A Comment: The Bladen Plan for Increased Protection for the Automotive Industry

Author(s): Neil B. MacDonald

Source: The Canadian Journal of Economics and Political Science / Revue canadienne
d'Economique et de Science politique, Vol. 29, No. 4 (Nov., 1963), pp. 505-515
Published by: Wiley on behalf of Canadian Economics Association
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 NOTES AND MEMORANDA
A COMMENT: THE BLADEN PLAN FOR INCREASED PROTECTION
FOR THE AUTOMOTIVE INDUSTRY

NEIL B. MAcDONALD*
Oakville

THEillustrative arithmetical model included as an Appendix to Professor H. G.

Johnson's article in the May issue of the JOURNAL, "The Bladen Plan for
Increased Protection for the Automotive Industry," analyses the decisions of a
Canadian subsidiary automobile company in securing parts of an automobile,
either from the same sources as are used by its parent company or by purchase
in Canada. In the article proper, Professor Johnson has made the most detailed
analysis yet published of the effects of the Bladen Plan on the Canadian
economy and has pointed out, correctly, that there would be no real gain to
Canadians if the governmental duty receipts, which his analysis detected
would be forfeited under the Plan, simply had to be made up by higher tax
revenues from the population at large, as opposed to car buyers. The Appendix
itself provides major support for this thesis, its model showing large increases
in economic inefficiency resulting from the adoption of the proposals for
extended content.
The full complexity of the problem the subsidiary faces, however, is not
made evident in Professor Johnson's original model because it ignores the
profits of the parent company and its subsidiary, and the trading off of the
one profit against the other which will occur when the subsidiary's decisions
to import or secure the part locally are made. It can be demonstrated that
decisions to import or to make or buy parts locally must become quite differ-
ent from those contained in the model when the profits of the parent company
are considered against those of the subsidiary, and these different decisions
can lead to quite different conclusions as to the validity of Dean V. W. Bladen's
recommendations in the Report, Royal Commission on the Automotive
Industry.
In Professor Johnson's original model, the foreign purchase price plus the
assumed duty was simply balanced against a Canadian purchase price to
determine whether a part would be imported or secured locally. In the
modified model, as in business practice, the detailed economic analysis of each
part is much more complex, because automobile companies have a very high
degree of vertical integration and therefore must consider the worldwide
corporate profit generated from the sale of the part by the parent company
to the subsidiary. These profits, of course, can be expressed in two ways:
accounted profit, representing the profit included in the unit selling price at
the planned (standard) production volume, after full costs, including, of
'Mr. MacDonald is Special Financial Studies Co-ordinator in Ford Motor Company of
Canada, Limited. The opinions in this comment, however, are his own and do not neces-
sarily reflect those of Ford of Canada.
505
Vol. XXIX, no. 4, Nov., 1963

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 506 CanadianJournal of Economics and Political Science
course, all fixed costs, are considered; and economic profit, representing the
difference between the unit selling price and the incremental costs of making
one more part, with no fixed costs included in the quotation. This economic
profit represents the full, accounted profit of the added sale beyond the planned
(standard) volume by the parent company to its Canadian subsidiary.
Professor Johnson's model was based on the data in Table I. It was also
noted that the subsidiary was wholly owned by the parent company. None
TABLE I
ORIGINAL DATA PROVIDED BY MODEL

Complete
Part 1 Part 2 Part 3 Part 4 Assembly Vehicle
Value of components
World level $200 $200 $200 $200 $200 $1,000
Canadian level 220 240-260* 270-300* 300 Not Not
Specified Specified
Canadian duty data
Rate 20% 20% 40% 30% 20%
Amount $ 40 $ 40 $ 80 $ 60 $ $200
Eligibility for free
entryt Yes Yes Yes No
*Subject to economy of scale.
tlf of class or kind not made in Canada.

