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EPW Commentary
February 16, 2002

Social Clause in WTO

Cases For and Against

Although social clause as an issue related to international competition and trade has a rich history and has been pursued haltingly by the US ever since the pre-Tokyo GATT rounds, it is topical today because of the prospect of labour standards becoming a formal instrument of trade policy through incorporation in the rules-based WTO. What are the moral, economic and political cases for and against bringing a controversial social clause into the WTO rubric?

Sreeram Chaulia

Demands for ‘fair trade’ and ‘level playing fields’ as preconditions for free trade used to traditionally target practices like foreign subsidies and predatory dumping, but have now multiplied to encompass a range of domestic policies and institutions, including labour and environmental standards and technology policy. Social clauses or international labour standards are being vigorously pushed forward for inclusion in the WTO by the US and the European Union, particularly France, and are equally energetically being opposed by developing countries whose low labour standards and conditions are under question. While the social clause debate remains an outstanding ‘new issue’ with long-term implications for the global trading regime, it may be mentioned at the outset that it is new only insofar as being invoked by the developed north since the 1980s with the visible threat of protectionist barriers if not accepted by the south.1 As an issue related to international competition and trade, the social clause cause has a rich history dating back to the early 19th century,2 pursued haltingly by the US in the pre-Tokyo GATT rounds. What makes it topical and ‘new’ is the prospect of labour standards becoming a formal instrument of trade policy through incorporation in the rules-based WTO.

The original ‘values-based’ impetus for introduction of universally applicable labour standards and improving worldwide conditions of work comes from the ILO. It has been at the helm of an eight- decade old campaign for international standards to cope with the problem of labour conditions involving “injustice, hardship and privation”.3 Through a plethora of non-binding conventions, recommendations and supervisory mechanisms, the ILO has attempted to transform working practices in every country, and claims “thousands of documented cases of improvement in situations”.4 However, in light of the absence of compelling enforcement machinery, ILO achievements need to be judged as modest. Many pro-WTO social clause advocates in the industrialised world invoke ILO’s moral terminology and its none-too-spectacular enforcement by arguing respectively that labour standards that are ‘low’ are unacceptable, unfair and illegitimate and that the stick of trade sanctions would work marvels towards ensuring compliance by errant third world countries. A question is whether the north has hijacked ILO principles and embedded liberalism to the trade discourse for selfish protectionist purposes5 or if OECD countries are genuinely motivated by solidarity with foreign workers and are lending the ILO a helping hand. As shall be demonstrated, the former is primarily the case.

The moral argument in favour of a social clause runs into rough weather due to the monopoly that the west enjoys in deciding what is a fair and legitimate standard. This Chomsky-patented ‘assumption of universality’ and enforced conformity by the north offends anti-social clause parties as reeking of Orientalism and imposition. While ILO bifurcates labour standards into ‘Fundamental Conventions’ and ‘Priority Conventions’, the American concept of ‘core standards’ or ‘minimum internationally recognised standards’ suggests a compulsoriness and fixity that rewards similarity and treats diversity (derived from different cultural values, economic conditions and analytical beliefs) as deviation and hence punishable offence. It has been pointed out by anti-social clause thinkers that while the north may enjoy advanced standards in some areas like basic wages, employment benefits, minimum working hours and protection of women and children, its record in areas such as unionisation of labour, right to strike, worker participation in decision-making on the factory floor and treatment of immigrant workers is dismal.6 If it were a pure slanging match over which labour market is more humane, or which standards are adequately ‘core’ for inclusion in the WTO, east and west disagreement, except regarding egregious practices like slave and prison labour (already prohibited under GATT XX), promises to be prolonged. As long as symmetry of obligations does not exist in the proposed social clause, the moral argument will remain one-sided and opposition to it undiminished.

