Trade, Labour, Global Competition and the Social Cause

June 1998, Number 5

Trade,
Labour, Global Competition and the Social Clause 

Introduction 

The Economics of Trade-Labour
Link 

International Competition
and Wages 

What Does the Empirical
Analysis Tells Us? 

Development of the Issue 

The Debate at the GATT/WTO 

The Southern Perspective 

The Way Out 

Option A: Leave it to the
ILO 

Option B:
Incorporate labour rights into the WTO 

Option C: Hybrid scheme 

Two Others 

Conclusions 

Recommendations

 

The Economics of Trade-Labour
Link 

For most modern observers of trade policy the development of neo-classical
economics of most relevance to the trade-labour debate is the Heckscher-Ohlin-Samuelson
model. The long and short of the model stipulates that, other things being
equal, each country will produce that good in which it has a factor abundance.
This may mean that it has a factor abundance of capital or land over labour
(i.e. a high capital-labour, land-labour ratio). 

Based on that model, Stolper and Samuelson argued about the impact of
protective tariffs on the relative earnings of each factor of production.
This theory/result is immensely important for the utilisation of protective
tariffs on the relative earnings of each factor of production. Stolper
and Samuelson argued that placing a high tariff on the imported good would
increase its domestic price. This would increase the real return to the
scarcer factor of production in the importing country and thus reduce the
real return to the abundant factor of production used intensively in the
production of exported goods. 

Setting aside core economic theory, it is extremely difficult to pinpoint
the effect of trade on labour in an accurate manner. The following three
questions need to be answered specifically: 

• What is the relationship between a changing exposure to international competition
  and the conditions and quality of employment of all workers?
• What part does cross-border trade play in this dynamics?; and
• What can be done at the international level to respond to this dynamic
  development?

International Competition
and Wages 

There is a little dispute that wage differentials between skilled and
non-skilled workers have increased markedly since 1970. However, there
is considerable dispute about the cause of this rising inequality. Borjas
and Ramey argued that the literature on the subject, dealing with the US
situation, breaks down into the following strands: 

• The decline in the baby boom forcing up wages to college graduates;
• The shift from manufacturing to service employment;
• The de-unionisation of employment and the removal of “safety nets”;
• The increasing openness of economies to trade and immigration; and
• ‘Skill-biased’ economic change.

What Does the Empirical
Analysis Tells Us? 

The studies of the issue have generally shown that: 

• Overall trade only explains a small share of any decline in employment;
• In concentrated sectors this impact is considerably larger; and
• Trade explains only a small amount of the growth in wage inequality in
  developed economies.

However, the impact of globalisation on employment is a much wider question
than the impact of trade on employment. The trade element is an important
one, but not the only deciding factor. Many opponents of finding a link
between trade and employment point to the fact that technology helps to
explain more of the decline in employment than trade. Any analysis of the
basic Structure-Conduct-Performance model of industrial market structure
would indicate, the impact of competition at the firm level can have a
number of sources. Increased trade penetration, investment penetration
and consumer expectation and demand are important elements of this. Thus,
change in the structure and conduct of business cannot simply be captured
in a normal trade model. 

At the most, the spread of globalisation and its popularism in the media
has lead to a climate of fear among most workers in developed economies
about the effect of trade and foreign competition. The base threat that
firms will transfer production to another corner of the world is often
more a threat than a reality. 

Development of the Issue 

Contrary to the popular belief, the debate on social clause dates back
to the 19th Century. A history of the debate has been outlined by Stephen
Woolcocks. He says, the first concerted effort to draw a link between trade
and labour standards was made in 1880s. In order to diffuse social tension
and to face the growing popularity of the socialists, Kaiser Wilhelm of
Germany invited other European governments to the “Berlin Congress” to
negotiate on international labour laws. 

In 1920s, faced with social and political unrest at home, the European
governments called for international labour standards under the Treaty
of Versailles. Part XIII of the Treaty dealt with international labour
standards and envisaged common provisions for: 

• Right of association;
• Wages for a reasonable standard of life;
• An eight hours day, 48 hours week and rest of 24 hours in each week;
• Abolition of child labour; and
• Equal remuneration for men and women and equal rights for migrant workers.