of the original data is changed in the revisions to the model, but the following
additional assumptions are made: (1) That the "world" value of components
shown is the price at which they would be purchased in the home market of
the parent company. Thus, in a vertically integrated company, the purchase
price is a "transfer price" between one of its manufacturing divisions and a
consuming division, and contains a profit to the parent company. (2) The
Canadian level shown, being also a purchase price, can also become a transfer
price containing an element of profit to the Canadian subsidiary, if it manu-
factures the part instead of buying it. As Professor Johnson points out, these
purchase prices are subject to economy of scale; likewise, the manufacturing
costs themselves are subject to economy of scale. (3) Canadian duty in a
finished vehicle is charged, not on the sum of manufacturing costs plus profits,
but on the lowest wholesale price to a dealer in the domestic market which
includes, of course, a selling expense and sales profit. In the analysis below,
another $200 is assumed for selling and other costs, plus $100 incremental
profit, for a world wholesale price of $1,300. (4) Finally in our development
of the alternatives open to the Canadian subsidiary, we shall use the actual
Canadian costs we develop for analysis of Commonwealth content rather than
"world" costs as in Professor Johnson's analysis to be in accord with the present
provisions governing content. The additional assumptions are shown in Table
I. The parent company therefore makes an accounted profit of $155 a vehicle
at standard volume or an economic profit of $300 a vehicle, which, once the
standard volume is passed, becomes an accounted profit.
The Canadian level of costs to manufacture or purchase must be compared
to the actual corporate cost level of the same parts imported (Table III).
While no final conclusions can be reached at this point as to what the ultimate

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 Notes and Memoranda 507

TABLE II
ADDITIONAL ASSUMPTIONS MADE IN RELATION TO PARENT COMPANY'S COSTS AND PROFITS

Complete
Mfrg. Sales Total
costs/ costs/ costs/
Part 1 Part 2 Part 3 Part 4 Assembly Profits Profits Profits
Fully accounted cost* $180 $185 $195 $200 $160 $920 $225 $1,145
Incremental cost* 150 125 175 200 150 800 200 1,000
Manufactured or
purchased Manufactured Purchased
Accounted profit* 20 15 5 - 40 80 75 155
Economic profit* 50 75 25 50 200 100 300
Selling price 200 200 200 200 200 1,000 300 1,300
Sold to: Sales Division Dealer
*To parent company.
TABLE III
COSTS OF IMPORTING PARTS VS. LOCAL PROCUREMENT COSTS

Part 1 Part 2 Part 3 Part 4

Costs to subsidiary to import parts $240 $240 $280 $260
Costs to parent company to have sub-
sidiary import parts (World incre-
mental costs plus duty) $190 $165 $255 $260
Alternative costs for subsidiary to Low-volume
purchase parts in Canada producer 220 260 300 300
High-volume
producer 220 240 270 300
Alternative fully accounted costs for Low-volume (Buy 260 290 (Buy
subsidiary to manufacture in Canada producer only) only)
High-volume (Buy 200 220 (Buy
producer only) only)
Most profitable sourcing decision and Low-volume Buy in Import Import Import
domestic costs for subsidiary producer Canada
($220) ($240) ($280) ($260)
High-volume Buy in Make in Make in Import
producer Canada Canada Canada
($220) ($200) ($220) ($260)
Most profitable sourcing decision and Low-volume Import Import Import Import
world costs for parent company producer ($190) ($165) ($255) ($260)
High-volume Import Import Make in Import
producer Canada
($190) ($165) ($220) ($260)
Increased world profit by sourcing to Low-volume
corporate advantage producer $ 30 $ 75 $ 25
High-volume $ 30 $ 35
producer

sourcing pattern for the Canadian subsidiary should be (because of the effect
of the provisions for duty avoidance if a required level of Commonwealth
content is reached), it is clear that the parent company cannot logically allow
its wholly owned subsidiary to decide where to buy its parts on the basis of
out-of-pocket costs to the subsidiary alone.
Two other costs for the subsidiary should be established before we com-
mence to manipulate the modified model, assembly costs and sales and other
costs. These costs are subject to economy of scale, assembly costs because of
the high investment required in specialized facilities for a particular model,

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 508 CanadianJournal of Economics and Political Science
and sales and other costs because of irreducible expenditures in advertising
and development of a dealer network. We shall assume the fully accounted
costs shown in Table IV for these items.

