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📜 The G7 tax agreement: now aren’t you glad we try to make this newsletter funny?
🏅 The Tokyo Olympics: should the show go on?
We'll also give you the results of our forecasting question two weeks ago, and some choice responses.
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1. 📜 The G7 tax agreement
Let’s talk about the G7 and tax!
Let’s f***ing not I hear you say, and normally I’d be cussing me out right alongside you.
But stick with me, because last weekend the meeting of G7 finance ministers reached an agreement that could prove to be the most consequential change in global governance this decade.
The G7 - some quick context
In the wake of the 1973 oil crisis, four chaps decided in a library that losing so much money simply couldn’t stand. Have a guess what they called it…
‘The Library Group’. 🙄
At that point it was just the US, UK, France, and West Germany. By 1977, the slumber party had expanded to include Japan, Italy, and Canada, and the name changed to the Group of Sev….. honestly the marketing.
Traditionally, the finance ministers meet about a week before the G7 summit to sow and water the seeds of global bonhomie. The idea is to tackle the more technical issues in advance so the - how shall I put this kindly - less detailed-oriented leaders can rubber stamp and promote any agreement.
The G7 finance ministers met last weekend and agreed to a potentially very important tax deal.
The G7 Summit will take place this weekend in Cornwall (God help our retinas if Boris Johnson tries surfing).
The G20 will take place in October in Rome.
What problem were finance ministers trying to solve?
I knew that famous tax havens like Cayman Islands, British Virgin Islands, Bermuda, and Jersey offered huge tax reductions for corporations.
But I was shocked to discover that ~40% (~$650bn) of multinational profits are shifted to tax havens. Ireland, Luxembourg, and Switzerland are the main beneficiaries, and the EU and US are the biggest losers.
Wait… Ireland. What?
Yep. Ireland has emerged as arguably the largest tax haven in the world. It imposes an effective rate of <5%, which is why more than one thousand big US companies - including Google, Apple, Facebook, Microsoft, and Intel - have a big presence there.
In fact, US companies account for ~70% of the profits of the world’s hundred most profitable multinationals.
Thanks to the digital economy, the use of tax havens has never been more prolific. And due to a lack of international cooperation, regulating them has proved very difficult.
So what was agreed?
Still with me?
Ouch. Okay, I’ll be quick.
The 1st pillar: a minimum global corporate tax rate of 15%. This doesn’t mean that countries must increase their corporate tax rate if it is lower, but that multinationals in that country will be subject to a 15% effective tax rate:
Take a German multinational that books income in Ireland, taxed at an effective rate of 5%. Germany will now collect an extra 10% tax to arrive at a rate of 15%—same for profits booked by German multinationals in Bermuda, Singapore, etc.
- Gabriel Zucman, economist at UC Berkeley
The point: there won’t be an incentive for governments to offer low rates and for multinationals to seek tax havens.
The 2nd pillar: apportioning the profits to where sales are made. Firms can’t move physical customers from Scotland to the Cayman Islands (no matter how much a Scottish customer may welcome the tropical relocation), so they shouldn't get to move the profits.
The point: to avoid tax arbitrage by taxing the profits where profits are made.
The two pillars are estimated to generate an additional $50bn - $80bn a year in tax revenues for governments.
Two emerging narratives
‘This is a great thing!’
Mostly people are just excited that senior politicians and officials acted like adults for the first time in… a while:
What I’ve seen during my time at this G7 is deep collaboration and a desire to co-ordinate and address a much broader range of global problems.
- Janet Yellen, US Treasury Secretary
That is indeed important. We’re a long way from declaring 'multinationalism is back, baby!' but it's a step in the right direction. And it's probably a step that wouldn't have been possible during the Trump years.
The agreement also addresses a major reason why global inequality is widening so quickly: the biggest multinationals pay almost no tax.
So you might expect tech giants to have resisted this move:
[It's the] first step towards certainty for businesses and strengthening public confidence in the global tax system... we want international tax reform to succeed and recognise this could mean Facebook paying more tax, and in different places.
