Question

Ross Perot added his memorable “insight” to the debate over the North American Free Trade Agreement (NAFTA) when he warned that passage of NAFTA would create a “GIANT SUCKING SOUND” as U.S. employers shipped jobs to Mexico, where wages are lower than wages in the United States. As it turned out, many U.S. firms chose NOT to produce in Mexico despite the much lower wages there. Explain why it may not be economically efficient to move production to foreign countries, even ones with substantially lower wages. What about ethical considerations?

Answer 1

It may not be economically efficient to move production to foreign countries, even ones with substantially lower wages, because of the following reasons:

1) The production might be heavily dependent on various materials or components which are sourced locally from the US itself. Moving production base would require building new supply chain and logistics system to ensure the smooth flow of components. This might increase the overall cost of production.

2) Quality-related issues might arise because of shifting production to other countries as keeping a quality check would be more difficult when production is shifted to other countries. Higher deficits and escalation of other quality issues might result in fall in revenue and make the production

3) There can be various ethical issues related to shifting production to low-cost countries. These ethical issues include bad working condition, the practice of child labor, long working hours, etc. Such ethical issues can have damaging effects on the brand image, reputation and customer loyalty of the company.