TABLE IV

Low-volume High-volume
producer producer
Assembly costs $250 $240
Sales costs $325 $315

We shall now examine the alternatives open to the Canadian wholly owned
subsidiary, in conjunction with its parent company, in deciding to market a
vehicle in Canada under current tariff conditions. We shall then develop
conclusions as to the effect of the tariff and Commonwealth content regulations,
and proceed to apply the recommendations of Dean Bladen's Report in con-
nection with extended content to the model.
The possibilities open to the subsidiary are three:
1. Import complete vehicle, fully assembled. This alternative would import
the finished vehicle, paying duty on the dealer price (last column of last line
of Table II) and sell it at a nominal mark-up over cost. Since the Canadian
subsidiary is generating profit in the foreign parent organization, the mark-up
could be considered as "nil,"representing "very low," with the selling expense
and costs being considered actually as a cost of the parent organization. The
exercise is useful, however, because, in effect, this price sets a ceiling in our
model for the price of an identical domestically assembled vehicle. One cannot
expect to sell such a vehicle for more than the cost of independently importing
it. If the foreign domestic wholesale price is $1,300, to which is added a duty
of 20 per cent ($260), we have a Canadian "ceiling" wholesale price of $1,560.
(In practice, of course, competition between manufacturers establishes actual
Canadian wholesale prices, but no price is in excess of the above formula.)
2. Assemble vehicle from imported or made-in-Canadaparts (assuming no
Canadian content requirements). Individual decisions would be made on each
part to determine the "world" profit implications of importing the part and
paying duty (with profits continuing to accrue to the parent company) or of
buying the part from a Canadian vendor or of the subsidiary making it. The
details of the part-by-part analysis are shown in Table III, and the costs for
the low- and high-volume subsidiaries are given in Table V. Since the low-
volume subsidiary has higher costs (in the model, at any rate) than the Cana-
dian import "ceiling" price of $1,560, it theoretically should not attempt to
assemble the vehicle at all. At a price of $1,560, the $325 Canadian selling
expense would be absorbed, and the sale of the three components of the
vehicle which the parent itself manufactures (parts 1, 2 and 3) would be
increased beyond its planned domestic standard volume. The costs of these
parts are only incremental and the parent company has therefore increased
its own profit by $150 in the process of its subsidiary's selling one additional
vehicle in Canada. The final "world" profit level to the low-volume producer
would be the net of the loss in selling the vehicle in Canada below its Canadian

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 Notes and Memoranda 509

TABLE V

Low-volume High-volume
producer producer

Part 1 $240 $240

Part 2 240 240
Part 3 280 220
Part 4 260 260
Assembly 250 240
Sales and other costs 325 315

Total costs $1,595 $1,515

Assumed selling price $1,560 $1,560

cost ($1,595 - $1,560 - $35 loss) against the domestic profit of $150 on the
sale of the parts, or $115.
The high-volume producer with lower costs has the advantage of manufac-
turing Part 3, trading off the $45 increase in cost, from the incremental cost
level ($175) in the parent company to the accounted cost in the subsidiary
($220), against the avoidance of $80 duty. The profits of the high-volume
producer are the $45 on the sale of the vehicle in Canada, plus the parent
company's profit in the sale of the two parts to its subsidiary, $125, for a
total of $170.
3. Assemble vehicle from either imported or made-in-Canadacomponents,
giving considerationto Canadian content requirements.The duty-free entry
of the parts specified in Table I is possible if a required percentage of the
manufacturing cost of vehicles made by the manufacturer is represented by
TABLE VI
CURRENTSTATUSOF COMMONWEALTH CONTENTAND SOURCING
(based on economic sourcing decisions)

