The shine comes off Dubai for British expats and the wealthy

Dubai Airport United Arab Emirates — (Image credit: Giovanni Mereghetti/UCG/Universal Images Group via Getty Images)

It was the moment the governments of the Gulf hoped would never arrive. When US president Donald Trump launched coordinated American and Israeli strikes on Iran, the Islamic Republic responded by raining drones and missiles down on Dubai and the rest of the Gulf statelets. Over last weekend, the five-star Fairmont hotel was set ablaze, drones hit a series of sites across the city and the airport was closed, leaving tens of thousands stranded, and the estimated 240,000 British citizens living and working there unable to get out.

The states of the United Arab Emirates are all key allies of the US, so to the Iranian regime at least they must look like legitimate targets. But the attacks are a disaster for Brand Dubai. The city-state has boomed over the last 25 years as a low-tax hub for the world's wealthy and its most ambitious entrepreneurs. It had dozens of sleek new office buildings, luxury apartments, glitzy shopping centres and some of the most luxurious real estate in the world. Along with the rest of the Gulf, it has turned into an engine of prosperity. A GDP of $16 billion in 2000 had by last year grown to $96 billion. As Britain, in particular, imposed higher taxes, it became the preferred refuge for the rich.

Those expatriates were not looking to move to a war zone, of course. The conflict may be resolved quickly and everything may get back to normal very rapidly. But if the conflict drags on for months, it will start to do very real damage. Dubai does not have the experience of defending itself from missiles and drone attacks in the way that Israel does. Its entrepreneurial population is by definition very footloose. It is made up of people who have already decided they have no special attachment to the country they were born in, and you can't expect them to have any greater attachment to the place where they have temporarily resettled. None of them will want to get caught up in a regional war. As soon as it is safe to do so, they will be off.

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Malta: the next Dubai?

That means there is now a huge market for a low-tax mini-state to replace Dubai. The Caribbean is one obvious potential beneficiary – the Bahamas, the British Virgin Islands and the Cayman Islands are already significant offshore centres. Some of the smaller states of central America have already started to turn themselves into low-tax hubs. El Salvador, which has made bitcoin a legal currency, is one obvious example.

There could be candidates coming forward in Europe. Malta already has lowish taxes and generous deals for expatriates. Albania and Montenegro are rapidly developing offshore industries. Italy has already captured much of the top end of the market with its flat-tax deal. Even Gaza, with its peace plan overseen by Tony Blair and Jared Kushner, may emerge as a viable alternative, especially if it has committed military protection from Israel and the US.

There is a long list of countries eager to capture some of the wealth Dubai was generating. None have Dubai's infrastructure or critical mass yet. But they could build it quickly. The template is already there. It will just take political leadership to grab the opportunity.

The low-tax mini-state is one of the key innovations of the century so far. Digital communications have made it easier than ever to move from one place to another. There are few barriers to trade, so people can do business from anywhere. And relentless rising welfare bills and ageing populations mean the tax burden is constantly going up across most of the developed world, creating more incentives for people to get out. Dubai captured that market brilliantly. The war has created a huge gap in the market.

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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.