The European Treasury, individually as member States or collectively as Union, has so far reached – with a race to the bottom – as many as 72 agreements with large global companies.
Tax competition is still very strong and active. Just think of the US corporate tax that-following the latest reforms- has decreased to a maximum 26% rate, more than one third less than the previous rate, with a US average corporate tax rate which is now below all OECD and G7 levels. Similar approaches, however, are developing in Argentina, Colombia, Luxembourg, Canada and even Japan.
Conversely corporate taxes have increased in Turkey, Portugal and Taiwan, with further increases – albeit slight – also in India. They are selective increases to favour some foreign or national companies compared to others.
At world level we now have as many as eleven jurisdictions –which account for 27% of the total corporate taxes in the world – that are currently increasing corporate taxes, while all the other small and large countries will keep on competing fiercely at tax level with their neighbouring countries.
In short, technology has made all the old tax strategies obsolete.
In fact, currently competition between EU tax systems costs the weakest countries 60 billion euros a year.
It is worth recalling that nine of the twenty companies with the largest capitalization in the world are digital.
The most used corporate tax avoidance strategies to move profits sourced in EU countries to offshore tax havens include the “Dutch sandwich”, the Luxembourg tax rulings-which have recently come to light with the LuxLeaks scandal which hit the headlines – or the specific Irish tax policy, known as the double Irish arrangement.
They rely on the tax loophole that most EU countries allow royalty payments be made to other EU countries without incurring withholding taxes. However, the Dutch tax code allows royalty payments to be made to several offshore tax havens, without incurring Dutch withholding tax.
The Dutch sandwich is based, at first, on the Dutch national rule according to which the dividends and surplus value of a parent company can be transferred to its subsidiaries without paying any tax.
Hence any capital can be transferred to companies based in the Netherlands, thus avoiding all taxation on this liquidity.
Therefore the Dutch sandwich behaves like a “backdoor” out of the EU corporate tax system and into the untaxed non-EU offshore locations.
On the other hand, Luxembourg tends to enter into bilateral agreements with large companies and multinationals, as in a sort of State-company agreement. Everyone tends to do so, but in Luxembourg the transactions and agreements with companies are always particularly beneficial to the private sector.
Ireland imposes a maximum 12.5% corporate tax rate on the total taxable income stated. For purely financial companies said tax rate is only 10%.
Currently the EU tax policy is still based on the destination principle which allows for VAT to be retained by the country where the taxed product is sold.
This is a strategy dating back to the period when the European Union had to deal with the booming phase of Internet sales.
In that case, however, it was a matter of selling traditional goods in a new way. Nowadays brand new goods are sold on the Internet in an even more unusual way.
For IT companies, however, the matter is even more complex, considering they can make turnover and profit anywhere without having any kind of permanent and stable organization where they sell or buy product (or, possibly, produce them).
According to the latest data, with the aforementioned “Dutch sandwich” strategy, in 2016 Google put aside as many as 3.7 billion euros on a total taxable income of 15.9 billion euros.
As all web firms do, it is enough for an Irish subsidiary of the Californian company to sell products globally via royalty schemes to a Dutch company without staff or operations in progress or to another Irish subsidiary also incorporated in Ireland, but managed from an offshore tax haven like Bermuda..
Over a period of three years, the well-known monopolistic Internet firm of California has “saved” approximately 34.2 billion euros, with an annual saving increase of about 7%.
At this juncture, we could only define a universally applicable legal formula of registered office or business organization, in addition to the one of the tangible or intangible place where the tax is generated.
Obviously we also need to imagine the tacit blackmail power of major corporations operating on the Internet, which have very useful databases for all governments and for the US one, in particular. We should also consider to what extent this information and tax asymmetry is useful for the US hegemony over global markets.
This is the geopolitical issue: the tax supremacy of major web firms is an essential and irenouceable factor of the new US hegemony, namely of the New American Century.
With a view to curbing web majors’ tax power, someone has also considered the formula of “meaningful interaction” with users, obtained through widespread digital channels.
It may happen, however, that at least part of the online turnover is produced through peer-to-peer channels between the company and some customer sectors or through a splitting of the IT mediation between small companies, carried out by customer groups.
With the pretext of “dedicated” content, you can avoid taxation and artificially limit the visible invoicing in one single country.
A faster option than “significant interaction” would be to hit only the companies which invoice the intermediate services (advertising, etc.) to the web majors.
Nevertheless, if the web majors bought also these intermediaries, we would go back directly to the Dutch, Irish and Luxembourg tax avoidance schemes and practices.
Furthermore, current data points to a 3% average tax for the companies supplying services to the web majors in Italy and in the rest of the European Union.
In the latter case, the European Commission foresees revenue of only 5 billion euros for the whole EU-27.
However, if we calculate the average of the tax rates currently in force in Europe, the Internet majors pay income tax rates equal to 9.2%, as against the EU average rate of 23.3%.
Is it rational, however, that companies are taxed only on the basis of self-stated annual invoicing?
In essence, with current regulations the sale of data or User Generated Content cannot be taxed properly and profitably.