Low-volume producer High-volume producer

Common- Duty Common- Dutv

wealth Foreign "No" wealth Foreign "No"
content content content* content contenit content*

Part 1 $200 $ 40 $200 $ 40

Part 2 200 40 200 4-0
Part 3 200 80 $220
Part 4 200 60 200 60
Assembly $250 240

Total $250 $800 $220 $460 $600 $140

Total costs for contenit

calculation $1,050 $1,060

Total mfg. costs $1,270 $1,200

Total selling and other
costs (not included in
content) 325 3l15

Total costs 1,595 1,515

Percentage of Common-
wealth content $250 $460
a $1,050 23.8 $1,060
*Duty and certaini other costs do niot apply in conitent calculationi, either for or againist.

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 510 CanadianJournal of Economics and Political Science
Commonwealth content. As in Professor Johnson's model, the low-volume pro-
ducer is assumed to require 40 per cent content, the high-volume producer
60 per cent. Both producers have to raise their content to secure duty remission
by uneconomically sourcing added parts in Canada. Any premium in cost
(inefficiency) in Canada, of course, works to increase content: Part 1: purchase
from a Canadian vendor would create $220 of content at a cost of $30 for
either producer. Part 2: purchase from a Canadian vendor would create $260
of content at a cost of $95 for the low-volume producer or $200 of content at
a cost of $35 for the high-volume producer. Part 3: manufacture by the
subsidiary would create $290 of content at a cost of $45 for the low-volume
producer. (The high-volume manufacturer is already making this part.) Part
4: purchase from a Canadian vendor would create $300 in content at a cost
of $40 for either producer. The special circumstances surrounding this part
should be emphasized: (1) Part 4 is purchased by the Canadian subsidiary
from a Canadian vendor whose profit becomes Canadian content. (2) It
appears unwise to purchase Part 4 in Canada in the face of the simplest
economic analysis, because it can be imported for $260, against the Canadian
price of $300. (3) Part 4 is purchased, however, from an outside vendor by the
parent company in its domestic market and there is no sacrifice of "world"
profit if it is bought from a Canadian vendor.
We can now prepare Table VII, analysing the world cost to each producer
of adding a part to secure content. This analysis shows that it is obviously
to the advantage of both producers to start off with the resourcing of Part 4

TABLE VII
COST IN CENTS FOR EACH ADDED CONTENT DOLLAR

Part 1 Part 2 Part 3 Part 4

Low-volume producer 13.6 37.6 15.5 13.3
High-volume producer 13.6 17.5 - 13.3

to a Canadian vendor, and see what the result is to their Commonwealth

content (Table VIII). Both producers are able to import Parts 1 and 2 duty
free, having reached the required content with the one part which was not
eligible for free importation. The low-volume producer cannot now import
Part 3 duty-free1 because it is ruled as "being of a class or kind made in
Canada," being manufactured by the high-volume producer.
The costs of the two producers would now be as shown in Table IX. These
profits (a combination of accounted profits in Canada and economic profits
earned by the parent organization) compare to the $155 accounted and $300
economic profits earned by the parent company in a domestic sale.
Before drawing conclusions from such a mathematical model, it is most
important to recognize that it grossly oversimplifies the problems faced by
a subsidiary manufacturing company in making Canadian sourcing decisions.
'Under present regulations, it is necessary for an outright "sale" to have been made, to
secure this ruling. Thus, the high-volume subsidiary would have actually had to sell this
part, or a similar part, to another automobile company for the low-volume producer to be
affected.