Furthermore, the issue of internationally recognised labour standards and
their relationship with trade was also recognised by the holding of a special
conference on the issue at the League of Nations in 1927. Even further,
the United Nations Conference on Trade and Employment noted in Article
7 of the International Trade Organisation Charter (the predecessor of GATT
1947 treaty) that the existence of unfair working condition was a problem
for international trade. 

However, what is important to note is the fact that there was never
a clear consensus on the meaning of labour rights, and the definition of
‘unfair’ was never made clear. More notably, their enforcement through
trade mechanisms has also been an issue that was never properly addressed
nor spelt out. 

The Debate at the GATT/WTO 

The issue did not die with the International Trade Organisation. In
1954, the US Committee on Foreign Policy recommended the use of sanctions
against countries for the payment of unfair wages. 

The issue was raised in 1979 at the end of the Tokyo Round negotiations,
and was raised again in 1986, 1987 and during the first half of 1990s.
In June 1986, the US tried unsuccessfully to get the issue onto the original
agenda of the Uruguay Round at Punta del Este. In 1987, the US attempted
to persuade the GATT Council to establish a Working Group on the issue
of international labour standards, their relationship to the trading system
and their possible relationship to the objectives of the GATT system. 

Despite failing to get the Group established, it is important to note
the scope of the proposal put forward. The following labour standards were
targeted for inclusion: 

• Freedom of association;
• Freedom to collective organisation and bargaining;
• Freedom from forced or compulsory labour;
• A minimum age of employment for children; and
• Measures setting minimum standards in respect of conditions of work.

The latter two issues were the most contentious and was evidence of the
two-fold split on the issue—between basic human rights and secondary economic
rights. By 1990, the US had scaled down its request for a Working Party,
which again was rejected. The new remit of the US focused on the human
rights based principles only (the first three one). 

During the closing months of the Uruguay Round and again at the Marrakesh
Summit of April 1994, the US continued to make unsuccessful attempts to
get the idea of a Labour Standards Standing Committee off the ground. This
time they had the partial support of a number of European Union governments,
most notably the French. At that time, the US unveiled their latest proposal
to get progress on the issue at the WTO. 

The proposal does not mention the use of negative sanctions (i.e. blocking
of trade), but instead concentrates on positive sanctions. The latter are
defined as bearing those sanctions that entail the denial of a benefit
otherwise available. The proposal bears a striking resemblance to the existing
US and future EU regimes for the granting of GSP (Generalised System of
Preference) benefits. 

The position on the social clause at the Singapore Ministerial Conference
was a re-run of the Marrakesh situation. The final result at Singapore
was far from a success, but managed to keep the issue alive at the WTO
for a while longer (see Box 1). 

 

From the very beginning the debate on the issue of social clause has
a North-South dimension (see Box 2). The Southern proponents of the debate
argue that increased exports from the South is not as a result of low labour
costs but due to competitive advantage of the South in the production of
certain goods. 

Furthermore, the debate at the South revolves around the question: whether
trade retaliation would secure the human rights of workers or not. Mention
should be made that the Southern proponents do not disagree with the fact
that core labour standards are important. 

 

• International labour standards do not cover the unorganised and informal
  sectors where the majority of the Southern work force is concentrated.
  What about the human rights of this vast majority of workers?;
• Workers engaged in the international trade-related production constitute
  only a small percentage of workers in the entire production activity. Trade-linked
  upgradation of labour standards would, therefore, exclude a large part
  of the workforce which is not engaged in export production; and
• Trade-restrictive effects will adversely affect the interests of workers
  in both the developed and the developing countries. In the developed countries,
  higher import costs would result in low real wages of workers. In the developing
  countries, it would result in restrictions on employment opportunities.

The Way Out 

If most countries accept that core labour standards are important for
their workers and they tend to accept that forced labour is wrong and that
freedom of association and freedom from discrimination are universally
acceptable human rights, then the question: how to promote these rights?
(see Box 3 for core labour standards). This is the most complex question
in the debate. The three approaches open to the international community
are as follows: 

• Leave it to the ILO;
• Incorporate it into the WTO (possibly through Article XX of the GATT);
  and
• Opt for a hybrid solution.

