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The New York-London Financial Nexus in the Shadow of Brexit

Martine Azuelos
p. 119-140

Résumé

While concern has been widespread that Brexit will endanger Londons status as a global financial hub, a relatedalthough far less publicizedissue is that it may also weaken London’s interconnectedness with New York, which this paper refers to as the ‘NY-LON nexus. To address this issue this paper brings it into the wider debates on the ’special’ UK-US economic relationship and on the role of financial centres in the process of globalisation. Part one focuses on the centrality of Foreign Direct Investment (FDI) and finance in the UK-US economic relationship and on the role of NY-LON as a key driver of globalisation. Part two outlines the ‘space of flows between the ‘global twin-cities and the institutional foundations underlying those flows, making the case for the locational and institutional embeddedness of globalisation in NY-LON. Keeping that framework in mind, Part three provides a few insights into the potential effects of Brexit on NY-LON and globalisation.

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Introduction

  • 1 See Wójcik, D., ‘The Dark Side of NY–LON: Financial Centres and the Global Financial Crisis’, Urban (...)

1 Since January 23, 2013 when David Cameron announced his plan to hold a referendum on British membership of the European Union if the Conservatives won the following general election, concern has been widespread that Brexit would endanger Londons status as a global financial hub. Given the importance of the United Kingdoms EU membership to the dynamism of its financial services industry, this concern was perfectly understandable. A related, although far less publicized, issue is that Brexit might also weaken London’s interconnectedness with New York—which a variety of authors have referred to as the NY-LON axis, dyad, or transatlantic core,1 and which this paper refers to as the NY-LON nexus. This weakening of NY-LON may well, in turn, lead to a shift of the global financial industry’s centre of gravity. Although at the time of writing (January 2019) whether Brexit will actually take place, and if so, under what circumstances, is still largely undetermined, this paper seeks to identify the actual and potential effects of Brexit on NY-LON and, consequently, on the global financial industry.

  • 2 My italics. The Cambridge Dictionary defines a nexus as ‘an important connection between the parts (...)
  • 3 This concept, which was first introduced by Manuel Castells in 1989, has been widely used ever sinc (...)

2 Choosing the word ‘nexus,2 implies that the issue of the future of the NY-LON connection is brought into the wider debates on both the past, present and future of UK-US ‘special’ economic relationship, and on the role of financial centres in the process of globalisation (the system). Thus, rather than limiting itself to a macro approach this paper also focuses on the ‘space of flows’3 between the ‘global twin-cities’ and on the institutional foundations underlying those flows.

3 The first two parts provide a general framework for the study of the NY-LON nexus, with the first focusing on the centrality of Foreign Direct Investment (FDI) and finance in the UK-US economic relationship and on the role of NY-LON as a key driver of globalisation and the second outlining the space of flows between the global twin-cities and focusing on the institutional foundations underlying those flows, making the case for the locational and institutional embeddedness of globalisation in NY-LON. Keeping that framework in mind, the final section provides a few insights into the potential effects of Brexit on NY-LON and globalisation.

The special UK-US economic relationship, financial globalization, and the NY-LON nexus

The special UK-US economic relationship since the 1980s

  • 4 In 2018 the United States of America accounted for 15.7% of global gross domestic product (GDP) com (...)
  • 5 See Azuelos, M., ‘Turning the Telescope Around. The Anglo-American “Special” Economic Relationship (...)
  • 6 Ibid.

4 Although the US-UK economic relationship is hugely asymmetrical given the obvious difference in size between the two economies,4 and although the relative importance of bilateral trade has declined for both,5 the two nations remain powerfully bound by the magnitude of bilateral Foreign Direct Investment (FDI) and the tight-knit connection between the New York and London financial centres.6

  • 7 House of Commons, International Trade Committee, UK-US Trade Relations, Second Report of Session 20 (...)
  • 8 The gravity equation in international trade is one of the most robust empirical findings in economi (...)
  • 9 As underlined by the World Trade Organization, Regional Trade Agreements (RTAs) have become a promi (...)

5 As noted in a 2018 House of Commons report ‘the US is the UK’s largest single-country trade partner, with the US-UK trade relationship being valued at over £ 160 billion’.7 Yet although bilateral merchandise trade remains strong, its relative importance to each of the two economies has declined in the past few decades, reflecting what economists refer to as the gravity equation in international trade8 and the dynamics of regional integration which has been a major force in the transformation of the global economy especially since the 1990s.9

  • 10 The first of these was the Canada-United States free trade agreement signed in 1988. Since then it (...)
  • 11 The countries involved were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, (...)

6 Reflecting this trend towards regional integration are the trade agreements that both the UK and the US have entered with their closest neighbours, impacting the direction of their trade flows. In addition to the North American Free Trade Agreement (NAFTA) —recently renamed USMCA— the US has signed trade agreements with many Western Hemisphere partners10 and with major Asian economic nations in response to their rise in the global economy. Despite President Trump’s decision to withdraw from the Trans-Pacific Partnership (TPP), the fact that this was negotiated with 11 countries in Asia and the Americas is evidence of US long term ‘pivot’ to the Asia-Pacific region.11 As a result, the UK ranked only seventh among US top trading partners in 2017, far behind China, Canada, Mexico, Japan, Germany and South Korea, with UK-US bilateral trade accounting for only 4.5 per cent of US foreign trade in goods and services.

  • 12 McKinney, J., Dobson, A., P., The Anglo-American Economic Relationship’, in Dobson, A., P., & Mars (...)

