In a time of recession, businesses examine their production costs. Such costs are primarily comprised of material inputs and labor. There is a fair amount of “democracy” when it comes to material input costs. That is to say, firms now buy their inputs from around the world and the ultimate base price is often tied to a widely-traded commodity.

Commodity prices are determined in worldwide markets and, as such, can be purchased by anyone with the right amount of money. Of course, there are some exceptions. Producers often want to secure supplies and therefore sign long-term delivery contracts. It is also an interesting twist of fate that many of the largest raw material suppliers − Canada, Australia, Brazil, the Middle East and some countries in Africa − are not the largest producers of finished goods.

The United States, Europe, Japan and China all need significant quantities of raw materials from other nations, sometimes because they’ve already used up their own resources. Oil would be the prime example. But let’s also look at China specifically. In iron ore and cement, China is now accounting for approximately half of world demand. In coal, copper, aluminum, zinc and steel, it accounts for about one-third of world demand. China gets up to half of its needs for iron ore, copper and oil from imports.

The upshot of all of this is that commodities are international. But when it comes to production, labor is local. High-cost, often unionized labor in North America has been finding it hard to compete with the pools of workers − admittedly facing lower working/safety standards and reduced benefit set-asides − in emerging nations at the best of times. What happens during a world-wide recession? Something has to give and that is likely to be labor costs in the United States and Canada. And this time around, that decline may be more than just cyclical and may have to involve some structural re-thinking.

The structural re-thinking with regard to labor costs has direct application when it comes to the death throes being experienced by the Detroit Three automakers. Reductions in rates for new workers and the offloading of medical and pension benefits that were achieved in the last labor agreement were positive for the Detroit Three car makers. But their labor costs are still too high in the U.S., and even more out of line in Canada. When companies the size of General Motors, Ford and Chrysler are at risk of going “belly up”, then something major has to be done to improve competitivenes.

The Detroit Three, in bygone days, used to have the North American car market to themselves. Now they have to compete with a large number of offshore producers who are exporting here or offshore owners who have located here. Where there used to be three major carmakers, now there are seven or eight. The new producers are mainly non-union.

The term “new domestics” has been adopted by some analysts in the auto industry to signify Asian and European car producers who have set up assembly operations in the United States, Canada and Mexico. Those three countries essentially form one market.

The particular sites of strong foreign-ownership are in Ontario in Canada, due to the presence of Honda and Toyota, and in a band of four states across the American southeast rimming Florida. There are the following plants or planned operations: BMW in South Carolina; Kia in Georgia; Mercedes-Benz, Honda and Hyundai in Alabama; and Toyota in Mississippi.

The new domestics are low-cost, mainly non-union operators. It is hard to see how any long-term future for the Detroit Three can be achieved without a merger or two and wrenching adjustments on the labor cost side.

And it is hard to see how the current slowdown in the overall economy worldwide won’t mean signficant distress for workers in the United States and Canada who are involved in the production side of things generally (as opposed to services), except when there are specialty skills based on high-tech expertise.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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