In this respect, the EU has proposed two different levels of taxation, but considering the digital platform to be a “presence” of company and, therefore, a “permanent and stable organization”.
The criteria under discussion will be the following: exceeding a revenue threshold of 7 million euros in a single EU Member State; the presence of over 100,000 users in one Member State during a single fiscal year; the presence of over 3,000 contracts for digital services concluded between company and users in a single fiscal year.
Hence, with a view to circumventing EU rules, the Internet majors can rely – for their “permanent and stable organization” – also on systems based outside the EU. They can also distribute their users among various micro-companies, not necessarily having a permanent and stable organization in the country using them. Finally they can invoice the 3,000 minimum contracts differently.
A second proposal, still under discussion among the EU leaders, regards the “temporary tax” on digital activities which, moreover, are not currently taxed in any way by the EU.
Hence, according to this proposal, revenues resulting from the sale of advertising space for goods or services other than the means used would be taxed.
Or the revenues resulting from the sale of data based on the information provided, free of charge, by users would be taxed.
Obviously the tax would be collected by the Member States in which the users are located.
Are we sure, however, that an online service can be used without being tracked? This is the rule in what is currently known as the dark web.
If smuggling is the strategy used by all those who do not want to pay taxes on sales, the dark web could become – with some mass IT devices – the new Tortuga of Internet majors.
In Italy, the new Budget Law provides for a tax on digital transactions -as from 2019 – but only relating to the provision of services to subjects resident in Italy both by national companies and through non-resident companies.
In more specific terms, each transaction shall be taxed at 3% net of VAT, thus further loosening the legal connection existing between company’s presence and provision of services, i.e. between “permanent and stable organization” and online commercial activity.
The Italian rule for 2019, however, regards only business to business transactions, thus explicitly excluding both e-commerce ones or the final business to consumer connection.
Much Internet content, however, can easily shift from business to business(B2B) to other types of sales or supply.
Therefore the tax levied should be the withholding tax on revenues, which creates a difference between resident and non-resident companies, which could not suit the EU system.
Hence, again with reference to Italy, the new tax will be neutral with respect to the place of origin of the transaction, but revenues can be subjected not only to the 3% levy, but also to other taxes.
Moreover, it could also be possible to carry out manoeuvres on the prices of the IT supply, with a sort of new dumping on EU or Italian companies by the big Internet majors.
On the other hand, the Italian web tax relies only on self-certification. There will be trouble.
If the web tax and the other taxes on the Internet are VAT modelled, we will face the problem that the VAT transitional regime, defined in Europe until 1997, is still currently in force.
Not to mention the fact that the transfer of capital via the Internet is fully uncontrollable for the States or unions of States and that information gap and asymmetries between States and Companies in this field are such that everything relies on the “good will” of the subjects taxed. Too little.
A solution would be to equip the EU with a stable IT system capable of controlling, at least, a significant part of commercial transactions via the Internet, but this is almost science fiction.
Otherwise, stringent and fast regulations would be needed to definitively close “tax havens” both in the EU and elsewhere but, apart from the unavoidable delays, the result would be that the countries which are currently tax havens would ask for something-indeed, much – in exchange to the other ones which are not tax havens.
Or it could be possibly stated very frankly that the EU market does not accept the free movement of capital in this sector.
However, this would favour the geopolitical areas that would like to use what, in their eyes, would be considered a European weakness.
Nonetheless, here as elsewhere, we should really rethink the architecture of the world economic and financial system.
Said system results from the fully geopolitical irrational anarchy which saw Eurasia yield to the US unipolarity, which currently no longer exists, at least according to the 1990s standards.
Here as elsewhere, we should import the idea of a great liberal and free trader, a disciple of Luigi Einaudi who, in the 1950s, imagined the “army of labour”.
I am referring to Ernesto Rossi who, while assuming a public system using the huge mass of post-war unemployed people, clearly theorized – as a liberal – “a marked integration of Socialist elements into the market economy”.
Abolire la Miseria was written by Ernesto Rossi in 1942, on the island of Ventotene where he had been confined. It was published in 1945 and then re-edited in 1977 after his death.
The Tuscan liberal thinker theorized no “social safety nets”, but rather the creation of an army of labour to be recruited as an alternative to the military service.
The army provided all its members with essential services, with dignity and autonomy, but the “army of labour” had to work both on public infrastructure and on land use and maintenance activities, i.e. all the productive activities that – as Keynes said- could not attract and rely on private capital, which would record no sufficient and quick returns.
What about including clearly Socialist mechanisms in the current financial system, and not only through tax systems, thus rightfully leaving high-income activities to private capitalism?
It would finally be the merger between the two best intellectual and technical lines of Italian democracy, namely social Catholicism and secular Liberal Socialism.
Flourishing Forex Market amidst Covid pandemic
The Covid-19 outbreak has halted the normal channel of life, people losing their livelihood and income has dwindled over the past eight months all over the world. However, in the tailspin the world has faced, the Forex accounts have witnessed a phenomenal growth over the pandemic-ridden months. Month-on-month growth has been recorded as close as 25-50% while the total volume has expedited at an all-time high of 300% growth. Over the past decade such a phenomenal growth was hardly ever seen since the last record high was a close to 40% which is mere compared to the colossal figure posted on the stage in June 2020.