7 A similar trend has occurred across the Atlantic and affected UK trade since 1973, when the UK joined the European Common Market. Thus if, as previously underlined, the US remained the UKs largest trading partner in 2017, it accounted for only 15.2% of its exports and 8.4% of its imports, while the European Unions shares were 44% and 53%, respectively. What is more, European economic integration has sharply reduced the UK’s freedom of action vis-a-vis third countries, so much so that its trade and investment relations, which were once ‘part and parcel of the very essence of the special relationship’, can no longer be handled bilaterally and are necessarily mediated by the European Union.12

  • 13 Dalingwater, L., ‘Transatlantic Services Trade and Investment: Dynamics of and Challenges to the “S (...)
  • 14 For a detailed analysis of this topic, see Dalingwater ‘Transatlantic Services Trade and Investment(...)
  • 15 See Hamilton, Daniel S. & Quinlan, J., P., The Transatlantic Economy 2018, 1, Washington, DC, Cente (...)

8 Of particular importance is trade in services, a fast-rising component of bilateral trade flows in the past decades and one whose value now exceeds total trade in goods.13 Indeed, the United States and the United Kingdom are the world’s top exporters of services,14 and the United Kingdom ranked first out of the top ten export markets for US services in 2016, while also being the leading service provider to the US.15

  • 16 Ibid., p. vii.
  • 17 Ibid.

9 Mutual foreign direct investment is an even more significant defining feature of the bilateral relationship, and its ‘real backbone’.16 Indeed, the US remains the major source of inward FDI to the UK, although its share in the total stock of foreign FDI in the UK has declined, with continental Europe now accounting for close to half of the total. The United Kingdom remains a top destination for US direct investment, although its relative importance within Europe has declined in recent years: after losing its first ranking position to the Netherlands in 2009, it had dropped to fourth place in 2017 with US FDI flows to the UK plunging by over 50% in the first three quarters of that year.17

  • 18 Ibid., p. xii.

10 The United Kingdom predominates as a source of foreign direct investment in the US. At $ 556 billion in 2017, its stock of FDI accounted for 24.4 percent of total FDI in that country, well above the shares of other major investment sources such as Japan, Luxembourg or the Netherlands. UK-based companies employed roughly 1.1 million workers in the United States in 2015.18

  • 19 Ibid., p.vii.
  • 20 . Ibid., p.18.

11 Cross-investment is vital to the relationship because foreign investment and affiliate sales drive transatlantic trade19. Indeed, intra-firm trade accounted for 52.3 per cent of UK exports to the US and 30.0 per cent of US exports to the UK in 2016.20

  • 21 Daniel S. Hamilton is a leading American expert on U.S. foreign, security and economic policy, Euro (...)

12 Notwithstanding the size of bilateral trade and investment flows between the two countries one should stress the fact that viewed from the United States, a key dimension of the special relationship in the past 45 years has been UK membership in the EU. As was clear in Daniel S. Hamilton’s21 2017 testimony to Congress,

  • 22 Next Steps in the “Special Relationship” – Impact of a US-UK Free Trade Agreement’, Testimony by D(...)

Americas significant commercial and financial presence in the UK is premised in large part on UK membership in the European Union -- the largest, wealthiest and most important foreign market in the world to U.S. companies. For decades, the UK has served as a strategic gateway to the European Union for U.S. firms and financial institutions. The primary motivation of many U.S. companies to invest in the UK has not been to serve only the UK market but to gain access to the much bigger EU Single Market. Similarly, many U.S. banks and financial institutions have relied on ‘passporting’ via London to access the Single Market. U.S. affiliates based in the UK export more to the rest of Europe, in fact, than U.S. affiliates based in China export to the rest of the world.22

  • 23 House of Commons Library, ‘Financial Services: Contribution to the UK Economy’, Briefing Paper no 6 (...)
  • 24 Passporting refers to the fact that banks and financial instituions that are authorised in a Eur (...)
  • 25 House of Commons Library, ‘Financial Services: Contribution to the UK Economy’, op. cit.
  • 26 McKinsey Global Institute, Digital Globalization: The New Era of Global Flows, March 2016, p. 55.

13Indeed, the fact that 44% of UK financial services exports were destined for the EU27 in 201723 is evidence that ‘passporting’24 has played a key role in the growth of the UK’s financial industry in the past few decades. This is of course something that will affect UK-US post-Brexit negotiations and weaken Britain’s position vis-à-vis the United States. With London accounting for 50% of the UK financial industry25, one can see why Brexit poses a particular challenge to the City and to the NY-LON nexus. This is why, in addition to the macro-economic approach followed so far, it is useful to narrow the lens to these twin global cities. Indeed if ‘nation-states are not the only unit of analysis for understanding globalization’,26 focusing on NY-LON may help us understand that it is not only at the heart of the UK-US relationship, but has also been a key driver of globalisation in the past few decades.

The NY-LON nexus as a key driver of globalisation

14 If finance has been a driving force accounting for the deepening and speeding up of globalization since the 1980s, Britain and the United States have been key actors in this momentum. Indeed, the wave of financial deregulation initiated by both countries in the 1970s (and which was then gradually implemented in most other economies) turned finance into a global industry in which New York and London developed into interconnected financial hubs. Both cities flourished under the favorable political and legal environments which domestic reforms and financial globalization created. From the late 1970s, as economic policies implemented across the Atlantic promoted free markets, free flows of capital, and financial deregulation, they not only increased the role of financial institutions in the domestic economies but also strengthened the transatlantic interconnection of financial markets and institutions.

  • 27 Sassen, S., Global City, Princeton, NJ, Princeton University Press, 1991.
  • 28 Castells, M., ‘Globalisation, Networking, Urbanisation: Reflections on the Spatial Dynamics of the (...)
  • 29 McKinsey Global Institute, Digital Globalization, op. cit.
  • 30 Wójcik, D., ‘The Dark Side of NY–LON’, op. cit., p. 2740.
  • 31 Sassen, S., ‘The Global City. The De-nationalizing of Time and Space’, in Stocker, G., & Schöpf, C. (...)

