Chapter 8: International

Trade and Labor and

Environmental Standards
Dr. Jennings Byrd
ECO 4451 Economics of Globalization
Learning Objectives
• List and discuss the three possibilities for setting standards.
• Discuss and give examples of the relationship between income levels
and environmental and labor problems.
• Define labor standards.
• Distinguish between and explain the different approaches to solving
transboundary and non-transboundary environmental problems.
• Describe three alternatives to trade measures for enforcing labor and
environmental standards
Introduction: Income and Standards
• Since the end of World War II, many of the formal barriers to
trade have been removed
• New obstacles to increased international economic integration
are driven by two important forces.
1. National laws and regulations adopted for strictly domestic reasons
unintentionally limit international commerce in an integrated
economic environment
• Is this a bad thing?
• Consider the effects on competition.
• (Monopolies)
Introduction: Income and Standards
2) Conflict over standards
• technical product standards,
• health and safety standards,
• Labor standards
• environmental standards.

• When we are arguing over different types of standards we must also

consider what the country wants. For example, the U.S. went through
what many developing nations are currently going through, yet the U.S.
is trying to restrict those nations in their development due to certain
types of standards.
Setting Standards: Harmonization, Mutual
Recognition, or Separate?
Most regional trade agreements and the WTO agreements practice a
combination of:
• Harmonization of standards: Two or more countries adopt a common
set of standards
• Mutual recognition of standards: Countries maintain their own
standards, but accept the standards of others as valid and sufficient
• Separate standards: Countries maintain their own standards and refuse
to recognize the standards of others
• Foreign doctors are often required to go through residency in the U.S.
Setting Standards: Harmonization, Mutual
Recognition, or Separate?
• There are no general rules to determine which approach is most efficient
or fairest in all cases.

• Each of the three mechanisms has advantages and disadvantages

• Harmonization of technical standards, for example, leads to a larger
market and greater efficiency
• If a set standard is in place for a product, then the cost to produce
product components is greatly reduced
• But may also freeze inferior standards into place
• Also, consider that it only benefits those countries engaged in trade agreements
Setting Standards: Harmonization, Mutual
Recognition, or Separate?
• However, differences in labor and environmental standards, in
particular, have generated concerns
• High-income countries often fear that laxer standards in other
countries induce domestic firms to
1) adopt lower standards to remain internationally competitive
2) move to countries with lax standards
• Countries are feared to engage in a race to the bottom:
• adoption of the lowest level of standards possible in order to attract foreign
firms
Population, Income, Labor by World Bank Categories, 2018

Income Classification (2017 Population GDP per Labor Force

Category GNI per capita) (millions) capita Participation Rate
(Male/Female)
Low - 705.4 $746.22 78.23 / 62.88
Lower Middle - 3,022.1 $2,261.55 75.94 / 34.33
Middle >$996 & <$12,055 5,677.6 $5,199.94 75.37 / 44.38
Upper Middle >$3,896 & <$12,055 2,655.6 $8,540.79 74.8 / 54.28
High > $12,055 1,209.8 $43,577.83 68.57 / 53.26
 Life Expectancy and the Environment

Income Category Under 5 Life Expectancy at Percent of Population Percent Change in CO2 Emissions
Mortality (per birth (years), 2018 using safely managed Forest Reserves, (metric tons per
1,000 live births), drinking water services 1990 - 2016 capita, 2014)
2018 (2017)
Low 68.1 63.8 26.7 29.8 – 25.2 0.307
Lower Middle 49.1 68.5 53.7 32.4 – 28.8 1.46
Middle 35.8 71.9 34.3 – 33.1 3.86
Upper Middle 12.6 75.7 35.0 –34.6 6.52
High 5.0 80.7 98.7 28.5 – 29.0 10.93
Living on less than $2 a day

Source: worldbank.org
Labor Standards
The U.S. and many other countries today want labor and
environmental standards included in future trade
agreements
• U.S. trade agreements with Canada and Mexico (the North
American Free Trade Agreement, NAFTA) and with Jordan
address labor and the environment: each country must enforce
its own standards or face monetary fines
Labor Standards
• Labor and environmental activists see fines as inadequate to enforce
standards and prohibit the race to the bottom, demanding the use of
trade sanctions
• At the core of the argument is:
• Unfair commercial advantage
• Human rights and environmental standards
• Consider what could happen to firms/countries that face trade
sanctions.
• Reduced output, higher prices
• Lower welfare
• Slower development
Defining Labor Standards
• The International Labor Organization (ILO) proposed five
labor standards as basic rights, revised by OECD:
• Prohibition of forced labor (slavery)
• Freedom of association
• The right to organize and bargain collectively (unions)
• An end to the exploitation of child labor
• Nondiscrimination in employment
Defining Labor Standards
• The five standards are widely agreed upon, but also ambiguous:
what is meant by “exploitation”?
• Many potential labor standards are contentious: universal
minimum wage level, limits on the number of work hours,
workplace health and safety, etc.
• Low-income countries are reluctant to pay much higher minimum wages:
higher wages would reduce firm profits, and result in closing down of
production and a rise in unemployment
• In many cases a $1/hr. job is a significant improvement.
• A further result is a slower rate of development
Child Labor and Hazardous Work 2000 – 2016

