There is a popular Malaysian adage – "When elephants fight each other, the mousedeer dies in the middle" – where conflict between "big" entities leads to collateral damage on the "smaller" entities.
This proverb couldn't be more evocative against the backdrop of today's ever-present global trade war. As major economies inflict tariffs upon tariffs on each other, smaller economies feel the aftershock from these actions, especially in their economic growth.
The most prominent example of this is the United States (US) charging heavy tariffs on imported products from China, the E.U and several other countries to encourage more local manufacturing. With the uncertainty of Brexit, some have even hinted that this approach could be adopted to mitigate economic shocks post U.K's "divorce" from the E.U.
Seeking a safe port of call or "Labuhan"
As the effects of the trade war spill across the globe, businesses have tried different ways to mitigate the damage that ensues. Harley-Davidson, for example, declared that it will move production out of the U.S to offset a 25% tariff imposed by the E.U, a major market for their motorcycles.
Other manufacturers have ramped up production in China. Tech giant Tesla opened its first factory outside the U.S in China, while luxury car manufacturer BMW bought over majority control of a Chinese automobile venture to produce their cars locally in China, which bypasses the import taxes.
As contributors to an emerging economic bloc, ASEAN companies need a sustainable solution to offset trade war uncertainties – and setting up a holding company in an international finance centre (IFC) is a viable solution.
By their very nature, international financial centres (IFCs) are primed to facilitate trade – they offer high concentrations of financial institutions, developed commercial infrastructure, tax and currency neutrality and ease of doing business. In times of trade wars where the next tariff imposed can be a tweet away, IFCs help protect companies in these ways:
Protection against currency fluctuations. Without a doubt, trade wars influence currencies: the Chinese yuan, for example, has sunk to new lows since its devaluation in 2015 and since the trade war erupted. IFCs mitigate the risks of currency fluctuations by allowing companies to hold assets in multiple currencies while offering a myriad of banking services.
Doing business under a neutral tax regime. The trade war imposes huge tax increases – often by 15% or more. This causes costs of products and services to sharply increase, which affects companies' bottom line and customer satisfaction. IFCs on the other hand offer standard, fixed tax rates which could provide peace of mind, as well as trade relationships with multiple jurisdictions through double tax agreements (DTAs).
Providing a business-friendly location. Companies considering a more traditional offshore jurisdictions to mitigate trade war losses often have to deal with the reputational baggage of setting up in "tax havens". IFCs offer a balance – they provide facilities for businesses to incorporate at lower costs and offer easy access to manpower and professional services. At the same time, they also offer legal protection under the rule of law of established business jurisdictions, as well as compliance to international trade and tax standards.
Seeking stability in the "new normal" of trade wars
As protectionism is becoming a trend increasingly affecting economies in the West, the trade wars won't be ending anytime soon. Companies based in an export-heavy region like Asia would benefit from locating their holding structures in a midshore IFC located in their own region.
With the "larger boys" such as U.S, China and the E.U playing hardball on tariffs and taxes, the smaller boys will feel the pinch. Midshore IFCs might just be the relief that Asian companies need to weather the war.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.