By
Graham Dunkley
Senior Lecturer in Economics
Department of Applied Economics
Victoria University of Technology
Introduction
The historic Uruguay Round has set the pace for an unprecedented push towards global free trade and has been widely acclaimed as a massive breakthrough. Not all observers are this excited, however. As I have argued elsewhere (Dunkley, forthcoming), a wide range of community groups and non-government organisations (NGOs) are much less bullish about the Round outcomes and I have identified up to twenty possible arguments against full free trade, most of which are not countenanced by orthodox Free Trade theorists. One of these issues, around which dissent from free trade centres, is that of labour standards (LS) and related social or human rights questions.
The issue is not a new one, but has become the focus of a socalled 'Fair Trade' alternative to Free Trade which is supported by many influential NGOs (e.g. Oxfam) and some OECD country governments, being currently on the WTO's agenda at the Singapore Ministerial Meeting. In this paper I will briefly outline the history and politics of the labour standards (LS) issue, the key arguments in the debate and the possible forms an LS regime might take. I will advocate a system which could be described as a 'multilateral social clause' encompassing a range of human and labour rights within the framework of an alternative world order.
Labour Standards in History
The case for labour standards was not long in following the emergence of Ricardian comparative advantage theory, and accelerated with the growth of trade during the Industrial Revolution. Ricardo had only linked comparative advantage to resource endowments and perhaps tastes, but early LS theorists quickly asserted that labour conditions and a wide range of social issues (today the environment is emphasised) also shape comparative advantage. Post-Ricardian, and most contemporary, Free Trade economists assent to this basic proposition but stress that these issues do not negate the gains from trade, through it could influence which items a country exported.
From early in the Industrial Revolution writers and activists such as Robert Owen urged domestic labour legislation to prevent the sorts of worker exploitation which were becoming rampant around the time that Ricardo published his theory (1817). The first advocate of an international treaty on labour questions was British MP, Charles Hindley (in 1833), a notion which was subsequently supported by several French liberal economists and the Alsatian industrialist Daniel Legrand. The Belgian Edouard Ducpetiaux was the first to advocate a formal international labour body (in 1843) and he was active in setting up the first international conference on such issues, held at Brussels in 1856.(1)
The main foci of such early debates were poor working conditions, health and safety, child labour and the like, but these were pressed mainly by individual scholars, including economists. Even Karl Marx's International, which advocated world worker solidarity, lacked political support and international trade unions were non-existent. A series of major international conferences in the 1890s attracted the ear of some governments, particularly in Switzerland, and the 1890 US Trade Act banned imports of goods made by convict labour, which was probably the first case of trade-based legislation on an LS issue (Perez-Lopez, 1988). In 1890 a Swiss-based International Association for Labour Legislation was formed and on May Day 1901 an International Labour Office (ILO) was established in Basle, a precursor to the present-day Geneva-based International Labour Organisation (Alcock, 1971:Ch 1).
Soon afterwards the world's first international LS conventions, banning night work for women and the manufacture of matches with white phosphorus, were signed. Thereafter, many bilateral and some multilateral LS treaties poured forth in great profusion, culminating in the formation of the present ILO in 1919, the latter organisation having since then generated almost two hundred Conventions and a similar number of general Resolutions. Principles recommended by the ILO include rights of workers to free association and bargaining, equitable payment, equal pay for equal work between the sexes, the eight-hour day and forty-eight-hour week, rejection of child or other forced labour and so forth. However, the ILO does not advocate complete uniformity of work conditions, or perfectly level playing fields, and it has only investigatory, not sanctioning, powers (Alcock, 1971). In 1927 an international convention against slave labour was signed and during the 1930s the possibility of a link between trade and worker rights was widely canvassed, receiving support from J.M. Keynes, among others (Goodhart, 1994).
The 1948 Havana Charter for an International Trade Organisation (ITO), of which GATT was to be just a component part, decreed (in Article 7) that:
. . . . . unfair labour conditions, particularly in production for export, create difficulties in international trade . . . (so) each Member shall take (action) to eliminate such conditions within its territory.(2)
The ITO did not eventuate but its surviving component, the GATT, did tacitly incorporate the ITO's LS provision and also allowed Members to ban products made by prison labour.(3)
In 1953 the USA tried to have Article 7 of the ITO formally included in GATT, but was rebuffed because there was no agreement on what constituted 'unfair' labour conditions (Perez-Lopez 1988:2567), many European countries later becoming suspicious that the US intended to discriminate against their exports (Hansson, 1983:25). Nonetheless, LS provisions gradually crept into several commodity agreements and other international treaties, into the trade legislation of many countries and into a number of US foreign relations measures, notably the 1969 Overseas Private Investment Corporation, the 1974 Generalised System of Preferences for Third World countries and the 1983 Caribbean Basin Initiative (see Perez-Lopez, 1988).
At the level of the academy the LS issue remained in the 'dubious' basket, a 1954 US advisory commission (Perez-Lopez, 1988:258) and a 1955 report for the ILO by the famed Bertil Ohlin (Hansson, 1983:23) both recommending against extensive international harmonisation of labour standards, though both hinted at mild, preferably non-trade, international measures to encourage gradual improvement of labour conditions. In general, however, political passions about the issue remained minimal until the 1980s and the dawn of the Uruguay Round.
