Free trade the lifeblood of our economy

Hey there, time traveller!
This article was published 04/07/2018 (2677 days ago), so information in it may no longer be current.

If we ever needed a lesson on the value of free trade to Manitoba, the sale of 10 electric buses to Toronto by New Flyer should nail it. This single transaction shows how open borders create benefits in multiple dimensions.

New Flyer, North America’s largest bus and coach manufacturer/distributor, is a remarkable firm. Started in 1930 as a car and truck body manufacturer, it transitioned to making buses in the 1940s and then to urban transit vehicles in the ’60s. Facing stiff competition, the business faltered and the Manitoba Development Corp. purchased it, making it an economic ward of the state. Government acquisition of the manufacturing firm fit well with the then-prevailing theory of industrial policy, but the firm never thrived under public ownership.

This dependency continued until 1986, when a bus manufacturer from the Netherlands purchased New Flyer and initiated a program of innovation. By 2002, when KPS Capital Partners purchased the still-struggling firm, New Flyer had started a chain of innovations in bus technology.

We often hear about corporate raiders that capture failing companies at bargain prices, strip the assets and leave a shell. In this case, however, the new owners injected needed management expertise that laid the foundation for continued success, culminating in the present situation in which New Flyer seems poised to catch the wave of electric mass transit.

Current management deserves much credit in creating the modern rendition of New Flyer. But strategic partnerships and free trade form the canvas on which these management artists paint.

New Flyer illustrates how public-private co-operation can create innovation. The electric buses just sold to Toronto resulted from a strategic joint venture involving Mitsubishi, Manitoba Hydro, the Manitoba government and Red River College. The accelerating interest in non-fossil-fuel transportation, evidenced by Volvo’s commitment to produce only electric and hybrid cars by 2019, shows a strong trend that New Flyer seems well positioned to exploit. But make no mistake, New Flyer management, with its profit motive, was clearly in the driver’s seat of this public-private partnership.

The sale of buses manufactured in Winnipeg to the City of Toronto also shows interprovincial trade at work. Specialization is at the heart of free trade, and New Flyer has created a strong cost and innovation advantage that make such a purchase a no-brainer for Toronto. It is a shame that most provincial premiers fail to embrace free trade. The result is that we preach a free-trade mantra when dealing with the other countries, but internally we continue to maintain all forms of barriers to the movement of goods and services, thereby raising costs for all.

New Flyer also reveals critical lessons about the value of free trade between the U.S. and Canada. As a multinational corporation, New Flyer has full transit assembly operations, parts manufacturing and service centres throughout in the U.S., specifically in Minnesota, Alabama, North Dakota, Indiana and Wisconsin. While Manitobans can take pride in the growth of New Flyer, its economic centre of gravity lies throughout the U.S. Management has selected each location to be close to key inputs, as well as to service its customer base.

Being able to move parts and services around North America without impediment and surcharges is fundamental to the financial health of this firm. Continued economic success of New Flyer certainly benefits Manitoba, but it is likely that the workers in each of its U.S. locations, as well as the firms that supply inputs, probably gain more from the growth of New Flyer.

It is this web of economic integration that is under threat from the proposed tariffs related to growing Canada-U.S. trade tensions. If the Trump trade agenda persists, New Flyer management may need to move some operations back to Canada, or even to other countries. The announcement by Harley-Davidson that it is shifting some production to Europe in response to the Trump tariffs illustrates how quickly firms can change course to meet evolving economic conditions.

Relocating activity to Canada may seem like a “win,” but the reality is that manufacturing locations reflect a careful calculus that balances the revenue/cost divide. Upsetting that balance invariably compromises profitability.

It is impossible to know what the next few weeks will bring with regard to tariffs. Certainly, the federal government feels impelled to stand up against the Trump trade agenda, and we all share the instinct to confront a bully. That response is also certain not to reverse what the U.S. will do. And it will have little effect on the U.S. economy; more likely it will just boomerang higher costs back on us.

From an economically rational perspective, maybe Canada’s best course is to do nothing. But a muscular tit-for-tat response is too valuable a political advantage for the federal government to yield, especially since it creates cover for its disastrous management of our oil economy and the prime minister’s costume fiasco in India. Raised costs to Manitobans and threats to companies such as New Flyer seem to be the only certainties ahead.

Gregory Mason is an associate professor in the department of economics of the University of Manitoba.