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An Economic Perspective on the Race-to-
the-bottom in International Labour
Standards
A thesis submitted to the Bucerius/WHU Master of Law and Business Program in
partial fulfillment of the requirements for the award of the Master of Law and Business
(“MLB”) Degree
Teresa Wittgenstein July 24, 2013
14.436 words
Supervisor 1: Prof. Dr. Ralf Fendel
Supervisor 2: Mr. Iraj Ispahani
i
TABLE OF CONTENTS
Table of Contents……………………………………………………………………………. i
List of Abbreviations………………………………………………………………………… ii
List of Figures ………………………………………………………………………………. iii
1. INTRODUCTION………………………………………………………………..…… 1
2. BACKGROUND………………………………………...…………………………….. 4
2.1 International labour standards: a historical overview……………………………..…. 4
2.2 International labour standards: definition and scope……………………………….... 6
2.3 Labour standards in the globalised economy………………………………………... 7
3. CORE LABOUR STANDARDS AND COMPETITIVENESS…………...………... 9
3.1 Regulatory competition: the prisoner’s dilemma……………………………….…… 9
3.2 Trade and resources: the Heckscher-Ohlin model………………………………….... 11
3.2.1 Reasons to choose the Heckscher-Ohlin model and relevant assumptions……... 11
3.2.2 Free trade equilibrium: respect of ILO core labour standards………………...… 12
3.2.3 Free trade equilibrium: decline in core labour standards in country H………..... 13
3.2.3.1 Child labour and forced labour……………………………………………... 13
3.2.3.2 Employment discrimination…………………………….………………….. 16
3.2.3.3 Freedom of association and collective bargaining…………………………. 19
4. RACING TO THE BOTTOM OR CLIMBING TO THE TOP? …………………... 21
4.1 Empirical evidence…………………………………………………………………... 21
4.2 Theoretical literature……………………………………………………………….... 22
4.3 Market-driven mechanisms………………………………….………………………. 24
4.3.1 Ethical consumerism……………………………………..……………………... 24
4.3.2 Trade and income convergence…………………………..……………………... 26
5. CASE STUDY: EVIDENCE FROM CHINA………………………………………... 27
5.1 China’s economic integration…………………………………..……………………. 27
5.2 Regress or progress? ………………………………………………………………… 29
5.3 Racing to the bottom…………………………………………………….…………... 29
5.4 Climbing to the top……………………………………………………….….………. 31
5.4.1 Trade and export diversification……………………………………..….………. 31
5.4.2 Ethical supply chain management……………………………………..………... 32
5.5 China and the ILO core labour standards………………………………….………… 34
6. CONCLUSION AND POLICY IMPLICATIONS…………..………………………. 36
Bibliography…………………………………………………………………………………. 39
ii
List of Abbreviations
ACFT All China Federation of Trade Unions
CPC Communist Party of China
CSR Corporate social responsibility
FDI Foreign direct investment
GATT General Agreement on Tariffs and Trade
ILO International Labour Organisation
IOE International Organisation of Employers
ITO International Trade Organisation
ITUC International Trade Union Confederation
OECD Organisation for Economic Co-operation and Development
PRC People’s Republic of China
SOE State-owned enterprises
UN United Nations
US United States
WTO World Trade Organisation
iii
List of Figures
Figure 1: Systems competition illustrated in terms of the prisoner’s dilemma……………… 10
Figure 2: Trade and welfare effects of child/ prison labour – country H……………………. 14
Figure 3: Trade and welfare effects of child/ prison labour – country F……………………. 15
Figure 4: Trade and welfare effects of discrimination – country H…………………………. 18
Figure 5: Trade and welfare effects of discrimination – country F………………………….. 19
1
1. INTRODUCTION
The integration of national economies through trade, capital flows and the international
movement of workers is a phenomenon frequently termed as economic globalisation (Bhagwati
2007). Rapid integration of the global economy began in the final decades of the 19th century,
facilitated by improvements in communication and transportation. Advances such as the
telephone, the steamship and the railroad greatly intensified the volume of trade, investment
and outward expansion (Feenstra and Taylor 2011).
During the interwar period, globalisation was interrupted by economic downturn and
rising trade barriers (Bhagwati 2007). Post-war liberalisation of commerce and investment led
to a resumption of the dynamics set in motion at the end of the 18th century. Especially the
second half of the 19th century witnessed the pace of globalisation accelerating, as hostility in
many of the developing countries turned to the progressive embrace of the market mechanism
(Steger and Roy 2010). While previous integration was primarily advanced by technological
innovations in transportation and communication, “today’s most dramatic change is the degree
to which governments have intervened to reduce obstacles to the flow of trade and investments
worldwide” (Bhagwati 2007, p.11)
Although the current phase of globalisation has been advanced first and foremost by
changes in political strategy, the pace of technological progress has continued unabated (Singh
and Zammit 2004). With resources such as capital becoming increasingly footloose, countries
are now more than ever exposed to both opportunities and threats emanating outside their
control (Eglin 2001). Following Mosley and Uno (2007), “the standardisation of manufactured
commodities, the liberalisation of trade in manufactures, and the decline in long-distance
transportation costs have facilitated the development of global production networks” (p.927).
Multinational corporations may retain ownership of facilities within the global production
network by foreign direct investment (FDI) or may generate subcontracting and outsourcing
relationships with firms in distant countries. As competitive pressures have exacerbated, a
country’s ability to manufacture products at low costs is central to determining the extent of its
participation in the world market.
Lawrence et al. (1996) provide “as international competition has intensified, firms,
workers, and citizens have become increasingly aware that different national policies have
international effects” (pp.4-5). Subsequently, in recent years there appears to be a public
backlash evolving against globalisation (Sanyal 2001). Discontent translates into the perception
that neoliberal globalisation is the cause of a race-to-the-bottom in a whole host of economic
and social policies in which governments seek to attract mobile resources and access to lucrative
2
markets. As explained by Klevorick (1996), “at the heart of the race-to-the-bottom argument is
the view that the competitive process among firms is imperfect” (p.460). Concerns about unfair
competition and an associated erosion of standards have been expressed in the arenas of
taxation, environmental regulation, and more recently labour standards (Davies and
Vadlamannati 2013). Few debates have been as controversial as the nexus between international
commerce and labour rights. While it is unambiguous that standards respond to the opening of
trade, conceptually speaking, the relationship between labour conditions and trade remains
ambivalent.
Importantly, anti-globalisation sentiments are expanding among developed countries.
Governments, workers, unions, as well as parts of the business sector blame intensified
competition, stemming primarily from less developed trading partners, as the basis for
diminishing labour standards in their own countries (Sanyal 2001). In consequence, pressures
for fair trade as an alternative model to neoliberal globalisation have intensified, rooted in both
social and economic concerns. As Lawrence et al. (1996) stipulate, “once markets and
competition are global there is a strong case for the rules defining fair competition” (p.5). One
response to these misgivings has been the call for tying recognised basic labour standards to the
multilateral trading system. In terms of the analysis of Polanyi (1944), the introduction of a
social dimension to trade is necessary to ensure that prosperity is generated on socially
acceptable terms.
While globalisation critics fear the competitive erosion of labour standards, their fixing
in multilateral agreements is a similarly contentious issue (Singh and Zammit 2004). To trade
economists, used to the general idea that gains from commerce stem from differences between
countries rather than from uniformity, the demand for harmonisation sounds suspicious.
Globalisation enthusiasts are concerned that the promotion of rules tied to the international
trading system might become a pretext for protectionism, denying countries access to
international markets. Following Casella (1996), “as markets continue to integrate and tariff
barriers are progressively eliminated, the political debate has shifted to differences in standards
and regulations as possible instruments of markets protection and of trade distortion” (p.119).
Despite the fact that labour standards have taken on a high profile in contemporary
policy debates, to date, there have been few comprehensive studies analysing the impact trade
liberalisation exerts on labour practices. This paper is devoted to filling this void, contributing
to the discussion by systematically investigating the race-to-the-bottom hypothesis. The labour
standards discussed are those set out by the core conventions of the International Labour
Organisation (ILO), embodying consensus on a subset of practices that ought to be recognised
3
globally, irrespective of a country’s stage of development (Hasnat 2002). Although there
appears to be agreement among the major protagonists that these standards need to be upheld
for social as well as economic reasons, heated debate about the appropriate mechanisms to
ensure protection continues unabated. This paper will thus analyse the arena in which
internationally applicable labour standards ought to be established, arguing that market access
will play a vital role in improving a country’s labour conditions.
This paper begins with a review of the social and historical background in which labour
standards were fashioned, locating the current debate in the broader perspectives on economic
globalisation. It must be emphasised that in sketching the historical context, developments that
are peripheral to the main theme are necessarily omitted. Chapter three goes on to examine the
analytical underpinnings of the race-to-the-bottom argumentation, setting the stage for the
theoretical critique. Extending the Heckscher-Ohlin model in its basic version to incorporate
labour standards, it will be demonstrated that while countries can improve their competitiveness
in producing and exporting labour-intensive goods through strategically repressing their
domestic labour standards, the resulting market allocation does not necessarily occur to the
detriment of the economic welfare of the country’s trading partners. However, enforceable
labour standards will be vital to ensure that the benefits of globalisation are spread evenly. As
explained by Elliott and Freeman (2003), “labour standard are a way to balance the interests of
workers and capital within countries and in the world economic system. This balance, in turn,
is an essential element in building public support for continued globalisation” (p.11).
Chapter four examines both the theoretical and empirical literature on the race-to-the-
bottom argumentation. It will be shown that globalisation has altered the incentive structures
for both governments and the business sector alike, fostering market-driven demand for labour
standards. The fifth chapter applies the preceding analysis to China’s recent market reforms.
Following the race-to-the-bottom hypothesis, trade liberalisation and progressive market
engagement since the late 1970s should have culminated in the competitive erosion of China’s
labour standards. The case study will demonstrate that the interaction between trade and labour
standards is complex and multifaceted, giving rise to countervailing forces.