The Contemporary Politics of Labour Standards
US legislation for participation in the 197379 Tokyo Round of GATT called for "the adoption of international fair labor standards" and US negotiators pressed during the Round, for GATT to enforce four minimum labour standards (re forced and child labour etc), but were supported only by the Scandinavian countries. The US received little support on the issue during post-Tokyo consultations (Perez-Lopez, 1988:2589).
In March 1986 at a meeting of the Preparatory Committee for the Uruguay Round of GATT the USA proposed that the LS issue be included in the Round. No specific regime was detailed, only that a sub-group examine the matter during the Round, although it was proposed that matters pertaining to both labour rights and workplace standards be investigated. The US delegate intimated that there was no intention to impose its wage standards on the world or to deprive poor countries of their comparative advantage, but argued that reasonable standards should be retained and that "trade expansion was not an end in itself". However, few countries supported the US push and many specifically opposed it, these mostly being Third World Members of GATT, but including a New Zealand newly converted to Economic Rationalism (Perez-Lopez, 1988:277ff).
Throughout the century-and-a-half since the LS issue was first mooted it had been confined to the rarefied realms of government decrees, obscure ILO declarations and musty international conferences of experts, although many trade unions had nominal policies on the matter. During the late 1980s this changed dramatically as awareness of and concern about the Uruguay Round dawned amongst NGOs and a range of social groups, especially in relation to environmental issues (see Dunkley, forthcoming). These movements, in conjunction with trade unions, soon had the LS issue on the agendas of many First World governments.
As the Uruguay Round drew to a close the US and the EU lobbied to have a statement about LStrade links included in the final version of the agreement, one proposed model entailing the inclusion of LS and environmental 'side agreements' of the sort which Clinton had incorporated in NAFTA. In the event, the whole idea was dropped after some fierce opposition from a number of Third World delegations, notably Singapore and Malaysia, the compromise being that the LS issue be placed on the agenda of the future WTO.(4)
The conversion of the EU, especially France, to LS activism appears to have been due to a number of factors such as trade union and NGO pressure, the intraEU debate about the European Social Charter (see below), concern about the rising competitiveness of newly industrialising countries (NICs) and a strong proLS stance by the then French President, Francois Mitterand. In late 1995 the European Parliament called for an international 'social clause' on LS matters and since then EU Commissioner, Sir Leon Brittan, has been actively endeavouring to have the matter considered by the WTO, though against the wishes of his own government in Britain.(5) In the USA there has been a long-term adherence to LS principles, especially in Congress, although there is some division over the matter, and over trade liberalisation in general, between various arms of government. It has been claimed that Clinton dislikes the LS notion but is supporting it in NAFTA and the WTO as a payoff for trade union support (see Dunkley, forthcoming: Chs 3 and 12). Australia has never been a strong advocate of LSs and in fact both Labor and Liberal Governments have opposed their inclusion in GATT, the present government opting for 'aggressive bilateralism' with trading partners on the issue (see Dunkley, forthcoming: Ch 12).
The EU's conversion has been decisive, with world-wide lobbying on LSs intensifying since the end of the Uruguay Round and with most international bodies taking some stand on the matter, though opinion is seldom unanimous. Within the OECD, for instance, the USA, France and Belgium have pressed that body to back an LS clause in the WTO, but the UK, Japan and Italy have opposed such a move, with the result that the OECD has resolved to do no more than investigate trade, employment and LS matters (ICDA 18:13). The ILO is likewise divided on the LS issue and so has been unable to produce a resolution on inclusion of LSs in the WTO, although ILO Director, Michel Hansenne, appears to support such a measure.(6) In January 1995 a major group of Non-Aligned countries, in a socalled Delhi Declaration, rejected the inclusion of LSs in the WTO or any form of international 'social clause', but a year later the G7 powers called for such a clause to be placed on the WTO agenda.(7)
Even Third World trade unions and NGOs are divided on the issue with some backing their governments' hostile stance. However, Latin American trade unions have called for a 'social clause' to be included in negotiations for the proposed extensions of NAFTA, while unions in Asia and elsewhere have urged a variety of protective measures on labour rights.(8) The International Confederation of Free Trade Unions (ICFTU), the main world trade union peak body, has been particularly active during the 1990s in campaigning for a social clause on LS matters to be incorporated in GATT.(9) According to one report (Hutton, 1994) the leaders of major international bodies such as the ILO, the World Bank and the UN are drifting towards a consensus that LS questions must be linked to trade via the WTO, although WTO Director-General, Renato Ruggiero, is more reluctant on the matter (ICDA 18:12). International employer organisations and TNCs have habitually been opposed to LSs and one NGO group claims that it was TNC lobbying which sank the incorporation of LSs into NAFTA-proper and the Uruguay Round, although one US business group is backing the ICFTU's version of a mild 'basic rights' regime.(10)
LS politics are not particularly complex or sophisticated. Essentially, the notion of an international LS regime is supported by First World trade unions and social NGOs, as well as by many Third World equivalents, generally on moral grounds (see below), and by many First World governments, mainly on the grounds of a supposed need to protect established rights or standards. Many Free Trade economists are sceptical or unsupportive for reasons to be discussed below, but most interventionist economists are sympathetic.
