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How Much of China's Export Industry Is Owned By US Corporations?

Economics / China Economy Sep 04, 2009 - 01:24 AM GMT

By: Andrew_Butter

Economics

Best Financial Markets Analysis ArticleI don't know much about China but I know about free zones.

From 1990 to 1995 my partner and I wrote the "playbook" to entice foreign companies into the Jebel Ali Free Zone in Dubai, during that period the number of companies went from 500 to 3,000 (an increase of an average of about 40% a year), we also set up interviews with the new arrivals in to understand what were the deciding factors, and we worked out how much the zone contributed to the development of Dubai. It was considerable, in my opinion the main driver of the Dubai economy which grew in nominal terms at a rate of 15% a year since 1990 was free zones (real estate came later and that was driven by the economic growth not the other way around).


The way a free zone works is that it attracts companies that would not normally invest in a country due to problems with red-tape, corruption, organized crime, or lack of infrastructure; what they get in return is cheap labor, low taxes, security, good infrastructure, and most important a break from government meddling, plus the ultimate cherry on the cake, the option of 100% ownership; what the host country gets is the spillover supporting the new arrivals, housing, and services etc.

In JAFZ the main driver was never cheap labor, there were minimum wages, and minimum standards for health and safety and environmental controls, so if your bag is to use child labor in a polluted and dangerous industry, and pay peanuts; free zones are not the place, and there are plenty of other places where you can do that.

The basic offer to the foreign companies was that they could bring their technology and more important their market access and distribution channels, and do the real money-making work outside the meddling gaze of big government and unions, it was a way to suck the juice out of operations that were based in developed countries that had lost sight of the idea that ultimately, unless there is freedom and free markets, there is nothing. What the previous hosts lost, was the spillover economic activity that you get from having manufacturing physically located on your soil.

We used to benchmark China; it's interesting that over the past fifteen years the places that have grown like crazy; all have free zones. The other day, after a break of over ten years, I thought I'd have another look.

Free Zones in China:

Shenzhen was the first Special Economic Zone (SZE), it manufactures 14% of China's exports; set up in 1979 it is the largest one of five set up about that time. I couldn't find numbers for all the other four, but from the numbers I managed to find I reckon those five together generate about 25% of China's exports.

Depending on your definitions there are another 49 to 95 other free zones in China, called Technology Development Zones or Industrial Zones, all of which give special privileges to foreign companies, many allow 100% ownership.

After Hong Kong, on a cumulative basis USA is the largest investor into free zones in China, in the five years up to 2005 the USA provided an average of 9% of the Foreign direct Investment (FDI), and the Virgin Islands (where a lot of US Corporations are nominally headquartered, provided 12%).

In 2007 about 25% of China's exports went to USA; which is about the ratio of FDI investment; I suspect that a large proportion of those exports were US Corporations, or companies de-facto controlled by US Corporations, deciding the do the "juicy" part of their manufacturing outside of USA.

That could explain why stocks of US corporations are (relatively) healthy in spite of the fact that manufacturing is down, and why it's likely that the recovery might be broadly "jobless".

It also explains why the idea of "bashing" China for the current account deficit is pointless, as is the debate of the value of the Yuan, all China provided was an environment where free markets and free enterprise could prosper, Yankee know how and ingenuity did the rest. There is no reason why America can't do that, but "Stimulus Packages" and intrusive government, won't achieve it.

Perhaps it's time for America to get back to its roots? I'm reminded of Edward Deming who invented the idea of modern quality control, spurned in USA his ideas were embraced in Japan.

And guess who makes the best quality cars; there is a reason for that.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

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