First, there are trade unions which claim that American workers can never compete with China’s low wages and the human rights activists who complain about China’s lack of respect of workers rights.  Then there are the economists who believe in comparative advantage and the businessmen who preach benefits of competitive trade.  Let’s review the arguments.

“How can we compete against a low-wage country like China?”  This is the familiar refrain of trade unionists from the US and other developed countries.

But from an economist’s point of view, this is the basis of comparative advantage.  China has a comparative advantage in the production and exports based on low cost, lower skilled labour – things like toys, textiles and assembly operations.  By contrast, the US has a comparative advantage in the production and exports based on higher cost, higher skilled labour and technology, such as information technology, biotechnology, aircraft etc.

Both sides gain by exploiting these comparative advantages.  Workers in export industries earn more than other workers.  Imports provide lower price goods and services, and greater variety, which lower income households especially can benefit from.  And as trade has grown in importance, these benefits have also grown.

That said, even the economist must recognize that when the US opened up to trade with China, there was a decline on the relative demand for lower wage, blue-collar American workers.  This is one of the reasons why US workers at the bottom of the ladder have seen weak or even falling real wages.  The other reason is rapid technological progress, which has pushed up the demand for skilled labour relative to unskilled labour.

Should we do anything in this situation?  Yes, indeed.  If we don’t, lower skilled workers are going to push their Congressmen to implement protectionist measures against China.  Moreover, from the point of view of social justice, it is important that we help these poor workers.

There are several things that we can do.  First, we can reduce taxes on poorer people, and increase taxes on rich people – just like Robin Hood!  Silly old George Bush reduced taxes on rich people, and created many of the problems we have today.  Then we can offer income assistance, and education and training services to workers who are adversely affected by international trade and technological progress.  And we can also offer them assistance to find a new job.  The regrettable reality is that many governments do not do enough to help these workers.  And we therefore pay the price, as pressure for murky protectionism grows stronger day by day.

Trade unionists and human rights activists also complain that China does not respect workers labour rights, as embodied in the International Labour Organisation’s “core labour standards”.  They argue that employers and multinational buyers try to compete by lowering or ignoring such labour standards.  In 1998, the ILO identified four standards as “fundamental principles and rights at work” that all countries should promote, whatever their level of development.  They are: freedom of association and the right to organize; freedom from forced labour; elimination of child labour that is harmful to the child or interferes with schooling; and nondiscrimination in employment.

It is true that there are many abuses of labour standards, especially in export processing zones where there is very little government oversight of corporate activities.  But what should we do?  Trade sanctions or a trade embargo?  No, the reality is that sanctions and embargoes rarely have a positive effect on workers’ conditions.  Moreover, the evidence shows that as trade promotes development, workers’ conditions usually improve.  The evidence also shows that abusing workers’ conditions rarely makes a country more competitive.  If you mistreat a worker, he or she is hardly likely to be very productive.

What other actions are possible?

Some European and North American governments believe that labour standards should be taken up at the WTO.  Compliance with core labour standards could be part of international trade agreements.  But WTO Ministerial conferences have always affirmed that the ILO is the competent body to set and deal with labour standards.  This has not stopped some countries taking up labour standards in free trade agreements.

In the context of the North American Trade Agreement (NAFTA), special side agreements were negotiated to ease concerns that Mexico's low wage scale would cause U.S. companies to shift production to that country, and to ensure that Mexico's increasing industrialization would not lead to rampant pollution.  The labour side agreement calls on all three governments (Canada, Mexico and the US) to improve their performance regarding a list of basic labour principles.  It does not however establish a set of international labour rights and standards, but mainly commits the signatories to enforce their national labour law ‘’ “Each party shall promote compliance with and effectively enforce its labour law through appropriate government action”.  Under those agreements, the three countries agreed to establish commissions to handle labor and environmental issues. The commissions have the power to impose steep fines against any of the three governments that failed to impose its laws consistently.  However, environmental and labor groups from both the United States and Canada have repeatedly charged that the regulations and guidelines detailed in these supplemental agreements have not been enforced.

Today, in all its free trade agreement, the U.S. demands that her trade partners comply with all the 4 core labour standards, as well as additional rights on ‘acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.  Even here, many developing countries have all the right regulations on the books, but fall short when it comes to implementation, in part because large shares of their populations are in the informal sector (therefore not formally registered anywhere).

One way to encourage respect for labour rights and other human rights in developing countries like China is to encourage non-governmental organizations, trade unions and the media to keep pressure on the Chinese and other governments.  Moreover, putting pressure on multinational enterprises which operate in such countries by monitoring their activities and those of their supply chain can also be effective because these enterprises do not want to see their reputations tarnished.

Many companies themselves are concerned that their reputation could be at stake if they abuse core labour rights or source their supplies and products from companies which abuse such labour rights.  Companies are now developing internal codes of conduct which include commitments by the enterprise achieve or observe certain standards in the social field, including with respect to labour rights.  Another recent development has been the emergence of International Framework Agreements that seek to establish a relationship between a multinational company and a trade union at the global level concerning the application of labour standards throughout the company.  Another development has been product labeling certifying that the product was produced under acceptable labour conditions.  Social labeling schemes are usually accompanied by consumer awareness and sensitization campaigns which encourage consumers to buy labeled products and sometimes boycott unlabelled ones.

International organizations like the OECD have instruments such as their Guidelines for Multinational Enterprises which allow you to lodge a complaint against the offending company to its home government.  It might seem like a toothless tiger, but no company likes to be dragged across the coals by NGOs and trade unions in front of government officials and then see the whole affair published by the OECD.

References:

Global Trade, Jobs and Labor Standards

CENTER FOR GLOBAL DEVELOPMENT

http://www.cgdev.org/content/publications/detail/2846/

NORTH AMERICAN AGREEMENT ON LABOR COOPERATION BETWEEN

THE GOVERNMENT OF CANADA, THE GOVERNMENT OF THE UNITED MEXICAN STATES AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA

http://www.sice.oas.org/trade/nafta/labor-c1.asp

OECD Guidelines for Multinational Enterprises

http://www.oecd.org/department/0,3355,en_2649_34889_1_1_1_1_1,00.html

The evolving debate on Trade and Labour Standards.

International Organisation of Employers.  March 2006.

http://www.wto.org/english/forums_e/ngo_e/posp63_ioe_e.pdf

Trade and labour standards: subject of intense debate.  World Trade Organisation

http://www.wto.org/english/thewto_e/minist_e/min99_e/english/about_e/18lab_e.htm

Trade and Labor Standards: A Strategy for Developing Countries, Sandra Polaski

Carnegie Endowment Report, January 2003

http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=1148

OECD Policy Brief.  International Trade and Core Labour Standards

http://www.oecd.org/dataoecd/2/36/1917944.pdf