A currently popular analysis amongst political-economic conservatives, Public Choice theory, suggests that minority protectionist interests can be disproportionately influential over government relative to the majority who are adversely affected to only a small degree. In my view this is an unduly cynical perspective, even if true to some extent, and it does not adequately explain anti-free trade views, let alone the LS issue for which moral stances are often invoked. In many Western countries there is now a 'Fair Trade' movement which advocates, among other things, the incorporation of labour and environmental standards into GATT. In Australia this group consists of a coalition between Community Aid Abroad, the Australian Conservation Foundation and the Australian Consumers' Association, bodies whose mix of interests hardly fit the Public Choice model. In fact, according to Public Choice theory consumer organisations should oppose protection.(11) The involvement of such groups in the debate indicates that the issue is a wider one than most Free Trade economists concede, as becomes apparent when the arguments are examined more closely.
Political Economy of the LS Debate
Discussion of the arguments about LSs needs to be prefaced by several distinctions. The first is between standards and practices, the former being norms to be enforced while the latter are rights, conditions and so forth actually practiced in the workplaces of nations. The second distinction is that assessment of the effectiveness of an LS regime may depend on whether its main goals are to protect the higher standard country or improve conditions in the lower standard country, for the two goals are not coterminus. The third distinction is that several types of LS regime are possible, of which I will discuss three - a 'basic rights' model focussing just on a limited range of labour rights; a 'social clause', entailing a range of human, labour and social rights and measures; a 'unit cost equalisation' model which seeks to influence, ultimately approximately equalising, actual practices not just standards, perhaps including wage levels, working conditions and so forth. The fourth distinction is with regard to the mechanisms of concern, the traditional focus being on the labour effects of trade between nations, but increasing attention now also being given to investment flows.
A fifth distinction involves two different aspects of a key concept in the debate - the notion of 'cheap labour'. Many LS advocates over the years have argued for LSrelated protection on the grounds that poor countries have an unfair advantage due to absolute low wages which result from them allegedly being willing to live on a 'bowl of rice a day'. This notion is still expounded periodically by some union and populist leaders, but has long been regarded by economists as fallacious because low wages reflect productivity and resource development. Where 'cheap labour' is fairly related to low productivity it is a legitimate component of comparative advantage. The fallacious 'cheap labour' idea must be distinguished from what for convenience I will call 'exploited labour' which arises when workers are rewarded at levels well below those warranted by productivity, which I have elsewhere described as a 'unit cost gap' (Dunkley, forthcoming). This is also related to the wider concept of 'social dumping' which I will discuss below. Most LS advocates have understood this distinction from the outset and almost all do so today.
There is a wide and rather jumbled range of arguments for LSs, most advocates espousing more than one and many critics focussing on some of the less popular cases. In the interests of clarity I will identify, accurately I trust, five general forms of argument for an international LS regime.
1. The 'social justice' argument: a 'non-economic' case which suggests that some set of rights and other social principles are anterior to considerations of trade and are applicable in all times and places.
2. The 'reinforcement' argument: this holds that an LS code is required to reinforce standards already achieved in socially aware countries, to guard against a competitive 'race to the bottom' and to help extend existing standards.
3. The 'virtuous circle' argument: the idea that the enforcement of reasonable standards makes for political and economic stability, thus leading to efficiency, development and further improvement in standards.
4. The 'pre-emptive strike' argument: the claim that the use and enforcement of selected standards will provide the reassurance required to prevent workers in high standard countries from pressing for higher, willy nilly protectionism.
5. The 'induced growth' argument: the assertion that a rigidly enforced LS system, particularly in the 'unit cost equalisation' form, can boost wages thereby accelerating growth and creating a market for the products of First World exporters, thus boosting trade by more than might have been sacrificed through sanctions.
The arguments most commonly used by general advocates of LSs, especially unions and NGOs, are the 'social justice' and 'reinforcement' arguments, although the others are employed at times. The ICFTU has particularly emphasised the 'pre-emptive strike' argument.(12) Hard-line Managed Traders such as various researchers at the Washington-based Economic Policy Institute often invoke the 'induced growth' argument (see Dunkley, forthcoming: Ch 12). In general I sympathise with all of these arguments except the 'induced growth' case. The typical LS argument holds that an industrially developing country may easily be tempted to engage in 'social dumping', which entails exporting products manufactured below their true labour, environmental or other social cost. This then generates pressure, via global competition, for established industrial countries to dilute their labour or other standards in order to compete with imports, or else induces capital to the lower-cost economies, thus destroying jobs and jeopardising standards.
A number of mainstream economists support at least a mild version of this picture and so approve some form of LS regime (e.g. Trebilcock and Howse, 1995:411 ff). However, many Free Trade economists, particularly those most active on the international conference circuits, reject the picture on grounds which I will discuss below. A typical view of this sort holds that LSs are unnecessary, may be self-defeating, may be in danger of disguising protectionism and are justified only where a 'race to the bottom' may occur (considered unlikely) or where there are clear 'psychological' benefits - e.g. preventing dogooders from worrying about exploitation, unionists from getting restive etc (e.g. see Anderson, 1995:21 ff).
AntiLS arguments by Third World governments and media are usually somewhat cruder, centring around accusations of blatant protectionism or else claiming that 'their' workers are prepared to work hard for low wages and modest conditions in the interests of development.(13) A range of standard responses to LS arguments are outlined below, together with my comments thereon.