Source: Global Estimates of Child Labor

Changes in Child Labor, 5 – 17 Age Group, 2000 – 2016

Source: Global Estimates of Child Labor

Child Labor by Region, 5-17 Age Group, 2016 (Millions)

Source: Global Estimates of Child Labor

Percent of Children Working by Region, 5-17 Age Group, 2012 - 2016

Source: Global Estimates of Child Labor

Child Labor as a Bad Equilibrium
AA’ is the number Wage is too low, so some families
of unskilled adult send children to work.
workers
Wage is so low that all children
TT’ is the aggregate
work.
supply of labor

Considered the bad equilibrium:

all children are working.

Considered the good equilibrium:

children are not working and this
becomes self-enforcing.
Labor Standards and Trade
• The major source of disagreements between trade economists
and labor activists is over the use of trade barriers to enforce
labor standards
• Should one country use trade barriers to pressure another
country into altering its labor standards?
Labor Standards and Trade
• Trade economists think such barriers are ineffective as
an enforcement mechanism and only spur
protectionism, deadweight losses, and other economic
inefficiencies
• These barriers limit developing countries abilities to
export their products, which in turn lowers their
welfare.
Labor Standards and Trade
• Economists express four concerns over the use of trade
measures to enforce standards:
1. Effectiveness:
(a) only large countries or coalitions of countries can use trade
barriers successfully to enforce standards, since small countries
do not have a large enough impact on global demand

(b) use of sanctions could be counterproductive for boosting

working conditions: improved enforcement in the target country
may cause producers to shift to the unregulated and uninspected
informal economy
Labor Standards and Trade
2. Hazy Borderline between Protectionism and Concern:
special interests sometimes use the issue of foreign labor
standards in order to attain their real goal, protection
against foreign competition
• Producers in a high-income country with scarcity of cheap, unskilled labor
may seek sanctions against a low-income country in order to counter the
competition posed by the low-income country producers with abundant
supplies of cheap labor
• Consider the sectors (agriculture, clothing, etc.) in which high income
countries have lost their comparative advantage.
Labor Standards and Trade
3. The Specific Content of Labor Standards: there is no
international agreement on the specific content and language of
labor standards
• Justifying the specific goal of sanctions to the international
community is difficult; may lead to conflict in international
economic relations
4. The Potential to Set Off a Trade War: use of sanctions is
discriminatory and infraction of WTO
• Sanctions may cause retaliation from the targeted country,
further hurting international trade rules
Evidence on Low Standards as a Predatory Practice
Low standards are generally not effective mechanism to enhance
competitiveness and attract foreign investment
1. In theory, countries cannot simultaneously capture markets (run a trade
surplus) and attract foreign investment: trade surplus implies capital
outflows, not inflows
a. Relatively recent papers (Olney, 2013 and Davies and Vadlamannati, 2013)
seem to contradict the theoretical assumption.
2. There is very little evidence that countries that lower labor standards
succeed in obtaining a comparative advantage in a new line of
production
a. Busse (2002) finds that forced labor improves comparative advantage, but the
opposite with discrimination against females
Evidence on Low Standards as a Predatory
Practice
3. Low labor standards; not a successful means to attract
foreign investment:
•Low labor standards are correlated with unskilled, illiterate
labor force, lack of economic development (poor roads, ports,
telecommunications, schools, and sanitation)
• Low labor costs are thus more than offset by the costs
implied by a lack of development
• Higher labor standards tend to lead to higher rates of
economic growth (Bonnal, 2010)
Labor Standards
• If trade sanctions are welfare destroying what can be done?
• Many labor standards issues focus on child labor. Some
alternative proposals to enforce better labor standards include:
• Compensation programs focused on
• Reducing poverty alleviation
• Provide some level of compensation to families that use child labor to supplement their
income
• Improving educational access
• This follows along with the first, however, this aims to ensure children have a better
means to get to school and stay in school
• See Muralidharan and Prakash (2017) for a program developed to aid children in getting
education.
Labor Standards
• Other issues arise as well…
• Providing union rights raises wages in the export sector but lowers
wages in other areas. (We would have to look at the net effect)
• Workers wages in developed countries (particularly large economies)
are not as likely to see downward pressure as many developing
countries don’t have a large enough share in export markets.
Trade and the Environment: Transboundary and
Non-Transboundary Effects
• There is considerable overlap in the debates on labor
and environmental standards
• Proponents of including environmental standards in trade
agreements believe sanctions should be used to enforce such
standards
• Spillovers from production are not often weighed in market
transactions, and countries that insist on lax environmental
standards to enhance other types of welfare harm other
nations
Trade and the Environment: Transboundary and Non-
Transboundary Effects
• Critics of sanctions concerned about:
• ineffectiveness of sanctions,
• the hazy borderline between protectionism and environmental
concerns,
• the lack of international definitions of environmental standards, and
• the potential for trade wars
• When it comes to trade policy, the distinction between
transboundary and non-transboundary environmental impacts is
an important one.
Trade and the Environment: Trade and Environmental
Impacts That Do Not Cross Borders
Proponents of trade barriers to enforce environmental standards base their analysis
on two types of claims:

1. Without adequate enforcement of standards, countries engage in an

environmental race to the bottom to boost industrial competitiveness
• Firms are faced with higher cost with tougher standards
• The MSC > MPC reducing output and raising the price

2. Lack of enforcement of standards in developing countries induce dirty rich

country industries to “export pollution” and thus create pollution havens
Environmental Race to the Bottom
• Is there an environmental race to the bottom?
• Although high environmental standards reduce industrial
competitiveness, they raise national well-being and lead to
economically optimal levels of production, making the nation
better off
• Most countries have adopted tougher environmental standards
over time. In order for race to the bottom to occur, sectional
interests would have to be politically powerful
Pollution Havens
• Do pollution havens attract foreign firms?
• Some dirty industries did move in the 1970s from high-income countries
to low-income ones
• However, there is no evidence that any country competes successfully for
investment on the basis of lax environmental standards, nor does it help
create a comparative advantage for the high-income country
• The evidence is somewhat mixed. For example, see (Xing and Kolstad, 2002).
• As a result, individual firms cannot move to escape the environmental
regulations of a high-standards country
• Another issue to consider, is factor endowments.
• If capital is immobile, then pollution havens won’t arise.
Trade and Transboundary Environmental
Problems
Transboundary environmental impacts happen when one
country’s pollution spills over into a second country
•For example, a shared watershed is polluted by an upstream
user, or industrial production in one country creates acid rain in
another country (e.g. the U.S.-Mexico border)
•Transboundary environmental impacts can occur as the result of
similar activities in many countries, leading to global impacts
such as global warming and ozone depletion.
Alternatives to Trade Measures
• Currently, it is impossible to predict how, or even if, trade
rules might eventually change to accommodate labor and
environmental standards
• As long as there are large income gaps between rich and poor
countries, it seems unlikely that differences in standards will
disappear
• Big question – How to enjoy the benefits from world trade
while resolving the conflicts over standards?
Alternatives to Trade Measures
• There are three ways of enforcing sanctions without
hurting international trade
• Labels for Exports
• Requiring home country standards
• Increasing international negotiations

• Let’s examine the usefulness of each of these in

detail…
Labels for Exports
• Labelling: A certification process producing a label attached on an
exported good to indicate to consumers that the good was produced
under humane and environmentally sound conditions
• The method is already in place in some instances: Cambodian
textile exports to the U.S., coffee imports, dolphin safe tuna, etc.
• Problems:
(1) Many countries resist labelling as an infringement of their sovereignty
and
(2) Consumers must be convinced the label provides accurate information
Requiring Home Country Standards
• Requiring home country standards: High-standard
countries can require their firms to follow home
country standards when operating abroad
• Pros: impedes the race to the bottom; avoids the problem
of high-income countries’ dictating standards
• Cons: addresses only firms of high-standard countries;
low-country producers are not affected; a high-standard
country firm may outsource production to a low-standard
country producer
Increasing International Negotiations
• Increasing international negotiations: Using either
existing international organizations or creating new
agreements and organizations
• ILO could be given a greater role and start, for example,
publicizing lack of compliance with labor standard
• The WTO is not an environmental organization; however, it
allows international environmental agreements to develop
their own enforcement mechanism