A review of this length is necessarily selective. As such, the following analysis can
only provide a flavour of the main dynamics in the discussion. Pressures for improved labour
conditions are deeply rooted in social and humanitarian concerns and the notion that labour
standards need to be maintained cannot be disputed on moral premises. While fully recognising
the various dimensions to the discussion, this paper focuses first and foremost on the associated
economic argumentation.
4
2. BACKGROUND
2.1 International labour standards: a historical overview
The modern evolution of labour standards begins in England in the late 19th century as an
attempt to mitigate the human and social costs accompanying the potent combination of rapid
industrialisation and laissez-faire liberalism (Engerman 2003). Before the deepening of market
forces, workers and families relied on the church, landowners, and local authorities to support
them in times of illness, unemployment, or other hazards. However, “these institutions proved
to be insufficient in the wake of the industrial revolution that brought with it new kinds of
exposures and risks” (Huberman 2012, p.4). Threats emanated primarily from the development
of the factory system and the agglomeration of industry in urban centres where workers found
themselves isolated from established social networks (Huberman 2012).
As observed by a contemporary, George Campbell, the Eighth Duke of Argyll, “during
the [nineteenth century] two great discoveries have been made in the science of government:
the one is the immense advantage of abolishing restrictions on trade; the other is the absolute
necessity of imposing restrictions on labour” (Campbell 1867, p.367). Much support of free
trade was contingent on the adoption of complementary labour regulations to provide assurance
against trade’s more brutal reality. Consequently, historically, labour standards are seen as a
precursor to greater and more direct state intervention (Huberman 2012).
Early initiatives for improved labour conditions stemmed primarily from philanthropic
and intellectual movements among bourgeoisie reforms and activists (Haworth and Hughes
1997). As Huberman (2012) stipulates, “because these reforms required cross-class support, the
argument had a political dimension” (p.2). From the early 19th century, a growing nexus of
countries introduced national labour standards, although most practices were only implemented
at the turn of the century. Development was internal and limited to the respective country, with
legislation formulated by the sovereign state (Engerman 2003).
The movement to coordinate labour standards internationally was set in motion at the
end of the 19th century. Engerman (2003) explains that “to have any chance of being effective,
international standards require bilateral or multilateral agreements or else acceptance of policies
set by some form of international agency” (p.31). The predecessor of the American Federation
of Labour, the Federation of Organised Trades and Labour Unions, urged the United States
(US) Congress in 1881 to adopt legislation providing “American industry full protection from
the cheap labour of foreign countries” (cited in Charnovitz 1987, p.568). In 1890 similar
concerns prompted the German Emperor William II to order a reluctant Bismarck to convene
5
an international conference to build support for the establishment of international labour
standards (Manhaim 1934). International encompassed only Western Europe, nations that are
geographically proximate and with similar social traditions and economic development levels,
while distant colonial labour markets were outside the scope of applicable legislation
(Engerman 2003).
As examined by Brown (2001), “the international labour rights agenda broadened
dramatically at the end of World War I with the creation of the ILO” (p.90). The ILO was
established in 1919 as part of the implementation of the Treaty of Versailles and as a result of
the League of Nations. To date, it is the only international organisation that is not purely
intergovernmental in its governing structure, with unions and employers being represented in
its tripartite executive body (Sanyal 2001). The ILO’s primary activity is to negotiate and
promulgate conventions which, when ratified, bind the respective country to uphold these goals
(Bazillier 2008). During this process, the ILO provides guidance and technical advice, relying
on voluntary compliance and cooperation (Golub 1997).
The Great Depression of the 1930s, followed by the outbreak of World War II,
hindered further efforts to integrate international trade and labour standards. Following World
War II and the subsequent development of the present international trading system, cooperation
on the regulation of labour practices resumed new importance, with the ILO becoming an
agency of the United Nations (UN) (Engerman 2003). The 1944 Declaration of Philadelphia
had expanded the mandate of the ILO to include all nations, irrespective of development status.
The Declaration reaffirmed the legislative objectives of the Versailles mandate but gave formal
recognition to the role economic policies were to play in post-war social development and
labour welfare (Haworth and Hughes 1997). This readjustment aligned the ILO to the social
provisions of the 1941 Atlantic Charter, which called for “the fullest collaboration between all
nations in the economic field with the object of securing for all improved labour standards,
economic advancement and social security” (cited in Alcock 1971, p.165).
Agreement on the need for international labour legislation in any post-war peace treaty
was established by the 1947 UN Conference on Trade and Employment and was prompted by
three factors: first, increasing intra-European competition as European economies initiated
post-war reconstruction; second, enhanced international competition stemming from the new
industrial might of the US and rapid Japanese industrialism; thirdly, the persistent call for
linking economic policy and social justice (Haworth and Hughes 1997). The mandate of the
stillborn International Trade Organisation (ITO), as enunciated in 1947 by the Havana Charter,
was expansive on labour standards. Article VII stated that “unfair labour conditions,
6
particularly in production for export, create difficulties in international trade, and, accordingly,
each member shall take whatever action may be appropriate and feasible to eliminate such
conditions within its territory” (cited in Lawrence et al. 1996, p.38). However, attempts to
formally include labour standards into the architecture of the post-war trading regime as
established by the General Agreement on Tariffs and Trade (GATT) were unsuccessful. The
GATT virtually ignored the issue of labour practices, except for Article XX(e), prohibiting trade
in goods produced from slave or prison labour (Charnovitz 1987).
As impediments to international trade became dismantled, particularly since the 1970s,
a group of advanced countries, supported by their respective trade unions and constituencies of
their business sector, resumed a vocal campaign at the GATT for adopting a formal role in
commanding adherence to labour practices in its member states (Eglin 2001). The sources of
concern are both social and economic, with demanded standards being based on key human
rights norms. Developed countries perceive themselves to be at a growing disadvantage, unable
to compete against countries whose production costs are depressed artificially through the
absence of enforceable labour standards. Attempts to formulate a so-called social clause
permitting trade sanctions to be levied against nations failing to comply with basic standards
have been unsuccessful in all eight rounds of trade negotiations under the auspices of GATT
(Srinivasan 2004). At the GATT ministerial meeting in Marrakech in 1994, the debate was
passed to its assessor, the World Trade Organisation (WTO) (Haworth and Hughes 1997).
2.2 International labour standards: definition and scope
This paper acknowledges that labour standards are multifaceted, “depending on the stage of
development, per capita income, political, social, and cultural conditions and institutions”
(Stern and Terrell 2003, p.3). Notwithstanding the fact that codified labour standards largely
depend on national circumstances, international consensus has been reached on a subset of
standards that ought to be recognised globally, irrespective of a country’s economic
fundamentals (Hasnat 2002).
Some of the voices calling a social floor to international trade were calmed by the ILO
Declaration on Fundamental Principles and Rights at Work. The Declaration, which was
adopted unanimously by the International Labour Conference in June 1998, is regarded as
indicating international agreement on a limited number of labour standards which should be
applied worldwide (Singh and Zammit 2000) . As stated by Palley (2004), such standards, “are
very much in the spirit of rights and stand independent of a country’s stage of economic
development” (p.23). Eight fundamental ILO conventions, general grouped into four categories
7
referred to as the ILO core labour standards, form the basis of consensus among ILO
constituencies (Norton 2003):
i) Freedom of association and the effective recognition of the rights to collective
bargaining (Conventions 87 and 98);
ii) Elimination of all forms of forced or compulsory labour (Conventions 29 and 105);
iii) Effective abolition of child labour (Conventions 138 and 182); and
iv) Elimination of discrimination in respect of employment and occupation
(Conventions 100 and 111).
ILO involvement is generally limited to cases where countries have ratified the
respective convention. The labour standards addressed in the ILO Declaration, however, are
binding on all ILO member states by virtue of their membership in the ILO (Singh and Zammit
2004). However, this paper recognises that in the broader discussion on globalisation and labour
practice, the rights being referred to extend beyond the aforementioned standards. These relate
to acceptable working conditions and include considerations such as minimum wages, working
hours, occupational safety and health practices in the workplace (Stern 2000). Such labour
standards are set in statute law, since they are “labour market interventions that are clearly
contingent on the stage of development” (Palley 2004, p.23).
The International Organisation of Employers (IOE) (2006) finds that “the narrowing
of the issue to fundamental or core labour rights as contained in the ILO’s core conventions and
the Declaration has made the entire labour/ trade debate less divisive” (p.1). However, the ILO’s
institutional structure and supervisory mechanism are criticised for lacking both credibility and
enforcement power, implying that the adoption of the Declaration is not necessarily an
appropriate indicator for a country’s labour conditions (Elliott and Freeman 2003). With no
ability to offset national sovereignty through punitive trade measures, the ILO has a mixed
record of success in imposing its core labour standards.
2.3 Labour standards in the globalised economy
As the foregoing analysis has shown, the labour standards agenda has proliferated both in terms
of scope and breadth and labour standards continue to be among the more controversial issues
in contemporary global policy debates (Engerman 2003). The debate rests firmly in the wider
discussion on the implications of globalisation, and “the drive for harmonisation of labour
standards is part of a broader trend towards deeper integration” (Golub 1997, p.14).
8
Demand for coordinating labour standards has been growing with the globalisation
process. Singh and Zammit (2000) explain “the pressure from groups militating in favour of a
link between labour standards and trade has become particularly intense as developing countries
have increased their capacity to produce and export manufactured goods and increased their
share of world trade in manufactures” (p.3). Subsequently, in recent years a coalition of trade
unions, labour representatives, employers, human rights activists and governments, primarily
from developed countries, has argued that exploitative labour practices conducted by their
major trading partners culminate in a race-to-the-bottom in labour conditions worldwide as
alternative production sites compete for mobile capital and global markets (Stern 2000).
According to Martin and Maskus (2001), the sources of concern are threefold: firstly,
there are altruistic concerns for workers in poor countries. Secondly, weak and inadequately
enforced standards are viewed as unfairly enhancing national competitiveness. Finally,
globalisation critics argue that the sustainability and legitimacy of commerce itself might be
eroded if human rights are not protected properly. While fully recognising the social and moral
dimensions, this paper focuses first and foremost on the associated economic argumentation.