Market distortion and the economics of futility: as is their want, many mainstream Western economists have, over the years, argued against LSs particularly on the grounds that, via increased production costs, these would tend to distort labour or other markets in the affected countries, thus distorting development, discouraging investment, fostering labour-displacing technologies, forcing workers out of the formal economy into the informal sector (where conditions are even worse) and so forth. The result may be the opposite of what was intended (e.g. Lawrence, 1994; Anderson, 1995).
This is not an unreasonable argument and is backed by some theoretical and empirical evidence. One of the most detailed analyses of the question, by Swedish economist Göte Hansson (1983), has shown that in a labour surplus economy, which is very common in the Third World, most forms of LS regime will be ineffective as a protective device for the sanctioning country because factors will shift between sectors in the sanctioned economy, usually leaving factor and production costs unchanged, without the sanctioned country being much better off. On the other hand, Hansson has shown that where a 'basic rights' regime results in the formation of beneficial trade unions (i.e. where more systematic bargaining leads to productivity improvements), or where a 'social clause' regime induces productivity-enhancing innovations, the sanctioned country may become better off economically. Ironically, however, this might boost exports and subject the sanctioning country even more competition, though perhaps not unfairly.
How important such distortions may be is difficult to assess for evidence is thin on the ground, but these can certainly result in inappropriate technology of the sort which concerns many Third World commentators and can result in 'unit cost gaps' of the sort which worry Fair Traders. However, a more important source of 'unit cost gaps' are the technological policies of TNCs which often import that equipment with which they are familiar, but pay their workers only a bit above local rates, paradoxically, often appearing therefore to be generous.(14) Many industries in NICs and other Third World economies now have comparable productivity levels to the West but much lower wages. A typical estimate by LS activists of the balance is that the Third World has attained 65 per cent of First World manufacturing productivity but 25 per cent of the latter's wage levels, resulting in unit labour costs 37 per cent lower than the latter (Mead, 1990:20). Mainstream economists tend to find smaller but still significant unit cost gaps, Lawrence (1994:249) for instance, estimating that Third World productivity is about 40 per cent of US levels (in 1989) and wages 28.5 per cent.
The greatest distortion would, of course, occur under a 'unit cost equalisation' version of LS (see above). Such a model is rejected so completely by mainstream economists that they virtually never even discuss it, but it is still seriously advocated by some unionists, NGOs and Managed Traders particularly on the grounds of the 'induced growth' argument (see above), the rationale being that global growth (and rich countries' trade opportunities) are inhibited primarily by lack of purchasing power in poorer countries.(15) I agree with Free Traders' rejection of this view but on grounds more extensive than just market distortion. This type of approach would clearly induce inappropriate technologies, accelerate urbanisation and invoke Western-style development of a sort now being widely rejected in the Third World, while it unjustifiably assumes that growth and consumption are a panacea for all ills.
In sum, it is likely that an LS regime would distort sanctioned economies to some extent, but only in the case of a 'unit cost equalisation' version would this, in my view, be to an unacceptable extent. In most circumstances the impact would either have minimal (perhaps mildly beneficial) effects, or else the adverse effects would be outweighed by 'democratic' or 'psychological' benefits of improved labour or other rights. Worse distortions probably occur through the technological policies of TNCs, and in my view an LS regime should be accompanied by an 'appropriate technology' policy (see below).
Maximising whose welfare?: one of the more anomalous-sounding arguments of economists in this field is that, in theory, global welfare will be maximised if relatively unsafe production were to shift away from countries that place a 'higher value' on safe workplaces towards those which place a 'lower value' on safety, and so a 'social clause' regime which emphasised health and safety could 'reduce' global welfare (see Lawrence, 1994:259; Anderson, 1995). The obvious questions which non-economists always ask are 'whose welfare'; whose 'value' is being measured; were 'ordinary' people ever asked what they value; how do we weigh economic value (production) against the non-economic (safety etc)? This argument is akin to Lawrence Summer's much quoted throw-away line some years ago that Africa is 'under-polluted' and the world's welfare would be increased if Africans would only take more 'dirty' industries (quoted in Dunkley, forthcoming: Ch 10). So the impact of an LS regime on 'welfare' will clearly depend upon one's definition of the term, and in any case, Hansson (1983) has shown that even when measured in narrow economic terms a country not currently in a Pareto optimal state could conceivably obtain an increase in welfare via the impact of enforced LSs.
Gains from trade for everyone?: the 'welfare maximisation' argument is, of course, closely linked to the notion that all partners can gain from trading on the basis of 'comparative advantage', and that differing labour (also environmental) conditions are a dinkum part of comparative advantage. This also implies the doctrine, well known to economists (I call it 'unilateral benefit'), that a liberalising country can gain from trade even if others remain protectionist. In the LS context this means that the high standard country can still gain even if other countries maintain apparently 'unfair' conditions.
Such an argument is theoretically sound, but requires three qualifications. The first is that recent 'strategic trade' and 'cumulative advantage' theory undermines the gains from trade claims to some extent, and 'exploited labour' would be one way for a country to reap a strategic advantage, as some claim Asian NICs are now doing (see Dunkley, forthcoming: Ch 6). The second qualification is that environmentalists question the notion of 'differential absorptive capacity' upon which the Free Traders' postulate rests (see Dunkley, forthcoming: Ch 10), and the postulate could likewise be challenged in the labour area. LS values are socially shaped, may change with development, are linked to ideology can be quite different with a different social consciousness and so forth. So labour and environmental conditions are not as static, predictable or as readily discernible a component of comparative advantage as Free Traders seem to think.
