Labor Standards and Trade: Labor Standards and Trade


The Effects of Increased Trade: The Effects of Increased Trade Increased trade can bring about one of two futures 1. Better working conditions: Increased trade leads to an improved economy and therefore, increased wages. The increased wages create the demand for better working conditions 2. Exploitation: Investors and Firms play one low-wage country against another placing continual downward pressure on wages and working conditions in a “race-to-the-bottom”


How Do Labor Standards Help?: How Do Labor Standards Help? Several Studies have shown that increased wages (due to labor standards) have created an expanded domestic demand Singapore developed rapidly in the 1970s due to a tripartite system of the government, unions and employers that aided in the political stability and better income distribution that brought in rapid economic development


Why Should We Increase Protections?: Why Should We Increase Protections? Benevolence A person’s utility will increase if the welfare of workers and children in a poor countries increases Selfish The fear of the erosion of one’s high standards through a “race-to-the-bottom” in the global economy where “low” standards anywhere can threaten “high” standards everywhere


How Do We Increase Protections: Benevolence: How Do We Increase Protections: Benevolence Lobbying Save the Children Imposition of Sanctions Reduction on immigration standards for workers from areas with low labor standards Income Transfers Parents would not need their children to aid in additional income as much (if at all)


How Do We Increase Protections:Selfishness: How Do We Increase Protections: Selfishness Fear A country or firm with low labor standards faces a lower production cost and can therefore sell at a lower price. The fear stems from the idea that firms in high standard countries could lobby governments for lower standards or wages to remain competitive Buy American! The idea that buying only American goods can force an offending country or firm out of a nation’s market so that the firm will either have to improve standards or face a possible loss due to foregoing that market all together


Selfishness, Benevolence or Protectionism?: Selfishness, Benevolence or Protectionism? Economic theory predicts and empirical evidence suggests that lax enforcement of workers’ rights encourages prolonged reliance on less skilled labor-intensive activities and does not encourage economy-wide capital formation and long term growth The Economic Strategy Institute estimates that annual manufacturing labor costs per worker (after taking into account national differences in productivity) are reduced by more than $6000 in economies where both freedom of association and child labor are not well protected


Game Theory and Comparative Advantage: Game Theory and Comparative Advantage


Reviewing the Concepts: Reviewing the Concepts Comparative Advantage David Ricardo Principles of Political Economy and Taxation Heckscher-Ohlin


Game Theory: Game Theory Background and Examples 1944 - Theory of Games and Economic Behavior by John van Neumann and Oskar Morgenstern M.A.D. and the Cold War John Nash and the Nash Equilibrium Where each player is doing the best they can given what the other player is doing. The Prisoner’s Dilemma


Prisoner’s Dilemma: Prisoner’s Dilemma


International Trade: International Trade Humanitarian Concerns Labor Standards The Effects


The Race to the Bottom: The Race to the Bottom Hecksher-Ohlin How do reforms affect comparative advantage? Possible Prisoner’s Dilemma Incentive to adopt low standards But all nations benefit from coordinated choice of higher labor standards


Race to the Bottom and the Prisoner’s Dilemma: Race to the Bottom and the Prisoner’s Dilemma


Analysis: Analysis Dominate strategy for both is to set a low standard. Collectively though, the rational strategy is a high standard to yield a high, positive pay off for both.


The Labor Organizations: The Labor Organizations The WTO and ILO


WTO: WTO The WTO currently defers issues relating to labor standards to the ILO. Although many industrialized countries believe the WTO should adopt a set of core labor standards into the organization, other countries view it as a smokescreen for protectionism. Legal Question – should trade action be permitted as a means of putting pressure on countries considered to be severely violating core labor rights? Analytical Question - if a country has lower standards for labor rights, do its exports gain an unfair advantage? Institutional Question - is the WTO the proper place to discuss labor? Should trade actions be used to impose labor standards or is it an excuse for protectionism?


International Labor Organization (ILO): International Labor Organization (ILO) Five Internationally Recognized Core Principles of the ILO: Freedom of Association Freedom from Forced Labor The Effective Abolition of Child Labor Nondiscrimination in Employment Remuneration for Men and Women for Work of Equal Value


Disputes In the WTO: Disputes In the WTO


Disputes In the WTO: Disputes In the WTO Under the old GATT, dispute settlements had no fixed timetables, rulings were easier to block, and many cases dragged on for a long time inconclusively. Although this takes time and is complicated, it does provide much more effective results than under GATT


Enforcement of the Decision: Enforcement of the Decision If the offending country loses, it must follow the recommendations of the panel report or the appeals report. It must state its intention to do so at a Dispute Settlement Body meeting held within 30 days of the report’s adoption. If complying with the recommendation immediately proves impractical, the member will be given a “reasonable period of time” to do so. If it fails to act within this period, it has to enter into negotiations with the complaining country (or countries) in order to determine mutually-acceptable compensation — e.g., tariff reductions in areas of particular interest to the complaining side.


