In my last column, I made what I think was the best case for “buy local” and economics professor can make. Supporting your local community is a very important part of being a good citizen and a smart risk manager, but are there exceptions? Are there cases in which it might be sensible to support trade from other places? I think there are, and I’ll explain two cases in this column.
The first case is relatively straightforward: you can’t grow coconuts in Kansas. Unless you have a sophisticated network of firms operating in concert under multiple nations’ laws to bring about international trade (or a very strong barn swallow that recently flew south for the winter), you can’t buy coconuts here in Ottawa. The network that brings our soybeans to Japan and their cars back here is responsible for giving us a wide range of products we would not enjoy otherwise.
The second case takes a bit more thought. The production of many goods we enjoy couldn’t happen without investment in large-scale operations that may supply goods for consumers or other businesses over a large area. A simple example will help us get started.
Suppose you want to have pizza for supper. You might have all the ingredients you need at home and likely have an oven that will bake the crust nice and crispy. While this might work well for you, it might be nice if you could get someone else to make the pizza for you. Maybe you’re short on time or didn’t want to pay a lot of money for high-quality cheese at the grocery store. Maybe you’re just not a great pizza chef.
Another option would be to order the pizza from someone else. A pizza restaurant very likely has a large, expensive, specialized oven and a very large refrigerator filled with ingredients. These pieces of equipment allow the restaurant’s employees to efficiently make hundreds of pizzas per day; certainly more than the employees themselves could eat.
This large-scale production is great for all of us who enjoy pizza because it means the owners and employees can specialize in making pizzas and can buy ingredients at a lower cost per pound than the rest of us are able on our weekly trip to the store. The restaurant’s specialization and lower cost means the rest of us can enjoy tasty food on demand.
The comparison between household production and specialized production enabled by investment in fixed assets like commercial pizza ovens helps us understand the second exception to our buy local rule: sometimes the cost of production is too high for local production. Sometimes it’s so high it outweighs the benefits of local commerce I laid out in my last column.
Consider an example from our own backyard, Kalmar Ottawa. Kalmar Ottawa has been in business for over 60 years and has produced over 65,000 “terminal trucks” which are low-speed trucks used to move trailers around at shipping terminals. It is the leading producer of these trucks, which are all manufactured here in Ottawa and sold through dealers around the country.
Given the specialized knowledge and expensive machinery needed to manufacture these trucks, it wouldn’t be sensible to expect a shipping terminal to produce them on their own. It also wouldn’t make sense for there to be dozens of smaller manufacturing facilities all over the country making these trucks. No, we can all benefit when these trucks are made in one larger facility. It minimizes the cost of production and allows all the knowledge needed to be located in one place to maximize efficiency in production.
In addition to the benefits associated with the jobs and other commerce generated by Kalmar Ottawa, we also benefit indirectly from Kalmar Ottawa’s centralized production of their trucks. The coconuts we ship from the tropics get here a little more efficiently and at a little bit lower cost thanks to Kalmar Ottawa’s efficient business model. Whether those coconuts end up in a pina colada or a cream pie, I think we can all appreciate this exception to buying local.
— Levi Russell is a professor of economics at Ottawa University.