The third qualification is that, whilst gains from trade may ensue despite 'exploited labour', some industries will clearly suffer reduced competitiveness, so trading with exploitative countries would necessitate what I will call 'red restructuring'. This could arouse resentment, would entail social costs which might not otherwise occur and may jeopardise some favoured national industry, and such favourites exist whether Free Traders like it or not. In short, if the gains from trade are less than Free Traders claim, which I argue is the case (Dunkley, forthcoming: Ch 7), then these qualifications may result in costs which outweigh the benefits.
Trade not the 'culprit': a key mainstream economists' argument against LSs is that trade between First and Third World countries (i.e. with LS candidate economies) is insufficient to explain the adverse economic effects which Fair Traders attribute to 'exploited labour'. At the start of the 1990s only 30 per cent of US trade was with such countries, and although this trade doubled during the 1980s, it began from a very low base, growing from 1.2 per cent of US GNP to 2.1 per cent (Lawrence, 1994:241). NGOs attribute to what I call 'Third World competition' a much greater proportionate impact than is indicated by such figures but hard data are lacking.
Mainstream Western economists mainly debate the issue within the context of an apparent trend since the early 1980s in many OECD countries for relative wages and employment opportunities of unskilled workers to decline, the main rival explanations of the phenomenon being trade and technology. The great majority of economists argue for the latter, but several, most notably former World Bank economist, Adrian Wood, argue that trade is having an adverse impact, especially when the data are adjusted to allow for imperfect substitution between Third World imports and First World manufactures. Wood also argues that even the technological process may be partly 'defensive' against import competition, a view for which there is at least some evidence (see Lawrence, 1994: 242 ff). Ultimately, therefore, the pressures of globalisation are doubtless playing a role in our employment problems, and Wood proposes at least a modicum of temporary protection in lieu of restructuring assistance. Studies by various bodies, including the OECD, the ILO and even the World Bank concede this to some extent.(16)
Two additional factors are important but are often excluded from the mainstream debate. The first is that most LS advocates now see DFI flows as ranking equally with trade as a factor in adverse 'Third World competition' and 'exploited labour' via the 'runaway industries' mechanism, although evidence on the matter is thin. Mainstream economists deny the quantitative importance of DFI (e.g. Lawrence, 1994:248 ff), but many LS advocates claim that TNCs are now able to use the threat of shifting to lower-standard countries as a bargaining chip, one claiming that this has reduced US wages by about ten per cent.(17) Even the OECD (1994:1601) has suggested that DFI is now sensitive to labour conditions, and certainly NICs have played on this, governments and ministers often openly admitting to the fact (e.g. see Dunkley, 1982). Certainly there are documented cases of industries purposely shifting to lower LS countries for cost reasons.(18) World DFI going to the Third World is rising rapidly, now being about half the total on some estimates (UNCTAD, 1994: Ch 2), and is considerably more multi-faceted than trade. All the concerns which have so far arisen under the NAFTA LS regime have related to investment (UNCTAD, 1994:360).
A second crucial consideration is that under the high-protection regime of the past, LSs have not been a major element in corporate calculation, but some commentators suggest that with the decline of traditional protectionism under the Uruguay Round, labour and environmental costs could become a much more sensitive factor in both trade and investment decisions (Trebilcock and Howse, 1995:414). Also, the OECD (1994) has pointed out that downward pressure on LSs would have been much greater in the past if labour had been more mobile, which suggests that such pressure could rise in future if globalisation of labour were to accelerate.
In sum, trade volumes might not at present be sufficient to constitute a 'threat' to Western LSs, but continuing increases in trade, the rising importance of DFI and general globalisation may in future greatly exacerbate LS pressures.
Time heals all wounds: although most mainstream economists and institutions accept that 'exploited labour' may occur, they invariably argue that this is a temporary state of affairs which cannot last long, because with development the market soon eliminates unit cost gaps, so 'economic justice' improves with rising income. This clearly is a judgment and arguably is a leap of faith. In some NICs the rising tide is tending to float the boats, but not all as yet, and repressive labour conditions have been a long term feature of the Asian development model. As one observer has put it ". . . sustained industrialisation has not altered the weak political position of labour".(19) In some Third World countries unit cost gaps have now been persisting for two decades or more, notably in Mexico where during the trade and investment-liberalising decade of the 1980s real wages, and relative wages vis-àvis the USA, actually declined, while unit cost gaps in non-wage areas such as health and welfare have also been rising.(20)
Cases of exploited labour are not entirely confined to Third World countries, there being claims that many Japanese TNCs export products made by prison labour within Japan itself under appalling conditions.(21) Moreover, according to the OECD (1994) LSs world-wide are increasingly being set through market-based bargaining, mainly due to labour market deregulation, and the apparent result is that minimum labour rates and 'social wage' expenditures are on the decline everywhere. Even Britain has been achieving notoriety in the EU by trading on lower LSs to attract investment (Dunkley, forthcoming: Ch 8). So the assumption of continuous improvement is questionable and future reversals under pressures of globalisation are not out of the question.
