Would you give up your job to make the rest happy?


Image source: theturthaboutcars.com

Image source: theturthaboutcars.com

Ford Motors announced that it will shut down all its manufacturing plants in Australia by October 2016, after 85 years in operation. The automotive giant incurred a loss of AUD$ 600 million from its operations in Australia in the last five years.  Two remaining automotive manufactures in Australia will be the General Motors subsidiary Holden and the Japanese Giant Toyota.

Bob Graziano, chief executive of Ford Australia has pointed towards a “… increasing challenging market conditions…” as the reason for shut down. Weak demand, high costs and a strong Australian dollar have all contributed to the non-feasibility of Ford manufacturing in Australia. The two factories that are to be shut down would result in 1,200 job losses and of course it would have further ramifications in the economy.

Looking at this case as a subset of the bigger international trade discourse, this move by Ford seems to be the correct way to go. It’s a matter of comparative advantage; the core of the argument is pretty simple: if Australia is not good at making cars, then it should not make cars. Ford manufacturing in Europe costs half as much as in Australia and Ford manufacturing in Asia churns out same product for a quarter of the cost. In other words, for every car Fords builds and sells in Australia is loses out on three cars.But this is not a loss just to Ford Motors but it’s a loss to all of humanity. For every utility (happiness) derived from a Australian made Ford, three times the utility is lost to all of humanity!

Producing along the lines of comparative advantage benefits all of humanity. So following this line of logic, we could argue that the world as a whole would be better off if both Holden and Toyota followed Ford and shut down their manufacturing plants in Australia and started manufacturing in Asia. But of course things are not this simple.

How could we justify this to the thousands of Australians that would lose their means to live hood if these automotive giants pulled out of Australia? And then there are those in the respective complementary industries (for example those that distribute parts) that would be severelyaffected by the move. Would their “sacrifice” for the “greater good” be justifiable to them?

But there is another side to the coin. These jobs are not “lost”; they are mainly being transferred from one place to another. How about all the new jobs created, say in the Asian plants, from increased production. Would this new means of livelihood created for, say Ford’s new Asian employees, offset the loss to its Australian employees? If we add into the equation the increased utility for humanity as a whole from increased productivity, would that be justifiable to the Australian worker?  But if Ford was to continue its production in Australia, would that be justifiable to the unemployed Asian worker whose improved livelihood never came to be? Would it be justifiable to humanity as a whole?

How do we include these sufferings into the cold calculations of comparative advantage? This is the question I want to leave you with. Being completely impartial to all affected parties, and looking at the implications at an aggregate level, we might be able to justify the mathematics of international trade. But who in this world is completely impartial. Our interests are not just aligned to that of self but also that of our community and nation.

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