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.

Shipping costs of raw materials plus costs of shipping the finished products is one disadvantage. Another is whether unskilled labor can efficiently make quality products.

To understand why it may not be economically efficient to move production to foreign countries with substantially lower wages, we need to consider several factors.

1. Transportation and logistics costs: Moving production to a foreign country involves additional expenses such as transportation and logistics costs. These costs can include shipping raw materials to the new location, shipping finished products back to the home country, and managing complex supply chains. These expenses can significantly reduce the cost advantage of lower wages.

2. Time and distance: Production facilities located in foreign countries may face delays in communication and coordination due to geographical distance and time zone differences. This can slow down decision-making, increase lead times, and result in inefficiencies in the production process.

3. Quality control and intellectual property protection: Depending on the country, there may be concerns about quality control and intellectual property protection. Companies may need to invest in additional measures to ensure product quality and safeguard their intellectual property rights, adding extra costs to the manufacturing process.

4. Regulatory and legal environments: Differences in regulatory frameworks and legal environments between countries can also pose challenges for foreign operations. Companies may need to comply with a whole new set of regulations, deal with unfamiliar legal systems, and navigate complex bureaucratic processes.

5. Reputation and customer perceptions: Companies that move production to countries with poor labor standards or questionable human rights records may face reputational risks. Consumer perception of socially responsible practices can influence buying decisions, and negative perception can impact sales and brand image.

6. Technology and innovation: Lower wages in a foreign country might initially attract companies, but if that country lacks advanced technology, infrastructure, or innovation capabilities, it can hinder long-term growth and competitiveness. Access to skilled labor, research and development resources, and technological advancements are crucial factors for sustainable success in many industries.

These factors highlight that cost savings from lower wages alone might not outweigh the additional costs and risks involved in moving production to foreign countries. Assessing the overall efficiency of such a decision requires a comprehensive analysis of all the relevant factors mentioned above.