The protectionist Trojan Horse: a popular, though political rather than economic, antiLS argument amongst mainstream economists is the fear that an LS regime might become a Trojan Horse for renewed protectionism and undermine the trade liberalisation process (e.g. Anderson, 1925). For a start this case depends on how important liberalisation is for the world and I have argued that its importance has been exaggerated, which suggests a range of 'non-economic' grounds for trade intervention (Dunkley, forthcoming). Certainly most LS advocates tend to argue that the importance of trade liberalisation does not outweigh the principles involved in Fair Trade. Subsidiary to that issue is the question of whether or not protectionists could manipulate an LS regime, and on the basis of the above critique of Public Choice theory in this matter I suggest that this is unlikely if the regime is structured multilaterally in the way I propose below.
The right to child labour!: a taboo argument even amongst Western economists, but espoused by many Third World governments and a surprising number of humane Third World NGOs, is the suggestion that at present some child labour is required for development and that poor families often rely on childrens' income. Even UNICEF has said that child labour is not necessarily harmful, that recent dismissals of Bangladeshi children under LS pressure from the US has caused a lot of social problems and that elimination of such practices would not be feasible in the foreseeable future (ICDA 18:14). Hansson (1983:94 ff) has suggested that a ban on child labour would only be practicable in manufacturing and would almost certainly only force migration to uncontrolled rural, backyard and service activities, while impoverishing many low income families.
Clearly this argument can be accepted up to a point, and some work is performed by children on Australian farms even today. But the dimensions of the issue are staggering. The ILO now estimates that throughout the world there are 250 million (equivalent to the total population of the USA) child workers aged 5 to 14, about half of whom work full-time, and doubtless long hours at that, while this figure does not even include domestic workers.(22) Both the ILO and UNICEF describe working conditions which rival the Dickensian picture of the English Industrial Revolution, and adduce evidence that many of these children suffer excessively by any standards of assessment. Furthermore, some are forced to labour under a variety of feudal-style bonding obligations. ProLS advocates often argue that a ban on child labour would help promote 'human development' and accelerate growth (OECD, 1996), a process whose virtues depend upon the model of development used. At this stage it is probably only possible to conclude rather lamely that the issue would have to be handled with great sensitivity (see below).
The right to development: a standard anti-LS argument by many Third World governments and some NGOs is an outgrowth of Western Free Traders' case - that poor countries have a right to use their cheap labour-based comparative advantage for development purposes. ProLS replies are also fairly standard - this entails a distorted, uneven, inegalitarian, 'trickle-down' model of development which is now coming into disrepute. Both sides of the argument are frequently over-simplified, but I agree with the increasingly widespread notion that most conventional models of development are 'inappropriate' in a range of social, environmental and technological respects, this sort of laissez faire approach being part of the problem.
Alternatives to LSs: methods other than a sanction-backed LS regime have been advocated (e.g. Lawrence, 1994:262), the usual, improbable-sounding, options being moral suasion, compensation, incentives and labelling. These will be discussed below, along with others.
Problems of enforcement: a final argument often levelled against LSs, and a key rationale used by the Australian government, is that an LS regime would be difficult to enforce in practice and that sanctions have not got an effective track record. This clearly depends on the form of LS regime used and types of enforcement proposed. The ILO claims that it has had some long-term success, through moral suasion and certain other pressures (investigations and the like), in implementing its 'basic rights'-type LSs. The US has been fairly rigorous in the application of its 'social clause' provisions in foreign relations projects (see above), and has periodically had recipient countries change their labour policies (Perez-Lopez, 1988). It has even been claimed that a 'wage equalisation' scheme between the US and Puerto Rico in the early post-war years was successful in raising standards and preventing a movement of jobs to the latter (Rothstein, 1993), although in my view this was at the huge cost of virtual integration into the US economy.
Certainly ratification of ILO Conventions has been a patchy process, with few countries having ratified even half of the total and fewer adequately enforcing these. Certainly the US has been accused of hypocrisy for its 'aggressive unilateralism' over LSs while itself only having ratified about a dozen.(23) However, the ratification picture is an uneven one, France, the other active LS advocate, for instance, having ratified 114, the greatest number of any nation. Third World countries have typically ratified about ten to forty or so, but some with dubious rights records, such as Mexico (76) have ratified more than this. Australia has ratified 53.(24) Certainly there are logistical problems with sanction-based systems, but at a multilateral level these can be overcome, as will be outlined below.
Labour Standards and a New World Order
On the basis of at least some of the above sorts of arguments there is now a widespread consensus amongst the more reasonable Free Traders and international institutions that some (usually mild) form of LS regime is, on balance, justified, though it is the form which is in dispute.(25) The possible models can be distinguished in four ways - by form, channel, level and implementation method. These will be examined below, with my preferences indicated.
Form: as noted above, I have suggested that three possible forms are indicated in the literature - 'basic rights', 'social clause' and 'unit cost equalisation'. The sorts of basic rights or 'core standards' usually advocated are: a ban on child labour and forced labour; freedom of association; right to organise and bargain collectively; non-discrimination in employment. These sound noble enough, but the ILO, the OECD (1996) and others have often pointed out that most countries in the world have now ratified ILO conventions on these matters, the problem being in the implementation, a process which is often under-resourced and politically stymied. So as a 'soft' option I argue that it is unsatisfactory.