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 Notes and Memoranda 511

TABLE VIII
STATUSOF COMMONWEALTH
CONTENTAFTER RESOURCINGOF PART 4

Low-volume producer High-volume producer

Common- Duty Common- Duty

wealth Foreign "No" wealth Foreign "No"
content content content content content content

Status before resourcing $250 $800 $220 $460 $600 $140

Effect of resourcing 300 (200) (60) 300 (200) (60)

Status after resourcing $550 $600 $160 $760 $400 $ 80

Total costs for content

calculation $1,150 $1,160
Percentage of Common-
wealth content $550 47 8 $760 = 65.5
$1,150 $14160
Both producers have established the necessary Commonwealth Content percentage for the
duty free entry of eligible parts by the resourcing of Part 4.*
*The "leverage" exercised by the single part is, of course, the result of the over-simplification
of the basic model to four parts only.

TABLE IX
COSTSOFPRODUCERS
AFTERSECURINGCOMMONWEALTH
CONTENTREQUIRED

Low-volume High-volume
producer producer
Part 1 $200 $200
Part 2 200 200
Part 3 280 220
Part 4 300 300
Assembly cost 250 240
Selling and other costs 325 315
Fully accounted Canadian costs $1,555 $1,475
Canadian wholesale price 1,560 1,560
Accounted profits earned in Canada $ 5 $ 85
Economic profits earned on sale of parts
to subsidiary 150 125
World profits earned $155 $205

Instead of one vehicle, made up of four parts, they must deal with hundreds
of different vehicles each made up of thousands of parts, some of which are
unique to a particular make or model, many of which are common to several.
The required content percentage is applied, not to each separate vehicle, but
to a company's total passenger vehicle output and, separately, to its total truck
output.
A number of interesting conclusions may, however, be drawn from the
preceding analysis, even wvhenits limitations are recognized. (1) High-volume
producers, because of factors of economy of scale, have a strong competitive
advantage in manufacturing in Canada. (2) Sourcing decisions will be taken
to maximize corporate, world-wide profits, rather than the profits of a sub-
sidiary. This statement leads to a further conclusion; that the application of
duty rates does not necessarily ensure Canadian sourcing in the simple manner

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 512 Canadian Journal of Economics and Political Science
one might expect. (3) The sourcing of Part 4 to a Canadian vendor, to secure
Commonwealth content, was made attractive to both producers because it was
not manufactured by the parent company, but bought from a vendor, and
therefore contained no element of world corporate profit. (4) Actual payments
of duty to the Canadian government were much less than the assumed tariff
rates would have indicated. Instead, in one case Canadian manufacture was
undertaken at higher corporate cost ($45) which was, however, lower
than the duty cost avoided ($80) for a net saving of $35. In the simplified
model (particularly oversimplified, of course, in connection with tllis complex
problem) the low-volume producer ended up by paying $80 of the potential
$220 duty and the high-volume producer none at all. Both incurred the penalty
costs of purchasing the high-cost Part 4 from the Canadian vendor, at a cost
of $100, much above the Canadian protective duty rate of $60, in order to
secure their content needs. The Canadian government, therefore, may well
collect very little of the duty which its duty rates apparenitly impose. By
achieving the required content percentages, and by making or buying at a
premium cost which may have little relation to duty, the manufacturer can
eliminate, or greatly reduce his duty cost. Duty rates may be conceived of
under these circumstances, not as a tax to produce revenue, not even mainly
as an incentive to manufacture in Canada rather than to import, but simply
as one more cost hurdle to be surmounted.
If it can then be accepted that the duty cost is not collected by the Canadian
government, but becomes a means of supporting premium costs of inefficient
sourcing in Canada, one is at the heart of the logic of Dean Bladen's extended
content recommendations. Given that Canada's premium costs are basically
caused because of two facts: (1) the subsidiary Canadian company is never
today the prime producer (world-wide) for any part; and (2) the large number
of parts required at low volumes to produce the present diversity of models
precludes the most efficient production methods used by the parent company,
we then have only three choices: (1) completely free importation under which
there would be no incentive to manufacture any vehicles or parts in Canada;
(2) internal markets highly protected by duties, with resulting high costs
which prevent us from being competitive internationally; or (3) duty-free
importation, provided that a measure of balance is maintained between im-
ports and exports as in Dean Bladen's extended content plan.
It can be shown that, unlike the present combination of duty and limited
content, which works to guarantee that certain manufacturing is undertaken
in Canada, albeit with serious inefficiencies in relation to being spread across
too many parts at too low volumes, the extended content/free importation plan
can serve only to reduce Canadian costs to world levels, while retaining the
efficient manufacture at a high volume of a more limited number of parts.
The levels of cost assumed at the end of the analysis of the modified model
are given in Table X. The Canadian government would have received, in duty
payments, $80 of the remaining penalty costs of the low-volume producer and
none of the penalty costs of the high-volume producer which would be shared
between inefficiency costs paid to the Canadian manufacturer of Part 4 and
production inefficiencies on Part 3, assembly costs, and sales and other costs.

