Comparative Advantage and Streetcars, Redux

Photo credit: Faith Cathcart, The Oregonian

The news, reported today by The Oregonian, that United Streetcar, the Clackamas based subsidiary of Oregon Iron Works, is months behind schedule on their streetcar manufacturing seems like a good opportunity to revisit an old blog post I wrote a couople of years ago when the contract was awarded.

First yesterday's news:

Officials for Clackamas-based United Streetcar acknowledged this week that work on their first five streetcars is months behind schedule. Representatives for the city's streetcar division remain hopeful that at least one of the vehicles will be ready for the line's Sept. 22 opening.

The setback is just the latest as United Streetcar, a subsidiary of Oregon Iron Works, attempts to break into a sector that's traditionally been monopolized by European companies. Design problems already prompted city leaders to delay the line's opening by five months and reduce the number of cars from six to five, while barely trimming the $19.5 million budget.

"We're not on the schedule we'd like to be," said Carter MacNichol, a consultant with Shiels Obletz Johnsen, which is managing the project for Portland. But, he added, "it's an extremely challenging effort. I just can't emphasize that enough. There's a reason there haven't been car builders in the United States for decades. It's difficult, difficult work."

Now here is what I wrote more than two years ago:

Why do we care so much about having our streetcars totally made in the US? What if we are not terribly good at it? Perhaps the Czechs are real experts and can produce a more reliable propulsion system for less money. Wouldn't it be better to focus on what we are good at - like designing iPhones, making good beer (Pilsner - pah!), making Hollywood blockbusters - and then trading them to the Czechs for streetcar propulsion systems?

Almost 200 years of economic theory suggests that we should and that if we do we will be better off.

In fact it appears that we are not very good at it - yet - and we will pay a pretty high price for insisting on USA built streetcars.

But this is not the end of the story.  As I mentioned at the time, for industries where there is a lot of learning-by-doing (and the O's article suggests that there is a lot of learning-by-doing going on at United Streetcar) there is a reasonable argument to be made for supporting them in their infancy.  But the rationale imagines a future where they have learned, become competitive, and don't need support or preferential treatment.  For this to be true in this case would mean a future where there is a large demand for streetcars. I was a little skeptical, but United Streetcar has racked up a bunch of orders - apparently streetcars are becoming something of a trend.

I am still skeptical it will last.  How many streetcar manufacturers can the world support, and why shouldn't we expect that the Czech Republic has a comparative advantage?

Only time will tell - maybe in ten years we can look back and pass judgement, but I am not ready to do so now.