Without a strict observation of certain universally applicable labour standards, “it is alleged that
exploitive practices in many low-wage exporting countries artificially depress labour costs,
leading to unfair competitive advantage in world markets and thereby to a downward pressure
on labour standards in rich countries” (Lawrence et al. 1996, p.36). The process arguably results
in inefficient resource allocations and reduced welfare, with distributional impacts being a
subset of these concerns.
A near-consensus has been reached by the major protagonists to focus international
efforts on the ILO core labour standards in order to place a floor under the treatment of workers
that is irrespective of a country’s development status (Leary 1996). While some progress has
been made, the extent of agreement is frequently overstated and there remains less than
universal adherence to the ILO’s core conventions. To date, there is little agreement on the
appropriate mechanisms to ensure protection and enforcement of these standards. While it is
unambiguous that standards respond to the opening of trade, conceptually speaking, the
relationship between labour practices and trade is ambiguous. Globalisation enthusiasts argue
that trade openness, rather than culminating in a race-to-the-bottom, will have positive effects
on labour rights, with public awareness, consumer demand and economic growth stimulating
economic and market-driven improvements in labour practices (Haworth and Hughes 1997).
Alternatively, debates about the inclusion of a social clause and with it the enforcement
of labour standards backed by trade sanctions into the mandate of the WTO have been resumed
9
by developed countries and free-trade critics (Elliott and Freeman 2003). The analytical appeal
of selecting the WTO derives from the organisation’s powerful and authoritative position in
adjudicating disputes and imposing punitive trade measures on its members via its dispute-
settlement mechanism (Moran 2002).
The WTO has been hesitant to approach this issue in a comprehensive fashion and thus
far, attempts to place labour practices at the centre of multilateral trade agreements have been
resisted on both technical and political terms (IOE 2006). However, the issue is likely to be on
the agenda of any future set of multilateral trade talks. In some countries, simultaneous
pressures are building up for unilateral action. The US has, for example, recently negotiated
trade sanctions for violations of labour standards in several of its unilateral trade initiatives
(Golub 1997). The enforcement of international labour standards is perhaps one of the few
debates continuing to split constituencies along the North-South divide.
3. CORE LABOUR STANDARDS AND COMPETITIVENESS
3.1 Regulatory competition: the prisoner’s dilemma
As part of the broader phenomenon of globalisation, a heightened concern about the impact of
international trade on labour standards pursued by national governments has emerged. Much
opposition rests on the assumption that globalisation leads to a socially undesirable race-to-the-
bottom by which nations compete for scarce resources and lucrative markets through repressing
their labour standards for terms of trade purposes. Following Brown (2001), “trade with
countries in which labour is protected poorly may create an incentive to lower wages in
industrialised countries and weaken existing labour law in order to maintain competitiveness in
international trade” (p.89). Thus, globalisation arguably precludes fair competition, culminating
in an inefficient allocation of resources and welfare reductions. According to Palley (2004),
“the incentives to lower standards are likely to become exacerbated as international trade
becomes a larger proportion of economic activity, because the payoff from obtaining
competitive advantage is greater” (p.27).
The reference to a race-to-the-bottom resulting from competition among countries
suggests that the problematic outcomes are due to failures in the interactions among states,
failures external to any one country (Klevorick 1996). The argument is that the pattern of
incentives motivating the choice of labour standards has the structure of a prisoner’s dilemma
game, “in which each country has an individual incentive to adopt low labour standards, but all
nations could benefit from a coordinated choice of higher labour standards” (Brown 2001,
pp.100-101). Originally framed in 1950 by the scientists Merrill Flood and Melvin Dresher, the
10
dilemma was later interpreted by A.W. Tucker and is now the most famous and analysed game
in game theory.
The prisoner’s dilemma serves as a catalyst for structuring research concerned with
strategic decision-making in situations where no single player has full control over the
outcomes (Kelly 2003). It is thus well suited to analyse collective actions issues associated with
the setting of national standards. The pathological incentive structure generating regulatory
competition is provided in Figure 1. Assuming the simplest possible example involving two
trading partners, home (H) and foreign (F) have the choice to either maintain (M) or lower (L)
labour standards. The best possible payoff for each country individually is to lower labour
standards, while the other country maintains its labour standards. The second best result is
mutual cooperation, followed by mutual defection, while the worst possible outcome is reached
when one country cooperates, with its trading partner defecting. Thus, in a prisoner’s dilemma,
the payoff structure for country H can be ranked as follows: LM > MM > LL > ML.
Lowering labour standards is a dominant strategy for both H and F, “a strategy that
yields the best outcome for an individual regardless of what anyone else does” (Kollock 1998,
p.185). The non-cooperative outcome where both H and F lower their labour standards is the
only Nash equilibrium of the standard setting interaction, with each country maximising its
payoffs given what the other country does (Ostrom et al. 1994). The dominant strategies
culminate in a deficient equilibrium with inefficient levels of standards, since the collective
payoff of H and F is maximised when both countries cooperate to maintain standards. While
both countries would benefit from mutual adherence, every individual country has an incentive
to disregard standards for reasons of strategic competitiveness. Subsequently, international
coordination is unstable, with both countries tempted to deviate from it to attain short-term
benefits. Kollock (1998) explains “social dilemmas are situations in which individual
11
rationality leads to collective irrationality. That is, individually reasonable behaviour leads to a
situation in which everyone is worse off than they might have been otherwise” (p.183).
At the heart of the argument is the view that the competitive process among firms is
imperfect. In this context, the race-to-the-bottom hypothesis can be described as an externality
of weak labour practices in one country for labour in the country’s trading partners (Singh and
Zammit 2004). One response to this misgiving has been that coordination failure justifies
international intervention such as to enforce mutually beneficial cooperation. As noted by
Palley (2004) “owing to the pattern of private incentives, in the absence of binding labour
standards, the global economy will only support the equilibrium in which both countries lower
standards” (p.27).
3.2 Trade and resources: the Heckscher-Ohlin model
In the early 20th century, the Swedish economists Eli Heckscher and Bertil Ohlin put forward a
model intending to explain the large increase in international trade they had witnessed in their
own lifetimes. As noted by Booth (1995), “history informs the development of theoretical
models” (p.12). Heckscher and Ohlin believed that the new ability to transport machines
quickly and cheaply set in motion a convergence of technologies across countries (Feenstra and
Taylor 2011). The basis for explaining trade patterns is instead rooted in differences in national
factor endowments, the degree to which an economy is relatively endowed with resources such
as land, capital, and labour (Hill 2011). In essence, a country will have a comparative advantage
in producing goods that are intensive in its abundant factor, while importing goods that make
intensive use of factors that are locally scarce.
3.2.1 Reasons to choose the Heckscher-Ohlin model and relevant assumptions
The Heckscher–Ohlin framework has particular strengths in examining whether lax labour
standards provide countries with an unfair competitive advantage to increase production and
exports. As initially demonstrated by Busse (2002) and expanded on below, an association
between labour standards and relative factor endowments exists. Following Lawrence et al.
(1996), “analytically, most cases of low labour standards can be thought of as an enlargement
of the effective labour supply in the country concerned” (p.40). The Heckscher-Ohlin model is
based on the assumption that trade patterns emerge from differing factor endowments and it is
thus well suited to analysing polices affecting an economy’s relative supply of resources.
Nonetheless, this paper recognises that additional factors influence competitiveness, including
differences in institutional context and technology (Costinot 2009).
12
Moreover, the Heckscher-Ohlin framework is convenient since it allows for a
differentiation between factors of production, including skilled and unskilled labour. Although
oversimplified, modelling developing countries as primarily trading in manufactures is
commonly used in the literature (Golub 1997). It is evident that such a view is simplistic, failing
to explain inter-industry as opposed to merely intra-industry trade. This paper acknowledges
that capital mobility and the increasing ease of technology and knowledge transfer have
culminated in more complex and sophisticated export structures, with countries shifting to more
knowledge-intensive products as they integrate further into the world economy. However, these
trends have been deliberately omitted and the following analysis is limited to a simple scenario
such as to focus on the interaction between labour standards, production, and trade, as
incorporated in the broader discussion surrounding globalisation’s welfare effects.
In designing the Heckscher-Ohlin framework in its basic version, this paper assumes
a world comprising of two countries, each of which produces two goods by using two factors
of production. As aforementioned, production technologies are identical across the countries.
Moreover, there are no market distortions such that both production factors can move without
friction between industries. Similarly, final outputs can be traded without any restrictions.
However, production factors are assumed to differ in their abundance between nations and are
not able to move across borders. Consumer tastes are homogenous, and preferences don’t vary
with a country’s income level. Finally, constant returns to scale exist in both nations.
While the assumptions on which the Heckscher-Ohlin model is based have been
criticised for being unrealistic, they allow the preceding analysis to focus on a single reason for
trade, namely the differences in resource endowments between countries. As noted Leamer
(1995) “the Heckscher-Ohlin model is empirically useful because it helps us to understand
important aspects of the patterns of international trade” (p.3).
3.2.2 Free trade equilibrium: respect of ILO core labour standards
Assume country H (home) is relatively more abundant in unskilled labour compared to country
F (foreign). Good A (e.g., shoes) is intensive in unskilled labour, while good B (e.g., computers)
is intensive in skilled labour. Both countries produce each good, but given the above
assumptions, H is capable of producing relatively more shoes than computers, while the
opposite holds for F. This translates into comparative advantages and a general trade pattern:
country H should specialise in manufacturing shoes and country F should specialise in
producing computers. Each country’s production possibility frontier (PPF), defined as the
maximum amount of goods that can be produced given the country’s production factors, will
13
be convex. H’s PPF is skewed in the direction of A to reflect H’s greater capability of producing
good A, as shown in Figure 2. Similarly, F’s PPF, as outlined in Figure 3, is skewed in the
direction of good B. Consumer tastes are graphed using indifference curves (ICs), the selection
of productss that consumers view as being equally desirable. Since preferences are assumed to
be homogenous across nations, ICs have the same shape in country H and F.