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 Notes and Memoranda 513

TABLE X
COSTS CAPABLE OF BEING REDUCED UNDER EXTENDED CONTENT PLAN

Low-volume High-volume
producer producer
Total Canadian cost (Table IX) $1,555 $1,475
Parent company's cost 1,145 1,145
Penalty costs for production of
Canadian vehicles $ 415 $ 330
Less penalty in Canadian sales and
other costs* 100 90

Net remaining penalty costs, capable

of being eliminated by Bladen Plan $ 315 $ 240
*It is assumed that the penalty in Canadian sales and other costs
could not be eliminated, because of geographical considerations.

In terms of the mathematical model, the Canadian government would collect

in corporate income tax (assumed at 50 per cent) on the profits earned in
Canada (Table IX), three dollars from the low-volume, and forty-three dollars
from the high-volume producer. It would, of course, not receive taxes on the
profits earned by the parent company from the sale of parts to its subsidiary.
If, through Professor Bladen's extended content plan, the Canadian subsidiary
were able to sell parts for one vehicle line at world prices, or to concentrate
on one type of part for a number of vehicle lines, importing other parts duty-
free, it would reduce its costs to world levels. If its selling costs retained their
present (theoretical) premiums over world levels, costs would be reduced by
the $315 remaining penalty costs in Table IX for the low-volume producer and
the $240 remaining penalty costs for the high-volume producer. Let us assume
that the rationalization of the Canadian automotive industry resulting from
the application of the extended content plan would, in fact, create full economic
integration between the parent company and its subsidiary. The opportunity
for price competition, opened up by the reduction in costs for the Canadian
vehicle, would be exploitable by the high-volume producer to the extent that
the profit made on the sale of a Canadian vehicle would not be less than that
of the parent company. The low-volume producer would be forced to match
the prices of the high-volume producer, in order to maintain his market
position, although his Canadian selling and other costs are still above the
high-volume producer's level. The costs of the high-volume producer remain
above the parent company's costs by the remaining premium in Canadian
sales and other costs-$90-and this $90 shows up in the selling price in Canada
to maintain the same profit level. The low-volume producer, whose sales and
other costs are $10 higher, must cut his profit margin accordingly to maintain
competitive pricing.
The costs, prices, and profits in Table XI would result from the application
of the extended content plan and the pricing hypotheses outlined. If the
volume ratio of the two producers is assumed to remain constant at 1 :10
before and after the change in prices, the Canadian government would trade
off duty and sales taxes collected at present high prices against increased

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 514 CanadianJournal of Economics and Political Science

