Hamish McRae: Power is shifting away from governments

Politicians now have to take into account the reaction of the global business community

So Nasdaq, the New York electronic stock exchange, wants to buy the London Stock Exchange. London says no, but since Nasdaq already owns 30 per cent of the shares, there is a fair chance that it will succeed.

It is a story at three levels. It is another example, albeit a high-profile one, of the fact that everything in Britain is up for sale. Beyond that, it is an indication that London now rivals New York as a global financial centre, on several measures outstripping it. And moving on from that, it shows how the new area of competition between governments is in their ability to fine-tune both taxation and regulation in order to attract global business. A word about each.

The "for sale" notice has been hung over the UK for such a long time that we tend to regard a foreign bid for a UK trophy asset as routine. On Monday it was the Stock Exchange, yesterday West Ham - a few souls might even regard the latter as a more important symbol. Besides, even if there is an asymmetry between the way we treat foreign bids and most other countries treat ours - and there is - the fact remains that the UK earns much more from its overseas assets than it pays out on foreign-owned assets here.

Nevertheless, the lack of reciprocity may become more of a concern in the future. It would, for example, be impossible for the London Stock Exchange to make a bid for Nasdaq: US regulation would, in practice, block it. Just last week at an official do in Whitehall I listened to a foreign industrialist praising the British regulatory environment. He was immediately followed by a British industrialist, who noted that his company had extensive overseas activities and he wished other jurisdictions were similarly helpful to him.

This asymmetry is not just an issue for developed countries. As China and India play an increasing role in international investment we will find the divergent treatment of foreign interests increasingly irksome.

However, the fact that the UK has got a favourable approach to foreign investment is one of the reasons why London is doing so well vis-à-vis New York. On most measures of international, as opposed to domestic, financial business London is now ahead: international bank loans, international equity trading, internationally-traded insurance, over-the-counter derivative trading, foreign exchange, and so on. The only areas of international finance where the UK is clearly behind New York are private equity and hedge funds.

Indeed this year it looks as though more money will be raised by companies in London than in New York, the principal reason being that international companies in the "new" economies, such as Russia and China, find it easier to comply with London's regulatory environment than New York's.

Does that mean we are a soft touch? Well, not really because well-crafted regulation and a predictable legal environment are essential to investor confidence. On both counts the UK leads the US. That is partly because the Americans have shot themselves in the foot with the onerous Sarbanes Oxley legislation that followed the collapse of Enron.

The problem, however, goes beyond one bit of legislation. It is the wider perception that the US is not very welcoming to foreign interests at a host of different levels. This includes the practical business of getting into the place. Just this week a survey by the Discover America Partnership showed that international business travellers see the United States as the world's worst country in terms of getting a visa and, when you arrive, getting way past rude immigration officials. That is just a survey but it is supported by hard data. The plain fact is that business visits to the US are running 10 per cent down on 2000, and that during a period of huge economic growth.

Suddenly America has become worried. On Monday Hank Paulson, US Treasury Secretary, called for a fundamental rethink of how the US regulates its capital markets, questioning the entire legal system rather than any specific legislation. That followed a speech two weeks ago by John Thain, chief executive of the New York Stock Exchange, who called for a "rebalancing" of the US legal and regulatory framework. So even the US, with its vast scale, is aware that business can walk, indeed is walking.

This last point seems to me to be the most interesting. We are used to a world where democratic governments make legislation and introduce regulation at the behest of their electorates. They may not succeed in doing what their electorates want but they do try to do so. Frequently, new legislation seems to have a perverse effect and sometimes they misread what the electorate wants. But these failures are the result of politicians' incompetence rather than their motives.

But now, in this global world economy, there is a new force to be recognised. Politicians still have to pay heed to their electorate but they also have to take into account the reaction of the global business community. That affects every country, even the US, which accounts for nearly one-third of the world economy.

This is not entirely new, for there have been occasions in the past where a piece of ill-judged US legislation has driven business offshore. Back in 1963 it brought in a new tax, the Interest Equalization Tax, on foreign companies that wanted to raise money in New York. The business moved to London, which created the eurobond market, the first of the international financial markets that have been developed here since the 1960s.

But there have been very few such examples. By and large the US market has been such an attractive one at every level that any company with global ambitions feels it has had to grit its teeth, hire bodyguards in the form of expensive New York lawyers, and plunge in.

That era seems now to be coming to an end. This shift of mood applies to companies seeking to raise money but also to those seeking to sell goods. The US market, both in financial and physical terms, may be vast, but if entering it makes you liable to all sorts of legal attacks you might be better to focus attention elsewhere. Besides, if you want to grow you should look at India and China and the other "emerging" economies.

The big point here is that every government has to recognise that its freedom of action when framing business taxation and regulation is much more curtailed than it was even a decade ago. Power has shifted. Some niche countries, such as Ireland, have been so clever at crafting a business-friendly environment that they are forcing changes in business taxation right across Europe. If London is gaining business from New York, it is also losing it to Dublin.

To some people this will all seem a bit alarming. Elected governments are no longer supreme, for they have to trim to global business. What does that say about democracy? But I find it tremendously comforting. That is partly because competition almost always improves performance, so more competition between governments ought to help them lift their game. But is also comforting, surely, to see that even the US system of governance has to take global preferences into account.

As for the London Stock Exchange's future owners, I for one do feel a little uneasy about a New York takeover. We would not want any spill-over from US regulation to be imported here. Maybe we could get Iceland to bid for the Stock Exchange and have New Yorkers get their hands on West Ham.