The developing markets, however, post a lucrative section to invest in since the region has been the biggest contributor to the FX rise: close to 60% being the beneficiary of Europe, Africa and South Asian countries. Safe to say that this trend has been so steep largely due to the investors being ridden with optimism over the volatile prices of many of the commodities that were rendered stagnant over the previous decades. This includes the oil prices, gold valuation and even the real estate market that despite being involved in a price bubble leading to the worst financial crisis of the millennial, still stood relatively steady over the past 11 years.
The FX market is oozing optimism to say anything about the trend which could be directly associated to the unprecedented financial climate and the looming atmosphere of recession and financial crisis pushing people towards adopting a new income stream. As conventional income channels come to a dead stall and people having time and focus to spare towards trading, the large volume of cumulative accounts could be further expected to extrapolate since price volatility and unexpected events both in the trade and world affairs have had a conducive effect on even the layman to dip into the trading cycle: FX market being the coherent choice due to safe commodity and currency investments and quick gains.
Exacting one’s mind towards the milestones achieved this year, be it the plunge of global oil prices to the negative scale of the exchange or the sharp fall and sudden rise of DJI or even the injection of one of the largest stimulus packages in the United States since the infamous financial crisis, this year marks the focal point of risks and opportunities. The prospects of a new vaccine are still trailing to the second quarter of 2021 despite some countries picking up the pace to vaccinate early means the trend in the market is not short term unless a breakthrough is imminent. On the market front, the interest rate crunch with UK expected to nudge the rates in the negative along with global relief to debt financing, traders have a global ticket on both the borrowing and the lending front to turn up abnormal gains. However, reliable brokers are a tough nook to find since the uncertainty also grips the traders regarding investments in the skewed conditions as such. Moreover, with naïve traders entering the market, small scale brokers clustering the exchanges and limited physical interactions due to social distancing protocols are all but exhaustive factors that could easily deteriorate the growing trend and bring about a financial crisis much sooner than expected if not regulated efficiently.
Public Council Sets New Tasks to Support Russia-Africa Relations
In this interview with Armen Khachatryan, Deputy Chief Executive Officer and Programme Director at the Roscongress Foundation, and now a member of the newly created Public Council under the Secretariat of the Russia–Africa Partnership Forum, argues that the first Summit held in October 2019 ultimately seeks to inject a new dynamism in the existing Russia-Africa relations.
According to him, as the African continent undergoes positive transformation, platforms for dialogue between Russia and Africa are profoundly changing too. The Russia–Africa Summit demonstrated the sheer enormity of potential that exists for collaboration across various areas, and one of the outcomes of that historic event was the establishment of the Secretariat of the Russia–Africa Partnership Forum. The Secretariat further created a Public Council, the body also incorporates a Coordinating Council, Research Council and Media Council.
Speaking with Kester Kenn Klomegah early January 2021, Armen Khachatryan unreservedly stressed that building on the existing relations and all that have been achieved over the past few years, needs new platforms such as the Public Council. This Public Council aims primarily to uplift and solidly support the relations into a new stage, change perception among the public and give it an entirely new outlook into the future. Here are the interview excerpts:
A meeting of the Public Council of the Russia–Africa Partnership Forum Secretariat took place early November 2020. What were the main outcomes of the event?
It was the first kick-off meeting held last year. We determined the objectives facing the Public Council of the Russia–Africa Partnership Forum Secretariat. Specifically, these were to do with implementing the decisions of the inaugural Russia–Africa Summit and organizing the second summit, which is planned to take place in 2022. We discussed the current state of Russian-African relations in the humanitarian sphere, as well as the potential to develop them further. We also set out the council’s plan of action.
In your opinion, what social initiatives were prioritized – particularly at this time when Russia is seriously looking to focus on Africa?
Humanitarian cooperation has recently played an increasingly significant role in the development of Russian-African relations. The lively discussions at the Russia–Africa Economic Forum in October, 2019, in Sochi are testament to the importance of joint social initiatives, and to the shared desire to implement them. I believe this is with good reason, as collaboration in this area can help build an atmosphere of mutual trust. It isabsolutely essential to forge sustainable partnerships in different spheres with Africa.
In terms of priorities, areas in which we have traditionally collaborated include education, healthcare, culture, the environment, safety and security and so forth. All of these fields possess enormous potential for Russia and Africa to work together, and our country is ready to share its experience and expertise on mutually beneficial terms. Unlike some other countries, Russia wants a strong Africa with genuine sovereignty and a competitive economy. With this in mind, I would place particular emphasis on education. From my point of view, Africa’s most valuable asset is not its natural resources, but its people.