TABLE XI
SELLINGPRICES,COSTANDPROFITSAFTERAPPLICATION
OFEXTENDEDCONTENT
PLAN

Low-volume High-volume Parent company

subsidiary subsidiary (reference)
Fully accounted costs $1,245 $1,235 $1,145
Selling price 1,390 1,390 1,300
Accounted profit $ 145 $ 155 $ 155

income tax receipts as calculated in Table XII. Of course, all such models
must be only very broad approximations of reality, but it is now possible to
conclude that the cost effect to the government of the duty forfeited could
be much more attractive than Professor Johnson anticipated. Both the rela-
tively small amount of duty actually paid under the model and the greater
taxes from increased profits available to the Canadian subsidiary from the
reduction of its equivalent parts costs to its parent's level, either directly or
by manufacturing equivalent volumes for export, combine to increase the
government's revenue.
Dean Bladen has offered a practicable solution to some of the problems of
Canadian secondary manufacturing. He has balanced the political impossi-
bility of completely free trade, involving the sacrifice of existing secondary
industry, let alone its further growth, against the need for Canada to become

TABLE XII
CHANGESIN FEDERALGOVERNMENT
REVENUESAND CONSUMERCOSTS, RESULTINGFROM
EXTENDEDCONTENTPLAN

Low-volume High-volume
producer producer Total
Present situation
Duty paid $ 80
Sales tax paid (11% of $1560) 172 $172X10 = $1,720
Income tax paid
50% of $5 3
50% of $85 43X10 = 430
$255 $2,150 $2,405
Under extended content plan
Duty paid - -
Salestaxpaid (11%of $1320) 145 $145X10 = $1,450
Income tax paid
50% of $145 73
50% of $155 78X10 = 780
$218 $2,340 $2,448
Increase in government revenue, eleven vehicles $ 43
Increase in government revenue, one vehicle $ 4

Decrease in costs to consumer

Present assumed selling price $1,560
Assumed selling price after application of Canadian content 1,390
Saving to Consumer $ 170

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 Notes and Memoranda 515
fully competitive, which is possible only at world costs. He invented the
extended content plan by which he would guarantee Canadian participation
in the world automobile industry, but without the penalty and inefficiency
costs associated with duty and limited content protection.
It is possible, of course, to criticize details of his plan, such as the exact
content percentage which should be achieved by manufacturers at particular
volume levels. Such points are, however, only details and the unique principle
of the Report remains intact: to stimulate low-cost domestic production by
offering remission from duty (or alternative inefficiency costs) to automobile
manufacturers who include a certain level of Canadian production in their
world-wide planning. This is protection, it is true, but it is aimed at lowering,
rather than increasing, manufacturing costs, by lowering, rather than raising,
the premium for inefficiency.

THE BLADEN PLAN: A REPLY

HARRY G. JOHNSON
Universityof Chicago

ONE of the central themes implicit in my review of the Bladen Report was that
far too little attention has been devoted to the analysis of the economic effects
of the automotive tariff to suit the requirements of intelligent policy-making.
I am therefore grateful to Mr. MacDonald, who knows far more of the internal
operations of subsidiaries in the industry than I can claim to, for taking the
trouble to write down his reactions to my model of the industry and the
effects of the tariff structure in the form of an alternative model. That model
provides an illuminating insight into both the way in which a company con-
ducting international operations takes its decisions with respect to the choices
between domestic supply and importation, and between domestic production
and domestic purchasing, and the ways in which these decisions are affected
by the tariff and the content requirement. In addition, it distinguishes (where
I did not) between production and marketing considerations, and deals with
some of the complications of customs valuation that I ignored. His model is,
however, a short-run decision model which raises some unanswered questions
for an economist; and it does not provide the justification for the Bladen Plan
that Mr. MacDonald claims for it.
In my own model, which was concerned with the long-run effects of
alternative tariff arrangements on the excess cost of protected production in
Canada, I made use of the customary simplifying identification of price with
cost, including normal profit as an element of cost. In contrast, Mr. Mac-
Donald introduces a distinction between cost and price, for items produced
within the corporate enterprise, the differences being profit to the company.
On this basis he is able to establish a number of results that differ from
those obtained when prices do represent costs. One interesting result is that
a company may decide to export a part to its subsidiary even though the
subsidiary could produce the part at a lower cost than the tariff-inclusive

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