-Nick Clegg, VP Global Affairs, Facebook
He’s referring to the fact that countries (e.g. France, UK, Canada) have started to introduce digital taxes, which makes complying with multiple tax regimes more costly than actually paying more tax.
‘Pfffttt it'll never work'
Call me sceptical, but Clegg in that quote above sounds very much like a smug Mafioso who welcomes the police into his restaurant, safe in the knowledge that the body has long been disposed of.
Did I just call the former Deputy Prime Minister of the UK a gangster? Perhaps I’ll leave it to the mainstream experts:
The bad news is that the new rules are so full of holes as to put sieves to shame.
- Martin Sandbu, Financial Times
Some other criticisms:
Countries aren’t committed: the intention of the first pillar is for the global minimum tax rate of 15% to replace individual digital taxes, but countries signaled an unwillingness to do this. Do they even want global rules?
Small countries who rely on multinational tax revenues will never sign on: Irish Finance Minister Paschal Donohoe ominously suggested that countries like his could band together to ensure they weren’t left worse off (Ireland stands to lose ~$2.7bn in tax revenue).
All this is far from certain.
The agreement will need to be enacted by each national legislature, which c̶o̶u̶l̶d̶ ̶p̶r̶o̶v̶e̶ will be difficult. You can be sure that the agreement will change considerably between now and then.
That said, it’s easy to see which way the wind is blowing. Countries have had enough of unchecked globalisation. This is at least an attempt at a grand bargain - one that ‘little l’ liberals might be wise to champion.
Regardless of political philosophy, I think businesses should advocate for this best case scenario. Insisting upon genuine transparency and fairness in global business is the best way to subject globalisation to appropriate checks and balances, without rolling back its immense benefits.
2. 🏅The Tokyo Olympics: Should the show go on?
To some (me), the Olympics are the greatest show on earth, filled with pageantry, mastery, and global kumbaya. To others (I suspect most), it’s simply that month every four years when one must endure one’s mates’ overnight transformation into synchronised swimming specialists or archery aficionados.
But I think we could all do with getting at least a little hyped about the postponed 2020 Tokyo Games this summer. If not for the spectacle of watching ‘sport climbing’ as one of the Games’ six new sports, then for its symbolism as the light at the end of our collective pandemic tunnels.
A COVID ‘Armageddon’ in Japan
With less than two months until the Olympics begin, ~80% of Japanese people fear it will become a superspreader event and want their government to cancel or postpone the Games.
Their protests come amidst a fourth wave of COVID infections spreading across Japan, where only <3% of the (very much ageing) population is fully-vaccinated.
The Japanese Prime Minister Suga Yoshihide, meanwhile, insists that the Tokyo Games will be a sign of humanity’s triumph over COVID, and bring ‘hope and courage’ to the world. Against a chorus of criticism from health experts, he promises to deliver a ‘safe and secure’ Olympics (because nothing screams ‘fun’ like ‘safe and secure’, right mum?).
How did things get this bad?
Anyone who’s visited Japan has been wowed by its remarkable sophistication and efficiency.
So much so, that a Japanese rail company once publicly apologized for its train’s ‘inexcusable’ mistake of departing the station 25 seconds early.
So, why has Japan’s handling of COVID been criticised as less than sophisticated and efficient?
Despite being quick off the mark to contain COVID, Japan hit many hurdles in its vaccination rollout:
Risk-averse bureaucrats required local clinical trials for foreign vaccines (i.e. all of the vaccines).
Technical glitches overran the country’s testing and vaccine booking platforms.
A lack of manpower, since only registered doctors/nurses were permitted to vaccinate patients.
Japanese leaders failed to provide concrete plans, despite hospitals at capacity.
With an additional ~15,000 athletes, plus ~90,000 in their entourages, from 200+ countries expected to descend on Japan for the Games, you can see why so many Japanese fear the country won’t cope.