Young people currently make up a significant percentage of the population across the African continent. And that figure is going to increase further still. The population of the continent has already passed the 1.3 billion mark, with a median age of about 20. Around 60% of the population are young people under the age of 25. And according to forecasts, by 2050 the elderly will account for just 9% of the population. Given these numbers, we not only need to increase quotas for African students looking to study in Russia, but also open branches of our universities in African countries. That would allow us to offer a Russian education to many more African students as well as establish student exchange programmes.
By all appearances, aspects to do with education and professional training – and issues of humanitarian nature – are currently being examined in keeping with the course that has been delineated. Do you think that civil society should be involved in extending the reach of public diplomacy between Russia and Africa?
There is no doubt that collaboration between Russia and Africa should extend across the board, and take place at various levels. It should not be limited to ties between government officials and members of the business community. In any country, ordinary citizens make up the majority of the population, and for countries to collaborate effectively with one another, there needs to be an understanding of their perspectives and wishes. Therefore, as we look to establish direct ties and foster an environment conducive to regular dialogue with the people of various African nations, it is vital to involve civil society more closely.
It would appear sensible to provide more opportunities to people in Africa in terms of volunteering and doing internships at large Russian companies that are looking to build their presence on the African continent. The aim would be for these people to potentially be offered jobs at the companies’ African branches. Human resources need to be at the heart of our efforts, given their potential role in strengthening ties in both industry and science.
For our part, the Roscongress Foundation, as a socially oriented non-financial development institution, is open to proposals and is ready to provide assistance in promoting Russia’s image in African countries. This includes through organizing business, cultural and sporting events. As far as this is concerned, I imagine that the Foundation will receive support from Russian embassies and Rossotrudnichestvo’s offices in African countries.
Do you envisage any problems during attempts to better leverage Russia‘s soft power and to strengthen public diplomacy in Africa? Do you view competition from other foreign players as a challenge?
I don’t think it’s entirely appropriate to use the term “soft power” in this instance. In this regard, I am of the same opinion as Yevgeny Primakov, Head of Rossotrudnichestvo. The term I take issue with is “power”, which implies pressure of some kind. We have no intention of pressurizing anyone. We are in favour of equal relations with all of our partners, and this includes African nations. In particular, we are guided by the principle of “African solutions to African problems.”
Obviously, there is competition, but I would not call that a challenge as such. Our main objective is not to compete with someone, but to offer our own perspectives on certain issues, communicate our values, and build a positive image of Russia in the eyes of people in Africa. Let me explicitly reiterate here, we are not exerting power in any way. People in Africa will have the benefit of several alternative perspectives, and will be able to choose the approach they feel is closest to them. This, in my opinion, is the principle of equality and mutual respect.
Of course, there are things that are hampering efforts to implement a systemic Russian humanitarian policy in Africa. For example, Rossotrudnichestvo has only eight offices across Africa’s 54 nations. It would appear that Russian-African ties would benefit from Russia opening new diplomatic missions in the region. If we want Russia’s voice to be heard on the African continent, special attention needs to be given to this issue.
In terms of the media landscape, what steps need to be taken to improve the work done by various outlets? How can we better inform society about events in both parts of the world? Why, for example, news in Africa rarely reported on in Russia?
In terms of working with the African continent, I believe that raising awareness on both sides is one of the most important issues we face. It is difficult to talk about joint ventures, for example, to develop the SME sector, when the African continent remains so little known in Russia, and in Africa, there is only a vague notion of what Russia is. The Russia–Africa Summit and Economic Forum played a crucial role in addressing this, as did the 2018 FIFA World Cup. That event saw many people from Africa visit Russia for the first time. They were able to see with their own eyes what our country is like, instead of being presented an image by the Western media. People were following events using various information resources.
These events played a huge role in helping to shape the media landscape. However, this exchange of information needs to be done on a more permanent basis. It’s worth pointing out that in today’s world, awareness can be raised in more ways than just via the media. Given the spread of social media, the student exchanges I mentioned earlier could, over time, play a much more important role in cultivating Russia’s image than conventional media channels. However, in order to achieve this, it is vital to work with young people in both Russia and Africa.
Going back to conventional media, I believe that first of all, Russian news agencies need to expand their network of correspondents in Africa. That would allow our journalists to work with primary sources, rather than rely on material put together by foreign news agencies. It will also be important to get Russian and African journalists working together, for example, through placement programmes, master classes, roundtables and so forth.
To answer the question on news in Africa being reported on in Russia, things are developing. Telegram channels dedicated to the African continent are appearing, for example, so it is possible to stay up-to-date with key events. One organization which is doing much to leverage Telegram channels is the Association of Economic Cooperation with African States (AECAS). Its members include the Roscongress Foundation, which has considerable experience in developing and implementing humanitarian initiatives. AECAS is also currently working to build an integrated space for people in Russia and Africa to obtain information. This appears to me to be a very promising area. Admittedly, when it comes to large news agencies, the problem is that there are not enough events to report on which would garner widespread interest. However, I am in no doubt that as Russian‑African relations develop further, things will improve in this area.
The second Russian-African Public Forum took place in November 2020. In his welcome address, Foreign Affairs Minister Sergey Lavrov said that amendments needed to be made topolicy initiatives in order to respond to changing realities in Africa. What was he referring to, and what is your take on “changing realities” in Africa?