 

Economic Impetus

The most significant economic impetus for a WTO social clause has been the phenomenon of deteriorating OECD labour markets in recent years and the belief that free trade with a third world resorting to ‘social dumping’ is the main causative. In the US, a consistent downward trend began from the early 1980s manifested by falling real wages of unskilled workers,7growing income inequalities and increasing numbers of working poor. Simultaneously in Europe, high rates of unemployment8 have added to the popular perception of ‘labour pauperisation’ due to globalisation of trade and investment. The economics of ‘fair trade’ draws on the factor price equalisation (FPE) and Stolper-Samuelson theorems which postulate an adverse impact of free trade on the factor of production that is scarce in the importing country (by inference, unskilled labour in the north) vis-a-vis that which is abundant in the exporting country (unskilled labour in the south), ultimately leading to convergence of factor rewards. An oft-cited survey fashioning this linkage argued that burgeoning trade deficits in the 1980s as “the US economy became more connected with the rest of the world” led to a relative augmentation of unskilled labour supply and thus depressed its real wage.9 Another fear related to the ill-effects of globalisation concerns ‘outsourcing’, ‘delocalisation’ or relocation by MNEs to low-wage and low labour standard countries in the developing world, epitomised by Ross Perot’s demonisation of NAFTA a Pied Piper’s “giant sucking sound of jobs” as they moved southwards.10 By implication, unskilled labour-intensive import competing sectors in the developed world require protection from developing country cheap imports through a social clause in the WTO that would furnish disincentives to social dumping and redeployment of capital by raising third world wages and creating ‘less exploitative’ work environments.

Opponents of social clause find no plausible economic rationale in the trade-induced lower wages analysis and point instead to domestic distortions in OECD labour markets. FPE and Stolper-Samuelson thrive on extraordinarily demanding assumptions (constant technology and tastes) that are impractical in dynamic real world terms. Technology diffusion, specialisation, increased competition, ‘X-efficiency’ and economies of scale are among the most crucial externalities of free trade that generate a ‘lifting all boats’ effect and help converge factor rewards not negatively (US to Mexico or Europe to China) but positively by increasing real wages of unskilled labour in both north and south.11 Borjas-Freeman-Katz fail to juxtapose the impact of free trade on goods prices with that on factor prices and are ipso facto unable to prove fall in real wages (i e, labour purchasing power) owing to US BOT deficit. According to most leading economists, OECD labour market travails are attributable to trade-independent phenomena such as domestic technical and organisational change. Krugman refers to ‘technology’s revenge’ on unskilled labour-force by increasing the premium paid to highly skilled workers in the US as the principal culprit.12 Bhagwati also talks of skill-biased technological changes unrelated to trade within developed countries that have resulted in rising wage differentials.13 Robert Lawrence adds that organisational preferences in manufacturing, in deference to production techniques, have shifted toward use of educated white-collar workers and away from less-educated blue-collar workers. Outsourcing through increased FDI is another red herring because there is evidence of declining unskilled labour employment and increased skill premiums even in multinational affiliates in developing countries, suggesting reasons other than cheap labour for relocation.14 The corrective to skill and education-biased change is for affected labour to acquire skills through government subsidised retraining or lump sum income transfers rather than demand a social clause and other standard harmonisations in world trade. In spite of trade protection or labour standards, domestic technological trends would continue to affect unskilled labour.

Social clauses concerning child labour, a major area for setting international labour standards, may also not redress labour market anomalies or even protect American import-competing sectors as the 1993 Harkin’s Bill intended.15 The link between child abusing sweatshops and cheap exports is not as straightforward as assumed by many in the west. Bangladeshi textiles, Indian carpets and diamonds and Pakistani sports equipment are indeed export-intensive sectors that employ child labour on a whopping scale, but it is an undeniable fact that the bulk of south Asian child labour16 comes from rural areas (i e, farm-based ‘light’ agricultural labour) which is geared to production for domestic consumption and not export. Even among industrial sectors employing child labour, Kaushik Basu estimates that barely 20 per cent of Indian child labour-ridden firms produce for exporting. If the classic case of match industry in southern India17 is considered, even though it is hazardous factory labour employing almost entirely children, matches or fireworks do not figure in India’s export list. It may thus be “better to ban child labour on an economywide scale rather than specifically in export-intensive sectors”18 not just because the latter leads to reallocation of child labour into more hazardous occupations (a la Bangladesh after Harkin) but also as the harm that Harkin and social clause supporters imagine being done to northern labour19 is specious and limited to narrow sectional import-competing interests. A worldwide clause on child labour “will never have a protective effect” if the exports originate from labour surplus economies.20