Suppose country H and F trade with each other and fully comply with ILO core labour
standards. Due to international commerce, consumption lies outside each country’s PPF along
the free-trade world price line P with the slope PA/PB. As illustrated in Figure 2, H will
manufacture at point Q1 and consume at C1, where the highest utility IC1 is contained. Since
country H is abundant in unskilled labour, it will export good A and import good B. The
corresponding points at which F produces and consumes are Q3 and C3, respectively. Modelled
in Figure 3, country F will export skilled-labour-intensive good B, import good A, and reach
utility IC3. Since both countries are able to consume outside their individual PPF and reach a
higher IC, trade is mutually beneficial.
3.2.3 Free trade equilibrium: decline in core labour standards in country H
In assessing the perceived trade-off between higher labour standards and greater
competitiveness, this paper distinguishes between the four ILO core standards. As will be
demonstrated, from a theoretical point of view, the implications of repressing core labour
standards vary with the type of standard.
3.2.3.1 Child labour and forced labour
Consider an economy-wide decline in labour conditions in country H, caused for example by a
lowering of the minimum age of employment. This occurs either because H pursues national
policies that effectively reduce the working age, or because existing legislation is enforced
incomprehensively. Employing child labour will increase H’s total endowment of unskilled
labour. Similarly, employment of involuntary or prison labour will likely increase H’s unskilled
labour endowment, with most studies finding low levels of education and incarceration to be
correlated (Lochner and Moretti 2002). Subsequently, H improves its competitiveness in the
manufacture of unskilled-labour-intensive shoes.
As illustrated in Figure 2, H’s PPF pivots to PPF2, with a bias toward good A.
Assuming that H is large enough to affect world price, the enhanced endowment of A causes
PA and thus P to drop to P’, representing a decline in H’s terms of trade. Modelling the impact
of labour standards in this fashion is an extension of the techniques begun by Rybczynski
(1955). Following Rybczynski (1955), “an increase in the quantity of one factor will always
14
lead to a worsening in the terms of trade, or the relative price, of the commodity using relatively
much of that factor” (p.340).
Country H attains a higher welfare level IC2, producing at point at Q2 and consuming
at point C2, with exports of A and imports of B increasing. Rybczynski (1955) explains,
“assuming that the maintenance of the same rates of substitution in production after the quantity
of one factor has increased must lead to an absolute expansion in production of the commodity
using relatively much of that factor, and to an absolute curtailment of production of the
commodity using relatively little of the same factor” (pp.337-338).
Note that the worsening in H’s terms of trade could potentially counteract the
economy’s enhanced welfare stemming from growth in its unskilled labour force. This
phenomenon is termed immiserising growth, as coined by Bhagwati in 1958. Bhagwati (1958)
postulates “economic expansion increases output which, however, might lead to a sufficient
deterioration in the terms of trade to offset the beneficial effect of expansion and reduce the real
income of the growing country” (p.201). According to Palley (2004) there is a vicious cycle
dimension to this process, with falling prices and declining terms of trade compelling
developing countries to export even more, thereby compounding the problem.
15
Following the reduction in labour standards in H, country F experiences an alteration
in the relative price level from P to P’. Since F is a net importer of good A, a decline in PA
culminates in an improvement in its terms of trade. F will subsequently allocate its resources
further toward the manufacture of B as signified by its new production point Q4 and both exports
and imports increase, graphed in Figure 3. At the new consumption point C4, country F
consumes more of both goods and consequently reaches a higher welfare level at IC4.
As provided by Elliott and Freeman (2003) “forced labour and child labour increase
the supply of labour and could be used to increase low-wage exports” (p.17). Taking the
possibility of immersing growth into account, countries may improve their comparative
advantage in the production of unskilled-labour-intensive goods following the non-conformity
with internationally recognised basic labour standards. However, this does not necessarily occur
to the detriment of the overall economic welfare of the country’s trading partner, because what
will transpire are beneficial terms of trade for the developed country. In neoclassical economic
fashion, the Heckscher-Ohlin framework concludes that differing national systems of labour
protection are compatible with mutual gains from trade, with commerce compensating for the
uneven distribution of productive resources around the world (Leamer 1995). This stands in
16
contrast to the allegations made by globalisation critics and pressure groups from developed
countries, arguing that exploitive practices in exporting countries culminate in reduced welfare.
However, gains from trade are likely to be distributed unevenly within each country,
unless a redistribution of income will occur. According to the Stolper-Samuelson theorem, an
increase in the relative price of a product will enhance the earnings of the production factor
used extensively in the manufacture of that product and reduce the earnings of the second factor
(Stolper and Samuelson 1941). Subsequently, the theorem predicts that child labour and forced
labour will lower real wages of unskilled workers in both countries.
Consequently, the Heckscher-Ohlin model is particularly successful in explaining the
political economy of anti-globalisation sentiments stemming from certain groups in developed
countries. As Brown et al. (1996) outline, “it will be in the interest of particular groups of
producers within these countries to press for higher standards” (p.236). Increased domestic
inequality fuels backlashes from policy makers, workers, and trade unions and calls for
protectionism are manifestations of these concerns. It is within the context of these
controversies that the debate about internationally enforceable labour standards is best
understood. Subsequently, suitable domestic transfers and redistribution programs are an
essential element in building public support for continued globalisation. The current situation
represents an ironic reversal of the dynamics of the 1960s and 1970s when most developing
countries were perusing import-substitution policies to redress the alleged economic unfairness
of the international trading system (Bhagwati 2007).
This paper recognises that in the foregoing analysis, child and prison labour merely
have the effect of increasing production possibilities, as labour standards are not modelled to
affect the utility function (Busse 2002). However, pressures for fair trade are also rooted in
social and humanitarian concerns and that labour standards need to be maintained is not
disputed on moral premises (de Wet 1995). Prison labour and child labour are emotive subjects
and the debate surrounding these issues is charged with moral content. Moreover, as noted by
Elliott and Freeman (2003), while leading to lower costs and increased exports of low-skilled
goods in the short run, forced and especially child labour are detrimental to a country’s long-
term development, muting human capital acquisition. These effects, however, are beyond the
scope of this paper.
3.2.3.2 Employment discrimination
Employment discrimination encompasses both unequal opportunities as well as unequal
treatment, based on gender, race, ethnicity, national origin, religion or political opinion (Palley
17
2004). Common forms include restrictions on female labour in particular industries, as well as
lower compensation relative to male workers. Both forms of discrimination will culminate in a
reduction of the economy’s work force, as women are either coerced to or will voluntarily
redress from work (Busse 2002).
However, the effect such discrimination has on the relative abundance of unskilled
labour is ambiguous (Busse 2002). There is evidence that despite the improvement of
educational opportunities, women in developing countries continue to receive less education
than men. The 2012 World Development Report on Gender Equality and Development finds
that despite continuous progress, primary and secondary schooling for girls remains
significantly lower than for boys for disadvantaged populations (World Bank 2012). Women
therefore continue to be overrepresented in unskilled jobs and discrimination against females
in country H will then lead to a reduced relative endowment of unskilled labour.
As stipulated by Brown et al. (1996) , “how a standard affects output and trade depends
on the factor intensity of the standard itself – that is, the ratio of the factors withdrawn from
tradable production as a result of the standard – in comparison to the factor intensity of the
tradable goods” (p.248). Assuming that discrimination against females withdraws relatively
more unskilled labour, H’s PPF will shift inward to PPF2, with an increased biased toward good
B, and country H reduces its comparative advantage in the manufacture of good A. This process
causes P to rise to P’, as shown in Figure 4, representing an increase in H’s terms of trade.
However, owing to the reduced amount of production factors, the economy produces at Q2 and
consumes at C2, thus reaching a lower level of welfare at IC2.
18
Following the reduction in labour standards in H, country F experiences a change in the
relative price level from P to P’. Since F is a net importer of good A, a rise in PA culminates in
a deterioration in its terms of trade. This dynamic will make the production of B less profitable
compared to that of good A, with F shifting its production toward good A. Following the decline
in labour standards, F will produce at Q4 and both exports and imports decrease, as indicated in
Figure 5. At the new consumption point C4 country F consumes less of both goods, reaching a
lower welfare level IC4.
19
3.2.3.3 Freedom of association and collective bargaining
Over the past decades, there has been an expansive development of the economic analysis of
unionised labour markets, quantifying the impact trade unions have on a host of labour market
outcomes. Alison Booth (1995), a leading researcher in the field, gave some structure to this
burgeoning body of literature, finding that basic trade union rights have ambivalent effects on
labour endowment. Following Addison and Hirsch (1989), “controversy continues to surround
the nature and direction of union effects on economic performance” (p.72). The effects of
unionisation will depend on institutional labour market characteristics across countries.
Booth (1995) distinguishes between two faces of unionism – the monopoly role of
unions, and their possible efficiency-enhancing role. The monopoly face represents the
orthodox textbook approach to unionised environments, with unions arguably introducing
further distortions into the labour market, primarily by pressing wages for unionised workers
above market levels. According to her argument, “the standard view of trade unions is that they
are organisations whose purpose is to improve the material welfare of members, principally by
raising wages above the competitive wage level” (Booth 1995). Leonard (1992) finds that
20
unionisation will lead to greater rigidities and union wage gains will generally come to the
detriment of employment levels.
However, under some circumstances unions can be productivity-enhancing. As
stipulated by Booth (1995), “although unions may cause wages to increase in the union sector,
neither employment nor firms’ higher labour costs may be offset by opposing union effects on
productivity” (p.9). Much impetus behind this debate stems from the analysis of Freeman and
Medoff (1984), who outline productivity and efficiency gains stemming from better social
relations at the workplace, more efficient governance structures and subsequently higher
motivation and lower turnover. According to this argument, a unionised labour market would
pivot the PPF outward, but not necessarily with a bias toward unskilled labour.
Subsequently, it is evident that unions play a direct role in employment dynamics.
Depending on the relative size of the opposing effects, wages and the abundance of unskilled
labour could either rise or fall following the repression of basic union rights. As noted by Elliott
and Freeman (2003), “the effects on trade of discrimination and repression of unions are
conditional and depend on the sectors and environment in which they occur” (p.17). The
literature remains highly fragmented on this critical issue, which ultimately requires an
empirical analysis. As will be demonstrated in chapter five, although the effects of unions are
indeterminate a priori, states and employers continue to keep workers from forming
independent unions (Elliott and Freeman 2003).
