The Hidden Costs of “Unfair” Labor Practices in The Developing World

———–The interaction of labor standards and international trade has become a key issue in the relations between the advanced industrialized and developing countries in the past decade. Proponents of the international enforcement of labor standards present two lines of argument. First, organized labor and social activists in the United States and other industrialized countries argue that “unfair” labor practices and conditions exist in many developing country trading partners and need to be offset by appropriate trade policy measures in order to “level the playing field.” Second, many social activists argue that workers in developing countries are subject to exploitative and abusive working conditions, and that their wages are suppressed. The proposed solution is for the United States and other industrialized countries to take steps to ensure that labor standards are enforced through mechanisms such as the World Trade Organization (WTO) and bilateral and regional trade agreements.

While we embrace the goal of improving the wages and working conditions of workers in poor countries, we take the position that attaching labor standards to the WTO and trade agreements will not achieve this goal, nor will it have the desired effect of keeping more jobs in the industrialized countries. In fact, such a policy could make things worse for many workers in developing countries. Alternative policies and existing institutions must be deployed to ensure that: (a) workers in industrialized countries will not be adversely affected by freer trade and globalization in general; and (b) wages and working conditions of workers in the developing countries can be improved at a sustainable pace.

Factory workers experience exploitation in many countries across the world every day. Sometimes the consequences of these conditions can be fatal. Poverty has pushed millions of workers all over the world into unfavorable jobs to survive and provide for their family. Workers, including the elderly and children, labor long hours in the factory in unsafe conditions and receive very low wages. Unfortunately, in India and China, these practices are commonplace and result from the lack of laws and regulations and the lack of enforcement. The international trade policies in place have inadequate labor standards and are not enforced. The labor standards in the United States have been developed to protect workers and to be fair to the workers.

Numerous proposals have surfaced recently to incorporate a clause about labor standards in the rules of the World Trade Organization (WTO). Such a clause would require each WTO member to recognize and enforce certain core labor standards: forbidding forced labor, discrimination, and the exploitation of child workers, and guaranteeing the rights of workers to associate freely and engage in collective bargaining with employers. Failure to provide core labor standards would subject a country to international trade sanctions. The author analyzes links between core labor standards and international trade policy. He develops a series of simple models to see whether limiting core labor standards in export sectors of developing countries can improve the countries’ price competitiveness in export markets.

He concludes that deficient provision of core labor standards generally diminishes export competitiveness rather than improving it, because of the distortionary effects of those deficiencies. In other words, concerns about the negative impact on industrial countries of limited wage, employment, and labor standards in developing countries are largely misplaced -with one exception: exploiting child labor could expand exports in highly labor-intensive sectors. But wage spillovers into industrial economy labor markets must be trivial, and there is no empirical evidence that the use of child labor provides measurable competitive advantages. Do international trade sanctions serve a legitimate, effective role in penalizing countries that fail to observe core labor standards? The author points out that trade restrictions are blunt, indirect instruments and may be counterproductive, harming the people they are designed to help and ineffective in achieving stated goals.

Thus, including in WTO rules a social clause guaranteeing core labor standards would reduce global efficiency for a small gain. Some approaches -including compensation programs from wealthy countries, focused on poverty reduction and better access to education- would be more effective and less costly than trade restrictions. At the same time, the International Labor Organization could improve its monitoring and publicity efforts, to raise international consciousness about labor standards.

Although existing codified labor standards vary from country to country, depending on the stage of development, per capita income, political, social, and cultural conditions and institutions, efforts have been made to identify and achieve consensus on a group of so-called core labor standards that ideally should apply universally. According to the Organization for Economic Cooperation and Development (2000, p. 20), there are eight fundamental International Labor Organization Conventions that form the basis of consensus among the ILO’s constituents. These include: (1) prohibition of forced labor (ILO Convention No. 29 and 105); (2) freedom of association and protection of the rights to organize and to collective bargaining (No. 87 and 98); (3) equal remuneration for men and women for work of equal value (No. 100); (4) nondiscrimination in employment and occupation (No. 111); and (5) minimum age of employment of children and abolition of the worst forms of child labor (No. 138 and 182).

