"Break the Link between trade and labour"

On Wed, 29 Aug 2001, Ian Robinson wrote:

 This article was published in today's Financial Times of London.  After the article is my response/critique. – Ian Robertson

 

(NOTE from Boje: The critique in the second article, is a critical deconstruction of the arguments posed in the first article, Read both then review MONITORING – perspectives and more debate).

 

Break the link between trade and labour: There is no reason why the World Trade Organisation should concern itself with issues such as sweatshops, argues Jagdish Bhagwati

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Financial Times;  Aug 29, 2001

 By JAGDISH BHAGWATI

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 Mexico - whose President, Vicente Fox, needs no lessons on the virtues of  free trade – is hosting a meeting on Saturday to persuade ministers from a number of countries to bury their differences and launch a new trade round at Qatar. Yet one issue is likely to prove insurmountable: labour standards. The most important developing countries reject attempts to establish minimum labour standards worldwide. In fact, after Bill Clinton's gaffe during the 1999 Seattle talks over endorsing trade sanctions to enforce such standards, the position of the developing countries has hardened considerably: any involvement by the World Trade Organisation on the issue of labour is out of the question.

 At the same time, several Democrats in the US Congress, reflecting the politics of union support for setting minimum labour standards, have hardened in the opposite direction. Senator Dick Gephardt, the minority leader in the House, asserted this month that the renewal of "fast-track" (rechristened as Trade Promotion Authority) is contingent on making labour rights "central to US trade agreements". The politics of this issue in Washington is clear enough: Democratic leadership considers the rejection of "linkage" - attaching labour standards to trade issues - to be a morally defective affliction of Republicans and "free trade ideologues".

 On the surface, this argument sounds so plausible that few people in rich countries understand the opposition of the poor countries to linkage. They often dismiss it as the predictable response of developing governments indifferent to the interests of their workers. But one must ask why even a totally democratic country such as India, and all its labour unions, oppose such linkage of trade and labour. Are they wrong to do so?

 The answer is no. But to understand why, it is important to distinguish between – and refute - two main arguments for linkage that are invariably confused in the charged political debate.

 One is motivated by "egoistical" fears that real wages and labour standards  of workers in rich countries would collapse without linkage. The other  arises from altruistic concerns about real wages and labour standards elsewhere. According to this view, linkage is necessary to provide a minimum level of protection for workers abroad. Neither argument is valid.

 Consider the egoistical argument. Unions fear freer trade with the poor countries for two main reasons: they believe it will reduce the real wages of workers; and they think that as capital moves to poor countries with lower standards, they will lose their own hard-won labour standards.

 The fear over real wages has gained weight since the 1980s when real wages stagnated - possibly even declined - interrupting the positive postwar trend. The reason for this reversal, it is argued, is increased trade with poor countries. But probe deeper and the fear vanishes. If this were the case, the immediate result would be a fall in the (relative) prices of labour-intensive goods such as textiles and shoes in world trade. Yet throughout the 1980s, these prices in fact rose.

 The main reason for this rise in prices, of course, is that the general presumption that over time more poor countries will become suppliers of such goods in world trade - and hence lower their prices - is false. Poor countries also move on and get richer and they withdraw from labour-intensive activities into skills and capital-intensive exports, thus "absorbing" the new suppliers' exports. As Ross Gernaut, the Australian economist, has shown, China's sudden rise in labour-intensive exports during the 1980s was almost totally offset by the withdrawal of East Asian economies.

 Most trade economists have now concluded that trade with poor countries is not the main driver of the downward pressure on wages in rich countries; in fact, it may well have moderated the fall that would have ensued from technological change, which reduces the need for unskilled workers. As for the "race to the bottom", it has become a matter of faith that corporations will force lower standards at home by threatening to move production to poor countries with lower labour standards. But there is little evidence other than occasional anecdotes. Indeed, even in the highly competitive clothing industry, where many companies have gone abroad to the poor countries, sweatshops have not broken out in the rich countries in response. Sweatshops in the US are, rather, the result of domestic factors such as reliance on illegal immigrants and the abysmal level of law enforcement.

 Given the lack of evidence, such demands for linkage can only be interpreted as protectionist. If competition gets rough, either you can restrict imports through conventional import protection or you can try to raise rivals' costs of production.

 But what about the altruistic argument for linkage? Making market access conditional on satisfaction of labour standards at the WTO creates two problems: first, it makes the use of trade sanctions the way to advance standards; second, it lays the responsibility squarely with the WTO. Trade sanctions can flag complex problems such as child labour but they cannot solve them. That requires working with local pressure groups, governments, parents and schools. The International Labour Organisation's Programme for the Eradication of Child Labour does just what is necessary.

 In any event, the WTO is a cash-starved organisation - its annual budget is less than Dollars 100m (Pounds 70m). Do the rich countries that continue to deny it additional funds seriously expect that these complex social issues can be handled by a secretariat that can barely and bravely manage conventional trade analysis? Do they really mean to advance labour standards or are they simply surrendering to the demands of their union constituencies?

 The bottom line is that, with freer trade and labour issues linked by neither legitimate fears nor legitimate aspirations, it is simply wrong to insist that the WTO must address labour issues in any form. Not for the first time, the leading rich countries have it wrong.

 The writer is professor of economics at Columbia university and special adviser to the United Nations on globalisation

 

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 Response to Bhagwati's "Break the Link between trade and labour" in Fin Times (29 Aug 01) by Ian Robertson

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  Bhagwati divides the reasons for supporting the inclusion of worker rights in trade agreements such as NAFTA and WTO into two categories: the self-interested and the altruistic.

          One argument from self-interest is that, in accord with the predictions of Stolper & Samuelson, the real wages of relatively unskilled workers in economies where labor is scarce, relative to the international supply, will be pushed down by trade liberalization.  If this mechanism is operating, we should see the prices of labor intensive goods like apparel falling, relative to the prices of more capital intensive goods.  Bhagwati argues that we find the opposite trend.  He infers from this that real wages -- which fell steadily in the USA from the early 1970s to the late 1990s -- did not fall because of trade liberalization.   One could quibble over details, but the fundamental problem with this argument is that it assumes that Stolper-Samuelson dynamics are the only way in which downward wage pressures can be created by trade liberalization.

          Alas, it is not so.  As Dani Rodrik pointed out some time ago in Has Globalization Gone Too Far?  A more important potential source of such downward pressures is what increased international capital mobility promoted by neoliberal restructuring implies for the price elasticity of the demand for labor in any particular country.  That is, as it becomes easier to relocate apparel plants from Texas to Mexico, or from Mexico to China, corporations respond to smaller and smaller differences in labor prices, other things being equal.  Workers and unions know this.  So it affects collective bargaining as well as wage setting in more individualistic labor markets.  The key to the force of this dynamic is the level of international capital mobility with respect to the production of the goods or services in question.  A host of neoliberal reforms in the last two decades have promoted this mobility.  Not least among them have been the new international private property rights created by the investor and intellectual property rights chapters of the international trade agreements that Bhagwati seeks to defend and advance.

          (In fairness, Bhagwati has elsewhere argued that these trade agreements should not have been expanded to include the so-called TRIPs and TRIMs.  But when push comes to shove, and the TRIPs and TRIMs were included despite his objections, at the insistence of the transnational corporations who are their principal beneficiaries, Bhagwati always backs the package.  If we compared the number of attacks launched against self-interested unions with those against self-interested corporations in his writings on the substance of these deals, I predict that we would find a parallel asymmetry.  But I digress.)

          To return to the main thread, note that what the price elasticity of labor argument would lead us to expect is exactly what has happened, according to the facts that Bhagwati presents us with elsewhere in his article, in the apparel sector.   Bhagwati tells us that  "China's sudden rise in labour-intensive exports during the 1980s was almost totally offset by the withdrawal of East Asian economies."  What is he saying here?  That apparel manufacturing left low-wage (relative to North America) countries in East Asia for the even lower wage China.  As illustrated by this example, the price elasticity dynamic applies to workers in poor economies where labor is relatively abundant, as well as to those in rich countries where it is scarce.  In other words, this dynamic is universal, unlike Stolper-Samuelson, whose negative implications for wages are confined to the rich, labor scarce countries.   For this reason, it seems to me that the price elasticity of labor dynamic is more important, both empirically and morally, than the Stolper-Samuelson dynamic that is the exclusive focus of Bhagwati's attention.   Why then focus exclusively on the S-S dynamic?

          Bhagwati's argument against falling labor standards is that there is "little evidence other than occasional anecdotes" that this is occurring.  There is a legal concept known as "willful blindness," which I think may apply here.  Bhagwati launches his argument with a reference to Mexico and its new President, who "needs no lessons on the virtues of free trade."   There really isn't much debate regarding the deteriorating enforcement of constitutionally guaranteed worker rights in that country since 1982.   The case that this deterioration is causally linked to the neoliberal agenda of the government strikes me as impossible to refute, though I'd be happy to see Bhagwati give that argument a shot.   But maybe one case, however, compelling, is mere "anecdote."  OK.  Go to all of the countries that have created export processing zones (EPZs) over the last twenty years, from Malaysia to Central America, and check systematically to see whether production in the EPZs has been exempted - de facto if not de jure - from national labor laws.  This research has not been done, to my knowledge, but if it were, I think we'd find that labor standards are generally considerably lower in the EPZs - that is, the sectors of these nations' manufacturing economies that are most exposed to the pressures created by increased international capital mobility.

          So much for the self-interest arguments.  What of altruism?   Here Bhagwati's response is that trade-linked worker rights and standards simply won't work - meaning that they alone will not result in the elimination of child labor or worker rights violations.  Of course, he is right about that.  But there is no other magic bullet for these problems either.  The debate among those who are serious about this question is -- or should be -- about whether "social clauses" can contribute to this end.   What do we know in this connection?  We know that worker rights backed by serious sanctions worked in many national economies in the 20th century, bringing about real improvements in workers' standards of living as well as their dignity and freedom.  Why shouldn't the same thing work at the supranational level?  The burden here should fall on the skeptics to explain why the analogy cannot hold.

          The recent experience of the labor side agreement to NAFTA suggests that proclamations of worker rights, when they are not linked to real economic sanctions, have very limited (though, I think, still marginally positive) effects.  It's time to try something with real teeth, while recognizing that this would not be a panacea.  How should it be done?  Bhagwati raises practical questions.  The WTO is underfunded, he says.  I think we can solve this one.  Let the WTO agreement give to an ILO panel the power to determine whether international worker rights included in the WTO social clause have been violated.  Upon such a finding by the ILO panel, whatever sanctions are set out in the clause will be authorized.  The WTO will not have to worry about increased administrative costs, and those who worry that most WTO panelists know and care much more about trade liberalization than about worker rights (or environmental protection) will be relieved of that concern.  It will be easier to raise the ILO's budget for this purpose than the WTO's, I think.

          While not the only changes that would have to be made to the WTO to render it compatible with good economic policy and more fundamental values such as democracy and human rights -- above all, many of the new corporate private property rights found in the investor, intellectual property rights, and technical barriers to trade chapters of these agreements need to be dramatically narrowed if not completely eliminated -- such a social clause, backed by such an enforcement mechanism, would go a significant way towards increasing the legitimacy of the WTO with democratic publics in the North. 

          But what of the people of global South?  They have reason to be skeptical of Northern intentions of course.  Bhagwati tells us that all of India's unions are sufficiently skeptical that they oppose any social clause.   I am not sure whether or not this is true.  I do know, however, that the unions of Brazil and most other Latin American countries that participated in the Hemispheric Social Alliance, support a social clause as part of MERCOSUR and as part of any hemispheric liberalization agreement.   So, at best, we seem to be getting a very selective reading from Bhagwati on this issue.   I agree with the principle that Bhagwati implicitly invokes here, though.  Any social clause to be put in a global or hemispheric trade agreement should be supported by the unions that represent workers in that country, provided - as is the case with the CUT in Brazil, though not the CTM in Mexico - that their leadership is accountable to the rank-and-file, and so, can be assumed to represent their understandings of their interests fairly accurately.   I observe the AFL-CIO working very hard in the last five years or so to help develop such an international consensus among trade unions that are relatively free from state and employer control.   They are not there yet, but they are making progress, particularly within the hemisphere.  It is vitally important to the legitimacy of the social clause - as one piece of a larger strategy for reconstructing the neoliberal model of globalization to make it safe for workers, women, the environment, and democracy - that progress on consensus building among workers organizations in the North and South continue.

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