Summary:
This case is about the dilemma facing by John Martin, the CEO of Martin Textiles, a New York based textiles company. On August 2, 1992, which the day that the U.S., Canada, and Mexico agreed in principle to the North American Free Trade Agreement (NAFTA). Martin Textiles is a family business over four generation, which was started by John's great-grandfather in 1910. Today, the company employs 1,500 people in three New York facilities. John's dilemma, which is particularly troublesome to him because he feels a sense of loyalty to his company's longtime employees, is this. NAFTA will remove all tariffs on the trade of textiles between the U.S., Canada, and Mexico within 10 years. Textiles manufacturing is a low-skilled, labor-intensive business. As a result, the simple economics of the industry suggests that the under the auspices of NAFTA, the majority of textile manufacturing in the U.S. will move to Mexico, where wage rates are considerably lower than in the U.S. When he first realized the full implications of the NAFTA agreement, John thought to himself, "My God! Now I'm going to have to decide about moving my plants to Mexico." John dilemma is how to cope with this realization. If he moves his plants to Mexico, he'll have to let go many of his loyal employees. If he doesn't move, he risks going out of business.
1. What are the economic costs and benefits to Martin’s Textiles of shifting production to Mexico?
The definition of economic costs is the sacrifice involved in performing an activity, or following a decision or course of action. It may be expressed as the total of opportunity cost (cost of employing resources in one activity than the other) and accounting costs (the cash outlays). The production cost that is labour cost if Martin Textile shift its production to Mexico will be reduced to less than USD2 per hour as compared to wage rate paid to its unionized New York plant(USD12.50 per hour) and non-unionized textile plant in southeastern US(USD8 to USD10 per hour). The production too will be able to avoid cost disadvantage that they have to face in US due to tougher and stricter labour law, regulations and standards imposed by US as advanced country. Furthermore the production will be able to take advantage of lower labour cost allowing them to better compete with Asian and European rival. Benefits are any gained or advantage that a company would get in performing an activity, or a following decision or course of action. North American Free Trade Agreement (NAFTA) agreement that came into force in January 1, 1994 which one of its contents stated that abolition by 2004 tariff on 99% goods traded between Mexico, Canada and US. Therefore, the production can enjoy free tariff within next 10 to 15 years and ability to maximize its production profit. Martin’s major customer will be able to enjoy and benefits from the lower prices of products made in Mexico since the production has taken advantage of the lower labour cost efficiently.
2. What are the social costs and benefits to Martin’s Textiles of shifting production to Mexico?
Social costs include both the private costs and any other external costs to society arising from the production or consumption of a good or service. Private costs for a producer of a good, service, or activity include the costs the firm pays to purchase capital equipment, hire labor, and buy materials or other inputs. Martin Textile will have to face the situation whether the Mexican workers could be as loyal and productive just like its present employees in New York. In Mexico the production might be facing too low productivity, poor workmanship, high turnover and high absenteeism of Mexican workers as faced by other US textiles companies in Mexico. The question that should be asked is will the production able to create good labor relationship atmosphere in their company. The benefits to Martin are they have loyal and productive workers. All production employees were union members, and the company has a long history of good labour relations. Moreover, the company had never had a labour dispute since long time ago. John also knew many of the employees by name, and knowing a great deal about the family circumstances of many of the longtime employees. In conclusion, the success of the company is because of the existence of loyal and productive employees that has been built up over four generations.
3. Are the economic and social costs and benefits of moving production to Mexico independent of each other?
No. The economic and social costs and benefits of moving production to Mexico are dependent to each other because labour is important sources in order to generate production. Even though they had productive and loyal workers in US they also must consider the labour cost that will be incurred if they are not moving their production to Mexico. If they continued their plan to moving production to Mexico, they might be having more difficulties such as high labour rate in US and difference language between the foreign workers.
4. What seems to be the most ethical action?
In my opinion, it is a good ethical action if the company not moves their production to Mexico. Eventhough the company will incurred high labour rate if they continued production in US but the company already has a good labour relations. Therefore, it is easier in order to have loyal and productive workers. It is unethical action if they left the company in US as they have to terminate their loyal and productive employees who have work for the company 10 to 20 years. Moreover, in Mexico the production might be facing too low productivity, poor workmanship, high turnover and high absenteeism of Mexican workers as faced by other US textiles companies in Mexico.
5. What would you do if you were John Martin?
If I were John Martin, I will move the production in Mexico as I will get more benefits rather than the economic and social costs even this is not an ethical action. Ethics is considered as a branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such action. Because of differences in ethical values, judgments, culture, and morality in different countries in the world, this will unintentionally give rise to difference in ethical perspectives of what is correct and not. The company will get more benefits on new agreement of NAFTA. Although they have good relationship between the employees but they can enjoy free tariff within next 10 to 15 years and ability to maximize its production profit. The production too will be able to avoid cost disadvantage that they have to face in US due to tougher and stricter labour law, regulations and standards imposed by US as advanced country. Therefore, they can reduce the labour rate cost. Moreover, the company will incur more losses if they are not moving production to Mexico as the labour rate in US will increasing. Hence, they have to increase the price in order cover the high labour rate. If the company continued the plan it is more safer as John heard that in 5 years the US market would be flooded with cheap imports from Asian, US and Mexican companies, all producing in Mexico.