To sum up, as postulated by Martin and Maskus (2001), if the violation of labour
standards results from discrimination against certain groups in society, employment,
production, and competitiveness will deteriorate. However, if unionisation was intended to
enable labour to restrict output and increases wages, the absence of these standards increases a
country’s competitiveness. From an economic perspective, outlawing child and forced labour
leads to a reduction of the relative labour endowment and thereby to a reduced comparative
advantage in the production of unskilled-labour-intensive goods. As noted by Golub (1997),
differences in wages and labour practices are compatible with mutually beneficial trade and
capital mobility. Conceptually speaking, non-adherence to these standards by developing
countries does not threaten the economic welfare of their trading partners. Calls for international
harmonisation are thus generally focused on distributional concerns rather and spreading the
benefits of globalisation more broadly.
However, the results of this analysis ought to be interpreted cautiously. The augmented
model is simple and fairly mechanical. Under no circumstances does it suggest that labour
21
standards should not be a concern for policy makers and that labour practices need to be upheld
on moral grounds is not disputed.
4. RACING TO THE BOTTOM OR CLIMBING TO THE TOP?
4.1 Empirical evidence
While the intuition behind the race-to-the-bottom argumentation has surface appeal, there exists
little empirical evidence in the international literature to support the proposition. Empirical
studies have focused on the link between regulatory standards and FDI and to date conclusive
assessment has not been agreed upon.
Evidence of FDI being deterred by stringently enforced labour standards is provided
by Dewit et al. (2009), Görg (2005), as well as by Javorcik and Spatareanu (2005). However,
Dewit et al. find that high domestic levels of labour rights simultaneously discourage outward
FDI. According to their argument, “strict employment protection in the firm’s home country
makes firms reluctant to relocate abroad and keeps them “anchored” at home” (Dewit et al.
2009, p.98). Mosley and Uno (2007) argue that the overall effect of foreign investment on
labour rights is generally positive. The two economists find three causal pathways through
which FDI may facilitate labour standards: firstly, multinational corporations may pressure
governments directly to enhance their labour code; secondly, FDI can transmit best practices to
the labour market of the host countries; thirdly, public scrutiny can promote the transmission
of corporate social responsibility (CSR) among multinationals.
Similarly, the linkage between core labour standards and competitiveness has been a
topic of active empirical research. Aggarwal (1995) investigated the correlation between import
penetration in the US and adherence to basic labour standards in 10 developing countries. She
found it common for labour practices to be higher in export-oriented industries than in non-
traded sectors. Similarly, the Organisation of Economic Co-operation and Development
(OECD) concludes that no significant relationship between core labour standards and a
country’s export performance exists (OECD 2000).
By contrast, the work of Rodrik (1996) and Mah (1997) indicates that labour
conditions can reduce the competitiveness of countries in labour-intensive products,
culminating in diminishing manufactured exports. A further study by Hasnat (2002) concludes
that solely the ability organise and collective bargaining has a significant negative effects on
exports in non-OECD countries. According to his argument “there is no economic rationale for
introducing trade barriers in countries with high labour standards against goods imported from
countries with low labour standards” (Hasnat 2002, p.573).
22
Comprehensive tests on whether countries competitively undercut one another’s
labour standards are rare. However, the use of spatial econometrics to look for a race-to-the-
bottom in taxes and environmental policies, which in essence partakes a similar dynamic,
already finds some instance (Palley 2004). Research on the economic impacts of labour
standards is complicated by the absence of comparable cross-country information on
compliance. The existence of legislation may not be a good proxy for the enforcement of
standards, and thus studies that investigate the number of ILO conventions ratified do not allow
for differences in adherence. Elliott and Freeman (2003, p.17) find that “the application of core
labour standards differs widely among advanced countries, and the ILO conventions defining
the core standards allow for broad flexibility in implementation.” The US, for instance, has
ratified only two core Conventions, but implements these rigorously. Rwanda, on the other
hand, as ratified all eight Conventions, but struggles with exploitative labour practices.
Empirical detection of a global race-to-the-bottom in labour standards is at an early
stage, with only a handful of studies having systematically addressed the issue. In 2007, Mosley
and Uno highlighted globalisation’s mixed impact on labour rights, testing the relationship
between labour rights violations and globalisation in 90 developing nations from 1986 to 2002.
According to their argument, “the impact of globalisation depends on the precise ways in which
a country participates in the global production networks” (Mosley and Uno 2007, p.924).
However, the study concludes that trade generally gives rise to enhanced competitive pressures,
with behaviour among peer economies being related to national labour rights outcomes.
A further study was conducted by Olney in 2010, providing evidence of a race-to-the-
bottom in labour standards, both within OECD and non-OECD countries. Olney (2010)
concludes that developed countries tend to compete in laws, while developing countries do in
practice. Building on Olney’s work and using spatial estimation on panel data for 135 countries
from 1985 to 2012, Davies and Vadlamannati (2013) find regulatory competition in both
developed and developing countries. This interdependence is more evident in enforcement than
in labour law, “suggesting that competition is driven less by a failure to institute regulations
than by an unwillingness to enforce them” (Davies and Vadlamannati 2013, p.1).
4.2 Theoretical literature
One way of thinking about globalisation is that it is creating a “leaky economic environment”,
distinguished by three types of leakiness (Palley 2004, p.24). Macroeconomic leakiness refers
to the propensity for demand to leak out of economies toward imported goods and services.
Similarly, microeconomic leakiness alludes to the tendency for jobs to leak to other countries
23
if labour markets are sufficiently flexible. Financial leakiness comprises the exacerbated scale
of capital flows between economies. In this, Palley (2004) represents the theoretical case for
core labour standards, providing that standards generate both static and dynamic efficiency
gains that will improve a country’s competitiveness. Static arguments have been explored in
detail by Maskus (1997), arguing that core labour standards reduce domestic labour market
distortions by redistributing income away from capital. Dynamic efficiency gains stem from
advances altering the path of economic growth as countries adhere to more stringent labour
practices. Exploited workers are expected to invest sub-optimally in human capital, to lack
motivation, and to perform below their potential. Thus, as noted by Martin and Maskus (2001),
“paradoxically, then, the adoption and enforcement by developing countries of core labour
standards would increase the competitive pressures on workers in rich nations” (p.318).
According to Elliott and Freeman (2003), promoting global standards would not be so
costly as to put domestic competitiveness in manufacturing exports at risk. Freeman (1994)
concludes that countries desiring higher labour standards can purchase these without offsetting
their competitiveness in three possible ways: firstly, a currency devaluation could reduce costs
in foreign currency terms; secondly, wages could be adapted directly; thirdly, higher labour
standards may be financed by the state by raising taxes. Sanyal (2001) argues that the race-to-
the-bottom argumentation overemphasises the role of labour costs in corporate relocation
decisions, especially if lower costs simply reflect lower productivity of workers.
As postulated by Golub (197), while “it is in principle possible that a prisoner’s
dilemma situation could emerge, it is far less plausible than the popular fear suggests” (p.22).
Brown (2001) finds that if trading partners are small relative to the world market and are thus
unable to affect market prices and terms of trade, their individual standards do not affect each
other. According to Singh and Zammit (2004) labour standards are important indicators of a
country’s stage economic development and their promulgation is best advanced in a non-
coercive and supportive domain.
Klevorick (1996) provides that the existence of a race-to-the-bottom among national
governments depends much on the character of competition among them. Singh and Zammit
(2004, p.93) postulate “standards can, in principle, have both negative and positive
consequences, depending on the country’s history and the nature of its labour legislation.”
However, mobile resources and global production networks may render it more tedious for
labour to make other members of society, specifically employers, share in the costs associated
with enhanced labour standards (Lawrence et al. 1996).
24
4.3 Market-driven mechanisms
Globalisation has altered the incentive structures for both governments and the business sector
alike. Subsequently, free-trade proponents argue that trade openness, rather than culminating in
a race-to-the-bottom, will have positive effects on labour rights, with public awareness,
consumer demand and economic growth stimulating economic and market-driven regulation of
labour practices (Haworth and Hughes 1997).
4.3.1 Ethical consumerism
According to an expanding body of literature, irrespective of whether states enforce their
respective labour codes, companies in some respect are already encouraging more effective
implementation of labour standards in response to growing consumer pressures. The emergence
of an ethical consumer base has been studied at length by Freeman (1994), identifying that
consumers not only care about the physical attributes, but also about the production conditions
and social quality associated with the goods they purchase.
The spread in information technology has created a heightened sense of awareness
about business practices and production conditions in different parts of the world. Following
Elliott and Freeman (2003), “globalisation means that consumers and workers in rich countries
will scrutinise the labour standards producing consumer goods” (p.25). Companies are
increasingly alive to pressures emanating from a variety of stakeholders, with consumers
sanctioning firms engaged in exploitative and repressive labour practices. Nike, for example,
was confronted with consumer boycott after the New York Times unveiled abusive labour
conditions at the company’s Indonesian suppliers two decades ago (Porter and Kramer 2006).
In 2004, ethical consumerism accounted for almost $44 billion in the United Kingdom
alone (Gugler and Shi 2009). Foreign suppliers can tap this lucrative market and attract
multinationals that want to add value to their brand by emphasising the ethical credentials in
their business operations. As noted by the IOE (2006), “companies now find themselves much
more open to public scrutiny on how they operate, where they operate and who their partners
are. In such an environment enterprises are very aware of the need to project a positive image
of their company, its values and ethics” (p.7). With firms being awake to the damage labour
rights problems in their supply chain have on the reputation and image of their brands, supplier
compliance with basic labour standards becomes a precondition for access to international
business and investment.
Today, labour-related CSR initiatives are an inescapable priority and de factor
mandatory for multinational firms’ in every country. While the concept of CSR can be traced
25
back to Sheldon (1924), pioneer work analysing the linkage between CSR and competitiveness
is the research by Michael Porter. Porter describes how firms can enhance their long-term
business sustainability by reshaping their corporate agenda to align financial and social goals.
According to his argument, “companies achieve competitive advantage through acts of
innovation. They approach innovation in its broadest sense, including both new technologies
and new ways of doing things” (Porter 1990, p.74). While having traditionally revolved around
multinationals from industrial countries and their behaviour in developing countries, “CSR
issues are likely to become more important as firms in developing and transition economies
expand abroad” (Gugler and Shi 2009, p.17).
As a response to public pressures from consumers, investors, trade unions, and activist
groups, many reputable corporations have committed to corporate codes of conduct to regulate
labour conditions of their foreign suppliers and distant production facilities. In general, these
are written statements of norms and rules serving as the manifestation of a commitment to
uphold particular labour standards at the workplace (Yu 2008). Although their content and
format vary considerably, most codes reflect international legal norms and are based on the ILO
core conventions. As noted by Porter (1990) private corporate codes emerged as a response to
the lacking of a globally agreed upon labour regime. Since their credibility depends on how
they are monitored and implemented, consultancies have emerged with a vast network of tools
to assist firms with their ethical supply chain management.
It is convenient to think of goods conforming to certain basic labour standards as being
essentially equivalent to higher quality products, even though this attribute is based on the
manufacturing process rather than on tangible characteristics of the final good (Beaulieu and
Gaisford 2002). If such quality can be easily observed by consumers, labour standards will be
enforced at the efficient level to meet consumer demand. However, as Singh (2003) points out,
it is prohibitively costly for individuals to observe labour practices directly. Since conforming
products are generally indistinguishable from lower quality products when reaching the end
consumer, a disguised quality issue comparable to the lemons problem in the used car market
analysed by Akerlof (1970) exists. As in Akerlof’s studies, non-conforming goods will replace
high-quality products if they exchange at similar prices (Beaulieu and Gaisford 2002).
Social labelling schemes, involving assigning a label to products certifying that they
were produced under acceptable labour conditions, are implemented as one solution to getting
information about the production process to the end consumer. Especially third-party
certification, with an independent party monitoring labour practices and enforcing accurate
product labelling, is employed for credibility purposes. As noted by Lawrence et al. (1996,
26
pp.59-60), “if imported goods can be appropriately labelled, consumers who are willing to pay
a premium for higher standards in a foreign country will be able to do so.”
Subsequently, Freeman (1994) has emphasised the possibility that demand for labour
standards is similar to the demand for any other economic commodity – something that
consumers desire and are thus willing to pay for. Beaulieu and Gaisford (2002) provide that
“when households would prefer to directly consume products made according to recognised
standards, they would be willing to pay a price premium to consume conforming goods” (p.60).
In a similar vein, supply for standards is equivalent to the supply of any product, with producers
providing improved labour conditions when they can profit from it. High standards reflect
rational business decision-making when consumers, activists, or governments make it more
profitable to produce under good working conditions (Freeman 1994).
As explained by Elliott and Freeman (2003,), “this willingness to pay more creates a
financial margin for improving conditions or increasing wages in less developed countries”
(p.28). Thus, if consumers look askance at goods produced under poor working conditions,
increased trade will create pressures to improve them, thereby initiating a race-to-the-top in
labour standards. This allows the market-mechanism to dictate the extent of labour practice,
ruling out uneconomic upgrading of standards.
4.3.2 Trade and income convergence
The free trade view traces its intellectual basis to classical economics and the trade theories of
Adam Smith and David Ricardo in the 18th and early 19th century. The classical economists saw
the market as an efficient, self-regulating mechanism tending toward equilibrium, thereby
assuring an optimal allocation of resources. Unrestricted trade and a laissez-fair stance are
beneficial, while barriers to trade are self-defeating and inefficient, culminating in wasted
resources. As summarised by the Nobel Prize-winning neoclassical economists Milton
Friedman (2000) in an interview, “the most important single central fact about a free market is
that no exchange takes place unless both parties benefit”.
Building on this argument, free market advocates trust in the endogeneity of labour
practices, arguing that demand for standards will naturally be modified by changes in economic
fundamentals and the well-being of society. Rather than leading to a race-to-the-bottom, trade
will promote economic growth and welfare, thereby facilitating improvement in labour
standards. As summarised by Casella (1996), “the main mechanism responsible for the
tendency toward harmonisation is the convergence in national incomes brought by trade.
Failing this convergence, the convergence in standards will also fail” (p.120).
27
The intellectual rationale is rooted in the neoliberal economic doctrine, which sees
labour standards as counterproductive and interfering with the efficient market process. The
best protection for workers will emerge in a highly competitive labour market, unrestrained by
artificially imposed standards (de Wet 1994). The IOE (2006) provides, “marked-based
economic policies, including openness to international trade and investment, offer a superior
policy setting for lifting the pace and breadth of economic development in developing countries
and are the best means of enhancing labour practices in those countries” (p.2). Free market
advocates fear that prematurely enforced labour standards will threaten the competitive
advantage and trade prospects of less developed countries in the global market place, muting
the potential for economic growth (Roessler 1996).
According to trade economists, “open markets will bring about fast economic growth
in developing countries and this will ultimately lead to improvement of labour conditions”
(Denkers 2008, p.3). The argument is that trade results in both static and dynamic efficiency
gains. Economic openness will not only lower prices for consumers and increase domestic
employment opportunities, but liberalisation is thought to be an important source of long-term
economic growth. Through international trade countries may enhance their availability and
allocation of resources, benefit from specialisation in production, realise scale economies, and
access new production technologies and knowledge. However, globalisation enthusiasts
acknowledge short-term adjustment costs associated with trade openness, with the distribution
of benefits not necessarily shared broadly (Hill 2011).
Detailed statistical analyses show that open economies typically have faster growth
rates and more rapid declines in poverty (Dollar and Kraay 2002). However, existing studies
have been subject to intense scrutiny and empirical evidence that trade openness and economic
welfare are causally linked is hotly debated. Thus, conceptually speaking, the relationship
between trade and labour standards is ambivalent and the debate is ripe with grey areas.
5. CASE STUDY: EVIDENCE FROM CHINA
5.1 China’s economic integration
The economic system of the People’s Republic of China (PRC) has altered twice since its
foundation in 1949 (Rumbaugh and Blancher 2004). In the 1950s, a system similar to that of
the Soviet Union socialist economic model was established. The country’s industrial and
agricultural sector became nationalised and markets and prices were replaced by a planned
economy. As China pursued the economic strategy of self-sufficiency, four in five Chinese
28
worked in agriculture and economic activity was characterised by a preponderant role of state-
owned enterprises (SOE) and government intervention (Hu and Khan 1997).
Following Mao Zedong’s deceasing in 1976, the Communist Party of China (CPC)
implemented a series of export-oriented economic reforms, gradually shifting toward a market
economy and decentralisation of economic decision-making (Rumbaugh and Blancher 2004).
The subsequent years were characterised by the coexistence of planned and market economic
elements. The party state encouraged the formation of a private business sector, liberalised
commerce and investment, relaxed price planning, and invested in industrial production and the
education of its workforce.
Especially after the end of the Cold War, the Chinese government embraced closer
integration into the global capitalist economy (Clarke et al. 2004). A decade of modernising the
country’s authoritarian state had produced a workforce combining high-productivity
manufacturing with cheap labour and little independent political power (Diamond 2003). FDI
inflows surged throughout the 1990s as multinational corporations stretched their commodity
chains to exploit China’s newfound cost advantage (Huang 2003). In addition to building
production facilities in China, international firms engaged in subcontracting and outsourcing
relationships with local Chinese suppliers. Standardisation of manufactured commodities and
declining long-distance transportation and communication costs facilitated the development of
global production networks. With China’s accession to the WTO in 2001, trade barriers yielded
to the full embrace of economic liberalisation (Elliott and Freeman 2003).
Decisive commitment to accept a larger role for markets in domestic resource
allocation brought far-reaching changes, not only to the Chinese economy, but fundamentally
to its industrial relations (Garnaut 1996). The first labour law in the country’s history was
enacted in 1994, providing the foundation for a range of labour market concerns, ranging from
hours of working, rests and leaves, to occupational safety and rights of female workers to labour
dispute resolution. As noted by the International Trade Union Confederation (ITUC), the
revised Labour Contract Law entered into force in 2008, advancing collective contracts and
tripartite institutions to mediate labour disputes (ITUC 2001)
China’s economic growth and subsequent poverty reduction has been outstanding. As
summarised by Borensztein and Ostry (1996), “China’s experience is unique in that its economy
grew rapidly in the context of reforms that transformed it from a rigid central planning system
to an increasing open and market-based economy” (p.224). By the turn of the millennium the
Chinese economy had grown more than fivefold, average income per capita had quadrupled
and 270 million Chinese had been lifted out of poverty (Chen and Wang 2001). However, the
29
benefits of Chinese economic growth have been unevenly distributed and inequalities have been
deteriorating, particularly in recent years.
5.2 Regress or progress?
China’s entry into the global economy represents the integration of about a billion workers into
the labour market at wages below those found in advanced countries (Diamond 2003). Thus,
Elliott and Freeman (2003) note “what happens in China is important for labour standards
around the world. Because a large proportion of the global workforce is Chinese, changes in
China’s standards affect more people than changes in dozens of smaller countries” (p.119).
There remains heated debate about the effect China’s global economic engagement
has had on the country’s labour conditions. China has been at the forefront of growing concerns,
with a coalition of foreign trade unions, labour representatives, employers, activists and
governments arguing that brutal competition for mobile capital and global markets has
culminated in the strategic repression of labour standards (ITUC 2001). The global race-to-the-
bottom is allegedly an unhealthy feedback of this dynamic into the country’s major trading
partners, as alternative production sites compete for lucrative business. Diamond (2003)
explains “the structural changes underway in the Chinese economy are creating both domestic
and international imbalances that exacerbate inequalities among Chinese workers and create
new inequalities in the global labour market” (p.47).
Such concerns have provided much opposition to China’s entry into the WTO.
