious, as with a cocaine dealer. Both have in common is that they must work to generate income and survive.
Unskilled or semi-skilled labourer, too, needs to work to generate an income under today’s system and this is especially true in Asia. As jobs disappear, so does income. No income means no consumption. Under today’s policies, that means that your business is likely falter or die as net jobs move out of Asia.
Those at the top of the income distribution won’t be bothered; quality time is their issue, not food and shelter. If your business depends on the bottom 99% of society, you are probably in for a rough ride.
Governments really have no choice but to locate revenue sources that are eluding them or to raise taxes. Or both. Between twenty and forty trillion dollars in wealth are being hidden from governments today. As much as half of it provides no economic benefit… it is simply hidden away and gathering dust. Even the money that is supposedly in the economy shows up as overpriced stocks and overpriced real estate. That doesn’t create jobs. All those overpriced assets are simply waiting for the next, greater fool to purchase them. When the implosion comes, there won’t be any greater fools. The Ponzi game will be over.
Governments know this. They want those assets in circulation. They want to create jobs. And so they must scare the money back into productive use in the economy or take the money and do the job themselves. It really isn’t very complicated. Given that, AEOI, the Automatic Exchange of (tax) Information is nearly ideal.
Can Anyone Resist AEOI?
AEOI will be nearly universal. Only countries with adequate demographics, economic and political/military power can resist. Take another look at the map. Each purple country has demographics working against it. As you can imagine, each has an urgent need for AEOI to expand its revenue. If we check here we can find out which ones have low unemployment. Because we are looking for strong economies, we look for low unemployment. It seems just a bit of a surprise that not only the U.S. shows up favourably, so does Mexico. And Chile is another good performer. Finally we want to add in the test of political/military power. Among the three finalists, the dominance of the U.S. is unquestionable. Consequently, we rate the U.S. as the least susceptible to AEOI.
You probably aren’t very happy with that conclusion. The mass media, popular wisdom and your personal feelings may put you in denial. While you may wish it were some other country, the country most likely to be able to resist AEOI is the United States.
We have arrived at this conclusion through various chains of reasoning. It seems like no matter where we start, we end up at the same point: the U.S. is the county most able to resist AEOI.
With the offshore jurisdictions ability to hide your assets and the BEPS program killing transfer pricing schemes, the U.S. is shaping up as the place where you will be able to avoid AEOI, but may also be able to more favourable tax treatment than you can at home. Sometimes truth is stranger than fiction. If you want to dig into this more deeply contact us here or read some of our earlier postings on AEOI, CRS and BEPS in this blog.
F. G. Bouman