2 International Agreements on Labor Issues

Regional agreements often include issues other than tariffs and trade. For example, the NAFTA agreement included two side agreements that were negotiated by President Clinton to help ensure its passage through the U.S. Congress. One side agreement dealt with the environment (discussed later in this chapter), and the other dealt with labor issues.

We use the term labor standards to refer to all issues that directly affect workers, including occupational health and safety, child labor, minimum wages, and so on. Labor standards were included in NAFTA to satisfy several groups. First, consumers and policy makers are often concerned with the working conditions in factories abroad and want to avoid “sweat shop” conditions that exploit workers. Second, unions in the industrial countries are also concerned with these conditions, partly because of solidarity with foreign workers and partly because of the concern that poor labor standards abroad will create more competition for U.S. workers (imports will be cheaper because manufacturers don’t have to spend as much on safer working conditions and other labor standards).

Economists are sometimes skeptical about such concerns for foreign workers, however, and view attempts to enforce minimum labor standards as a form of “disguised protection” in the industrial countries. For example, the Indian economist T. N. Srinivasan of Yale University states, “The demand for linkage between trading rights and observance of standards with respect to the environment and labor would seem to arise largely from protectionist motives.”5 Likewise, the World Bank writes, “The real danger of using trade sanctions as an instrument for promoting basic rights is that the trade-standards linkage could become highjacked by protectionist interests attempting to preserve activities rendered uncompetitive by cheaper imports.”6 The former prime minister of Malaysia, Mahathir bin Mohammed, goes even further: “Western countries openly propose to eliminate the competitive edge of East Asia…. [T]he professed concern about workers welfare is motivated by selfish interest…to put as many obstacles as possible in the way of anyone attempting to catch up and compete with the West.”7 Whether you agree with these sentiments or not, economics teaches that we need to be careful that enforcing labor standards abroad does not worsen the situation for foreign workers by leading to unemployment. We discuss below some examples in which such an outcome has occurred.

Labor Side Agreement Under NAFTA

The labor side agreement negotiated under NAFTA does not change the existing labor laws in these countries but is meant to improve the enforcement of such laws. If one country believes that another is failing to enforce its own laws in these areas, then a complaint can be brought before a commission of the North American Agreement on Labor Cooperation (NAALC), which includes representatives from each country and which attempts to resolve the dispute through consultation and cooperation. Although many cases deal with conditions in the maquiladora plants in Mexico, operating just south of the Mexico–U.S. border, complaints have also been brought against the United States, as with a case in 1998 involving farm workers picking apples in the State of Washington, for example.8 In that case, the petitioners in Mexico charged that the United States failed to protect the rights of workers, especially migrant labor. The resolution of this case, reached in 2000, called for “planned outreach sessions at which these issues were to be discussed with migrant workers as well as a public forum for workers, unions, employers, and government officials.”9

Critics of the NAALC agreement have argued that the procedures for resolving disputes are slow and include major exceptions that render them ineffective. For example, a study at the University of California, Los Angeles, concluded, “The NAALC has failed to protect workers’ rights to safe jobs and is in danger of fading into oblivion.”10 Others argue that the agreement has created an institutional forum in which unions and labor activists from the three countries can build solidarity and that even the review of cases alone can lead firms to modify their practices.

Other Labor Agreements

Besides the labor side agreement in NAFTA, there are many other examples of international agreements that monitor the conditions of workers in foreign countries. Unions and other organizations are concerned with issues such as job safety, the right of workers to unionize, workers’ entitlement to breaks and not being forced to work overtime, and so on. In some cases, the pressure from unions and grassroots organizations can lead to positive changes in the situation faced by workers in other countries. Consumers also have an important role to play through their purchasing power: if consumers are more likely to buy a product that has been produced using methods that respect the rights of workers, then companies will implement such methods more quickly.