First of all, I would say that the African continent has undergone an enormous transformation over the last few years. Across all areas, Africa has become much more profoundly involved in the economic processes driving globalization. Partners in Africa are implementing a programme to ease the movement of goods, capital and people, and to employ new technology in business and marketing. This has made the African economy more open and attractive to foreign investors.
The first Russia–Africa Economic Forum in Sochi served as yet another clear demonstration to the Russian and global community that the African economy is becoming more organic. It served as proof of Africa’s increasingly significant role in the global economy. Indeed, the continent has a direct bearing on global growth, and on progress in science and technology. Africa’s economic ties with the rest of the world are certainly no longer solely about supplying raw materials and being a market for finished products.
The socioeconomic growth we are witnessing, together with the global economy’s accelerated transition to a new wave of tech innovation, has meant that Africa’s role and position in the global economy has shifted significantly. The continent is also becoming an important growth pole in terms of global demand. Consumer spending on the continent has already reached US$ 680 billion. According the World Bank, this figure is set to grow to US$ 2.2 trillion by 2030.
As the continent undergoes this transformation, platforms for dialogue between Russia and Africa are profoundly changing too. The Russia–Africa Summit demonstrated the sheer enormity of potential that exists for collaboration across various areas. It was a historic milestone for Russian-African cooperation. One of the outcomes of the event was the establishment of the Secretariat of the Russia–Africa Partnership Forum. In addition to a public council, the body also incorporates a coordinating council, research council, and media council. Never before in Russia’s modern history has there been such a serious mechanism for bringing together expertise and best practices from all sides and across all areas. It is set to act as a foundation to develop all aspects of Russian-African partnership, and to effectively position Africa’s transformation, which we briefly discussed earlier.
The high-level summit also led to the establishment of the Association of Economic Cooperation with African States, which will serve as a platform to strengthen business ties between Russia and Africa.
The situation is so diverse – politics, economy and culture – in Africa. In your opinion, what are the best pathways for promoting policy initiatives, as well as the social aspects of diplomacy with Africa?
That is quite important, but I don’t think we should try to identify a single “best” or “universal” pathway. It’s important to understand that Africa is a diverse continent – every country is unique, and requires an individual approach. And that’s before we consider that methods and initiatives that are employed in one region of the world – for example, Europe – are not at all necessarily appropriate for countries in Africa. We need to meticulously analyse each initiative, and be sure to draw the greatest possible benefit from them.
Generally speaking, there needs to be a focus on working with people, and in particular, with young people in Africa. These efforts should be based upon the needs of the population. And as I mentioned earlier, the pathways to achieving our aims could look very different from one another. Africa, just like Russia, is blessed with a wealth of extremely young talented people: some make films, others dance, others draw. But that’s not the important thing. What’s important here is to do everything we can to connect the lives of people in Africa with our country –we show that Russia is ready to help develop their talents. After all, these people could well become the thought leaders of the future, as well as ambassadors for Russian-African relations. These people could help foster a positive image of Russia in their respective countries. We are ready to engage and cooperate with intergovernmental organizations, civil society and African partners, work constructively to consolidate the results from the first summit and what both Russia and Africa further set inthe joint declaration in Sochi, in October 2019.
The role of economic warfare in understanding contemporary geopolitics
Despite Fukuyama’s theses, the traditional war is not over: especially in Europe, from the former Yugoslavia to Ukraine. As for economic relations between states, these – with all due respect to the Austrian school – do not amount to “soft trade”. Indeed, as early as 1990, Edward Luttwak heralded the age of geoeconomics when Bernard Esambert published The World Economic War. German surpluses against French deficits, weak dollar against strong euro, difficult negotiations between the United States and the European Union on the subject of the transatlantic treaty, the world yesterday as today is an arena. Economic warfare is so pervasive that expression is a victim of its success. It is therefore necessary to precisely define this new theoretical and practical object, to evaluate its real scope and its mode of action.
It should be clear, looking carefully at the contemporary dynamics, to affirm that economic war is the daughter of globalization
Although economic warfare in the broadest sense of the term is not new, its contemporary form has relatively recent roots. We can consider that after the Second World War, with the revival of an international monetary system and the signing of the GATT agreements in 1947, the rules for commercial competition between largely national economies were established within the Western bloc. Thus, the economic struggles that have taken place in recent years have been confined to an arena of limited size.
Furthermore, when Bernard Esambert published Le Troisième Conflit mondial in 1968, he traced the contours of an economic war with positive virtues: not only did this “soft” war replace the real war in the West, but it was also a stimulus for industrialized countries, engaged in a profitable competition for all. Furthermore, the Cold War forced the nations of the Western bloc into a de facto solidarity that further limited the effects of their economic rivalries.
