Free Free Lunch by David Cay Johnston Page A

now make seven billion pairs of shoes per year, a pair for everyone on the planet each year and then some. In theory, and in the
long run, free trade should make the world richer because production will reach maximum efficiency as each country returns to the
idea of comparative advantage, specializing in what it does best. But while waiting for this economic paradise to arrive by and by,
people have to eat.
    Thanks to the new rules governing global trade, the owners of capital dine
very well. Free trade really means that capital flows freely across borders, and so do the products and services financed with that
capital. Push a button and in a fraction of a second a billion dollars goes from Wall Street to Shanghai. Hire a ship and the products
made with that capital come back to the United States. People cannot move as easily, however. Not only are there issues of
language and culture, but governments impose rules on who can immigrate and what work they can do. The difference between
rules governing the flows of capital and labor has created a powerful new force in the global economy: labor arbitrage.
    On Wall Street there are billionaire
capitalists who built their fortunes a penny, a nickel, and a dime at a time. Their business is called arbitrage, from a French word
meaning decisive judgment. Arbitrage traders follow a company’s stock on global stock exchanges. If the price of a company’s
shares is slightly lower in London than, say, New York, that difference can be captured as profit. The arbitrageur executes
simultaneous trades to buy shares in the cheap market while selling the same number of shares in the higher-priced market. There
are apartments in Manhattan filled with Renoirs and Monets bought from arbitrage profits.
    Computer technology boosted arbitrage returns by making trades faster. Today trades are done by
computers that spot price differences and execute trades faster than any human can.
    Dave
Cummings specializes in such turbocharged trading through his firm Tradebot Systems. His company employed about twenty
people in a Kansas City storefront until 2003 when it moved to New York because Cummings had a problem with the speed of light.
It takes 20/1,000 of a second for a signal from a computer in the Midwest to reach Manhattan. After careful study, Cummings
concluded that cutting the time delay to just 1/1,000 of a second increased his firm’s profits, even after taking into account the
higher costs of running his business in New York City.
    Exploiting differences in the price of
labor between two markets produces profits, too. Indeed, the potential profit in global labor arbitrage makes stock arbitrage look
like chump change.
    Consider a factory paying $27 an hour to 1,000 workers in Indiana. From
the company’s point of view, the total cost of employing these workers, including fringe benefits and taxes, is about $40 per hour.
The company shuts the factory, packs the machinery in grease, and puts it on a boat to China, where the equipment is
reassembled in a new plant. Unskilled workers can be hired in China for as little as a quarter an hour.
    Manufacturing in China means some costs are higher. The company will need to send executives and
managers to China regularly. It will have to maintain a few there full-time. Paying for American-style housing and private schools for
an executive’s children is costly, as is paying for the family’s periodic home leave. Product quality may suffer, especially at first,
which will also cut into profits.
    Then there is the cost of shipping the manufactured product
halfway around the world. However, sending a television set by sea from China to California costs less than shipping it by rail from
California to Chattanooga, which in turn costs less than shipping it by truck to a suburban retail store.
    Let’s generously assume that all those added costs of doing business in China raise the effective cost of
labor