Consumer Responsibility How much do consumers value the idea that the clothing they purchase is made under conditions that do not exploit foreign workers? A survey conducted by the National Bureau of Economic Research asked people to respond to this question, with the results shown in Table 11-2.11

Individuals in the first group, Sample A, were asked whether they cared about “the condition of workers who make the clothing they buy,” and 84% responded that they care a lot or somewhat. Then they were asked, “How much more would you be willing to pay for items made under good working conditions,” for items worth $10 and $100. The premium they were willing to pay was $2.80 for a $10 item and $15 for a $100 item.

Individuals in the second group, Sample B, were asked about the premium they would pay for a T-shirt made under “good” conditions, but also about the discount needed to buy a T-shirt made under “bad” conditions. In this group, 84% said that they would choose an identically priced alternative to a T-shirt “with a nice logo” if local students told them that the one with the nice logo was made under poor working conditions. Furthermore, 65% said they would not buy the T-shirt made under poor working conditions at all. Among the 35% who were willing to consider buying it, the average discount to buy it was $4.30, whereas the premium they were willing to pay if assured the T-shirt was made under good conditions was $1.83.

The results of this survey highlight several interesting observations about people’s attitudes toward labor standards. One such observation is that consumers have a downward-sloping demand curve for labor standards; that is, many people are willing to pay at least a small amount to ensure good labor standards (or simply switch to an alternative with the same price), though relatively few are willing to pay a lot. For example, for a higher-priced good, consumers were willing to pay a smaller percentage of its value to ensure good labor conditions. A second observation is that individuals had to receive a higher discount to purchase a shirt made under poor conditions than they were willing to pay for a shirt made under good conditions. This finding indicates that consumers are more worried about potential losses (paying more) than potential gains (the discount), which is a commonly observed characteristic of consumer behavior. Results similar to those reported in Table 11-2 have also been found in larger-scale surveys of consumers in the United States and the United Kingdom. We conclude that a sizable number of consumers are willing to adjust their shopping patterns in response to the conditions faced by foreign workers.

Corporate Responsibility Because of the pressure from consumers and unions, corporations have started to monitor and improve the conditions in their overseas plants and the plants of their overseas subcontractors. One example of this monitoring is reported in Headlines: Wal-Mart Orders Chinese Suppliers to Lift Standards. Walmart insisted that its factories in China meet strict guidelines on both labor and environmental standards, or lose its business.

There are times, however, when this monitoring is inadequate and poor conditions for workers lead to disastrous outcomes. Sad examples are the fires in garment factories in Bangladesh and Pakistan in 2012 that killed or injured hundreds of workers, and the collapse of a garment factory in Bangladesh in 2013 that killed more than 1,000 workers. These were among the worst industrial accidents ever in the two countries, and they led to a storm of international criticism over worker safety. According to news reports, workers were unable to exit the burning factories because of locked fire escapes, leading to charges of criminal negligence for the owners and managers. It was also reported that both the factories in Pakistan and Bangladesh had passed recent safety inspections without serious violations. So the monitoring by the countries’ governments and by the companies buying from these factories—including Walmart and other major U.S. and European retailers—was not enough to prevent these disasters.

Country Responsibility After disasters like the burned and collapsed factories in Bangladesh and Pakistan happen, what additional steps can be taken beyond the improved monitoring of these buildings? One idea recommended by Sanchita Saxena of the University of California, Berkeley, is to reduce the tariff on imports from these countries, as described in Headlines: American Tariffs, Bangladeshi Deaths. She points out that Bangladesh faces a high tariff (15.3%) on its garment exports to the United States, which account for about 90% of its exports. This high tariff lowers the profits earned in the garment industry in Bangladesh, along with the wages of workers and the ability of firms to make improvements. It is ironic that this high tariff is charged on Bangladesh’s largest export item, when nearly all of its other exports enter the United States duty free. The European Union includes garments and textiles in the duty-free items imported from Bangladesh. It would seem to be a humanitarian gesture for the United States to eliminate the tariff on garments from Bangladesh, which, in conjunction with improved monitoring of factories, could improve the conditions of workers there.