It was precisely this balance that was upset in 1991 with the fall of the USSR and the end of communism. From that moment on, nothing stood in the way of the capitalist and free trade model which, until then, represented only one of the two economic systems at work on the planet. Now the arena is global and hardly anyone challenges the rules of the game, but at the same time the end of the war does not bring down the politics of power; it moves them from the military and geopolitical terrain (clash of blocs, peripheral conflicts, etc.) to the economic and commercial terrain (rivalry between powers over resources, the struggle for market share, etc.). According to Luttwak, “in the future, fear of economic consequences could settle trade disputes, and certainly more political interventions motivated by powerful strategic reasons.” If Luttwak probably underestimated the importance that geopolitical issues would maintain, he underlined the new dimension of our globalization: that of economic competition between nations Far from thinking like the men of the Enlightenment that trade softens morals, it believes that trade is only one of the modes of war when its armed side weakens.
Winners of the Cold War, the United States was in fact the first to take stock of the change that the world was going through. Basically, the Cold War gave them the opportunity to subsidize entire segments of their economy.
But if at the beginning of the 90s, the geopolitical argument collapsed, the economic discourse remains in all its purity. In the same year, Secretary of State Warren Christopher officially declared that “economic security” was to be elevated to the top foreign policy priority of the United States of America.
In other words, the winners of the Cold War have officially declared economic war on the rest of the world. The perspective is certainly largely liberal; everyone has their chances and can win this game, but the discourse is ambiguous because it is tinged with the defense of national interests. In the end, it mixes both liberal and mercantilist rhetoric, principles hardly compatible in the eyes of economists but perfectly legitimate for politicians.
In order for a country to be fit to fight in economic warfare, it needs a state, that is – Esambert would say – a resolute warlord, who knows the profession of arms and who reduces the morale and spirit of conquest to the economy.
Yet in the 1980s and 1990s, in the era of neoliberalism and the Washington Consensus, the state had been mistreated; it was seen as an obstacle to economic development and therefore President Reagan was not afraid to say that “the problem is the state”. Financial globalization, the transnationalization of companies, the intensification of international trade have rung the death knell for this relic of the past. Not only has the state resisted the neoliberal potion, it is now making a comeback. The state continued to play its role of overseeing the private space by creating a favorable legal, fiscal and infrastructural environment for the economy. In our current context, states have also taken on the role of military leaders, to conquer markets and resources, both to secure their power and to enrich their businesses and their fellow citizens.
In fact, the state has a certain number of prerogatives or capabilities that companies are naturally lacking. The state can think long-term, finance long-term when companies prefer the short or medium term. Furthermore, it can implement expensive tools at the service of its companies to distinguish the sectors of the future, the fields in which they have an interest in investing; in short, the state has a far better view of the battlefield than any of its troops. The Japanese example of the MITI has a paradigmatic value, as demonstrated by the pioneering studies of the Paris school of economic warfare directed by Christian Harbulot.
It is also the state that guides the dynamics of tomorrow by setting goals: thus, the Lisbon strategy that the EU member countries adopted in 2000 intends to make the Union “the first knowledge economy” by 2010 by explicitly linking this goal to that of full employment. Only a state can tackle these kinds of tasks, the scope of which far exceeds the financing capabilities and motivations of a business.
States don’t wage wars without troops. These are businesses, large and small.
But what does all this mean specifically?
First of all, it concerns a simple but at the same time extremely delicate question in an era of globalization: the nationality of companies. Isn’t it an illusion to say that more and more multinational companies, owned by foreign capital, are American?
Indeed, economists have shown that, despite the logic of transnationalization, the idea of “corporate nationality” is not obsolete. First, because a number of strategic companies are protected by states: directly when they are shareholders indirectly when they are guarantors their independence from foreign companies. We recall, for example, that in 2006 the Bush administration forced the Dubai Port World company to sell to AIG International the management of the six large American ports carried out by the P&O company that DPW had purchased. Likewise, advertising firm China National Offshore Corporation was prevented in 2005 from acquiring the US company Unocal. What does this mean if not that states easily recognize national companies, even if their capitalization is now international?
In short, even in the era of the “Global Players”, we can speak of nationality of companies.
Secondly, we can assimilate the present large companies, even more so the multinationals, to the legions of the late Roman Empire; mixed, variegated, composed of Roman cadres and barbarian troops, they are nevertheless the army of the Empire. Today’s companies, despite their global character, still maintain a national foothold. Furthermore, the recent Peugeot bailout around an alliance between the family, the French state and the Chinese manufacturer Dongfeng illustrates well that the idea of a national company did not die with globalization, it is only more complex than in the past. .
Returning to contemporary economic warfare this can be read as a traditional conflict, with its war objectives. The first is to defensive carette: saving industrial jobs. This challenge has become an obsession as relocations or subcontracting to low-wage countries are draining our industrialized countries.
Why this obsession with industrial jobs in our outsourced world? It is because our post-industrial societies, in the sense that most of the GDP no longer comes from the secondary sector, are no less industrialized than they have ever been. Not only do industrial jobs generate tertiary employment, but there are also many that require a qualification. Bernard Esambert speaks of an “industry-service symbiosis” to designate this pair formed by the high-tech industry and the service sector that accompanies it. Losing the former to the advantage of the new industrial powers means losing the latter and risking regress, not to mention the risk of unemployment or underemployment, which no democracy can bear in the long run. Advocates of economic warfare therefore believe that industrial employment must be defended and even maintained . Beyond the economic debates about their cost-benefits, the destruction of jobs is difficult to accept in the eyes of voters and, therefore, decision makers.
