REPORT ON THE OSLO SYMPOSIUM, 2-3 OCTOBER 1998
Erik Chrispeels
Legal Adviser, United Nations Conference on Trade and Development (UNCTAD)
The discussion of social conditions in international trade concerns the relationships among trade, labour standards, economic growth and socio-economic development. Interest in these relationships is as old as the theory of international trade. Necker, the finance minister of Louis XIV, is reported to have observed that a country that abolished work on Sundays would place itself at a disadvantage with countries where work continued seven days a week.
In our times, the relationship between labour standards and trade is normally discussed when an ailing industry needs to be restructured or in a case of regional economic integration. Managers of companies producing textiles or footwear tend to explain their economic misfortunes by pointing to foreign competition from goods produced by what they call "cheap labour." As for regional economic integration, the creation of a common market requires the gradual harmonisation of economic, monetary, fiscal and also social policies.
In this paper, I will discuss five questions:
After a brief discussion of each of these questions, I present my conclusions on the issue of whether sanctions or cooperation will better serve the promotion of labour standards around the world.
Renewed interest in the relationship between international trade and the observance of labour standards can be explained by a combination of arguments that have been put forward in recent years by economists, labour union leaders, government officials, businessmen and human rights advocates. Their views can be summarised as follows:
Neo-liberal economists believe that government regulation of labour conditions is an undesirable interference with labour markets and that it produces inefficient market outcomes. For them, labour conditions will improve as a result of growing employment, the unrestricted play of free market forces and economic growth. Their influence has led to a questioning of the welfare state in developed countries and of the economic validity of labour market regulation in all countries. Welfare economists, on the other hand, take the view that the enforcement by governments of minimum labour standards is necessary, not only to correct the imperfections of the labour market but also to promote socio-economic development.
Labour union leaders in developed countries argue that the rise of unemployment and the disparity in wage differentials between workers in their countries is the result of the liberalisation of world trade, and in particular trade between countries with low labour standards and countries with high standards. Their argument is that goods produced by countries with low labour standards are competing unfairly with goods in developed countries, which, in their view, are put at a comparative disadvantage in national and international markets for comparable goods. This argument has spurred a discussion in trade theory about comparative advantage and about free trade versus fair trade.
Human rights advocates, noting that certain fundamental labour rights, like freedom of association or the prohibition of forced labour and child labour, are also fundamental human rights, argue that such rights contribute to socio-economic development and should be observed by all countries as a matter of public policy. They consider fundamental labour standards as essential to the social and economic development of society, and believe that no derogation in their enforcement should be allowed.
Governments of developed countries, noting the growing mobility and interdependence of factors of production as well as the internationalisation of methods of production and marketing, call for trade-related rules on investment, competition policy, environment and also labour. Certain of these governments have made proposals to establish a formal link between core labour standards and international trade and investment. In their view, countries where core labour standards are not observed should not benefit from the worldwide liberalisation of rules on international trade and investment.
Finally, pictures of women and children working under harsh conditions for nominal salaries have travelled around the world as a result of the global communication revolution. Non-governmental organizations have called on consumers to boycott certain products made by children or by women in so-called sweatshops, and they have pressured governments to take action in international fora.
So much for the policy arguments. What is the evidence from economic and international trade theory? Do core labour standards improve or impede economic efficiency? Do core labour standards strengthen foreign trade or does foreign trade strengthen core labour standards? Economic studies on the interaction of international trade and fundamental labour standards are few, conflicting and inconclusive. One expert, writing in 1994, called this debate long on ideology and rhetoric and short on analysis and evidence.
A recent OECD study, noting the paucity of data and the difficulty of relating trade to core labour standards, reached tentative conclusions on a number of issues: trade improves welfare regardless of the observance of labour standards by the trading partners; the comparative advantage of a particular product is determined not by capitalising on differences in labour standards and labour costs but by factor endowment, technology, labour skills, productivity and business organisation; there is no evidence that the export performance of countries with low labour standards is better than that of countries with high standards; core labour standards are not important determinants in decisions on the location of foreign direct investment; and the observance of core standards will strengthen the long-term economic performance of all countries.4 Other studies reached the conclusion that low labour standards have influenced trade performance and investment decisions to a certain extent.
