Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Destruction of US Manufacturing, Confessions of an Economic Terrorist

Economics / US Economy Jun 08, 2011 - 02:07 PM GMT

By: Andrew_Butter

Economics

Diamond Rated - Best Financial Markets Analysis ArticleJust 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, I’m 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 get’s transferred is “intangible” (as in the tax-man can’t get his sticky fingers on it).

Here is a statistic, 80% of China’s exports have “value-added”, added, in what they call “Special Economic Zones” (and what I call Free Zones). That’s huge.

Here’s another one, 50% of the earnings of S&P 500 corporations (that’s 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 wasn’t (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 Sulayem’s 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 America’s story, I don’t 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 don’t think I’m breaking any client confidentiality by “sharing”.

1: It’s nothing to do with Labor Costs.
There is a popular idea that cheap labor is why America lost its manufacturing jobs, perhaps that might play a part in something (although if it did, why didn’t Germany and Japan lose more?), but there is nothing I ever saw to support that notion.

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 that’s not core to what Free Zones are about.

2: Infrastructure.
Things had to work; planes & ships had to arrive on time, and go places on time, plus telephones, electricity, water and waste needed to work, all the time. Sheikh Rashid bin Sultan, once said to someone I knew, “I will build the infrastructure and the rest will follow”. How right he was, but you go to USA or UK, and the infrastructure is lousy, the money that gets paid by corporations in tax, does not end up servicing their needs.

3: Security:
 A lot of people have this thing about other people stealing what they got; and whether the crooks are government “gate-keepers” hustling kick-backs, clever tort lawyers, or the mafia, it makes no difference. And violence is a real turn-off; you would be surprised how important having proper laws and decent-honest policemen are for people making 10-Year or so investment decisions. You think America is a “safe” place to do business? Well sorry to have to break the news, compared to a lot of places, it isn’t, and I got “genuine customer feedback”, to prove it.

4: Tax.
Of course, and sure, (2) and (3) have got to be in place first, that’s what marketing guru’s call an “absence of gross-negatives”, but tax is huge.

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%; it’s 37% in UK. The interesting thing is that not a big part of the total tax-revenue comes from that source (in UK it’s about 7%, I didn’t find what it is in USA, perhaps I didn’t look hard enough, but I don’t imagine it’s much different). The reason it isn’t 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 1990’s 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 don’t 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 don’t 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.

That’s called “Killing the Golden Goose”.

5: Free-Labor Markets
In Jebel Ali, you want to employ a one-eyed cross-dressing transvestite from Bangladesh; well you just submit an application with a copy of his passport, three photographs, and $1,000. Two-days later you got a three-year-work visa. Nobody is going to ask you why, or tell you that the quota for those has been filled, so come back next year.

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, that’s why he was selling. Well, I could find him ten decent and competent people who could do both of those things, tomorrow, but he wouldn’t 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 he’s one of the most honest and decent people I ever met – but don’t piss him off!!

Sure the labor is cheap, but that’s 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, that’s just an input; but if you can’t buy the skills, when you want them, you are nowhere.

Immigration doesn’t 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

That’s 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

A good businessman always makes sure that the person he sells something to, can, if he wants, sell it on and make a decent margin. Whenever you do business, you need to think, not just “what I can get out”, you need to think “what am I bringing, that’s special”, because if you don’t keep an eye on that, one day someone is going to kick you out of your little niche.

 Free Zones add value to the inefficient and corrupt places where they are located, over the other side of the fence. That’s 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, that’s 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, it’s not the cost of labour; it’s 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 can’t 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 don’t 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.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. 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.

© 2011 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

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Rich
09 Jun 11, 22:04
US corporations

US corporations pay 9% of total US tax receipts:

http://en.wikipedia.org/wiki/File:U.S._Federal_Receipts_-_FY_2007.png


Rich
11 Jun 11, 11:33
FAIR TAX

I see the FAIR TAX proposal as solving #4 TAX and part of #6 PAPERWORK and #7 TRICKLE-DOWN by eliminating corporate income tax and its paperwork requirements.

A Free Economic Zone would be the full-monty.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules