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Business Title: Destruction of US Manufacturing, Confessions of an Economic Terrorist Just in case anyone has an idea to dispatch seventy-two SEALS by helicopter to deliver me a tap-tap, like they did to that other guy, save your money, Im a minnow. If you want to know the real culprits, have a look at this chart: The blue line is US Employment in Manufacturing (from the St Louis Fed), the purple line is the cumulative amount of money that Americans (mainly US Corporations) invested in projects outside of USA, instead of inside USA; (from the BEA time series on International Transactions (Line 51)). http://www.bea.gov/international/index.htm#trade Do I need to draw a picture? That line is probably an under-estimate of the value that was sucked out of USA and sent elsewhere. Because when you set up a factory in a Special Economic Zone in Guangdong Province or somewhere, to manufacture something that you know you can sell, particularly in USA; because you own the patents and the distribution and the brand. You also have the luxury of transferring intellectual capital, outside of the beady eyes of US tax-inspectors reading up the statutes on Transfer Pricing; so a lot of what gets transferred is intangible (as in the tax-man cant get his sticky fingers on it). Here is a statistic, 80% of Chinas exports have value-added, added, in what they call Special Economic Zones (and what I call Free Zones). Thats huge. Heres another one, 50% of the earnings of S&P 500 corporations (thats the E in P/E) are generated outside of America. My part in all that: In June 1990 I drove with my business partner at the time, to meet with His Excellency Mr. Sultan bin Sulayem, who was then the Chairman of the Jebel Ali Free Zone. The meeting had been set up because Sulayem had been invited to speak at the Confederation of British Industry in UK about how British companies might like to invest in the Zone. The head of the Dubai Promotion Board had figured it might be nice if someone wrote his speech and perhaps coached him a little on his delivery technique. We were a boutique consultancy doing work for the Board, so we were asked to lend a hand. As we drove through quite a few miles of flat empty desert inside the fence that designated The Zone, I remember thinking, Who on earth are they trying to fool? The idea at the time, if ever you could get someone to sit down long enough to think about it for more than one minute, was that General Motors was going built factories; which wasnt (in our humble opinion), very realistic
.and the place was empty, like a desert, with roads and lamp-poles here and there, waiting for
GODOT? Anyway, we put together a 20-Slide presentation; that was in the days you shot the Power Point onto actual slides and carried them around in a Xerox carrousel to put in a slide projector. We wrote a script to go with the slides (being careful never to follow a line-chart with a line chart in case our customer lost his place, and started inadvertently talking about the wrong slide), and Sulayem did his homework like he was told, and submitted to a practice session, and off he went. The trip was a success, he kept to his 20-minute time-slot (one minute per slide); and at the end, everyone clapped; mission accomplished. From then on for about five years, we wrote all of Sulayems speeches, and not just for him, for other Excellencies too; after the word got around that people tended to clap when you delivered one of our presentations, rather than going to sleep and having to be woken-up at the end. During that time, we managed to sell the idea that if the Zone was to be successful, then it might be a good idea to devote some very modest resources, as in put money into our pockets (since the speech thing was a complete loss-leader for the time we spent), to find out (a) who were the potential customers, and (b) what they might want, that the Zone could offer? That was a pretty radical idea at the time. So we got hired to do research, we pulled together information on all the Free Zones in the world, we did cross-section analysis, and we interviewed everyone who had expressed an interest the zone (mainly on the telephone). Based on that we kind of eased the marketing strategy away from this is what we got, take it or leave it, into this is how we can meet your needs and exceed your expectations. Whether we had any effect is impossible to know, but from flat-lining for the ten previous years, the numbers of new arrivals and also the exports from the Zone went up by 40% a year (compounded) for four years. And whether what we learned applies directly to Americas story, I dont know, most of the customers were European, or from the region. The point of that story is that we found out a lot about why corporations, Europeans, in particular, some Americans, were moving out of the safety behind the wall that keeps the Great Unwashed separated from the Great Washed, into the danger zone. Seeing as that was twenty years ago (or so); and when we started off there were only 300 companies registered in the Zone; now there are over 6,000 so I dont think Im breaking any client confidentiality by sharing. 1: Its nothing to do with Labor Costs. One thing we found out pretty-quick; was that the ability of the new-arrivals to hire cheap labor and suck blood out of their veins before throwing them on the scrap heap; was not an important reason why they were coming. In point of fact, the labor was relatively expensive because there was a minimum wage, there were laws on how many hours people worked, you had to provide decent accommodation (luxury accommodation by Third-World Standards), there were strict Health, Safety and Environmental rules that were enforced, and the employers had to pay for medical care. In short, compared to the indignities that Wet-Backs in USA and the kids who strap themselves under trains to get into fortress Europe, have to endure, it was Paradise. Sure, you can find other less salubrious Free Zones elsewhere, but right from the start the Unique Selling Proposition of the Jebel Ali Free Zone, was never as a place where you could squeeze the last drop of blood out of cheap labor and make a profit out of doing that. Regardless, if the applicants business model was to do that, and there were plenty, they got told to go elsewhere; none of the decent companies were interested in that business model. The stuff you read about exploiting labor; is done by sub-contractors, on the fringe of what the whole Free Zone idea is about, and often outside; sure you can make money, good money, doing that, but thats not core to what Free Zones are about. 