Opponents fear that China’s accession to the multilateral trading system has eroded the ability
of its trading partners to put economic pressures on Chinese politics and human rights
situations. As China exerts great influence over the world economy, pressures for labour rights
improvements may become negated as a pretext for protectionism. On the other hand, free-trade
enthusiasts postulate that China’s integration into the global structure has facilitated the
promotion of economic and structural development, indivertibly contributing to a stronger
emphasis on rule-based reform.
5.3 Racing to the bottom
In China’s pre-reform planned economy, SOEs provided wide-ranging protections and
certainties to its workers, including health care, housing, pensions, schooling and lifetime job
security (ITUC 2001). However, following China’s emphasis on export-led growth and the
expansion of its private sector, large parts of the country’s state-owned industries were
dismantled, laying off 30 million workers in the 1990s (Elliott and Freeman 2003).
30
As China’s SOEs are progressively alleviated from government control, responsibility
for management and social security has been handed to the enterprise level (Clarke et al. 2004).
Subsequently, the spread of market mechanisms to product and labour markets has eroded
traditional guarantees of employment, wages, and welfare for once privileged SOE employees.
As noted by the Norton (2003), “the process of liberalisation has reduced the statutory
protection that workers used to enjoy” (p.10).
The development of Chinese legislation has closely followed the country’s market
reforms, with the first labour code enacted in 1994. Today, Chinese labour laws approach those
in developed countries and are more advanced than existing rules in most developing countries,
save for the country’s treatment of freedom of association and collective bargaining (ITUC
2001). The critical issue is the extent to which enforcement of Chinese labour law lags behind
its legislation. As noted by Elliott and Freeman (2003), “with the exception of union rights, the
problem in China is not one of deficient labour laws but of deficient enforcement” (p.121).
Rampant sweatshop labour abuses, especially in labour-intensive export-oriented industries,
continue to be commented on in the media and academic studies. Such exploitative practices
are a manifestation of the conflict between capital and labour, emanating from the embrace of
neoliberal globalisation. Trade liberalisation has fuelled brutal competition as the ability to
create a positive investment climate for foreign capital determines the extent of participation in
the world market (Chen 2003).
According to Elliott and Freeman (2003) there are three main causes for China’s
incapability to enforce its labour code: firstly, China’s state-controlled trade union monopoly,
the All China Federation of Trade Unions (ACFTU), is virtually impotent when it comes to
representing and mobilising workers. According to official figures, the ACFTU has 137
members, more than the rest of the world’s trade union members put together (Metcalf and Li
2007). However, the ACFTU remains a pliable instrument of the state apparatus. As noted in
its constitution, “trade unions are a bridge and a bond linking the party and the masses of the
workers and staff members, an important social pillar of the state power of the country” (cited
in Clark and Lee 2003, p.64).
Second, widespread corruption in the CPC, fostered by economic decentralisation of
power in favour of regional control, implies that the repression of labour standards goes
unnoticed and unpunished (Elliott and Freeman 2003). The final and politically sensitive reason
China fails to enforce its labour code is that the country’s paternalist labour regime obviates
independent union representation. As noted by Clarke and Lee (2003), “the subordination of
31
trade unions and employers’ organisations to the party-state is clearly in gross violation of what
the ILO regards as the most fundamental precondition for real social dialogue” (p.77).
The repression of labour in favour of capital following China’s economic liberalisation
has provoked wide-ranging industrial conflict and social unrest. Discontent about growing
inequality and continued labour rights violations is exacerbated by the lack of appropriate
institutions assuring collective representation, resulting in a radicalisation of incidents (ITUC
2001). Although the right to strike was removed from the Chinese Constitution in 1982, each
year between 1992 and 1997, roughly 2 million Chinese workers were involved in protest
individually and another 1.26 million collectively (Chen 2003).
5.4 Climbing to the top
Elliott and Freeman (2003) argue that China’s embrace of globalisation, rather than culminating
in a race-to-the-bottom, has resulted in increased public awareness and market-driven
improvements in domestic labour practices. Consumer scrutiny and economic growth produce
opposing forces to existing competitive pressures, stimulating improvements in labour
standards until the highest, rather than the lowest prevailing levels among competitor nations
are reached (Haworth and Hughes 1997).
5.4.1 Trade and export diversification
The Chinese economy has responded dramatically to progressive economic reforms and
structural adjustment, enhancing its capacity to produce manufactured goods with high-
productivity at relatively low cost. China’s real exports have increased by more than 500
percent since the mid-1990s as the country yielded steadily to the progressive embrace of
globalisation (Amiti and Freund 2010).
Early phases of Chinese export-oriented economic growth were concentrated on
labour-intensive goods, following China’s abundant endowment of labour and land. By the
1990s, textiles, apparel, leather and footwear accounted for more than 44 percent of China’s
manufacturing exports to the world market (Xu 2010). However, as reforms took root, labour
and industrial land became relatively less abundant and increasingly costly, particularly in the
country’s coastal regions. By the turn of the millennium China’s inland had taken over coastal
provinces’ shares in the production of manufactured goods, competing with newly export-
oriented low-cost locations (Garnaut 1996).
Chinese real wages have tripled over the past two decades, reflecting both rapid growth
in productivity and more stringent labour legislation (Metcalf and Li 2006). With China’s
historical cost advantage diminishing, the economy has experienced dramatic changes in its
32
export composition. Rapid growth has been associated with a diversification out of agriculture
and soft manufactures into hard manufactures, including machinery, consumer electronics,
appliances, computers, and to a lesser extent, metals (Amiti and Freund 2010). By 2005,
sophisticated manufactures represented more than 42 percent of China’s exports (Xu 2010).
China’s distinctive demographic features have accelerated the country’s evolution of
comparative advantage out of labour-intensive goods. Prompted by the country’s one-child
policy, China’s relative abundance of labour is diminishing more quickly than if it were
experiencing a more naturally paced demographic transition (Garnaut 1996).
The sophistication of China’s export structure has been more progressive than what
would be expected from the country’s development stage, resembling the export composition
of high-income countries (Rodrik 2006). With capital-intensive products generally requiring
technological sophistication, integration into the global economy has acted as a transmission
mechanism, increasing the overall skill content of the Chinese workforce (Yao 2006). As noted
by Brown and Lauder (1996), upgrading a country’s educational standards is instrumentally
important for the delivery and expansion of social justice. Economic integration has intensified
global demand for skilled labour within China, with the necessary capabilities to enforce
existing labour laws against employers. Between 200 and 300 rural Chinese workers have not
been integrated into the modern manufacturing sector, implying that the repercussions are yet
to be felt (Yao 2006).
5.4.2 Ethical supply chain management
While the term CSR originates from the Western world and its implementation has a relatively
short history in China, Chinese responsible business practices can be traced back to the
Confucian traders more than 2000 years ago (Wang and Juslin 2009).
The CSR movement was initiated in China in the mid-1990s, as the country yielded to
the progressive embrace of export-oriented growth. As China increased its capacity to produce
and export manufactured commodities at comparably low costs, foreign-owned production
facilities surged and Chinese enterprises became increasingly integrated into global supply
chains (Kotabe and Zhao 2002). Standardisation of manufactured commodities, declining
transportation costs and improvements in information and communication technologies
facilitated the development of transnational production networks to exploit newfound cost
advantages (Sum and Ngai 2005).
However, advances in communication and information processing have also created a
heightened sense of awareness about business practices and production conditions around the
33
world. As aforementioned, firms now find themselves vulnerable to public scrutiny and are
awake to the damage repressive labour rights conditions in their global supply chains have on
the reputation of their brands (Elliott and Freeman 2003). Compliance with basic labour
standards has thus become a precondition for access to international business and investment.
As concluded by Ngai (2005), “global capital penetrates the sphere of labour rights in
China” (p.112). Public allegations of labour rights violations in Chinese factories have
triggered, especially from the 1990s onwards, transnational civic activism with a focus on
China. Multinational firms, concerned about their corporate image, have imposed strict rules
and standards for CSR in the form of codes of conduct to their Chinese production facilities and
overseas suppliers (Wang and Juslin 2009). Some companies have formulated codes of conduct
specifically for Chinese companies, epitomised by the China Business Principles of the
International Labour Rights Fund (Wang and Juslin 2009).
While CSR takes hold in China rapily, particularly among export-oriented firms,
Chinese CSR engagement is still in its infancy and continues to present a geographical disparity.
Gugler and Shi (2009) explain, “China’s CSR engagement has not yielded any systematic
approach so far, and the notion of sustainable development is still a new concept to many
business managers” (p.14). The most progressive region with respect to CSR engagement
continues to be the South China Guangdong province, accounting for one-third of the country’s
exports and most foreign-owned factories (Zheng 2006).
China’s extraordinary export performance in the past decades has been closely
associated with the production of labour-intensive goods for export. Subsequently, local
enterprises have only hesitantly accepted the labour-focus of many codes of conduct carried out
by foreign companies, concerned these might diminish their historical cost-advantage.
However, China’s export sector, accounting for 65 percent of national GDP in 2004, can no
longer afford to overlook the increasing profile of CSR on investment choices made by
multinational firms (Gugler and Shi 2009).
In fact, today “many large-sized enterprises recognise that an increasingly active CSR
engagement will offer them a chance to become globally competitive” (Gugler and Shi 2009,
p.13). Chinese suppliers now compete to introduce CSR initiatives as part of their strategic
policies on the global market. Losing cost-competitiveness to newly industrialising countries,
Chinese suppliers respond to the social responsibility movement, strengthening their
marketability and long-term competitiveness by emphasising their ethical credentials.
34
5.5 China and the ILO core labour standards
The PRC has ratified ILO Conventions 138 and 182, outlawing child labour. However, lack of
proper enforcement implies that child labour under the age of 16 continues to be widespread.
The penalties prescribed are not stringent, criminal law provisions apply only to child
trafficking, hiring minors for particularly hazardous tasks, compulsory child labour and offering
children for prostitution (ITUC 2001). However, as noted by the ILO (2006) in a follow-up
report to its 1998 Declaration, there is evidence that child labour is declining rapidly. According
to their findings, since the early 1990s, China has educated more children than any other nation.