15 What was particularly important in the process was that the interconnectedness which was being built between London and New York not only affected the twin cities themselves and the economies of the two nations to which they belong, but the whole global economy. Indeed, as Sassen first showed in 1991,27 as they turned into global cities London and New York became mega nodes28 in the global economic system. Indeed, ‘global cities are the real engines of the world economy.’29 As Wojcik has argued there is a ‘special relationship between these two cities in financial matters, underpinned by a special relationship between the USA and the UK, central to the operation of global financial markets and the process of financial globalization.’30 Contemporary globalisation may have been characterized by rapid growth in flows of knowledge, capital, goods and people across the world, but it has also been embedded in a number of cities and institutions—a process which Sassen refers to as the locational and institutional embeddedness of economic globalization’.31

  • 32 Ibid., p. 2744.

16 Thus, commenting on the dark side of NY-LON, i.e. the role it played in the 2007-2008 global financial crisis, Wójcik notes that [t]he crisis did not originate in an abstract space of financial markets; to a large extent it originated in [NY-LON]32 which was

  • 33 Ibid.

an important component of the multi-causal mix that underpinned the global financial crisis. New York and London have served as platforms for firms and individuals, as social and cultural milieus in which the types of behavioran explosive combination of hubris and complacencyfuelling the crisis flourished.33

  • 34 As Christian Meissner, global head of corporate and investment banking at Bank of America Merrill L (...)
  • 35 Moss, S., Special Report: An Outsider’s Guide to the City of London’, The Guardian, May 27, 2014 ((...)

17To this day London and New York remain the most integrated global cities in the global economy. Thus, while being a constituent part of the US-UK economic relationship, NY-LON is also a prominent actor in global finance, servicing clients operating well beyond US and UK territory. Big global players—be they American, Asian, or Europeanhave built a presence in New York because of the sophistication of its stock exchanges, but also because of the size of the US market, its integration with its two NAFTA neighbours, and the number of transnational corporations headquartered in the United States. The same big players have built a presence in London for reasons which have less to do with the interest they have in the UK’s domestic economy than with Britain’s time zone and membership of the European Union, as well as with the financial and professional expertise developed in the City of London.34 The banks may be in London, but the business they conduct is abroad, with customers not only located in Europe and the Middle East, but as far East as India and as far South as South Africa.35

Locational and institutional embeddedness of globalisation in the NY-LON nexus

Defining the NY-LON nexus as a space of flows36

  • 36 See note 3, above.

18 The NY-LON nexus cannot be fully understood unless one realizes the dominance of the two cities in the process of globalization process that has characterized the world economy since the 1980s. As Sassen argued in 1999,

  • 37 Sassen, S., ‘Global Financial Centers’, Foreign Affairs, vol.78, no.1, Jan.-Feb.1999, p. 76.

[g]lobalization usually implies decentralization. But while the international network of financial centers is indeed expanding, a leaner system dominated by a handful of strategic cities is evolving. As financial operations disperse around the world, only a few cities […] have the resources to be dominant. First among them are London and New York, with their enormous concentrations of resources and talent.37

  • 38 Pettis, M., ‘Why the Crisis Will Increase NyLon’s Dominance’, Newsweek, May 23, 2009 (http://www.ne (...)
  • 39 Hall, P., et al., ‘London, Reluctant Metropolis’, Urbanistica, May-August 2003, p. 31.
  • 40 Calingaert, M., The Special Relationship— Economic and Business Aspects: American Perspective’, in (...)

19 Indeed, the coining of the portmanteau word NY-LON suggests that the two cities are a single city separated by an ocean.38 Or, as Hall put it ‘London and New York [] represent the two poles of a transatlantic metropolis.’39 The two cities are closely-knit financial hubs and they form a single nancial market []. Each is a nancial powerhouse, and each is an undisputed nancial center—London in Europe and New York in the United States.’40

  • 41 Smith, Richard J., ‘Networking the City’, Geography, vol. 90, no 2, 2005, p. 172-176.
  • 42 Taylor, Peter J., Lang, Robert E., ‘U.S. Cities in the “World City Network” ’, Brookings Institutio (...)

20 Indeed, ‘the joining up of cities through trans-national networks and flows of capital, people, information, practices and economic activity [] is increasingly fundamental to the changing geography of the world.’41 And, as Taylor and Lang explain, world cities are ‘the global service centers of the world economy. As such, the network of flows between [these cities] provides a skeletal spatial organization of contemporary globalization.’42

  • 43 McKinsey Global Institute, Digital Globalization, op. cit., p. 63.

21 Moreover, global cities ‘serve as major waypoints for global flows’.43 Thus

  • 44 Ibid.

[a]cting as a waypoint generates significant economic output and high-quality jobs, and it helps a city accumulate knowledge, skills, and talent, with positive spillover effects on its broader economy. Once a city has established itself as a waypoint for a particular flow, other economic activity tends to coalesce or co-locate along with it. A city that establishes itself as a financial hub, for instance, is likely to attract insurance companies and other professional service firms.44

  • 45 Wójcik, ‘The Dark Side of NY-LON’, op. cit., p. 2737.

22This clustering process has been at work for centuries in London and New York, accounting for the fact that despite competition from other financial centres that have emerged in the past thirty years, notably in Asia, they have retained their lead. Following Wójcik who has characterized financial centres as ‘concentrations of financial activity, expertise, and power’45 one may therefore argue that NY-LON represents a space of its own, one which has been established and nourished by the continuous transatlantic flows of professionals operating in both cities, the transactions they conduct thanks to continuous use of ICTs, as well as by the flows of finance, insurance, auditing, tax, and consulting services these transactions consist in, and by transatlantic investment in the industries generating them.

