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Labor Standards and International Trade: A Proposal

By Sanjay Reddy, Christian Barry | June 7, 2006

What can poorer countries do to promote the well being of their people? In particular, what steps can they take given the constraints presented by the rules of the international economic system? What role should rich countries play in supporting the measures taken by poorer countries?

Poorer countries might consider policies that promote broadly inclusive growth while ensuring equitable access to social resources through progressive tax and expenditure policies. They might also consider policies that promote improvements in wages and working conditions.

For example, they could establish minimum wages or occupational safety and health requirements and define rights of collective bargaining. Such measures to improve labor standards were employed in the past by countries that successfully enhanced the prosperity and well being of their people.

Poorer countries, integrated into the world economy, fear that if they take steps to enhance labor standards they will be effectively punished for doing so, as the effect will be to raise labor costs and thereby cause a diversion of trade and investment toward countries with lower standards. As a result, workers may be harmed rather than helped by such policies.

Can the world trading system be designed so as to remove this impediment to promoting labor standards? Can it be designed so as to enable, and even encourage the promotion of labor standards rather than to discourage these actions, as at present?

The rules for international trade can be redesigned to diminish the costs to poor countries of promoting labor standards in two ways: Poorer countries that make efforts to promote labor standards can be offered trading concessions (additional access to export markets in rich countries); and rich countries can be required to provide financial transfers to poorer countries that promote labor standards.

Redesigning the rules for global trade in this way can encourage poorer countries simultaneously to promote labor standards, thereby muting the labor-cost-based competition between them that currently punishes improvements in labor standards with diversion of trade and investment.

New rules for global trade can lessen the collective action problem among poor countries that makes it difficult to raise labor standards and thereby foster an increase in the freedom of countries to improve the lives of people. The cost advantages of poor countries in the production of labor-intensive goods and services are likely to continue, even after significant labor standards improvements.

The new rules would make substantial allowances for the real constraints faced by poor countries, recognizing that the appropriate level of labor standards in each country depends on its level of development. An improved world trading system would require each country to promote labor standards only to the extent that is realistic and reasonable, given the country's level of development and social conditions, and would reward efforts rather than outcomes.

The new rules would involve context-sensitive and development-oriented linkage between global trade and labor standards. Linkage has been widely criticized on the grounds that it is likely to hurt those countries that it is meant to help and that it will provide a fig leaf for protectionism by rich countries.

Critics of linkage have asserted that it will reduce poor countries' gains from trade by diminishing the incentive to purchase from them the labor-intensive goods and services in which they enjoy a comparative advantage. These are legitimate concerns, and we share them. A progressive world trading system can address these concerns.

It will be infeasible for rich countries to employ provisions promoting labor standards for protectionist ends if these provisions form part of a rule-based and transparently adjudicated system. Indeed, under the proposed system, rich countries will be required to provide additional concessions to poor countries that demonstrably take efforts to promote labor standards.

The WTO system has been widely praised for creating a rule-based system for the governance of international trade. There is no reason that this desirable feature cannot be extended to incorporate labor standards within that system.

A new set of rules for global trade will empower rather than constrain poorer countries. It will permit governments that wish to promote labor standards to do so more easily, without fear of diminished opportunities to trade.

It will also encourage governments that are not inclined to promote labor standards to do so. In this way, new rules for global trade can provide powerful assistance to workers in poor countries whose interests are not being advanced by their governments, because governments are either unable or unwilling.

New rules for global trade can enhance the freedom of poorer countries to promote labor standards while taking advantage of trade to foster growth. Developing countries should present these ideas for the renovation of the world trading system in forthcoming WTO talks.

The commitment of poor countries to promote labor standards, and that of rich countries to provide additional trading opportunities and financial resources to poor countries that promote labor standards should both be incorporated into the single undertaking of all WTO members. Under new rules for global trade countries could have greater real sovereignty and be enabled and encouraged to implement policies that best serve the interests of their people.

Reddy is Assistant Professor of Economics at Barnard College, Columbia University. Barry is Visiting Professor, School of Politics and International Relations, University College Dublin.

Read More: Finance, Globalization, Governance, Trade

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