The Post-American World - Fareed Zakaria [96]
IPOs and foreign listings are only part of the story. New derivatives based on underlying financial instruments like stocks or interest-rate payment are increasingly important for hedge funds, banks, insurers, and the overall liquidity of international markets. (Derivatives can be important in bad ways, of course; derivatives based on home loans helped cause the mortgage crisis. But many derivatives are plain-vanilla contracts that help businesses minimize their risks.) And the dominant player on the international derivatives market (estimated at a notional value of $300 trillion) is London. London exchanges account for 49 percent of the foreign-exchange derivatives market and 34 percent of the interest-rate derivatives market. (The United States accounts for 16 percent and 4 percent of these markets, respectively.) European exchanges as a whole represent greater than 60 percent of the interest rate, foreign exchange, equity, and fund-linked derivatives. McKinsey’s interviews with global business leaders indicate that Europe dominates not only in existing derivatives products but also in the innovation of new ones. The only derivatives product in terms of which Europe trails the United States is commodities, which accounts for the lowest overall revenue among major derivatives categories.
There were some specific reasons for the fall. Many of the massive IPOs in 2005 and 2006 were privatizations of state-owned companies in Europe and China. The Chinese ones naturally went to Hong Kong, and the Russian and Eastern European ones to London. In 2006, the three biggest IPOs all came from emerging markets. In 2010, China Agricultural Bank raised $22.1 billion in the largest IPO ever. (It beat out the $21.9 billion IPO of another Chinese bank to win the title.) But this is all part of a broader trend. Countries and companies now have options that they never had before. Capital markets outside America—chiefly Hong Kong and London—are well regulated and liquid, which allows companies to take other factors, such as time zones, diversification, and politics, into account.
The United States continues functioning as it always has—perhaps subconsciously assuming that it is still leagues ahead of the pack. American legislators rarely think about the rest of the world when writing laws, regulations, and policies. American officials rarely refer to global standards. After all, for so long the United States was the global standard, and when it chose to do something different, it was important enough that the rest of the world would cater to its exceptionality. America is the only country in the world, other than Liberia and Myanmar, that is not on the metric system. Other than Somalia, it is alone in not ratifying the international Convention on the Rights of the Child. In business, America didn’t need to benchmark. It was the one teaching the world how to be capitalist. But now everyone is playing America’s game, and playing to win.
For the last thirty years, America had the lowest corporate tax rates of the major industrialized countries. Today, it has the second highest. American rates have not gone up; others have come down. Germany, for example, long a staunch believer in its high-taxation system, cut its rates (starting in 2008) in response to moves by countries to its east, like Slovakia and Austria. This kind of competition among industrialized countries is now widespread. It is not a race to the bottom—Scandinavian countries have high taxes, good services, and strong growth—but a quest for growth. American regulations used to be more flexible and market friendly than all others. That’s no longer true. London’s financial system was overhauled in 2001, with a single entity replacing a confusing mishmash of regulators,