(Random aside: ‘Tsundoku’ is the Japanese art of buying books and never reading them, while ‘Blagging’, is the British art of faking you know what a book is about when you haven’t read it).
A ‘suicide mission’: why the Games are still going ahead
There are a few reasons why the show will go on.
National pride: Symbolically, the Tokyo Games were meant to be Japan’s prestigious comeback on the world stage after two decades of economic malaise and a difficult recovery from the Fukushima nuclear accident.
Domestic politics: Prime Minister Suga needs to pull off a successful Games to maintain support within his own ruling party and to resuscitate his sagging national poll numbers.
Economic cost: The fallacy of a sunk cost, hey? The Tokyo Olympics have already cost the Japanese government $26bn, more than 3x more than its estimated budget. If cancelled, the Games will symbolise a gigantic government failure.
Regional grudge: Japan’s long-standing joust with China plays a big part. If the Tokyo Games were cancelled right before a successful 2022 Beijing Winter Olympics, that would show that China has eclipsed Japan in world importance. (Yes, grown-ass world leaders still tell their people that s*** like this matters.)
International obligations: The contract between the IOC and Tokyo only allows the IOC to cancel the Games. So if Japan was to unilaterally cancel the contract, then much of the risk is borne by the Japanese organising committee. (Remarkably, a global pandemic does not qualify as a reason for cancellation, according to the contract.)
Technically, Japan still has until the end of June to pull out of these games. Considering the costs listed above, I think it’s unlikely they will cancel - despite the high risk to Japanese citizens. We should expect a wave of bad Covid-19 news this summer.
➕ Extra intrigue
Hong Kong’s national security law strikes again. Israeli web-host Wix.com was asked to remove a pro-democracy website ahead of the June 4th Tiananmen Square commemorations, which were cancelled this year ‘due to COVID’.
France suspended financial aid to the Central African Republic, accusing the government of being complicit in a Russian-backed disinformation campaign. Russia has been increasingly influential in CAR since 2018 via ‘army instructors’, which some NGOs believe have a connection with Wagner Group paramilitaries.
In Canada, the recent discovery of the remains of 215 Indigenous children at a boarding school intended to assimilate children into Canadian culture re-opened the country’s national wounds. Between 1874 and 1996, more than 130 residential schools operated to forcefully assimilate native children.
So you thought business travel was a thing of the past? Think again, because FOMO is now a key economic indicator. The CEO of Airbus, Guillaume Faury, expects business travel will return post-pandemic because people fear losing business to competitors who can meet their customers in person. Break’s over, environment.
➕➕ Extra extra intrigue
Two weeks ago, we asked: Will there be a major cyber attack on critical infrastructure in a G7 country before December 31, 2021?
We received 92 responses, and here's what you thought:
You provided lots of great reasons for your forecasts. Here are two that sum up each end of the scale:
3%. A cyberattack on critical infrastructure of a G7 country is a likely precursor to a more significant move - and I just don't see that happening in the near term (say, out to 2023).
80%. And, I quote: "Capitulation to ransom demands doth not a kidnapping deterrence make." -- me, just now.
(😂 - Very on brand for International Intrigue. Hit us up if you ever want to write a piece for us whoever you are!)
But most importantly, here’s a comment from Michał, an experienced forecaster:
I find it hard to make a forecast because there should be more precise resolution criteria. The resolution criteria should specify what is "critical infrastructure", and what would we count as positive resolution (I think you meant successful cyber attack, but this is still not precise).
Michał is, of course, spot on. In fact, we bet most of you probably spotted those problems with our question. There's an old adage in data science: 'garbage in, garbage out'.
Or put more charitably: if you don't ask the right question, people can't give the right answer.
While we were trying to demonstrate how the forecasting technique might be relevant for businesses and policymakers, we ended up demonstrating something different: if you want to use quantitative analysis to make decisions, the source of the data must be of high quality. Or maybe that was our mission all along..? (It wasn't.)
(We’re hopefully going to work with Michał and other experts to learn more about high-quality forecasting. If you ever want to get involved, let us know.)
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