The make or buy conundrum: Navy ships edition

We have talked about this before but I will summarize it again given that three people this week approached me on the subject:  why don’t we just buy navy vessels from the Yanks or get them built in South Korea?  Isn’t this just an example of old style industrial policy that has been discredited?

Even in the strictest economist view, you need to do an apples to apples comparison.  If you could get the ships from the Koreans for $20B versus making them here for $25B you have to add in the value of the economic activity to the $25B.  For example, the Conference Board of Canada estimates that the shipyard work will generate $266 million in taxes each year for governments.  That would not occur if you buy the ships in South Korea (or to put it more accurately it would occur in South Korea).

So the equation becomes: Korea $20B >+ Halifax $25B + 25 years of thousands of jobs, hundreds of millions in taxes, and business for hundreds of small firms in the area.

But the broader point has to do with the quid pro quo of globalization and free trade.  The move in this direction was supposed to bring benefits to all parties – yes there would be some pockets that would hurt more than others (i.e. Detroit) but on the whole both the developed and developing worlds were supposed to benefit from free trade and investment flows.

And I would argue for the most part this has happened but sustained high unemployment will lead the Yanks, for example, to think they have been shafted by free trade and that will lead to more protectionism.

The open and free flow of investment and trade mean that jurisdictions need to be  evenmore focused on their comparative advantages and building economies around those advantages.    That was the point Halifax was trying to make.  Yes, there may be more advanced shipyards but shipbuilding is in the DNA.  The government work will build capacity in Halifax that will be used to build vessels for other clients in the future. Using government biz to foster a strong comparative advantage doesn’t seem to be a bad idea to me.

What’s the alternative?   I’m not talking raw economics here – I’m talking about people and communities.  You can outsource all your manufacturing and services to China and India but if there is no one working here and no money around why would it matter that the plastic toys are cheaper?

From a public perspective, you need both.  Capture the benefits of free trade and investment flows but at the same time tailoring policies such that the jurisdiction is attracting its share of investment.

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