Earlier today, following the announcement that Ford would shut its Geelong plant, Scott Steel tweeted
The lesson that shan’t speak it’s name – if we’d like to keep making stuff in Australia, we need more people in Australia
— Possum Comitatus (@Pollytics) May 23, 2013
Although the following conversation indicated he may have been concerned largely with products designed for Australian consumers rather than domestic production and certainly not exports, it did remind me of something very interesting, but possibly unimportant – the home markets effect, a product (partly) of the equally fascinating and possibly unimportant New Trade Theory and New Economic Geography.
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. This might simply be because the factories are already built, the workers trained, the know how known etc so there are no start up costs.
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.
The trivial example might be in your cupboard. If you have a tin of tomatoes, unless it is SPC, its almost certainly from Italy. The most expensive part of a tin of tomatoes is the canning. Italian plants already produces heaps of tins for Italians, so they can provide them for just 79 cents to us.
Its obvious though that a bigger population has a bigger home market. So if the hypothesis is true, population size becomes comparative advantage. Immigration could then become industry policy that works.
There’s a great deal of problems though.
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.
This is probably a reason why its so hard to think of Australian examples. Mining equipment for certain, given there is such a large industry here that can’t go elsewhere that also has to produce with a high productivity labour force . Lamb meat? English language tertiary education…
Anyway, I haven’t thought about it deeply, but it’s interesting and possibly useless. But if it leads to an acceptance of higher immigration I might take to trumpeting it.
[fn1] Or high wage if you will, they’re obviously the same thing if unemployment isn’t sky high