Agreement on the universality of these core labor standards derives ostensibly from adoption of the United Nations Universal Declaration of Human Rights in 1948, acceptance (though not necessarily ratification) of the pertinent ILO Conventions that deal with human rights and labor standards, and the ILO Declaration on Fundamental Principles and Rights at Work in 1998. In addition to these aforementioned core standards, there are other labor standards that are currently being discussed by labor advocates that relate to “acceptable conditions of work,” which include: a minimum (living) wage; limitations on hours of work; and occupational safety and health in the workplace. These core plus “other” standards are supported by the many non-governmental organizations (NGOs) that deal with the international monitoring of labor rights.

Advocates argue that enforcement of labor standards through trade agreements will improve the working conditions and wages of workers in poor countries, thereby reducing the wage differentials between rich and poor countries. They believe that this will protect jobs of workers in the rich countries. The question is whether working conditions in poor countries can be raised, and whether jobs of workers in rich countries can be protected with the application of standards that are designed and enforced by the rich countries.

In this connection, there is evidently a marked difference between the worldview of most advocates linking international labor standards to trade and most economists, including ourselves. Advocates of attaching labor standards to trade agreements seem to see the world in terms of a struggle between capital and labor for the rewards from production, without much regard to the determinants of the size of the output that each party gets. These advocates see the outcome as depending on power, not on economics. Economists see the world in terms of how resources are allocated to production with a view to maximizing the total output. They see the distribution of that output between capital and labor as depending on scarcity and productivity, not on power. Therefore labor standards advocates favor the use of intervention to tilt the balance of power in favor of labor, believing then that labor will get a larger share of a fixed pie. Economists have found that those same policies shrink the pie while altering the slices, i.e., by making poor workers in developing countries poorer and more numerous. This, we argue is not a result of changing power but due to changing the markets within which scarcity determines the rewards to capital and labor.

In order to establish the need for “leveling the playing field,” it must first be demonstrated that low labor standards in poor countries negatively impact workers in rich countries. Proponents of attaching labor standards to trade agreements argue that low labor standards act through two channels: a) goods from low labor standard countries displace products made by workers in high labor standard countries and hence reduce employment in the latter; b) multinational enterprises outsource jobs to countries with lower labor standards to take advantage of lower labor costs. The evidence suggests, however, that the observed patterns of traded goods and foreign direct investment (FDI) do not reflect inter-country differences in labor standards.

If one looks at the economic development of the United States, Western Europe, Japan and other advanced industrialized countries over the past century, it is evident that the real incomes of workers have increased dramatically and that the conditions of work have improved concomitantly. In recent decades, there have been similar improvements in a substantial number of developing countries, especially in East and Southeast Asia as well as in Latin America. What the historical record suggests therefore is that it is not through the external enforcement of labor standards that improvements have been realized, but through internal economic and social development and growth in a country’s GNP. This means that governments in poor countries must implement solid growth strategies and target policies to eradicate poverty. Governments in rich countries can also help increase demand for poor countries’ output by reducing the barriers to imports from these countries. Finally, conscientious consumers in rich countries can also play a small role in increasing demand for products that are not produced by children or sweatshops, while MNCs can ensure their affiliates also follow better labor practices. Although this strategy is more multifaceted and will seem to take longer than mandates, it will achieve the goal of improved labor standards and wages that are sustainable in the currently poorer countries.

As for the rich countries, their governments should assist workers in recognizing they can benefit from the globalization process. Rather than setting up barriers to imports from poor countries and seeking to enforce labor standards in poor countries, efforts should be focused on preparing workers to be more flexible and able to adapt to the evolving global economy. In particular, more resources can be allocated to retraining workers in declining sector jobs so they may unleash their talent in the growing sectors.​The process of economic change is complex and cannot be managed by mandates. The alternative policies we propose will be far more effective in making workers and the economies better off than trying to mandate change.