• Economic advancement: The agreement must be capable of creating
  conditions in which the observance of basic labour standards could be preserved;
• Dispute settlement: The agreement has to establish a mechanism by
  which disputes about the observance of these standards can be resolved;
  and
• Reciprocity: The enforcement of these standards has to be based
  on reciprocity, namely no country could enter into a dispute if it did
  not recognise the standards.

Furthermore, the report also argued that the conventions were important
core standards if they could pass a three-fold test: 

• Social test: Were the conventions targeted at human rights and basic
  human needs?
• Political test: Was there widespread international acceptance of
  the conventions? and
• Economic test: Would the standards impose undue economic hardship
  or impede economic development?

Option A: Leave it to
the ILO 

The argument is that the ILO is a tripartite body with representations
from workers, government and employers. However, the core problem for the
ILO is that of maintaining its legitimacy in the face of the social clause
debate. In other words, the ILO is faced with the “razor edge” problem—how
to maintain the balance between the developed world’s demand to enforce
labour standards vice-versa the developing economies’ position to limit
the role of the ILO as that of an advisor only. Moreover, the greatest
drawback of the ILO is its lack of enforcement capacity. Then the question
is does the ILO option allow for the passing of the Dutch test. 

There is no gainsaying of the fact that the ILO conventions on core
labour standards are aimed at economic development of the Member states.
Furthermore, there is an in-built reciprocity in the ILO conventions as
it can act against the Members who, even after ratification, does not comply
with the conventions. However, the ILO does not have a dispute settlement
procedure. 

Option
B: Incorporate labour rights into the WTO 

It is a fact that the WTO option passes all three tests mentioned by
the Dutch Advisory Group. First, the overall objective of the WTO is economic
development (raising standards of living). Secondly, the WTO has
an institutionalised dispute settlement mechanism. And thirdly, the reciprocity
clause was there in the GATT 1947 treaty (being entering into reciprocal
and mutually advantageous arrangements). It was further strengthened
by the single undertaking clause of the GATT 1994. However, it is also
true that the WTO can only entertain disputes which arise out of the agreements
already signed by the Members. As on today, there is no agreement on social
clause. 

Option C: Hybrid scheme 

In recent years, countries have developed the opinion that neither the
ILO nor the WTO per se can deal with the issue of social clause.
The ILO, on its own, cannot make much progress on trade-related issues.
On the other hand, the WTO can, at the best, take into account the trade-related
aspects of the social clause (it is not an institution to deal with the
human rights aspects of the social clause). 

This ambiguity makes route for a hybrid option. The proposal is that
the ILO should act as a first instance court in case of labour disputes,
and then pass on the report of the dispute to the WTO (as a court of final
resort) for looking at its trade-related aspects. 

Two Others 

Apart from the options mentioned above, there are two others. The first
is to leave it to the consumer. There are initiatives mainly by the civil
society in the North, to promote labour rights through social labels (e.g.
Max Havellar, STEP, Veillon in Switzerland; Rugmark, Kaleen in India) or
Codes of Conduct signed by the TNCs. Even the ILO has suggested a social
label. 

The second option is to promote labour rights through positive measures.
Some ‘positive’ measures are better market access, increased Official Development
Assistance, educational programmes, debt reduction etc. This option stems
from the strong negative correlation between poverty and low standards,
especially regarding child labour. 

Conclusions 

The social clause issue has remained one of the most heated areas of
international debate for a number of years. There is little doubt that
the impact of imports on employment and wage inequality in the developed
world is considerably less than is imagined. There are number of other
factors (notably globalisation) that have far greater impact. The wider
impact of globalisation (i.e. greater economic contestability) is a far
more important psychological factor in the debate on trade and labour standards. 

In conclusion, the following are the arguments of the paper: 

• International trade is not a significant cause of unemployment in the developed
  world. However, this impact is disproportionately felt in certain industries
  and in certain geographic regions;
• A social clause based on the desire to protect workers in developed countries
  from trade would be a bad thing;
• Some basic labour rights are human rights and are worthy of promotion and
  protection;
• A simple WTO route for a social clause will not produce the desired results,
  as far as the promotion of labour rights are concerned; and
• A simple ILO route for social clause is unworkable without the ILO being
  given far more teeth to enforce agreements. However, giving the ILO these
  teeth would be optimal approach.

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