Can Trade Agreements Be A Friend To Labour?

Dani Rodrik

Labour advocates have long complained that international trade agreements are driven by corporate agendas and pay little attention to the interests of working people. The preamble of the World Trade Organization Agreement mentions the objective of “full employment,” but otherwise labour standards remain outside the scope of the multilateral trade regime. The only exception is a clause, left over from the 1947 General Agreement on Tariffs and Trade (the precursor to the WTO), which permits governments to restrict imports that are produced with prison labour.

Regional trade agreements, by contrast, have long taken labour standards aboard. The linkage in these agreements between preferential market access and adherence to core labour rights has become increasingly explicit. In the original North American Free Trade Agreement, signed in 1992, labour standards were shunted to a side agreement. Since then, US trade agreements have typically included a labour chapter.

According to its proponents, the Trans-Pacific Partnership would have required Vietnam, Malaysia, and Brunei to improve their labour practices significantly – and Vietnam to recognize independent trade unions. And US President Donald Trump’s administration claims that its revamped agreement with Mexico contains the strongest labour provisions of any trade agreement.

Developing countries have generally resisted inclusion of labour standards in trade agreements for fear that advanced countries will abuse such provisions for protectionist purposes. This fear can be justified when the requirements go beyond core labour rights and make specific wage and other material demands. For example, the new US-Mexico agreement requires that 40-45% of a car be made by workers earning at least $16 per hour.

Auto companies can certainly afford to pay higher wages, and this provision on its own may not undermine employment prospects in Mexico. But it is not an altogether salutary precedent either, insofar as it sets an unrealistic wage floor – many multiples higher than the average for the Mexican manufacturing sector as a whole.

On the other hand, developing countries have little reason to reject labour standards that address bargaining asymmetries in the workplace and fundamental human rights. Core labour standards such as freedom of association, collective bargaining rights, and prohibition of compulsory labour are not costly to economic development; in fact, they are essential to it.

In practice, the problem with trade agreements’ labour provisions is not that they are too restrictive for developing countries; it is that they may remain largely cosmetic, with little practical effect. A key concern is enforcement. For one thing, charges of labour-rights violations can be brought only by governments, not by trade unions or human rights organizations. By contrast, investment disputes can be launched by corporations themselves.

Critics rightly worry that governments that are not particularly friendly to labour causes will not be keen to follow through. To date, there has been only a single instance of labour rights being pursued under a trade agreement’s dispute settlement procedures, and the outcome is hardly encouraging.

Following two years of complaints by US and Guatemalan trade unions, the US government formally launched a case against Guatemala in 2010. When a final decision was announced in 2017, nearly a decade after the initial grievances were aired, the arbitration panel decided against the US, but not because Guatemala lived up to its labour rights obligations under its own laws. The panel did find violations of Guatemalan labour laws. For example, court orders against employers who had dismissed workers for engaging in union activities were not enforced. But it ruled that such violations did not have an effect on Guatemala’s competitive advantage and exports, and therefore were not covered by the trade agreement!

There are two reasons to care about labour standards. First, we may have a humanitarian desire to improve working conditions everywhere. In this case, we should have equal regard for workers in the domestic economy and those employed in export industries. Focusing on the latter may even backfire, by deepening dualistic labour-market structures.

In principle, we could expand enforceable labour clauses in trade agreements to cover working conditions in the entire economy. But it seems odd to have the linkage in the first place: why should labour rights be left to trade negotiators and the commercial interests sitting around the table, and remain hostage to negotiations couched in terms of market access?

If we are serious about improving working conditions everywhere, we should resort to experts on human rights, labour markets, and development, and raise the profile of the International Labour Organization instead. The objectives of both domestic labour unions and international human-rights advocates are served better through other means.

One argument for linkage with trade is that it gives countries a real incentive to reform labour-market practices. But foreign aid agencies have long experience with conditionality, and they know that it is effective only under special conditions. The desire for change must come from within the country and be demonstrated by prior actions. Achieving reform by threatening to suspend material benefits – aid or market access – is unlikely to work.

Alternatively, the concern about labour standards may be narrower: upholding working conditions at home and preventing a race to the bottom. In this case, we should seek domestic remedies, as with safeguards against import surges. What is required is a mechanism against “social dumping” that prevents poor labour practices in exporting countries from spilling over to the importing country.

Such a scheme, if poorly designed, might deliver excessive protectionism. Yet even the overtly protectionist anti-dumping measures allowed under existing trade rules have not been overly damaging to trade, while providing an escape valve for political pressure. A well-designed safeguard against social dumping should do no worse.

Labour rights are too important to leave to trade negotiators alone. To date, labour clauses in trade agreements have remained a fig leaf, neither raising labour standards abroad nor protecting them at home. Real change would require a significantly different approach. We can start by treating labour rights as being on a par with commercial interests, rather than being an adjunct to them.

Republication forbidden. Copyright: Project Syndicate 2018 Can Trade Agreements Be a Friend to Labor?

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