Thursday, May 23, 2013

Ford closes... along with common sense

Now that Ford has finally closed its assembly plant we have a reason for the economics crowd to reveal the biases in their ‘model thinking’.

Take Possum Comitatus, aka Scott Steel, who seems to think that if Australia had a few more people we would make more stuff (is that more per capita Poss?).

Which is a bit of nonsense really.

A Twitter argument broke out between Possum, Nicholas Gruen, and our own The Prince. 

Nick - Nonsense, we’ll always make things in Australia, just less than some other countries.

Prince - Sorry, that’s BS. Switzerland, Norway, Finland. All manufacturing giants but minnows in population. It’s how you structure econ.

Possum - That utilise the EU population as a local population with common consumption demands. Ahem.

Possum - The Australian market isn’t large enough to sustain many goods specifically customised for Australia. Cars are the perfect example

Possum - Volume matters for stuff like this

Nick - So we’d export - like Volvo. Alas we woke up to that issue too late and too lethargically

Possum - We’d export to where? What other country in the world, using cars as an example - has a similar spectrum of conditions?

Prince - Population is not a cure for structural imbalances - makes house prices higher.. is that the real goal here?

Possum - Go and stick Finland, Switzerland and Norway in the middle of the Indian ocean. Reckon they’d be a manufacturing base?

Possum - Population is scale. Want cheaper house prices, build more houses.

Sorry Possum. Population is population. Scale is scale. The conflation of domestic population and industry scale, and therefore competitiveness, is one that regularly occurs. It is number two on my population myths list.

That large scale manufacturing is shifting to low cost countries is a product of globalisation - the multi-decade process of reducing barriers to international trade. It is a sign of our wealth relative wealth, but also a product of the management of our foreign account balances.

Switzerland protected its local trade-exposed industries by protecting its currency. German manufacturers are benefiting from the weak Euro, while Japan’s attempts at stimulating economy activity revolve around containing the value of the Yen.

Richard Tsukamasa Green actually has a very nice reply, outlining how in a situation of protected local markets being opened up to international trade.  He deserves quoting at length
In short, companies that produce for a market in their own country have an advantage when exporting. If we have increasing returns to scale, that is it keeps getting cheaper to produce more once you’re already producing, then the efficient, cheap producers are those who are already producing.
If so, then when it comes to trade, the countries who were producing widgets for their own market are those that provide it cheapest to everyone else. The home market has become part of the country’s comparative advantage.
Most importantly there aren’t too many cases I can think of where this advantage has been maintained without government props. Other elements of comparative advantage, like wages levels or training, seem to outweigh lingering home market effects – the massive amounts of computer hardware out of South East Asia isn’t due to their love of PCs, nor do Chinese consumers exhibit a love for…everything manufactured. The most valuable thing seems to be know how, and that is the most mobile of production factors.
The other is hat it makes the most sense when countries have been operating as autarchies and then BAM, international trade. That possibly made sense in the world of 1985 following five odd decades of global protectionism, but not now. Any developing industry will start with many countries as potential locations, regardless of where the consumer lies. The home market effect would only hold if transport costs are high so manufacturing close to customers is cheaper, but then that the lowering of costs once things get going are so great they more than offset the cost of transport.
I fully concur that this myth persists because in the period of reducing trade barriers larger domestic markets did provide a 'home market' advantage.  But this is not the world of 2013.

Let me respond to Possum point by point.

[Finland, Norway, Switzerland] “utilise the EU population as a local population with common consumption demands.”

I’m not sure what to make of this. Is he saying that foreign populations that demand the same goods generate a larger potential market? If so, that is my argument.

The Australian market isn’t large enough to sustain many goods specifically customised for Australia. Cars are the perfect example

Which is an astounding fact considering the number of different cars available from Japanese, European and US manufacturers. There must be at least 20 major brands in the Australian market, and over a hundred different models of car available. Whatever customisation they require seems a simple enough task.

After all, if Japan, Germany and Sweden can export a completed car suitably customised to Australian conditions to us, why can’t we do the same in reverse?

We’d export to where? What other country in the world, using cars as an example - has a similar spectrum of conditions?

I have no idea what ‘spectrum of conditions’ means, but the answer to the first part is easy - anywhere. If we are going to be an exporter we manufacture to the conditions of the destination countries regardless of whether they are identical to our own.

I find it funny because in Melbourne we have Boeing’s largest manufacturing base outside of North America. We assemble Volvo trucks. In fact over at Manufacturer’s Monthly there is a whole list of the companies ‘making stuff’ in Australia. It seems we can make stuff after all.

The problem of course is that the relative size of our natural resource production. Coal, iron ore and gold make up 40% of our exports. We then have education, tourism, and a whole bunch of other primary resources (gas, wheat, alumina, copper ore, beef). 

The big long term economic questions that the Ford decision reminds us about are
  1. Do we value diversity of economic production?
  2. How do we want to manage our external position given the volatility of the resources cycle?


  1. Not an argument either for or against any made in the above article, just an observation....the kind of vertical integration we see in places like China is largely absent here (yes I'm aware that China do source components elsewhere as well but I doubt it's to anything like the extent we do). Our manufacturing consists largely of screwing together imported parts. We should probably think of our manufacturing sector as mostly a "final assembly" industry, with much of the production occurring overseas.

  2. Thanks Cam, as it happens I was having this discussion last night.

  3. And given the "final assembly" nature of much of our domestic manufacturing, our domestic manufacturers may become more competitive aginst imports following a sharp fall in the currency but how many of our manufacturers are going to be in a position to pass much in the way of any savings on to the consumer as imported goods rise? They themselves are going to get slugged harder to import the pre-made materials they assemble to completion.