Shortly after the collapse of the factory in Bangladesh in 2013, however, the United States took an action in the opposite direction. Rather than reducing the tariff charged on garment imports from Bangladesh, it increased the tariff changed on other items imported from Bangladesh. This action was taken in an attempt to force the country to improve its monitoring of its factories. As described in Headlines: U.S. Suspends Bangladesh’s Preferential Trade Status, President Barack Obama dropped Bangladesh from the list of countries eligible for a program known as the Generalized System of Preferences (GSP), which grants low tariffs to the least-developed countries. In eliminating Bangladesh’s GSP status, President Obama cited the lack of progress being made in bringing worker rights to that country. The article describes this move as “symbolic” because it affects only a very small percentage of trade from Bangladesh, whose principal export to the United States is garments, which do not qualify for low tariffs under the GSP. Still, this action is meant to send a strong signal to the Bangladeshi government that greater attention must be paid to worker safety.

How effective will this action by the United States government be in changing the conditions for workers in Bangladesh? To answer this question, we can look at earlier cases in which the United States has raised tariffs. Several U.S. trade laws give the President the power to withhold trade privileges from countries that do not give their workers basic rights, including the right to organize. One study showed that these provisions have been used by the President 32 times from 1985 to 1994, but only one-half of the cases are judged to have been effective in improving workers’ rights.12

There are two problems with trying to withhold trade privileges. First, denying preferences to a foreign country across all industries is a very broad foreign policy action, when the problems may occur only in particular companies. Second, these laws involve a comparison of U.S. labor standards with those found abroad and the judgment that foreign practices are inadequate. Many people believe that countries should choose their own domestic policies, even when they conflict with established norms abroad, and that countries should not impose their preferences on one another.13

An alternative approach to government sanctions is for nongovernmental organizations (NGOs) to take actions that limit undesirable sweatshop activities. According to one research study focusing on Indonesia, actions by NGOs are actually more effective than government action.14 This study showed that when the U.S. government threatened to withdraw tariff privileges for Indonesia, the minimum wage was doubled in real terms. That increase in the wage reduced the employment of unskilled workers by as much as 10%, so these workers were harmed. The antisweatshop activism by NGOs targeted at textile, apparel, and footwear plants raised real wages as well, by ensuring that plants paid the minimum wage. But this activism did not reduce employment to the same extent. Plants targeted by activists were more likely to close, but those losses were offset by employment gains at surviving plants, which benefited from the growth in exports in these industries. So there was no significant decline in employment from the pressure exerted by NGOs.

The message of this study is that pressure from the U.S. government to raise wages by withholding trade privileges was too blunt a tool to be effective, whereas the actions of NGOs, which were better targeted at particular plants, resulted in higher wages with little or no net loss in employment. In addition, the pressure from activists can sometimes make U.S. companies more willing to reveal their foreign plants, as Nike has done, thereby making them open to monitoring.

Living Wage The final question we can ask about labor issues is whether it is fair to expect foreign firms to pay a living wage to their workers; that is, a wage above the norm in the developing country. This issue is perhaps the most controversial part of labor standards because it involves a difficult judgment: How high should foreign wages be to make them acceptable to activists in industrial countries? Economists have a ready answer: the wages should be as high as the market will allow, and not any higher. Raising wages above their equilibrium level will very likely lead to unemployment. In extreme cases, workers laid off from manufacturing jobs in developing countries might be forced into prostitution or other illegal activities that are far worse than the low-wage factory positions they held.

These types of concerns lead many economists and policy makers to reject calls for a “living wage.” But this rejection does not mean that we should abandon other types of labor standards. Workers in all countries are entitled to conditions that are safe and clean, honesty in payment, the right to unionize, and so on. Consumers, corporations, and unions all play an important role in advocating for such conditions in foreign countries, and that advocacy needs to continue. The enforcement of labor standards can ensure that workers benefit from trade without being exploited in the workplace.