What is the most suitable intergovernmental body to deal with these questions? Initially they were taken up concurrently in WTO and ILO. The governments of certain developed countries proposed examining the feasibility of establishing a formal link between trade and core labour standards in GATT 1994. The idea was to add a "social clause," which would have authorised the contracting parties, after investigation, examination and dialogue, to decide to withdraw trade benefits from a contracting party that does not enforce core labour standards. These efforts came to a halt at the WTO Ministerial Conference held in Singapore in December 1996, where the trade ministers took the following decisions with reference to our subject: they renewed their commitment to the observance of internationally recognised core labour standards; they recognised the ILO as the competent body to set and deal with these standards, and they affirmed their support for the organization’s work in promoting them; they believed that economic growth and development fostered by increased trade and further trade liberalisation contribute to the promotion of core labour standards; they rejected the use of labour standards for protectionist purposes; and they agreed that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question.6 This decision helped to clarify the nature of the link between trade and labour standards, which will be informal and not mandatory or legal. The implication of the ministerial decision is that further international negotiations will be confined to the selection of those labour standards that are considered fundamental and to their promotion by the International Labour Organization.
What are fundamental labour standards? The International Labour Organization has developed and monitors the implementation of over 170 international conventions and as many recommendations dealing with a wide range of labour matters: fundamental human rights, employment, social policy, labour administration, industrial relations, conditions of work, employment of women and children, and social security.7 There has been no demand for countries, developing or developed, to harmonise their labour laws and make labour costs equal for all producers around the world. A more realistic approach, taking into account the economic disparities among countries, is to select from the many labour standards proposed by ILO those standards that meet two criteria: they have a human rights dimension, and they have only an indirect and small impact on existing labour costs.
The selection of criteria for appropriate standards has been the subject of much debate. A consensus on core labour standards emerged at the World Summit for Social Development held in March 1995,8 and was confirmed by the "ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up" adopted by the International Labour Conference in May 1998.9 The latter defines the following as "fundamental principles concerning fundamental rights": freedom of association and the effective recognition of the right to collective bargaining; the elimination of all forms of forced or compulsory labour; the effective abolition of child labour; and the elimination of discrimination in respect of employment and occupation. They constitute four distinct groups of principles and rights. Not included among them are labour standards that have a direct and sizeable influence on labour costs, such as those establishing minimum wages, conditions of work, social security or training. The ILO Declaration reaffirms, in the form of a re-statement, the validity of the fundamental principles and rights of workers, which were promulgated earlier in the Constitution of the International Labour Organization, as well as in the Declaration of Philadelphia annexed to it and in seven fundamental ILO conventions.10 The same principles have also been recognised in international instruments on human rights.11 It is of interest to note that each of these conventions has been ratified by more than 100 countries, which makes them almost universal in their application; the principles and the rights which they establish should command a degree of consensus among trading nations. The selected standards are concerned with the organisation of the labour market and the welfare of disadvantaged groups of workers. They have little to do with international trade in goods.
Why then are core labour standards not observed in all the regions of the world? Labour conventions and human rights instruments are ratified on a voluntary basis by states, and they do not provide for sanctions in the case of non-observance. Compliance with them is based on monitoring, dialogue and persuasion. Another reason for their partial non-observance is that a country that has ratified a convention may not implement it as effectively as expected. In the case of the convention on freedom of association and collective bargaining, a government may authorise only one labour union that is controlled by it, or a government may authorise only one union for each industry, which are policies that are not in conformity with the relevant convention. Still another reason is that Article 19 (5) (e) of the International Labour Convention has been interpreted as authorising a country to postpone ratification for developmental reasons.
How can the ratification of the fundamental labour conventions be speeded up, and the enforcement of the principles and rules which they establish be improved? It may be of interest to review first the procedures that have been proposed in recent years, some of which have been implemented unilaterally, before turning to an examination of the scheme established by the ILO Declaration. A distinction should be made between sanctioning procedures and promotion procedures on the one hand and governmental and private procedures on the other.
A first group of proposals concerns the WTO and would introduce labour standards in the GATT 1994 multilateral rules and disciplines for international trade. The argument was that the production of goods under conditions of low labour standards and their export to foreign markets should be considered as either a "social subsidy" or "social dumping," calling for either a countervailing duty or an anti-dumping duty under Article VI or Article XVI, respectively, of the GATT 1994. It is difficult to implement these proposals because it is impossible to calculate the amount of the subsidy or the margin of dumping resulting from the non-application of core labour standards. Another proposal was to amend Article XX (e) of GATT 1994, which authorises a WTO Member to restrict imports of goods made by prison labour, and to ban goods made in exploitative conditions of work.12 All these proposals are now moot following the adoption of the WTO ministerial declaration and the ILO declaration referred to earlier.