2: Infrastructure. 3: Security: 4: Tax. A while back in America, they had this idea about no taxation without representation; that got changed to shake-down the dirty capitalists so we can live off their ill-begotten riches. Corporate taxation in USA is 38%; its 37% in UK. The interesting thing is that not a big part of the total tax-revenue comes from that source (in UK its about 7%, I didnt find what it is in USA, perhaps I didnt look hard enough, but I dont imagine its much different). The reason it isnt much is (a) the cost of the process of making sure you pay less tax, is tax-deductable, so a huge amount of GDP is devoted to employing legions of accountants and lawyers so as to pay less tax, (b) since the early 1990s there has been an alternative, as in Free Zones outside USA (and Europe). And the point is that when you pay that 38%, you often dont get much if anything in return. Think of it; you set up a factory or a business process, you employ people, but you have to pay out of your nose to support all the people in the area where you set up your business, who dont work for you! That might sound logical to some people, but the reality is that faced with that incentive, a lot of people, quietly
leave. Thats called Killing the Golden Goose. 5: Free-Labor Markets A friend of mine went to USA last month to check out a 2nd Hand 500-ton crane he was buying. The guy he was buying it from told him that he had a real problem finding anyone who could maintain or operate it, thats why he was selling. Well, I could find him ten decent and competent people who could do both of those things, tomorrow, but he wouldnt be able to get them a visa, particularly since three of the ten come from Peshawar, and the best one has got a huge beard and wears a short skirt; he prays five times a day without fail (as in he got religion with a capital R), and hes one of the most honest and decent people I ever met but dont piss him off!! Sure the labor is cheap, but thats just what it costs. No one is forced to come to leave their village in Pakistan or Philippines to travel half-way around the world to work, except that they want to leave behind the corruption and chaos. The point is, you work out the cost, and do your calculations, in Germany or Japan, which both seem to manage OK, you have high labor costs, so you automate more, thats just an input; but if you cant buy the skills, when you want them, you are nowhere. Immigration doesnt steal jobs, unreasonably preventing it, does. 6: Paperwork The United States Federal Tax code, is 70,000 pages, in 1940 it was 400 Pages. http://politicalcalculations.blogspot.com/2010/03/growing-complexity-of-us-federal-tax.html Thats what happens, when you get lawyers involved; particularly American Lawyers who are trained to never use one word when ten will do, and who charge by the kilo of output they generate. When Sheikh Rashid set up the Jebel Ali Free Zone, he told the lawyers who drafted the pro-forma agreement that potential customers would sign, to keep it short. Legend has it they came back with 30 pages, and he threw it back at them, and again, and again, until they managed to say everything that needed to be said, in two pages. Surprisingly, the Free Zone has survived. 7: Trickle-down Free Zones add value to the inefficient and corrupt places where they are located, over the other side of the fence. Thats what happened in China, and it happened in the Jebel Ali Free Zone, the success of the zone which attracts in business, creativity, opportunities and money, which would have never come in 1,000 miles of those countries, had there not been the protection of the zone, which sustains and adds value to the host country. Persuading US Corporations to invest in USA and not Guangdong Province: Follow the trend-line on the chart from after the War to 1979, and extrapolate, if the investment had not piled out of America, there would perhaps be 24 Million people employed in manufacturing in USA today, as opposed to just under, 12 Million. Meanwhile as one bunch of economists after another pontificates about how it is possible to create jobs and Make America Great Again, by tinkering with the base-rate, playing tricks with the money-supply, and lambasting China for over-valuing their currency, the thing that once made Americans swagger, so sure in their invincibility, is gone. Personally, I liked that, sure Americans used to be really in-your-face, but they were great, I liked their optimism, their can-do, and their generosity, and I learned a lot from them, old and young, fat and thin, when I was young
but from what I see, thats gone; replaced by fear and insecurity. None of the economic horse manure that counts as policy in USA, goes anywhere close to solving the real gross negatives, that cause US corporations to think twice, or more, about where to locate their latest business process, and certainly, I know a lot of people who do manufacturing, none of them are even contemplating setting up in USA. And like I said, its not the cost of labour; its the cost of government, and dealing with government. There is a town in California, with a population (at night) of zero people, it sustains a lot of people, but the people around and about cant put their hands in the pockets of the businesses that operate there; there is talk of closing it down. Perhaps, if there is anyone in America who wants Change, then once the clever monetary and economic policies are seen to fail (again), some thought might be directed at creating more towns like that, which can escape whatever it was that paralysed American Manufacturing? The point of Free-Zones is to create an environment where free-enterprise, and free-markets can thrive; and when all the rest is so corrupted by silly laws, regulations, and special interests, sometimes you just need to start over. And dont talk about the 38% corporate tax which would be lost, you can only lose something you got, and there are plenty of ways to make that up taxing rich people, and people with jobs.
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