Moreland (2013) claims that the continuing decline of Detroit’s local economy is due largely to the effect of the US joining the North American Free Trade Agreement or NAFTA . He states that the continuous flooding of foreign-made cars into the US has forced the US to outsource its production of automobile to Mexico. This led to unemployment and economic collapse. While it is unfortunate that Detroit’s hard earned economic stature collapsed in the last 40 years, economic theory suggests that NAFTA is not entirely to blame for it. The search for efficiency and increased productive capacity is a fundamental requirement for economic progress. Economic progress is defined as a way where a country’s resources are rearranging such that the resulting goods and service produced are of higher value . This statement means that Detroit’s demise is ultimately a move towards a more efficient use of economic resources that in the long run, would result to economic progress. This is the thesis that this study shall attempt to prove, that the benefits of NAFTA are greater than the economic downfall of Detroit.
The economic model that supports the validity of NAFTA is David Ricardo’s Theory of Comparative Advantage . According to Ricardo, it is beneficial for two countries to trade when the products traded are of different relative costs. Countries benefit when they realize that they can specialize and become highly efficient at production. Using Ricardo’s economic framework, it can be argued that Detroit’s relative costs have increased to the point where it operates inefficiently and therefore, the introduction of foreign cars was a move to manage the economy.
Following this argument, the operational issue of “outsourcing” may also explain the validity of NAFTA and its removal as the culprit for Detroit’s economic degradation. Outsourcing is defined as the delegation of a business process to a party that is not a part of the company (“third party”) who offers benefits to the outsourcing party . Outsourcing is controversial because it has evident disadvantages as well. For example, the Associated Press projects that about 3.4 million jobs in the service industry will be lost in the US by 2015 due to outsourcing . NAFTA essentially outsourced Detroit’s labor to Mexico but the reasons for doing are founded on the principles of outsourcing.
Lastly, Detroit may have failed due to the internal machinations driving the city. According to an article by Bomey and Gallagher, Detroit’s leadership may have caused much of its gains to wither away due to ineffective management . This suggests that NAFTA may not even be a detrimental factor but internal weaknesses may have been more significant.
The study would entail in depth research of the financial performance of city, the significant events within at least a 20-year period, and an econometric measurement of the effects of decisions made by officials managing the local Detroit economy and the US in general to gain an understanding of how truly Detroit’s economy was affected by NAFTA.
Statistical Data Accessed
Detroit Economic Performance - http://www.statista.com/statistics/183873/gdp-of-the-detroit-metro-area/
NAFTA US Trade Statistics - http://export.gov/FTA/nafta/eg_main_017795.asp
Associated Press. Study: Offshoring of U.S. jobs accelerating. 2004. 8 August 2013.
Bomey, Nathan and John Gallagher. How Detroit went broke: The answers may surprise you - and don't blame Coleman Young. 15 September 2013. http://www.freep.com/interactive/article/20130915/NEWS01/130801004/Detroit-Bankruptcy-history-1950-debt-pension-revenue. 18 February 2015.
Economic Insights. "Theory of Free International Trade." Federal Reserve Bank of Dallas Vol. 9 Number 2 (2002). https://www.dallasfed.org/assets/documents/research/ei/ei0402.pdf. 18 February 2014.
Flatworld Solutions. Top 10 Reasons to Outsource. n.d. 6 August 2013.
Moreland, James. How Free Trade Agreements Crippled Detroit. 2013. 18 February 2014.
Romer, Paul. "Economic Growth." 2008. 8 January 2014.