With respect to multilateral financial assistance and foreign direct investment, proposals have been made for the inclusion of a social clause in multilateral and bilateral agreements. Financial assistance and foreign direct investment would be made conditional on the enforcement of core labour standards in the recipient country.
The United States and the European Union continue to implement legislation that conditions the grant of tariff preferences to developing countries on the observance by the latter of core labour standards.14 Tariff preferences may be withdrawn after an investigation and examination has taken place. An interesting feature of the European Union’s scheme is that it provides for a combination of incentives and disincentives. The Commission can suspend preferences for developing countries not complying with core labour standards, and it can give additional preferences to countries that give evidence that they enforce such standards.
There have also been a number of private initiatives seeking the observance of core labour standards. As regards trade, the practice of social labelling and calls for boycotts of goods made under difficult conditions of work (e.g., carpets knotted by children) have been spreading. With reference to investment, ethical investment, which consists of buying of stock offered by companies that are known to observe social and environmental standards in their operations, is gaining ground in the United States and Europe.
What is the economic and ethical value of such sanctions? Do they make economic and social sense? Labour-related sanctions seek to deny target countries access to foreign markets or to foreign direct investment or, in the case of private initiatives, seek to persuade the consumer to buy goods produced under better conditions of work. Trade sanctions are unilateral threats, which the target country is likely to consider as an inappropriate interference with its national policies and as an offence to its national sovereignty. That country may interpret concern with human/labour rights abuses as a disguised policy of trade protection, and it may feel prompted, for reasons of national pride, to take retaliatory trade measures. Another point to bear in mind is that sanctions will not by themselves correct labour abuses; they will not keep ten-year-old children out of the workplace (or off the streets) and will not put them in schools. Finally, the suspension of trade benefits and of investment flows may retard economic growth and as a consequence the improvement of labour conditions. It is ironic that certain sanctions discussed above may defeat the very purpose for which they are imposed.
There are certainly other, more positive, ways to promote the observance of fundamental labour standards. Development cooperation should target working children and women in poor rural and urban areas through poverty alleviation and training. The ILO should step up its existing programmes that provide for assistance in the formulation and implementation of international labour legislation; many countries do not have the capacity to develop and enforce comprehensive labour legislation. As the cost of improved labour standards will fall on producers in developing countries, it would be fair for developed countries to agree to share this financial burden with developing countries, in return for satisfaction of the demands of the former for better general working conditions in a number of these countries.
The ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up, recognising the role of the ILO in the formulation and promotion of international labour standards, establishes procedures for the promotion of the fundamental labour principles and rights referred to earlier. The aim of the Declaration is to assist countries with low labour standards to implement the fundamental labour principles and rights through technical cooperation programmes of the ILO. The assistance that may be required in this regard will be identified on the basis of two reports, an annual and a global report. An ILO member state that has not ratified one or more of the seven fundamental conventions is expected to submit, in accordance with Article 19 (5)(e) of the ILO Constitution, an annual report indicating any changes that may have taken place during the year under review in its law and practice in respect of the subject matter of the convention not ratified by that state. The reports will be reviewed by the ILO governing body. On the completion of this annual review, the Director-General of the ILO will prepare each year a global report, on the basis of the annual reports submitted by all the member states of ILO in accordance with Articles 19 and 22 of the Constitution. The annual global report will review the progress made in the implementation of the principles and rights contained in each of the four categories of fundamental conventions. (Each group will be reviewed every four years.) The General Conference, on the basis of this information, will determine priorities for technical cooperation, and the governing body will approve the technical cooperation programmes. This new mandate for ILO concerns the promotion, not the enforcement, of the fundamental labour principles and rights.
In conclusion, the discussion about labour standards and international trade concerns the recognition of certain basic labour rights and the elimination of certain practices, which have little relationship to international trade. The promotion of the so-called trade-related labour standards requires two parallel and complementary processes: continued trade liberalisation through WTO and promotion of fundamental labour standards through ILO. This approach recognises the proper function of trade and labour standards and the relationship between them. Trade and labour standards are mutually supportive and contribute to socio-economic development. Cooperation and not trade sanctions will achieve this objective.