The other objective of the war, decisive for the states, is no longer defense but the conquest of markets and scarce resources. Economic warfare scholars have clearly demonstrated the intensification of the war for the control of natural resources, mainly for the control of hydrocarbons.
Perhaps nothing better than this example illustrates in the eyes of its proponents the obviousness of economic warfare: oil is a scarce and limited resource. Every drop gained by one is lost by the other. Therefore, as it is the basis of development, it is necessary for each state to ensure a secure and continuous supply. The inexorable struggle that the United States and China are waging for African oil but also for the other resources of the subsoil of this continent is an example of this. Absent in Africa 25 years ago, China is now the third largest trading partner after the United States and France; for two thirds it imports oil, but also metals, cotton and precious stones.
This war for natural resources is the scene of a reversal of the balance of power between Western countries on the one hand and emerging and / or developing countries on the other. The rise of China, of the BRICS, the rise of sovereign wealth funds in the Arab oil exporting countries would demonstrate this. In economic warfare, resources are powerful ammunition. And everything suggests that this conflict will escalate.
The International Energy Agency estimates that energy needs will increase by 50% by 2030, in part due to Indian and Chinese growth. The search for raw materials will in fact become a crucial issue for the States. As early as 2007, the Committee on Critical Mineral Impacts on the US Economy published a report in which it lists eleven minerals that are particularly crucial to the American economy due to their scarcity, their need in high-tech industries … the more coveted, is rhodium, used in particular in catalytic converters, and found in Russia but also in South Africa, a much better ally than Moscow. Rare metal, today it is the subject of struggles in which states and multinationals fight side by side. As guarantor of the national economy, each State is called upon to draw up, in its own way, a list of the resources that are or will be essential for it.
The “scarce resources” also include companies that today more than ever are falling prey not only to their private counterparts but also to governments. As such, the crisis has facilitated the entry into the capital of very large companies in the countries of the South through powerful sovereign wealth funds. The large investment funds of the United Arab Emirates, in particular Dubai and Abu Dhabi, have invested extensively in favor of the economic crisis in prestigious companies in difficulty: EADS, AMD, Sony, Citigroup … The Chinese sovereign fund holds almost 10% by Morgan Stanley. As for the Singapore fund, it entered the equity of Merril Lynch at the same level. Here we find the idea of revolution in the North / South hierarchy: winning in the economic war is not a legacy. The newcomers are shaking up the old hierarchy. Saudi Arabia is estimated to be responsible for 5% of US GDP thanks to wealth creation made possible by the use of Arab oil. Suffice it to say that Riyadh has a strategic advantage over its powerful economic partner.
Finally, there is a scarce and strategic commodity that constitutes a relatively new objective of the war: information. It is now important that companies and states know their opponents, their exact technological level, their strategy, in order to be able to anticipate them. Sometimes we speak of cognitive warfare to refer to the advanced weapon of economic warfare. In fact, the acquisition of information with high added value is also essential for the development of the tango economic activity as much as the accumulation of financial capital and the coordination of human skills. If states now want to help their companies gain market share, they must equip themselves with economic intelligence programs, otherwise they will lag considerably behind in a form of struggle that appears increasingly crucial as all the immense theoretical and operational work done by Ecole du guerre economique founded by Chrustian Harbulot.
In short, our time is woven of contradictions; on the one hand, the states hold an official speech supporting, sometimes with nuances, a multilateralism supported by the main international institutions such as the UN, the WTO, the IMF. On the other hand, everyone can see that the states are developing quite different reasoning. The imperative of solidarity in the financial field advocated by the G20 t new response to the need not to lose market share in a context of tension. In the midst of the crisis, the logic of competitiveness requires the conquest of foreign markets.
It is up to Christian Harbulot to have clearly shown this shift from Cold War Manichaeism to the multilateral economic war that states are waging today. According to him, the ally / opponent pair replaced the partner / competitor one. This transformation of possible alliances is accompanied, according to Harbulot, by a reorganization of the field of partners and competitors in geographical terms. The two blocks of the Cold War would have succeeded three blocks: the first is the degraded space of the Western world from which we can possibly extract the United States, the second is the expanded room for maneuver of the new powers, the third, finally, is space of survival of other countries. Each of these spaces follows very different power strategies. Furthermore, the members of each block are not necessarily allies as we have just seen.
Therefore, any peremptory statement becomes impossible. The United States and China are waging a relentless war over Africa’s resources. But China, through the purchase of US Treasuries, is the country that allows the United States to live on credit. Another example, China and Taiwan are political enemies but economic partners.
If economic warfare is a struggle, it is based on weapons and countermeasures. In covert warfare, a large number of tools count as weapons. The first of all is undoubtedly training: in our constantly changing societies, initial training helps create a workforce or managers prepared for change.
