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Case 12

August 12, 1992, was a really bad day for John Martin. That was the day Canada,
Mexico, and the United States announced an agreement in principle to form the North
American Free Trade Agreement. Under the plan, all tariffs between the three
countries would be eliminated within the next 10 to 15 years, with most being cut in
5 years. What disturbed John most was the plan's provision that all tariffs on trade of
textiles among the three countries were to be removed within 10 years. Under the
proposed agreement, Mexico and Canada would also be allowed to ship a specific
amount of clothing and textiles made from foreign materials to the United States
each year, and this quota would rise slightly over the first five years of the
agreement. "My God!" thought John. "Now I'm going to have to decide about moving
my plants to Mexico."

John is the CEO of a New York-based textile company, Martin's Textiles. The
company has been in the Martin family for four generations, having been founded by
his great grandfather in 1910. Today the company employs 1,500 people in three New
York plants that produce cotton-based clothes, primarily underwear. All production
employees are union members, and the company has a long history of good labor
relations. The company has never had a labor dispute, and John, like his father,
grandfather, and great-grandfather before him, regards the work force as part of the
"Martin family." John prides himself not only on knowing many of the employees by
name, but also on knowing a great deal about the family circumstances of many of the
longtime employees.

Over the past 20 years, the company has experienced increasingly tough
competition, both from overseas and at home. The mid-1980s were particularly
difficult. The strength of the dollar on the foreign exchange market during that
period enabled Asian producers to enter the US market with very low prices. Since
then, although the dollar has weakened against many major currencies, the Asian
producers have not raised their prices in response to the falling dollar. In a low-skilled,
labor-intensive business such as clothing manufacture, costs are driven by wage rates
and labor productivity. Not surprisingly, most of John's competitors in the
northeastern United States responded to the intense cost competition by moving
production south, first to states such as South Carolina and Mississippi, where
nonunion labor could be hired for significantly less than in the unionized Northeast,
and then to Mexico, where labor costs for textile workers were less than $2 per
hour. In contrast, wage rates are $12.50 per hour at John's New York plant and $8
to $10 per hour at nonunion textile plants in the southeastern United States.
The last three years have been particularly tough at Martin's Textiles. The
company has registered a small loss each year, and John knows the company cannot go
on like this. His major customers, while praising the quality of Martin's products, have
warned him that his prices are getting too high and they may not be able to continue to
do business with him. His longtime banker has told him that he must get his labor costs
down. John agrees, but he knows of only one surefire way to do that, to move pro-
duction south—way south, to Mexico. He has always been reluctant to do that, but now
he seems to have little choice. He fears that in five years the US market will be flooded
with cheap imports from Asian, US, and Mexican companies, all producing in Mexico. It
looks like the only way for Martin's Textiles to survive is to close the New York plants
and move production to Mexico. All that would be left in the United States would be the
sales force.

John's mind was spinning. How could something that throws good honest
people out of work be good for the country? The politicians said it would be good for
trade, good for economic growth, good for the three countries. John could not see it
that way. What about Mary Morgan, who has worked for Martin's for 30 years? She is
now 54 years old. How will she and others like her find another job? What about his
moral obligation to his workers? What about the loyalty his workers have shown his
family over the years? Is this a good way to repay it? How would he break the news to
his employees, many of whom have worked for the company 10 to 20 years? And
what about the Mexican workers; could they be as loyal and productive as his present
employees? From other US textile companies that had set up production in Mexico he
had heard stories of low productivity, poor workmanship, high turnover, and high
absenteeism. If this was true, how could he ever cope with that? John has always felt
that the success of Martin's Textiles is partly due to the family atmosphere, which
encourages worker loyalty, productivity, and attention to quality, an atmosphere that
has been built up over four generations. How could he replicate that in Mexico with a
bunch of foreign workers who speak a language that he doesn't even understand?

Case Discussion Questions
1. What are the economic costs and benefits to Martin's Textiles of shifting production to Mexico?

2. What are the social costs and benefits to Martin's Textiles of shifting production to Mexico?

3. Are the economic and social costs and benefits of moving production to Mexico indepenÈ]t of
each other?

4. What seems to be the most ethical action?

5. What would you do if you were John Martin?