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The power of States versus multinationals
16 Sep 2021
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CATEGORIES: Spain Global Europe Macro Global Insights AER Public

Twenty years ago, I attended a conference held at Fontainebleau about the power of multinationals versus States. The lecturer affirmed that the scale of multinationals was growing geometrically, reaching such high levels of economic and political power that the scope for action of countries became increasingly irrelevant.

I recall that he compared the turnover of five very important companies, which, according to him, exceeded the GDP of an average country like Spain (he was confusing turnover with GDP, although they are two different magnitudes). To ‘fight’ against this trend, the lecturer had set up a ‘Club’ linked to a European capital, a forum for debate so that States could confront evil corporations. Behind the lecturer stood three professors whom I did not know. One of them took the floor and said, "I do not agree with anything that has been said here". He then picked apart the populist speech of the lecturer.

After such a long time, it is worth revisiting the issue and analysing this reality from a static and dynamic point of view.

First, it is true that a context of low interest rates has led to a high volume of mergers and acquisitions, a process that has resulted in larger companies.

Second, it is correct to state that over the last decades there has been a phenomenon of competition between States to attract investment via tax reductions. While tax competition may be a healthy practice, there have sometimes been flagrant abuses.

Third, admittedly, firms have nowadays a significant bargaining power over employees. This is not new. The contribution of corporate income to GDP has been rising since around the mid-1970s at the expense of labour. The reasons are quite complex, but they have nothing to do with evil capitalist conspiracies, but rather with the massive entrance of baby boomers into the job market in the 1970s, the wage dispersion generated by technological disruption, and China’s and other emerging powers’ involvement in global trade market and supply lines.

But, what has been happening recently?

Broadly speaking, and referring to the relative bargaining power of companies versus employees, I believe we are at the verge of a turning point. Baby boomers are retiring, and not enough young people are joining the labour market to replace them. In this context, workers will progressively improve their bargaining power relative to their employers, which will lead to a higher labour factor in GDP, a process that has already begun.

China halted Ant Group's IPO, aiming to curb the power of its payments subsidiary, Alipay. Recently a leaked confidential Communist Party document proposed banning the profits of any company involved in education. Since then the Chinese stock market has plunged, especially its technology sector. One of the worst hit stocks is Tencent, owner of WeChat, China's equivalent of WhatsApp.

The US has announced a new competitive regime hostile to corporate concentration. The new head of the Federal Trade Commission, Lina Khan, has published well-known papers criticising Amazon's power and its alleged practice of incurring losses to eliminate competitors. Both Amazon and Facebook have challenged her appointment saying she is ‘biased’. In any case, the Biden Administration have stated it bluntly: they will curtail corporate power. This is illustrated by the recent termination of the agreement to merge two of the world's largest insurance brokers, Aon and Willis Towers Watson, worth some $30 billion. The United States is currently debating not only to restrict as much as possible the acquisition of large technology companies, but also the possibility of splitting them up, as happened with Standard Oil in 1911.

The European Union launched recently a crusade against bigtechs; fines imposed on companies such as Google or Amazon amounting to billions of euros in recent years. Moreover, it has spearheaded a regulatory effort and even directives such as the PSP2 (data directive) are setting the standard for global regulation.

The 130 most representative countries have reached a basic agreement on corporate tax rate, with terms that affect specifically big techs. It is a global breakthrough (there are 196 countries in the world).

I do not judge in this opinion column whether China, the United States, the European Union have moved in the right direction or if the global tax agreement is a success; I only expose the facts proving that the ultimate power lies with the State, not with multinational.

A look at the US stock index of 100 years ago proves that there is not a single company from then left in today's index. Companies rise, fall and disappear at the pace of creative destruction. This does not happen with States. That is why Spain, the United States or China have been around for centuries.

They are still in the indexes.

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