  • 46 Ibid.
  • 47 The CityUK, Key Facts about the UK as an International Financial Centre 2017, Dec. 2017.

23 The strength of this interconnection has built on expertise, developed throughout decades of UK-US cooperation and competition in the spheres of banking, market finance, insurance, auditing, tax, and consulting and fund management services. Wójcik insists on the ‘degree of commonality, complementarity and connectivity between the two leading global financial centres.46 Indeed, not only have they created a single space, but each of them has a competitive advantage in some lines of business and they also complement each other. Thus the New York stock exchanges (NYSE and NASDAQ) are pre-eminent for stock-trading, and New York is also preeminent in hedge fund management and private equity trading. Meanwhile London is a world leader in foreign exchange trading (37% of world total), international bond trading (with around 36% of secondary market turnover in 2016), cross border bank lending (16% of world total) and international insurance premium income (6% of world total). It ranks second, after New York, for its private equity market, for over-the-counter (OTC) interest-rate derivatives trading (39 % of world total) and as a centre for hedge fund management (with nearly 13 % of global assets).47

  • 48 McKinsey Global Institute, Digital Globalization, op. cit., p. 63.
  • 49 This is calculated by rank and change over previous year in each flow. Ibid., Exhibit 25.
  • 50 Reed, Dan, ‘New York-London Is The World's First Billion-Dollar Airline Route’, Forbes, July 9, 201 (...)

24 If, as the McKinsey Institute regrets, ‘data on global flows are not available at the city level’48, various indicators can be used to track the intensity of flows in goods, services, people, finance, data and communication and calculate city participation in major flows. Not surprisingly London and New York rank first in financial flows.49 An often used indicator is airline passenger traffic, with the New York - London route often cited as the busiest (and most profitable) in the world.50

  • 51 This is definition 3 for the noun flow given by the Merriam-Webster Dictionary.
  • 52 The concept of institutional thickness was first proposed by Ash Amin and Nigel J. Thrift in 1995 (...)

25 By definition flows, which are ‘smooth uninterrupted movements51 can vary depending on circumstances. One reason they have gathered momentum in the case of NY-LON is the ‘institutional thickness’52 of the nexus.

The institutional foundations of the NY-LON nexus

  • 53 The role of institutions in economic life has been an object of study since the seminal contributio (...)

26 Indeed, an additional element which makes the NY-LON nexus really unique is that it is rooted in a thick web of institutions whose nature and scope extend beyond the economic and political realms53. In approaching this nexus we can argue that the concept of ‘institutional thickness’ can be usefully applied.

  • 54 The LSE has 479 listed foreign companies, the NYSE 485 and the NASDAQ 388.

27 The role played by formal institutions in the forming of the nexus is indeed highly visible. Underlying the flows of finance, insurance, auditing, tax and consulting services, the flows of international investment are the institutions employing the individuals instrumental in making those flows take place, among which commercial and investment banks, as well as firms providing related professional services such as insurance companies, audit firms, tax consulting firms, corporate law firms, accountants, management consultants, fund management firms and hedge funds. Also noteworthy is the presence of institutions organizing markets such as the London Stock Exchange54, the London Bullion Market, the London Metal Exchange, the New York Stock Exchange, or NASDAQ. So is the presence of regulatory authorities, such as the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in London, and the Federal Reserve Bank of New York, although most regulatory agencies have their central offices in Washington. So is, finally, the presence of major education and training institutions offering degrees and courses giving students with the skills required in the various professions which are vital components in the lives of both financial centres.

  • 55 Brown, G., Beyond the Crash. Overcoming the First Crisis of Globalisation, London, Simon and Schust (...)
  • 56 Stafford, P., ‘LSE springs surprise with choice of chief’, Financial Times, April 14, 2018, p.17.

28 But informal, or tacit, institutions also matter. In addition to the fact that the same language is used in both cities, it has also often been noted that a common business culture prevails in them. Indeed, shared belief in and practice of Anglo-Saxon capitalism has been widespread among NY-LON business elites since the 1980s, as noted by Gordon Brown in his account of the 2007-8 financial crisis.55 Other sources refer to apparently more trifling details relating to the individuals working in the NY-LON financial nexus. Thus news of the appointment of David Schimmer, an American citizen, to the position of CEO of the London Stock Echange was commented upon by the Financial Times in April 2018 as illustrating the fact that these transnational individuals who people London’s financial centre move from positions in the private sector (here, Goldman Sachs, where Schimmer spent most of his previous career) to the public sector.56

  • 57 Amin, A., Thrift, N., ‘NeoMarshallian Nodes in Global Networks’, International Journal of Urban an (...)
  • 58 Beaverstock, Jonathan V. ‘Transnational Elites in the City: British Highly-Skilled Inter-Company Tr (...)

29 It has also been noted that, whatever their countries of origin and nationalities, these individuals often have similar psychological profiles and tastes, sharing a common international experience and outlook, which is enough to build a sense of community among them. As Amin and Thrift note, ‘[t]he City […] is a social centre of the global corporate networks of the financial service industry, with a large throughflow of workers from other countries, and people simply meeting.57 The same can be said of the New York financial districts. The transnational connections, relationships and organisational ties developed by professionals employed in those districts occur not only in their offices but in specific meeting places, such as wine bars, pubs, restaurants, gyms, clubs, conference centres, hotels and state offices.58 This has led to the emergence of a specific ecosystem which could be threatened by Brexit.

Brexit’s actual and potential impact on NY-LON

Brexit’s impact on the anticipations of representatives of the financial industry

  • 59 James, S., Quaglia, L., ‘Brexit, the City and the Contingent Power of Finance’, New Political Econo (...)
  • 60 See above, note 21.