Likewise, the importance given to research is fundamental. Since 2010, China has more researchers than the United States, although the latter enjoy, thanks to the practice of brain drain, the sharpest minds on the planet. In this context, public-private collaboration is fundamental: in the United States, the Bayh-Dole Act of 1980 provides that patents financed with public funds – by universities or public research centers – are assigned mainly in the form of exclusive rights to private companies American.
In other words, in the eyes of states in economic warfare, the search for patents is truly a national affair, a guarantee of productivity, a decisive weapon in the perspective of a trade struggle between nations. These tools are at the service of competitiveness, this ability to face competition on external and internal markets. As for the attractiveness – which could be understood as the competitiveness of a territory – it is the object of particular attention by many states that the disputes between the European Commission and Ireland regarding Apple have brought to light.
The ultimate hidden weapon of warfare is economic intelligence. It is similar both to a weapon, which anticipates the enemy’s movement to surprise him and steal his victory, but also to a defense tactic because it anticipates enemy moves, practicing disinformation for example. The United States is the main player in this information war. We now know that the NSA, initially created in a counterintelligence logic during the Cold War, would have used the Echelon network to know the position of the European Union in 1994 during the final negotiations of the Uruguay Round. In 2014, the New York Times revealed that the agency had spied on an American law firm defending a foreign country in a trade dispute with the U.S. Information has become one of the key issues of the economic war.
As states move from covert warfare to open warfare, weapons change. These attacks can take the form of geoeconomic retaliation in response to a geopolitical crisis; this is for example the case in the fruit and vegetable embargo between the European Union and Russia.
Voluntary import restrictions also amount to retaliatory measures. The well-known example of the restrictions imposed by the United States on Japanese cars in the 1980s testifies to the violence of the conflict. Faced with rising Japanese car sales, Washington sought to protect the “Big Three”. Rather than proceed unilaterally, the US government has asked the Japanese to limit their exports. Tokyo preferred to negotiate this perfectly anti-liberal measure rather than run the risk of even more unfavorable restrictions being imposed: this is the voluntary restriction agreement of 1980.
A series of disputes between states led to the adoption of tariff peaks in retaliation; for example, the United States decided in January 2009 to triple tariffs on Roquefort in response to a ban on exports of hormone-containing beef in Europe. In each of these cases, the best offense was the defense.
When worried about avoiding frontal conflicts, states prefer an alternative approach which is to facilitate the assault of their companies on foreign markets. For this reason the political power is an ardent promoter of its companies. This ancient practice has been systematized in the United States in the form of “commercial diplomacy”. This is based on three principles: preparing the ground by liberalizing trade with the destination country; use economic intelligence, industrial and commercial intelligence to provide American companies with all the data on the ground to be conquered; finally, to set up ad hoc structures such as the War room. This offensive public strategy is entirely in the service of the private corporations that are the strength of the United States. It is in the same perspective that Washington has increased the number of bilateral free trade treaties: with most of the countries of Central America in the 2000s, with Morocco in 2006, South Korea in 2010.
Finally, there is one last weapon that, individually, is now almost the prerogative of a few emerging countries: sovereign wealth funds. Although they deny themselves, these funds take hold in sometimes strategic groups and help guide their strategy.
To cope with these dangers, those involved in economic warfare have developed policies that resemble shields or even counterattacks. In a context where customs barriers are historically low, there are other means to preserve its market: export subsidies, standards, favoritism given to national companies in one form or another (think of the Small Business Act which reserves some public procurement for SMEs) In short, all means are good.
So it is with money, which has long been – and continues to be – a defensive weapon in the hands of states, especially in the form of devaluation. The UK gave us a recent example of the geo-economic use that could be made of a currency: at the height of the crisis, London let the pound slip while the euro remained strong. In this way, British exports were stimulated. We could reproduce the analysis for the yuan or even the yen at a time when Shinzo Abe has launched a policy of monetary expansion.
For large Western states, it is primarily about protecting their markets at a time when old-fashioned protectionism is almost outlawed. For emerging countries, the stakes are different: by increasing the number of regulatory sources (state, international, private, public, etc.), they weaken the universal legal system designed by the dominant states. Paradoxically, the desire to unify world trade has led to a legal fragmentation of the latter.
The rules of trade have become a battleground in a few decades. Witness the emergence in France of the notion of “economic patriotism”. Spread out in 2005 by Dominique de Villepin, then Prime Minister, the doctrine of economic patriotism is based on the idea that it would be up to the state to defend companies considered to belong to strategic sectors. In practice, success is mixed: while Suez was married to GDF in 2008 to deal with a potential takeover by Italy’s Enel, Arcelor was absorbed by Mittal.
Looking at the world today, it is tempting to provocatively conclude that war has a bright future; economic warfare of course, but also traditional warfare. But there is also a more dramatic scenario, namely that tomorrow’s economic wars can degenerate into armed conflicts.
In short, yesterday as today, historical reality is an ocean of forces that are opposed to each other, in a dynamic that determines a perpetual flow that now leads to ascent now to decline.
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