WTO Enforcement cont.: WTO Enforcement cont. After 20 days, no satisfactory compensation is agreed, the complaining side may ask the Dispute Settlement Body for permission to impose limited trade sanctions (“suspend concessions or obligations”) against the other side. In principle, the sanctions should be imposed in the same sector as the dispute. If this is not practical or if it would not be effective, the sanctions can be imposed in a different sector of the same agreement. In turn, if this is not effective or practicable and if the circumstances are serious enough, the action can be taken under another agreement


The ILO and Enforcement: The ILO and Enforcement Enforcement requires first, either a country refuses to submit reports or submit to inspections or another party (citizens’ group, another member nation, or NGO) must submit a complaint or referral of investigation before anything is done “Sunshine, Carrots and Sticks” Sunshine- elaborate supervisory mechanisms relying heavily on each layer of supervision to issue numerous reports have been the most popular choice Carrots- incentives usually in the form of technical assistance Sticks- usually in the form of peer pressure


The ILO and Enforcement: The ILO and Enforcement As of 2001, the ILO requires that if any nation has not ratified one or more of the 8 conventions associated with the core principles to provide an annual report containing their efforts to promote the principles. The language of ILO conventions and declarations do not leave out the possibility of sanctions, however with the existence of the WTO, action of this sort is highly unlikely The WTO authorizes member governments to take actions to remedy violations they do not directly impose Is the ILO willing to take on large countries? Only time will tell


Human Rights Organizations: Human Rights Organizations


List of Organizations: List of Organizations Amnesty International Human Rights Watch The United Nations The Universal Declaration of Human Rights of 1948 The UN Foundation Commission on Legal Empowerment of the Poor Members include Mike Moore, Anthony Kennedy, Gordon Brown, and Ernesto Zedillo


The Problem: The Problem Can these organizations really affect trade? Reports and Recommendations United Nations World Bank and International Monetary Fund


Case Study - China: Case Study - China Wealthier nations tend to have better labor standards than poorer countries. Because of the economic development in China, pressures are being placed on employers to improve labor standards in order to retain qualified workers. Foreign companies offer Chinese workers better working conditions, higher pay, and better governance by the company. Because the working conditions offered by foreign companies are much higher than local companies, many local companies are facing an upward pressure to improve working conditions and labor standards in order to remain active in a competitive market. (i.e. nondiscrimination policies, right of association and collective bargaining rights, and prohibition on child labor)


Case Study – China (continued): Case Study – China (continued) Many companies are exploring their option of expansion into China. While interest in the newly developed global market (in China) is high since China’s accession to the WTO and its hosting the 2008 Olympic Games, many companies are being cautious about current labor standards in China. If proper attention is not paid to these concerns, a company’s image can be ruined if they are associated with 18-hour days, sweatshops, child labor, and health risks associated with the job. Careful attention needs to be focused on Chinese cultural concerns as they differ heavily from the traditional Western ideology. This pertinent issue will remain a heavy topic of discussion as foreign companies hesitantly seek business expansion in China.


Case Study – China (continued): Case Study – China (continued) Government Involvement (Chinese Labor Law Reform) China’s economy has been growing at rates of 8-12% annually. A large majority of this growth, which has surpassed the centralized state, is being lead by the private sector within the past 25 years. In order to stay competitive, the Chinese government has been looking at ways in which they can improve labor standards while staying true to Chinese culture concerns.


Any Questions?: Any Questions?


Sources: Sources Srinivansan, Trade and Human Rights Polaski, Trade and Labor Standards. Carnegie Inst. WTO Literature ILO Literature Elliot, The ILO and Enforcement Trade Resource Center – Protectionist ` Measures Will Not Induce China to Raise Labor Standards: Economic Engagement is the Best Means to Achieve Higher Labor Standards Labour Standards in China, The Business and Investment Challenge Chinese Labor Law Reform: Guaranteeing Worker Rights in the Age of Globalism United Nations Literature United Nations Commission on Legal Empowerment of the Poor Amnesty International Human Rights Watch