While there are no convincing economic arguments in favour of a social clause in the WTO.21 it is nonetheless true that “the issue will not go away” because of the popularity of wages-jobs-trade linkage among important domestic constituencies like organised labour and working population in OECD member states.22 A social clause is seen as political desideratum by policy-makers in Europe and America to construct broad consensual support for multilateral trade liberalisation among labour unions and the productive workforce. The practical political contention that labour standards are essential for ‘saving the free trade system’, i e, preventing traditional tariff barriers (and the voices to impose them) from rising thus remains. It is also a case in point that the increased frequency of VERs as instruments of protection could be curtailed if a social clause is incorporated into the WTO, thus effecting important positive effects from an international resource allocation point of view and reducing the uncertainty in world economy that discriminatory quotas pose. Mitigating the effects of unilateral/regional tariff impositions and VERs and preventing a negation of GATT efforts since 1947 to eliminate protection could be motives for the south to agree on ‘core standards’. Since the US position toward standards harmonisation is all-important at the WTO and the likelihood of a social clause being mooted by Washington at the next multilateral round is strong, developing and middle income countries could judiciously agree at the outset and retain control over limiting its scope rather than risk a substantial loss of comparative advantage at a later stage. The analogy of Intellectual Property Rights during the Uruguay Round conveys that a determined OECD push for inclusion of an issue will succeed despite sworn opposition in the third world. India, Brazil and China could therefore eschew the dilemma on whether to concede a social clause and coordinate a proposal on what to include in an inexorable eventuality.

 

Political Incentives

Political incentives for a WTO social clause are often counterbalanced by political hurdles against them in the south. Standards are seen by sympathisers of developing countries as cloaks for naked protectionism and denial of diversity and natural comparative advantage that accrues to the labour-abundant third world. Integrating new issues into the WTO might open the door for G-7 interference in non-trade issues and dictation of the south’s domestic policies. A pre-emptive agreement on core standards could end up a slippery slope for developing nations. The supranational character of a social clause and the consequent usurpation of national sovereignty over labour legislation is a very sensitive concern, especially among former colonised countries living in constant fear of ‘economic imperialism’. Serious doubts have also been expressed about the purpose of ‘saving’ the free trade system through a social clause. There are apprehensions of WTO becoming overburdened and inefficient if it deviates from its raison d’etre, trade facilitation, by taking on extraneous issues such as labour standards. “Loading one specialised agency (WTO) with matters that fall within the purview of another (ILO)” may result in institutional competition and capture of free trade by obstreperous ‘labour aristocracies’.23 Prognoses that a WTO Social Clause would undermine not only the ILO but also trigger a major north-south split are worrisome reflections that emerge from these objections.

In conclusion, some modi vivendi between the seemingly polarised positions on a WTO social clause are worth considering. Richard Freeman tenders a market-induced social clause, whereby “genuine consumer demand for labour standards” (as for environmental standards in the ‘Tuna-Dolphin’ and ‘Beef Hormone’ cases) will shrink the market of sweatshop products and automatically harmonise working conditions provided there is accurate information of production processes through certified labelling.24 Legal social clauses riddled with ‘psychological externalities’ and controversy can thus be altogether avoided to the satisfaction of both north and south. In the event of a legal social clause being actually enacted at the WTO, OECD countries could persuade the obdurate south that standards will improve the exporter’s terms of trade by making their products costlier ex post.25 Trade adjustment assistance in the form of development aid, income transfers and liberalised immigration rules can also blunt the edge of stubborn southern resistance to the social clause. Compensatory market access in certain sectors where developed country tariff peaks are inordinately high could be brought into the bargain. Last but not least, OECD economic diplomacy can assuage third world presentiments of ‘managed trade’ and open-ended social clause through promises not to ‘drift’ into other domestic standards. These actions might serve as ingredients of the price that Bhagwati prescribes the west should ‘pay for virtue’.26

 

