Free Free Lunch by David Cay Johnston Page B

to the equivalent of $4 an hour. That means the owner of that Indiana factory can save $36 per man-hour worked by moving
production to China.
    Moving those 1,000 jobs to China adds $72 million to the company’s
annual profits if prices are unchanged—the $80 million not spent in the United States less the $8 million spent hiring Chinese labor
and covering increased costs for shipping and executive travel.
    In a competitive market there
is simply no way that a company with 1,000 workers producing a widely available product can raise prices enough for the same
volume of production to increase profits by $72 million if it stays in America. Even by moving to China it cannot capture all of that
$72 million because competition means prices should come down as other manufacturers cut their labor costs by moving their
production offshore. But so long as prices fall by less than the savings on wages, then profits are bigger when American
companies move their factories to China. Even if prices fall so much that $70 million less revenue is collected, the company still
makes a $2 million profit increase by going to China.
    Politicians who favor more such trade
frequently assert that free trade brings new investment to the United States from distant lands. But this foreign investment in the
United States, known as insourcing, is not helping create jobs, government data
show.
    In 1990, foreign-owned companies employed 3.8 million Americans. By 2003 they had
bought companies that employed another 4.5 million workers, as well as starting new companies that created 290,000 jobs. That
suggests that by 2003 foreign-owned companies had more than 8.6 million employees in America before taking growth into
account. They didn’t.
    Foreign-owned companies employed just 5.2 million workers, analysis of
the official data by Robert E. Scott of the Economic Policy Institute shows. So, even foreign-owned companies are shedding jobs in
America, not adding to them. The net effect of insourcing by foreign-owned companies was the elimination of 3.4 million American
jobs. While insourcing creates some jobs, the constant pressure to move even those jobs offshore is the inevitable result of how
our current government rules encourage this labor arbitrage.
    Let’s return to that fundamental
economic principle of comparative advantage and what it means in this radically changed global context. In the global economy, a
comparative advantage remains only as long as governments and companies protect it. In the case of the neodymium magnets, the
United States developed and adopted a new technology that China now controls. So what happened? Three issues
coalesced—tax rules that subsidize offshoring, a lack of political interest in holding on to a manufacturing resource that enhances
national security, and the labor arbitrage rules that encourage moving jobs to China.
    As a
result of our government’s policies and actions, the Chinese government was saved the risk and expense of developing a new
technology with military as well as commercial significance. Further, Beijing acquired this technology at a bargain price because it
used its leverage—controlling which American companies are allowed to invest there—to pay less than full value.
    All of this leads to a hard truth. Under current government rules, destroying American jobs and creating jobs
overseas is the single most effective way for manufacturing companies to increase profits. From the point of view of shareholders
and executives, any policy other than moving equipment and jobs offshore as fast as possible is a waste of corporate assets.
Executives have a duty under law to husband assets and earn the maximum profit. They have no duty to stop economic pollution.
Given our current rules, any CEO who is not moving as fast as possible to move equipment and jobs offshore should be fired. Are
those the rules we want? Are those the rules that will make our