30 Following David Cameron’s January 2013 speech, representatives of the UK financial industry expressed their concerns that Brexit would pose a challenge to the interests of the City of London.59 Leading representatives of US financial institutions with a well-established presence in London lost no time voicing their fears that Brexit would threaten London’s preeminence as a global financial centre and lead them to relocate at least part of their business elsewhere. Echoing the view that D.S. Hamilton would present three years later in his statement to Congress,60 giants such as KPMG, Goldman Sachs or JPMorgan stressed that losing the passport that London-based firms enjoy to operate on a cross-border basis within the European Union (passporting) would force them to move their operations to EU member countries :

  • 61 See House of Commons Library, Leaving the EU, Research Paper 13/42, 1 July 2013, p. 49 (www.parliam (...)

We believe that a key risk to London’s retaining its status as a financial hub is an exit by the UK from the European Union. In common with financial institutions across the City our ability to provide services to clients and engage in investment activities throughout Europe is dependent on the passport that London-based firms enjoy to operate on a cross-border basis within the Union. If the UK leaves, it is likely that the passport will no longer be available, thereby forcing firms that wish to access EU markets to move their operations to within those markets.61

  • 62 House of Commons Library, Leaving the EU, op.cit., 2013, p. 49.

31Thus if Brexit undermined London’s status as a global capital of finance it would also seriously weaken the NY-LON nexus. In the days that followed the June 2016 victory of the Leave vote, the New York Times claimed that ‘London’s days as the pre-eminent global financial capital, ranked even ahead of New York, may be numbered.62 The referendum result was a genuine shock to the City, which spared no effort to lobby the UK government and EU negotiators so as to weigh on the negotiation and minimize the damage of Brexit to its own interests. The European Banking Authority would be transferred to Paris where big banks like JPMorgan Chase and Bank of America, but also Middle East banks announced plans to send some their teams.

  • 63 Van Reenen, J., ‘Brexit’s Long-Run Effects on the U.K. Economy’, Brookings Papers on Economic Activ (...)

32 The Brexit vote also raised concerns among about higher trade costs with Europe, which would in turn impact inward investment adversely. As the largest share of FDI inflows into the UK goes to the financial services industry (which accounts for 45 % of FDI stock63), the future of this industry once Britain had left the EU would affect the amount of investment in it. The widespread feeling was that the NY-LON interconnection was therefore likely to suffer severely in the years following Brexit.

  • 64 Lancaster House Speech, January 17, 2017.
  • 65 As a study published by the Institute of Fiscal Studies notes ‘the majority of UK exports and impor (...)

33 Notwithstanding Theresa May’s commitment to lead her country to embrace a strategy that would build a truly Global Britain64 and to negotiate bilateral agreements with a number of countries, notably the US, negotiating such agreements could only begin once Brexit was effective and would take time. Moreover most analysts agreed that the UK would be in a much weaker position —given the size of its GDP— than as a member of the EU. All the more so, in the case of an agreement with the US, that Donald Trump’s key objective was to put America first. The size of UK-US trade might therefore decline for a while, and whether it would rebound in the medium term would also depend on the terms of the trade agreement eventually struck between the two partners and on the way this would affect the cross-border supply chains in which companies operating in the UK participate. Indeed, as the UK is not always the final destination of many of the goods it imports,65 Brexit was likely to disrupt these supply chains if goods and services exported from the UK no longer enjoyed free access to the EU markets, which would be the case if it withdrew from the customs union and single market.

The state they’re in… and what to expect next

  • 66 London loses top financial centre ranking to New York’, Financial Times, September 12, 2018.
  • 67 Rawlinson, K., & Sabbagh, D., ‘Brexit warning from investment firm co-founded by Rees-Mogg’, The Gu (...)
  • 68 Ullah, S., ‘Why is it important for large international banks to be based in the City?’, City of Lo (...)

34 Two and a half years after the June 2016 referendum, while extreme uncertainty as to the future of the Brexit process still prevails, the consequences have been surprisingly milder than many had predicted. Indeed, although London has lost its global city leadership status to New York, the fact remains that it still ranks a close second.66 Out of a total of 362,000 financial services jobs in London, fewer than 700 have been moved or created overseas because of the prospect of Brexit. Opinion remains divided as to the consequences Brexit will have on its activity and appeal to foreigners. While Remainers still expect Brexit to be damageable to London’s status as a financial centre, Leavers claim that after quitting the single market and customs union the country will benefit from being able to set its own rules and no longer be a ‘rule taker’ from Brussels. And while major US banks such as Citi, Morgan Stanley and Bank of America have revealed that they would be opening new offices in Frankfurt or Dublin, and even a British hedge fund like Somerset Capital Management (which was co-founded by leading Brexiteer Jacob Rees-Moggs) has set up an investment fund in Ireland,67 many other banks have delayed decision as to whether or not they would move, and if so how many jobs they would cut.68

  • 69 UK remains top destination for inward investment, but Germany and France are closing the gap as Br (...)

35 On the other hand it cannot escape notice that U.S. FDI flows to the UK plunged in 2017 and further declined in 2018. As an Ernst and Young report notes, investors expressed clear concerns surrounding Brexit, which contributed to the UK’s declining attractiveness and a decline in FDI projects in certain sectors, including financial services, business services, and logistics. There was also a marked increase in UK outbound investment in 2017, mostly to Germany and France, as UK businesses appeared to be accelerating their activity to position themselves for a post Brexit environment. That trend was evident in the financial services sector, logistics and particularly prevalent in business services.69

36 While the City of London will most certainly lose business post Brexit, one of the key challenges it already faces in anticipating the future is to attract new business to make up for the expected loss. Most analysts agree that to remain attractive it will have to reinvent itself, as it has previously done with great success, as Hall and Wójcik insist,

  • 70 Hall, S., & Wójcik, D., ‘Ground Zero to Brexit: London as an International Financial Centre’, Geofo (...)

the regenerative capacity of London has been one of the leitmotifs of its development as an IFC [International Financial Centre]. In this way, the power of London as an IFC is not a ‘thing’ that has been held by London and can simply be destroyed or taken to another financial centre in Europe, Asia or to New York. Rather, it includes an ability to reinvent itself, even in the face of adversity.70

  • 71 Allen, J., ‘The City and finance: changing landscapes of power’, The Economic Geography of the UK, (...)

