Over the past 12 months, economic and political commentators have stressed that the period of globalisation we have enjoyed over the last 30 years has shifted dramatically, and that policy makers and business leaders must now prepare for a new uncertain chapter for the global economy.
This sentiment has been further accelerated in the first few months of 2023 as leading economic players have sought to shift the status quo. The official re-opening of China has seen the world’s second largest economy return to the fore with a renewed focus on economic growth. China’s ongoing relationship with Russia, at a time when the country is facing extensive economic sanctions from the Western world, is also significant, with Russia in March announcing it is adopting China’s renminbi currency as a currency of reserve.
These developments have all raised more questions about the fragmentation of the global economy and the future of cross-border transactions, trade, and investment.
This shifting landscape has wide-reaching implications, including on the role of International Finance Centres (IFCs). IFCs, including the British Virgin Islands (BVI), have been a cornerstone for cross-border transactions and investment in the post-cold war globalisation era. The BVI specifically has contributed significantly to global prosperity through its business and finance centre, offering a neutral and trusted home for companies, providing a breadth of expertise and services that have driven forward innovation in financial and professional services. At its core, the ‘BVI Business Company’ (BVIBC) has provided a flexible corporate structure for a wide range of cross-border financial, wealth management, and corporate activities.
In this changing world, the need for international finance centres to act as vital cogs in the globalisation wheel will be more important than ever. The BVI’s robust legislative landscape, tax neutrality and agile corporate framework provide a business environment that can adapt swiftly to shifting regulations, investment trends and emerging technologies, enabling clients to successfully prepare for the next chapter of globalisation.
Beyond Globalisation – Three Scenarios For The Global Economy
In the recent report from Pragmatix Advisory, ‘Beyond Globalisation: The British Virgin Islands’ contribution to global prosperity in an uncertain world’[i], three possible directions for the future of globalisation are laid out – weaker internationalism, the bloc economy, and new economic nationalism.
The first potential scenario, described as ‘weaker internationalism’ sees no change in the direction of globalisation, but the trends continue at a slower pace.
The second scenario, ‘the bloc economy’ describes continued economic regulatory integration between countries within predominately regional geopolitical blocs, but with the blocs increasingly diverging from each other.
The third scenario ‘new economic nationalism’ would see many of the larger individual nations increasingly go their own way and become more protectionist and anti-internationalist.
At this moment in time, we are observing the potential for any of these three scenarios to be realised. For example, whilst China’s re-opening and economic alliance with Russia suggests we are heading towards a bloc economy, the country’s Premier Li Qiang recently offered a hearty welcome to US business leaders at a conference in Beijing, driving the message that the country was committed to international business and investment. China, after all, has benefitted exponentially from globalisation in recent decades and to turn its back on international trade and investment would have economic consequences on the country. On the other hand, we are also seeing a more protectionist stance from the US, whose Inflation Reduction Act has been criticised by policy leaders in Europe for discouraging trans-Atlantic co-operation and investment in the area of the green economy.
How these policies will play out remains to be seen. What we can identify with more clarity is the ongoing role of International Finance Centres in the period ahead.
Future Of IFCs
IFCs have been a vital cog in globalisation in recent decades, facilitating global investment, trade, and cross-border transactions. For example, the recent ‘Beyond Globalisation’ report from Pragmatix Advisory laid out the BVI’s global impact, finding that investment mediated through BVIBCs has been hugely impactful on the global economy, facilitating US$1.4 trillion in cross-border trade and investment, equivalent to 1.5 per cent of global GDP, and supporting around 2.3 million jobs globally.
There is a place in all three explored scenarios for IFCs to continue their work. However, we can expect the role of IFCs to shift according to what scenario is realised – dictating their direction and priorities for the coming decades.
For the weaker internationalism scenario, we expect to see IFCs such as the BVI continue to play their role as before, with international standards and markets remaining largely unchanged. There will certainly be challenges to navigate, such as existing geopolitical tensions and shifting pressures from varying markets. These challenges will require increased diversification and innovation from IFCs. But overall, their long-standing roles and potential will continue.
In the event of the bloc economy, the situation for IFCs might become more complex. The main challenges in this scenario will be a likely rise in tariffs that discourage international trade, diverging regulatory standards in areas such as tax and transparency, and an effort from blocs to limit activity across regional borders.
However, this could also open the door for new opportunities and push IFCs to explore new markets and areas of growth. Furthermore, in a world where activity across regional blocs is limited, the presence of neutral investment intermediaries, such as the BVI, between blocs will be more important than ever.
The new economic nationalism scenario would likely be the most disruptive to the overall health of the global economy. Here IFCs would become more integral than ever before to ensure that cross-border transactions and investment keeps moving.
Cross border transactions and trade have existed for as long as civilisation has – so economic nationalism will not be the end. It will however shift how trade is done and place significant importance on centres such as the BVI. As cross-border transactions become more complex and fraught with political tensions, the offshore expertise and neutrality of IFCs - and the wide range of financial and professional services in the BVI in particular - will become increasingly sought after and valuable.
BVI’s Place In An Uncertain Future
The BVI has continuously demonstrated its apt ability to understand and respond to the shifting needs of the markets. From responding to evolving regulatory standards to taking a leading role in the development of the crypto and digital assets sector, the jurisdiction has consistently proven the ability to remain nimble and responsive to change.
It is not only the geopolitical landscape that is shifting – we are currently witnessing forces such as advancing technology and the issue of climate change impact the global financial investment landscape. Consequently, we see several priorities to support our clients navigate the strong economic winds and embrace a forward-looking approach to new trends.
The first area is digital assets. The addressable market of digital assets is expected to be worth US$8 trillion and US$13 trillion by 2030, according to the ‘Beyond Globalisation’ report, and the BVI is fast becoming a renowned leader in the space. The BVI was one of the first jurisdictions to embrace the digital asset sector, with the BVI Investment Fund Association working with the Financial Services Commission to investigate ways to capitalise on digital asset funds.
The BVI is well-placed to take this leading role for several reasons. Firstly, BVI has the required financial and professional services expertise to cater for the entire life cycle of a business company, making it well suited to serve new and developing markets. Additionally, digital assets are increasingly non-geographical which makes sense for a tax neutral jurisdiction like the BVI to serve as a neutral and secure location for companies to operate in.
Another crucial factor is the BVI’s ability to deal with the complex regulatory landscape of the sector. There is currently a race between legislation and innovation in this space, with policy makers in the US, EU and Asian markets all currently exploring varying legislative approaches to crypto and digital assets to ensure due-diligence and legal accountability. The BVI’s well-respected legal system steeped in English law means that digital investors can also benefit from a trusted comprehensive legal framework.
Sustainable investment and ESG is a further key area for future growth. The value of the global sustainable fund market is predicted to be near 50 times greater by the end of the decade and the BVI is perfectly positioned to lead this area, with the needed frameworks in place for facilitating the investment. As an island jurisdiction with a deeply vested interest in the matter, the BVI has in fact already taken the lead on the regional level, and has established one of the first Climate Change Trust Funds in the Caribbean, allowing it to receive funding for climate-related projects and create a structure to explore how we can maximise the impact of funding as well as providing crucial vehicles and expertise to facilitate green bond deals.
We cannot be certain what lies ahead for globalisation and what scenario will come to dominate the next decade of the global economy. In any case, IFCs will continue to facilitate cross-border transactions and investment, ensuring that the benefits of globalisation can continue to be realised. In this ever-changing landscape, the BVI will remain a steadfast and trusted partner, supporting clients in managing their cross-border activities and contributing to global prosperity and jobs.