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.