37Indeed, as a ‘space of flows’, as Castells terms it, a financial centre is ‘something that is made and remade; a precarious achievement subject to the networked abilities of a multitude of bankers, brokers, dealers and investment managers, which hinges upon their own sense about what is put together.’71

  • 72 Philip Hammond, Speech at the FinTech conference held in Canary Wharf on March 22, 2018 ; and Mansi (...)
  • 73 Cassis, Y., ‘Introduction’, in Cassis, Y. & Wójcik, D., (eds.), International Financial Centres aft (...)
  • 74 Quoted in Hall, S., ‘Any Brexit deal on financial services could have unpredictable implications’, (...)

38 Losing the status of Europe’s financial capital means that London will have to innovate to preserve or regain its current status as a global financial hub. In 2018 Theresa May and her Chancellor of the Exchequer Philip Hammond were confident that Britain could rise to the challenge and ‘redefine [its] place in the global order once again’ by [l]eading the race to the top in such innovative lines of business as FinTech, Green Finance or cybersecurity and making it easier for the UK financial sector to hire the best from around the world’ and train workers for the jobs of the future.72 However, some experts, like Youssef Cassis, feared that London’s international influence would be diminished and become more akin to that of Singapore than that of New York.73 The extent to which its reinvention might affect its ecosystem, institutional thickness and complementarity with New York remains highly uncertain to this day. As the Chairman of HSBC commented to the UK Treasury Select Committee in 2017, ‘the ecosystem in London is a bit like a Jenga tower. We don’t know if you pull one small piece out, whether nothing happens or indeed if there is a more dramatic impact’.74

Conclusion

39 During the run-up to the June 2016 referendum undeliverable promises were made. In trying to deliver on these promises, the UK government was therefore faced with mission impossible, and what was true of the whole negotiation process applies more particularly to financial services which, like the rest of the UK economy, will be deeply affected by Brexit.

40 More specifically, Brexit is likely to impact negatively the ‘institutional thickness’ of the NY-LON nexus. True, the centrality of finance in the UK and US economies remains unchallenged to this day. And close US-UK cultural exchange, which the use of a common language facilitates and which has fostered cultural and policy transfers, has played a role in the formation of a shared transatlantic business culture which will not vanish overnight. What is more, the clustering of transnational talent and expertise in London may not be negatively affected if the London international financial centre can reinvent itself by developing innovative lines of business. But the extent to which this reinvention will impact the web of formal institutions which have sustained the strength of London’s financial industry remains difficult to predict.

  • 75 The term ’Slowbalisation’ was coined in 2015 by Adjiedj Bakas, a Dutch trend-watcher, to describe a (...)

41 More fundamentally perhaps, characterizing NY-LON as a space of flowsalso means that in the long run Brexit may transform the nature and direction of flows which have shaped and given substance to the interconnectedness between the twin global cities. This, in turn, might weaken the NY-LON nexus and foster the trend towards Slowbalisation.75

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Notes

1 See Wójcik, D., ‘The Dark Side of NY–LON: Financial Centres and the Global Financial Crisis’, Urban Studies, vol. 50, no 13, 2013, p. 2736-2752.

2 My italics. The Cambridge Dictionary defines a nexus as ‘an important connection between the parts of a system or a group of things’.

3 This concept, which was first introduced by Manuel Castells in 1989, has been widely used ever since to refer to [t]he material arrangements that allow for simultaneity of social practices without territorial contiguity. It is not purely electronic space […] It is made up first of all of a technological infrastructure of information systems, telecommunications, and transportation lines. See Castells, M., The Informational City: Information Technology, Economic Restructuring, and the Urban-Regional Process, Oxford, Basil Blackwell, 1989 and Manuel Castells, Grassrooting the Space of Flows’, Urban Geography, 1999, vol. 20, no. 4, p. 294-302.

4 In 2018 the United States of America accounted for 15.7% of global gross domestic product (GDP) compared with 2.24% for the UK. See International Monetary Fund, World Economic Outlook, October 2018.

5 See Azuelos, M., ‘Turning the Telescope Around. The Anglo-American “Special” Economic Relationship in the “Post-American” World’, in Groutel, A., Pauwels, M.-C., & Peyronel V., (eds.), Revisiting the UK and Ireland’s Transatlantic Economic Relationship with the United States in the 21st Century, London, Palgrave Macmillan, 2017, pp. 23-55.

6 Ibid.

7 House of Commons, International Trade Committee, UK-US Trade Relations, Second Report of Session 2017–19, 25 April 2018.

8 The gravity equation in international trade is one of the most robust empirical findings in economics, which states that bilateral trade between two countries is proportional to their respective sizes, measured by their GDP, and inversely proportional to the geographic distance between them.

9 As underlined by the World Trade Organization, Regional Trade Agreements (RTAs) have become a prominent feature of the Multilateral Trading System (MTS).

10 The first of these was the Canada-United States free trade agreement signed in 1988. Since then it has signed the North American Free trade agreement (NAFTA) with Canada and Mexico in 1992, the Central American Free Trade Agreement (CAFTA-DR) in 2005, and bilateral free trade agreements with Chile, Peru and Colombia. Under the Trump administration NAFTA has been renegotiated and a new USMCA (United States Mexico Canada Agreement) was finalized by the end of September 2018. At the time of writing (January 2019) this is pending ratification by the three countries which are parties to it.

11 The countries involved were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP negotiation was initiated under the Obama administration and concluded in October 2015, with the agreement signed by the 12 partners, including the United States, in April 2016. From that date they had two years to ratify it.

12 McKinney, J., Dobson, A., P., The Anglo-American Economic Relationship’, in Dobson, A., P., & Marsh, S., (eds.), Anglo-American Relations: Contemporary Perspectives, London, Routledge, 2013, p.145.

13 Dalingwater, L., ‘Transatlantic Services Trade and Investment: Dynamics of and Challenges to the “Special Relationship” in the Twenty-First Century’, op. cit., pp.185-204. See also Hamilton, D., S., & Quinlan, J. P., The Transatlantic Economy 2017, Washington, DC, Center for Transatlantic Relations, 2017, p.146.

14 For a detailed analysis of this topic, see Dalingwater ‘Transatlantic Services Trade and Investment," op. cit.

15 See Hamilton, Daniel S. & Quinlan, J., P., The Transatlantic Economy 2018, 1, Washington, DC, Center for Transatlantic Relations, 2018, p. 20.

16 Ibid., p. vii.

17 Ibid.

18 Ibid., p. xii.

19 Ibid., p.vii.

20 . Ibid., p.18.

21 Daniel S. Hamilton is a leading American expert on U.S. foreign, security and economic policy, Europe, and international affairs. A former Executive Director of the Center for Transatlantic Relations, he is currently Austrian Marshall Plan Foundation Professor at Johns Hopkins University.

22 Next Steps in the “Special Relationship” – Impact of a US-UK Free Trade Agreement’, Testimony by Dr. Daniel S. Hamilton, U.S. House of Representatives, Joint Hearing by the Subcommittee on Terrorism, Non-Proliferation and Trade Subcommittee on Europe, Eurasia and Emerging Threats of the Committee on Foreign Affairs, February 1, 2017, p. 4 (https://docs.house.gov).

23 House of Commons Library, ‘Financial Services: Contribution to the UK Economy’, Briefing Paper no 6193, April 2018.

24 Passporting refers to the fact that banks and financial instituions that are authorised in a European Economic Area (EEA) state can carry out activities in any other EEA state. Definition given by the Bank of England (https://www.bankofengland.co.uk/prudential-regulation/authorisations/passporting).

25 House of Commons Library, ‘Financial Services: Contribution to the UK Economy’, op. cit.

26 McKinsey Global Institute, Digital Globalization: The New Era of Global Flows, March 2016, p. 55.

27 Sassen, S., Global City, Princeton, NJ, Princeton University Press, 1991.

28 Castells, M., ‘Globalisation, Networking, Urbanisation: Reflections on the Spatial Dynamics of the Information Age’, Urban Studies, vol. 47, no. 13, November 2010, p. 2743.

29 McKinsey Global Institute, Digital Globalization, op. cit.

30 Wójcik, D., ‘The Dark Side of NY–LON’, op. cit., p. 2740.

31 Sassen, S., ‘The Global City. The De-nationalizing of Time and Space’, in Stocker, G., & Schöpf, C., (eds.), Unplugged: Art as the scene of global conflicts, Ostfildern-Ruit (Germany), Hatje Cantz, 2002, p. 18.

32 Ibid., p. 2744.

33 Ibid.

34 As Christian Meissner, global head of corporate and investment banking at Bank of America Merrill Lynch, explains, London’s time zone makes it easy to do business with Asia or emerging markets in the Middle East or Africa. See Pooler, M., ‘New York and London Vie for Crown of World’s Top Financial Centre, Financial Times, October 1st, 2014, (http://www.ft.com/intl/cms/s/0/b388de4c-174b-11e4-87c0-00144feabdc0.html#axzz3UAMDWDw3), date accessed January 19, 2019.

35 Moss, S., Special Report: An Outsider’s Guide to the City of London’, The Guardian, May 27, 2014 (https://www.theguardian.com/cities/2014/may/27/-sp-special-report-an-outsiders-guide-to-the-city-of-london), date accessed January 19, 2019.

36 See note 3, above.

37 Sassen, S., ‘Global Financial Centers’, Foreign Affairs, vol.78, no.1, Jan.-Feb.1999, p. 76.

38 Pettis, M., ‘Why the Crisis Will Increase NyLon’s Dominance’, Newsweek, May 23, 2009 (http://www.newsweek.com/why-crisis-will-increase-nylons-dominance-80071), date accessed January 19, 2019.

39 Hall, P., et al., ‘London, Reluctant Metropolis’, Urbanistica, May-August 2003, p. 31.

40 Calingaert, M., The Special Relationship— Economic and Business Aspects: American Perspective’, in McCausland, J. D., &. Stuart, D. T., (eds.), US-UK Relations at the Start of the 21st Century, Strategic Studies Institute, 2006, p. 23.

41 Smith, Richard J., ‘Networking the City’, Geography, vol. 90, no 2, 2005, p. 172-176.

42 Taylor, Peter J., Lang, Robert E., ‘U.S. Cities in the “World City Network” ’, Brookings Institution, Survey Series, February 2005.

43 McKinsey Global Institute, Digital Globalization, op. cit., p. 63.

44 Ibid.

45 Wójcik, ‘The Dark Side of NY-LON’, op. cit., p. 2737.

46 Ibid.

47 The CityUK, Key Facts about the UK as an International Financial Centre 2017, Dec. 2017.

48 McKinsey Global Institute, Digital Globalization, op. cit., p. 63.

49 This is calculated by rank and change over previous year in each flow. Ibid., Exhibit 25.

50 Reed, Dan, ‘New York-London Is The World's First Billion-Dollar Airline Route’, Forbes, July 9, 2018.

51 This is definition 3 for the noun flow given by the Merriam-Webster Dictionary.

52 The concept of institutional thickness was first proposed by Ash Amin and Nigel J. Thrift in 1995 (Amin, A., Thrift, N., ‘Globalization, Institutional Thickness and the Local Economy’, in Healey, P., (ed.) Managing Cities: The New Urban Context, New York, J. Wiley, 1995, p. 91-108). Since then it has been used by economic geographers to refer to and analyze the impact of the multi-layering of institutional spheres on a region’s or nation’s economy.