At the other end of the spectrum a 'unit cost equalisation' model would entail minimum wages, upward pressure on wage levels, specified hours, working conditions and so forth. As noted above, I would oppose rigid growth-oriented versions of this model though for reasons somewhat different from those of Free Traders. This would leave the concept of a 'social clause', which is usually seen as an 'inbetween model' focussed on a wider range of social and human rights than a 'basic rights' model. The EU 'social clause', for instance, contains thirty points covering freedom of association and movement, employment and remuneration, improvement of living and working conditions, social protection, vocational training, equal treatment, information, health and safety, protection of children, the elderly and the disabled and implementation.(26)
Clearly not all these could be included in an international regime, but in my view such a regime should cover a selection of human, labour and social rights to a degree which is reasonable given each nation's level of current development and plans for future 'appropriate' development. These would be specified as principles, not actual levels, and should include at least an elementary welfare and redistributive system aimed at social equity. This gives rise to the question of whether specific practices such as Indonesia's occupation of East Timor or China's occupation of Tibet should be included. I argue that such policies should be covered and sanction-based campaigns would then be waged in a way similar to the former anti-apartheid programme against South Africa.
Channel: one of the most heated questions in the whole debate is whether an LS regime should be channelled through the ILO, the GATT/WTO system or elsewhere. There is no consensus (see OECD, 1996), antiLS Free Traders wanting GATT left out of it (Anderson, 1995). But a common suggestion by proLS advocates is that GATT be appropriately amended and the WTO be advised by the ILO, GATT's Article XX exceptions being the most proposed location for the clause. The ICFTU, for instance, has proposed a formal clause allowing WTO members to observe and enforce, via a WTO/ILO committee, six core rights - freedom of associations, right to collective bargaining, a minimum employment age, anti-discrimination, equal remuneration and proscription of forced labour.(27)
Broadly, I agree with this model, but I have advocated that in the longer-term the WTO should consult more closely with NGOs and be more integrally linked with the UN as was intended for the illfated ITO, and this would make possible a suitable implementation process of the sort discussed below.
Level: as usual, three levels of operation are possible - the unilateral level, which the US has regularly taken upon itself to use, the bilateral level, which Australia claims to be using at present, and the multilateral level in the way indicated above. My proposal is that a multilateral LS regime be operated via a clause in GATT which permits members to take action against countries singled out for attention owing to unacceptable human, labour or social rights policies, but not be allowed to do so willy nilly on a unilateral basis. Decisions on the action would be made by a special multilateral 'Fair Trade' committee consisting of delegates from the WTO, the ILO, appropriate sections of the UN and selected appropriate NGOs - e.g. Amnesty International on human rights. This Fair Trade committee would identify countries and/or situations which appear to be acting unduly against basic human rights, or gaining undue trade advantage through 'exploited labour'. Action against such countries would not be compulsory, fairly obviously, but any action a member chooses to take would not be actionable through the WTO, while any actions not approved by the committee would be so. The Fair Trade committee would be required to consider whether or not the target country was making genuine efforts at appropriate, sustainable, equitable development. This effectively would entail a continuing dialogue process, a notion which has been advocated by EU Trade Commissioner, Sir Leon Brittan (ICDA 15:13).
Implementation methods: the possible use of formal trade sanctions for such non-economic purposes has caused Free Traders much heartache, but is nonetheless widely advocated. Some more constructive Free Traders have proposed alternatives (see above), most of which I consider to be sensible enough but inadequate, so I also propose some extra mechanisms.
Moral suasion - as noted above, this is a good starting point, but will always have limits; it should be used at all times in conjunction with other methods.
Labelling - the notion of devising marketing labels which declare that a product has been manufactured without the use of child labour, for instance, sounds fanciful. However, such schemes are getting under way, one example being the Indian non-child labour label for carpets known as 'Rugmark', for instance, and there are about 20 eco-labelling schemes for environmental matters. There is concern in WTO circles that such schemes can constitute a non-tariff barrier due to the resources required to conform with the requirements and obtain the necessary information, but this in my view will have to be seen as a justified cost of Fair Trade. However, there are likely to be limits to the possibility of labelling, the more the issues required by the social clause or the more complex the requirements.
Compensation - it is often proposed that a Fair Trade policy could be made more palatable through compensation payments to fund or partly fund the implementation process. I agree that some compensation is justified, but the question of which funding agencies would pay may be crucial. If a direct levy on importing countries were ultimately used then each country could calculate the benefits of Fair Trade relative to the costs of compensation. This would be desirable for individual countries, but might endanger the process in the long-run if too many countries drew an adverse inference.
Positive incentives - some European LS advocates propose that low standard countries should be offered 'carrots' for improvement in the form of better market access as a reward. This concept is inherent in the use the EU and the USA already make of LS prerequisites for preferential access, but under my proposal this would henceforth be determined multilaterally.
Grassroots action - Free Traders often say that social efforts should be made to eliminate exploitation before resorting to trade sanctions, and whilst I agree, this is easy for armchair theorists to say. Hundreds of labour activists are killed and thousands arrested annually throughout the world, and increasingly so in China now.(28) This situation makes implementation dangerous and political corruption often short-circuits the most well-meant policies. One solution being used widely is grassroots action through countless small scale NGOs which are closely integrated into the communities where LS questions are applicable. Much development work is now done through such groups but much more support is needed.
Alternative development policies - as noted above, the oftquoted panacea of 'development' begs the question of appropriateness, and given that the underlying concept in the whole debate is 'exploited labour', not 'cheap' labour per se, two possible rectification strategies suggest themselves. One is to artificially boost LSs, while the other is to ensure the use of appropriate technologies, which may for a time mean lower productivity industries and higher unit labour costs, but which should ensure better social development, more employment and fairer trade (i.e. no 'exploited labour' in the technical sense). Many Third World countries are now paying attention to this key issue, but the effects are not well documented by Western economists.