Notes

 1 US legislation since the mid-1980s directly linked preferential trade and investment benefits to respect for basic worker rights. ‘Section 301’ and ‘Special 301’ threatened countermeasures against denial of ‘internationally recognised worker rights’. More recently, ‘core labour standards’ are being used as criteria for granting trade preferences to developing countries under the GSP. The EC (now EU) adopted a Social Charter in 1989 and regularly castigates and takes action against non-conformers.
 2 Robert Owen of England, Frenchman Daniel Legrand, Belgian Edouard Ducpetiaux, and both the First and Second Communist Internationals showed keen awareness of the relation between international labour rules and commerce and advocated reforms to improve labour markets during the second Industrial Revolution. G Hansson Social Clauses and International Trade (Kent 1983), pp 12-18.
 3 ILO Website, http://www.ilo.org/public/english/standards/norm/whatare/index.htm
 4 Ibid. http://www.ilo.org/public/english/standards/norm/enforced/index.htm
 5 In Jagdish Bhagwati’s words, whether “the ‘white man’s burden’ is being exploited to secure the ‘white man’s gain’”, Writings on International Economics (New Delhi 1997), p 501.
 6 Anti-union discrimination is marked in a number of developed countries, including the UK and the US according to ILO’s Report of the Committee of Experts, 1994.
 7 Worker earnings by Consumer Price Index (1979 =100) fell from 95.2 (1980) to 88.8 (1994). Cf R Z Lawrence, Single World, Divided Nations? International Trade and OECD
Labour Markets, (Paris 1996), p 20.  8 Almost all European economies have experienced high levels of unemployment since 1973 (11 per cent in the 1990s), particularly among younger, temporarily laid-off and unskilled production workers. The last mentioned have suffered a “universal decline in demand”, OECD Employment Outlook (Paris 1994).
 9 The assumption being that “imports have the potential of displacing production workers more than non-production workers”. Cf G J Borjas, R B Freeman and L F Katz, On the Labour Market Effects of Immigration and Trade (Cambridge 1991) p 4.
10 In Europe, where unemployment is a greater worry than in America, free trade and delocalisation are being blamed for labour market ills. See for instance, P Buigues et al (eds), European Policies on Competition, Trade and Industry: Conflict and Complementarities (Aldershot 1995), or J Goldsmith The Trap (London 1994). 11 The rate of increase would of course be greater in the south than in the north, Bhagwati op cit, pp 512-18. 12 Pop Internationalism, (MIT 1996) pp 192-203. 13  There is however, a theoretical trade-dependent technological change possibility that could reduce unskilled labour’s rewards. Comparative advantage has become ‘kaleidoscopic’ and volatile in the last two decades, causing high labour turnover, which in turn may result in frictional unemployment and hugely mobile labour gathering zero skills and consequently receiving lowered wages. Bhagwati op cit, pp 527-37. 14 Lawrence op cit, pp 102-103. According to the OECD’s latest survey, FDI chases locations with ‘highly skilled workers and modern infrastructure’ like China’s ‘Smart’ Export Processing Zones, Cf International Trade and Core Labour Standards (Paris 2000), p 13. 15 Harkin’s Child Labour Deterrence Act was a direct response to American labour and consumer organisations threatening boycott of Bangladeshi garment exports in early 1993. 16 South Asia ranks first in total volume of children aged between five and 14 years engaged in production processes, i e, more than one-third of the world’s working children. It ranks second only to sub-Saharan Africa in terms of ‘participation rates’ of children. 17 India has the third highest ‘participation rate’ of children in production after Ethiopia and Brazil. 18 K Basu ‘Child Labour: Cause, Consequence, and Cure, with Remarks on International Labour Standards’, World Bank Paper, December 1998, p 70. 19 An early version of Harkin’s Bill appealed, “adult workers in the US and other developed countries should not have their jobs imperilled by imports produced by child labour in developing countries”, Ibid, p 20. 20 Hansson op cit, p 175. 21 Extraordinary exceptions are allowable – (1) Monopolistic exporters using labour standards as an optimal tariff to shift the terms of trade; (2) Closely integrated economies like in the expanding EU where low labour standards in the east threaten mass migrations and refugee flows into western Europe; (3) The standard-invoking country or organisation funding the adjustment cost in the exporting country, akin to the European Social Charter’s ‘Cohesion Fund’. 22 S Woolcock, The Trade and Labour Standards Debate: Overburdening or Defending the Multilateral System?, (London 1995) p 1-8. 23 T N Srinivasan ‘International Labour Standards Once Again!’ in International Labour Standards and Global Economic Integration: Proceedings of a Symposium, (Washington 1994) pp 35-37. 24 ‘A Hard-Headed Look at Labour Standards’, ibid, p 27. 25 The corollary is almost certain deterioration in terms of trade and overall loss of economic welfare in the importing country due to the Social Clause, Cf Brown-Deardorff-Stern ‘International Labour Standards and Trade: A Theoretical Analysis’ in J Bhagwati and R E Hudec (eds), Fair Trade and Harmonisation: Prerequisites for Free Trade? Vol 1, (MIT 1996), p 240. 26 Writings on International Economics, p 504.

 

 

 




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