53 The role of institutions in economic life has been an object of study since the seminal contributions of Thorstein Veblen and John R. Commons, and the often quoted definition given by Douglass North can be a useful starting point here. For North institutions are ‘the rules of the game in a society ; (and) more formally, (as) the humanly devised constraints that shape human interaction’. The word thus refers both to formal rules governing the way an economy and society operatessuch as the legal, political, banking, business or educational systems, the role of the state in economic life, or industrial relations—, as well as to norms, conventions, and rules of conduct or habits (informal, or tacit institutions).

54 The LSE has 479 listed foreign companies, the NYSE 485 and the NASDAQ 388.

55 Brown, G., Beyond the Crash. Overcoming the First Crisis of Globalisation, London, Simon and Schuster, 2010, p. 28.

56 Stafford, P., ‘LSE springs surprise with choice of chief’, Financial Times, April 14, 2018, p.17.

57 Amin, A., Thrift, N., ‘NeoMarshallian Nodes in Global Networks’, International Journal of Urban and Regional Research, vol. 16, issue 4, December 1992, p. 583.

58 Beaverstock, Jonathan V. ‘Transnational Elites in the City: British Highly-Skilled Inter-Company Transferees in New York City's Financial District’, Journal of Ethnic and Migration Studies, vol. 31, no. 2, March 2005, p.250.

59 James, S., Quaglia, L., ‘Brexit, the City and the Contingent Power of Finance’, New Political Economy, 2018, pp.1-14.

60 See above, note 21.

61 See House of Commons Library, Leaving the EU, Research Paper 13/42, 1 July 2013, p. 49 (www.parliament.uk/briefing-papers/rp13-42.pdf), accessed January 19, 2019.

62 House of Commons Library, Leaving the EU, op.cit., 2013, p. 49.

63 Van Reenen, J., ‘Brexit’s Long-Run Effects on the U.K. Economy’, Brookings Papers on Economic Activity, Fall 2016, p. 376.

64 Lancaster House Speech, January 17, 2017.

65 As a study published by the Institute of Fiscal Studies notes ‘the majority of UK exports and imports are now made up of goods or services that are themselves inputs into [the] production [of other goods and services] … Over half of the UK’s imports from the EU are of such intermediate goods and services, as are nearly 70% of our exports to the EU.’  Levell, P., ‘Firms’ supply chains form an important part of UK-EU trade: what does this mean for future trade policy?’, Institute of Fiscal Studies, January 8, 2018.

66 London loses top financial centre ranking to New York’, Financial Times, September 12, 2018.

67 Rawlinson, K., & Sabbagh, D., ‘Brexit warning from investment firm co-founded by Rees-Mogg’, The Guardian, June 13, 2018.

68 Ullah, S., ‘Why is it important for large international banks to be based in the City?’, City of London Economic Research Team, 2017.

69 UK remains top destination for inward investment, but Germany and France are closing the gap as Brexit bites’, ey.com, June 11, 2018. For an in-depth study of the actual and potential future effects of Brexit on FDI, see Serwicka, I., & Tamberi, N., ‘Not backing Britain: FDI inflows since the Brexit referendum’, UK Trade Policy Observatory Briefing Paper, no 23, October 2018.

70 Hall, S., & Wójcik, D., ‘Ground Zero to Brexit: London as an International Financial Centre’, Geoforum, 2018.

71 Allen, J., ‘The City and finance: changing landscapes of power’, The Economic Geography of the UK, 2010, p. 57.

72 Philip Hammond, Speech at the FinTech conference held in Canary Wharf on March 22, 2018 ; and Mansion House Speech, June 21st, 2018.

73 Cassis, Y., ‘Introduction’, in Cassis, Y. & Wójcik, D., (eds.), International Financial Centres after the Global Financial Crisis and Brexit, Oxford, Oxford University Press, 2018, p. 10.

74 Quoted in Hall, S., ‘Any Brexit deal on financial services could have unpredictable implications’, LSE Business Review, July 28, 2008 (http://blogs.lse.ac.uk/businessreview/2018/07/28/any-brexit-deal-on-financial-services-could-have-unpredictable-implications), accessed January 19, 2019.

75 The term ’Slowbalisation’ was coined in 2015 by Adjiedj Bakas, a Dutch trend-watcher, to describe a reaction against globalisation. It has subsequently been used to refer to the fact that the ‘golden age’ of globalisation, which characterized the world economy between 1990 and 2007, may be behind us. See ‘Slowbalisation. The steam has gone out of globalisation’, The Economist, January 24th, 2019 (https://www.economist.com/leaders/2019/01/24/the-steam-has-gone-out-of-globalisation), accessed February 5, 2019.

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Martine Azuelos, « The New York-London Financial Nexus in the Shadow of Brexit », Observatoire de la société britannique, 24 | 2019, 119-140.

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Martine Azuelos, « The New York-London Financial Nexus in the Shadow of Brexit », Observatoire de la société britannique [En ligne], 24 | 2019, mis en ligne le 01 mai 2020, consulté le 19 janvier 2021. URL : http://journals.openedition.org/osb/3311 ; DOI : https://doi.org/10.4000/osb.3311

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Martine Azuelos

Professeur émérite à l'Université de la Sorbonne Nouvelle Paris 3

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