In similar vein, Basu (1999) illustrates that the percentage of children aged 10 to 14 who work
has dropped from 48 percent in 1950 to 12 percent in 1995, following progressive embraces of
market reforms since the early 1980s.
Similarly, the Chinese government has ratified ILO Conventions 100 and 111,
prohibiting employment and occupational discrimination. However, rural migrants, comprising
35 percent of China’s urban employment, continue to experience discrimination based on their
socioeconomic status, language or ethnicity (Zhang et al. 2009). As analysed by Feng et al.
(2002), such discrimination has contributed to the development of a dual society and associated
segregation in urban China.
For more than half a century, the Chinese system of household registration (hukou)
has divided the country’s rural and urban populations, not only geographically, but more
fundamentally along social, economic, political and legal lines. As noted by Chan (2010), the
system “is the foundation of China’s divisive dualistic socioeconomic structure and the
country’s two classes of citizenship” (p.357). Under the socialist planned economy, labour
allocation and mobility came under tight codification, with every Chinese citizen registered by
either agricultural or non-agricultural status. Some 800 million Chinese continue to be in effect
inferior citizens, without the chance to settle legally in cities and without access to basic
government-sponsored benefits enjoyed by urban Chinese.
While it is frequently argued that such injustice is central to China’s historical cost-
advantage, the hukou system has provoked much opposition within the international
community. According to Chan and Buckingham (2008), the main argument for hukou reform
is economic, with China being increasing pressured by major trading partners and civic activism
to soften its approach. While it is unrealistic that the dualistic structure will be dismantled
completely in the near future, China can no longer delay substantive reforms.
However, China has not ratified ILO Conventions 29 and 105 concerning forced and
compulsory labour. Forced labour continues to be systematically promoted in China’s penal
35
institutions, in connection with prisoners sentenced to “reform through labour” (ITUC 2001).
Officially established in 1957, labour reform camps have become de facto enterprises, with
prison made goods generating $100 million in export value annually. However, in recent years,
the system has been widely condemned, both within and outside China, with prison labour
emerging as a central issue of contention between the US and China (Yang 2006). In February
2001, at her visit in Beijing, the UN High Commissioner for Human Rights called for the
Chinese regime to abolish is re-education through labour system (Keyuan 2001). Seymour and
Anderson (1999) argue that as international scrutiny is increasing, the system is becoming
inefficient and unprofitable, with the CPC having no option but to reform it.
Finally, China has not ratified ILO Conventions 87 and 98 on freedom of association
and the right of collective bargaining. As explained by Metcalf and Li (2007), “the party-state
does not recognise any conflict between capital and labour” (p.25). Trade unions have to be
affiliated to the ACFTU, which exercises a trade union monopoly. The ACFTU is a constituent
element of the state and the majority of its constituencies is elected directly by the CPC.
Activists of independent unions resisting ACFTU assimilation are arrested, detained or
imprisoned (ITUC 2001). Art.11 of the Trade Union Law stipulates “the establishment of any
trade union organisation, whether local, national or industrial, shall be submitted to the trade
union organisation at the next higher level for approval” (cited in ITUC 2001, p.2). Moreover,
there exists no comprehensive legislation on collective bargaining procedures, but instead a
nexus of laws regulating collective contracts (Fleisher and Yang 2003).
The CPC’s approach to labour conditions continues to be rigidly authoritarian, causing
dramatic confrontations, despite the government’s commitment to socialism. However, as noted
by Metcalf and Li (2007) “the whole notion of a labour market is only a decade or so old,
reflecting the previous Marxist aversion to exchanging labour for money” (p.3). Integration
into the global economy has accelerate the recognition that transition toward a pluralistic form
of corporate regulation constitutes an inescapable element to assuring long-term social stability.
As noted by Diamond (2003), “the trade union is a central force for democratisation,
transparency and social responsibility in a modern industrial economy” (p.46). It is becoming
politically increasingly difficult for the regime to react to industrial conflict with solely
authoritarian measures and trade liberalisation has pressured the ACFTU to stress its
representational role (Chen 2003).
In summary, deepening of the market mechanism in the PRC since the late 1970s has
brought momentous change to existing industrial relations. Failure or unwillingness to enforce
existing legislation has been used by globalisation critics as an argument supporting the race-
36
to-the-bottom hypothesis. China has come a long way in opening up its economy, but some of
its more challenging transitions have yet to be faced. Authoritarian measures continue to be
constituent elements of modern Chinese politics, creating industrial conflict and social unrest.
Unionsation will constitute a critical step in the country’s broader processes towards a
pluralistic system of labour relations, as found in advanced industrial nations. As noted by
Diamond (2003), “without an effective labour movement there is no counterweight to the power
of business interests or volatile market forces in society or to the state itself” (p.46). Independent
trade unions will be fundamental in enabling Chinese workers to defend their own rights,
pressuring for more stringent observance of existing labour laws (Elliott and Freeman 2003).
With labour standards pervading virtually every aspect of trade and investment
relations, China has no choice but to address its reform-through labour programs, household
registration system and widespread corruption of local officials and businessmen. China now
has to encourage its institution-building, dismantle remaining central planning institutions,
strengthen its social safety net, and narrow social and economic disparities between rural and
urban regions.
6. CONCLUSION AND POLICY IMPLICATIONS
As the foregoing analysis has shown, the labour standards agenda has proliferated both in terms
of scope and breadth and labour standards continue to be among the more controversial issues
in contemporary global policy debates. Contrary to prevailing assumptions, this paper argues
that, rather than culminating in a race-to-the-bottom, trade liberalisation can be expected to
stimulate improvements in labour conditions. While increased competition over the
international allocation of capital exerts downward pressure on labour conditions, the
interaction between trade and labour standards is multifaceted, giving rise to countervailing and
opposing forces.
A nation’s ability to attract mobile resources is not merely contingent on its cost-
competitiveness, since “game theory represents an abstract model of decision making, not the
social reality of decision making itself” (Kelly 2003, p.3). Globalisation has changed the pattern
of incentives for both policy-makers and the business sector alike, stimulating market-driven
improvements in labour practices. Martin and Maskus (2001) explain “there are complex links
between core labour standards and competitiveness, and the countries with the highest labour
standards (today’s industrial countries) dominate world trade” (p.318).
While blaming international trade for less than universal adherence to core labour
standards is politically convenient and has surface appeal, “trade did not create low labour
37
standards in developing countries; low labour standards are deeply rooted in poverty and social
customs” (Hasnat 2002, p.574). Demand for standards will be altered by changes in economic
fundamentals and long-term economic growth stemming from trade liberalisation will thus
facilitate adherence to internationally recognised labour practices. As explained by Casella
(1996) “because free trade modifies the national income of an economy, its production pattern,
and the distribution of its resources, we should expect standards to react positively to the
opening of markets” (p.124).
A key premise of this analysis is that the issue of labour standards stands at the
intersection of public and private spheres of law and policy. While the role of regulatory
regimes is an important part of any analysis, effective enforcement mechanisms have stemmed
from the business community itself. The spread in information technology has created a
heightened sense of public awareness about business practices in increasingly global production
networks, thereby integrating social concerns into private sector decision-making. With the
emergence of an ethical consumer base, multinational companies today encourage more
effective implementation of labour standards in their global supply chains. Growing consumer
pressures mean that labour standards are being leveraged to enhance competitiveness and
marketability (Haworth and Hughes 1997).
While the embrace of neoliberal globalisation has exposed the Chinese market to brutal
competition, prioritising economic development over workers’ rights, the twin pressures of
export sophistication and international scrutiny play a proactive role in advancing more
effective compliance with labour standards. As noted by (Wachman (2001)) “China is a more
human place today than it was during the years when Mao Zedong dominated it and ideological
extremism served as a justification for the wholesale deprivation of human rights” (p.257-258).
The foregoing analysis does not imply that labour standards may not be abused to
distort trade. As stipulated by Brown et al. (1996), “both import-competing and export firms
and workers may use issues of lower foreign labour standards to further their own narrow
interest” (p.231). As theoretically demonstrated by modifying the Heckscher-Ohlin framework
to incorporate labour standards, countries may improve their competitiveness in the production
and export of unskilled-labour-intensive goods following the non-conformity with
internationally recognised labour standards. However, this does not necessarily occur to the
detriment of the overall economic welfare of the country’s trading partners. Nonetheless, this
paper acknowledges that globalisation has increased national inequality, with labour standards
emerging as an essential element in building public support for continued globalisation.
38
The promotion of rules tied to the international trading system might become a pretext
for protectionism, denying developing countries access to international markets. Bhagwati
(2007) explains “governments that can accelerate globalisation can also reverse it” (p.11).
However, a group of advanced countries, as well as their respective trade unions and parts of
their business sector resume a vocal campaign at the WTO for coercing adherence to
compulsory minimum labour practices in its member states (Eglin 2001). The WTO has thus
far been hesitant to approach this issue in a systematic way, but the issue is likely to be on the
agenda of any future set of multilateral trade talks. While this paper does not address the general
issue whether trade sanctions are an appropriate tool for enforcing international labour
standards, Hasnat (2002) explains “restricting market access in the developed countries for
goods made in the developing countries with poor labour standards may be ineffective, and
even hurt the very labourers the restriction is presumed to help” (p.574).
Subsequently, this paper rejects the dichotomy that labour standards and trade are polar
opposites, arguing that they can be successfully combined. In the words of Elliott and Freeman
(2003), “the appropriate metaphor is that of Siamese twins who share vital organs and cannot
be separated. One may be stronger than the other, but neither can advance without the other;
and the effort to separate them endangers both” (p.9). The authority to regulate labour standards
internationally ought to remain with the ILO, promulgated through dialogue and technical
advice. Experience has shown that the real issue of labour standards is lack of application of
existing law. As noted by the IOE (2006) “in many cases, excessively complex labour codes is
a key reason forcing many workers into the informal economy” (pp.2-3). Thus, this paper
argues that the approach to be take is a practical one and not a narrow legislative route. Enabling
greater market access will play a vital role in improving labour conditions, allowing the market-
mechanism to dictate the extent of labour standards, thus ruling out uneconomic upgrading of
standards.
39
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