Trade sanctions - the whole point of an LS regime is that, when all else fails, trade measures should be invoked. These would take one or other of several forms - short-term anti-(social) dumping duties reflecting the perceived unfair social subsidy entailed; more permanent and structured 'red tariffs' against persistently offending countries; withdrawal of preexisting trade concessions; bans on particular products as required. All of these may be needed at certain times and each has its limits - temporary measures may be costly to regularly renew; withdrawal of concessional access would only apply to countries already in receipt of concessions, etc. Ultimately, special packages should be developed involving whatever mix of suasion, labelling, compensation and sanctions were required, with longer-term grassroots action and alternative development policies being encouraged by the Fair Trade Committee through suitable UN or other agencies. All this implies a new type of world order, but one which is feasible and increasingly advocated (see Dunkley, forthcoming: Ch 12).
Conclusion
The LS debate has been going on for over one and a half centuries and is not yet resolved, although some international actions have been implemented during the course of this century. Currently, debate is proceeding between certain First World countries, notably the USA and France, on the one hand, and certain Third World countries, led by Singapore and Malaysia, on the other. I have identified three types of LSs, five arguments in favour of a LS regime and eleven usual counter-arguments. I have suggested that, on balance, arguments of principle outweigh economic counter-arguments and an LS regime should be sought. This should be a multilateral model based on the GATT/WTO system using an extensive 'social clause' which includes basic human and labour rights. The regime should be administered by a multilateral 'Fair Trade' Committee which represents the WTO, the ILO, the UN and NGOs, with LSs implemented through a mix of methods, trade sanctions being a last resort. The regime would require a restructured world order.
Notes
1. See Alcock (1971) and Hansson (1983) for brief outlines of the issues and individuals.
2. United Nations Conference on Trade and Employment, Final Act and Related Documents, UN, Havana, March 1948, Ch 11, Article 7.
3. Article XXIX of GATT calls for the observation of Chapters I to VI and Ch IX (general, commercial and operational provisions) of the illfated Havanna Charter. Prison labour - Article XX(e) of GATT.
4. The European, 8-14 April 1994; Far Eastern Economic Review, 21 April 1994:82; Wall Street Journal, 89 April 1994.
5. ICDA No. 20:p.14 and subsequent issues; Wolf in The Guardian, 26 February 1994.
6. ICDA 17:11 and 18:10; Hutton (1994). Also see the statement by Deputy Director-General, Heribert Maier (1994).
7. ICDA 17:11-12; Australian Financial Review, 4 April 1996:10.
8. ICDA 18:10, and see Dunkley (forthcoming):Ch 12; Foreign Report, 10 February 1994.
9. Decisions of the 15th ICFTU World Congress, ICFTU, Brussels, 1724 March 1992:37; Goodhart (1994); Free Labour World, various issues.
10. Collingsworth et al (1994):9; A. Katz, Trade and Workers' Rights: A Proposal, Mimeo, US Council for International Business, Washington n.d.
11. For a critique of Public Choice explanations see Dunkley (forthcoming): Ch 3.
12. Esp see Free Labour World, November 1994:3.
13. Williams in Financial Times, 14 April 1994; Far Eastern Economic Review, 21 April 1994:5; Climo in Australian Financial Review, 19 May 1994:14.
14. Payment above local rates by TNCs is well documented, but is not always applicable, especially in 'mobile' industries such as electronics which are highly sensitive to cost considerations - see Dunkley (1982).
15. See Mead (1990); Rothstein (1993); Collingsworth et al (1994).
16. For a brief outline of the issues see Lawrence, (1994):241 ff; Dunkley (forthcoming): Chs 8 and 12.
17. Rothstein (1993) and in Cavanagh et al (1992); other cases, see Dunkley (forthcoming): Ch 8.
18. Dunkley (forthcoming): Ch 8; US General Accounting Office, USMexico Trade: Some US Wood Furniture Firms Relocated from Los Angeles Area to Mexico, Washington DC, April 1991.
19. F. Deyo, Beneath the Miracle, University of California Press, Berkeley, 1989:4. Also see Dunkley (forthcoming): Ch 12 and sources cited there; Mead (1990).
20. Dunkley (forthcoming): Ch 8; Cavanagh et al (1992).
21. The Age, 11 October 1994:6.
22. Guardian Weekly, 17 November 1996.
23. See P. Alston, 'Labor Rights Provisions in US Trade Law: "Aggressive Unilateralism"?', Human Rights Quarterly, 15, 1993.
24. ILO Lists of Ratifications, various years.
25. See, for example, Lawrence (1994); Trebilcock and Howse (1995); UNCTAD (1994); World Bank (1995): Ch 11; OECD (1996). Generally- Hutton (1994).
26. This is contained in Appendix II of the Maastricht Treaty for a Single Europe, the "Community Charter of the Fundamental Rights of Workers", which has been ratified by all EU members except the UK.
27. The Social Clause: Rationale and Operating Mechanisms, Mimeo ICFTU, Brussels, 1994.
28. Asian Workers Organising, 13/1-2, March 1995.
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Http://www.monash.edu.au/ausapec/citer 23.htm Last update: 16 December 1996