1. Copyright ©2014 Pearson Education, Inc. All rights reserved. 1 Chapter 8 Lecture - International Trade and Labor and Environmental Standards

2. Copyright ©2014 Pearson Education, Inc. All rights reserved. 2 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

3. Copyright ©2014 Pearson Education, Inc. All rights reserved. 3 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 2. Conflict over standards - technical product standards, - health and safety standards, - Labor standards - environmental standards.

4. Copyright ©2014 Pearson Education, Inc. All rights reserved. 4 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 There are no general rules to determine which approach is most efficient or fairest in all cases.

5. Copyright ©2014 Pearson Education, Inc. All rights reserved. 5 Each of the three mechanisms has advantages and disadvantages – Harmonization of technical standards, for example, leads to a larger market and greater efficiency, but may also freeze inferior standards into place 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; or (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 Setting Standards: Harmonization, Mutual Recognition, or Separate

6. Copyright ©2014 Pearson Education, Inc. All rights reserved. 6 Income Levels, Society, and the Environment, 2010

7. Copyright ©2014 Pearson Education, Inc. All rights reserved. 7 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 and environmental activists see fines as inadequate to enforce standards and prohibit the race to the bottom, demanding the use of trade sanctions Why?

8. Copyright ©2014 Pearson Education, Inc. All rights reserved. 8 Defining Labor Standards The International Labor Organization (ILO) proposed five labor standards as basic rights, revised by OECD: – Prohibition of forced labor – Freedom of association – The right to organize and bargain collectively – An end to the exploitation of child labor – Nondiscrimination in employment

9. Copyright ©2014 Pearson Education, Inc. All rights reserved. 9 Defining Labor Standards (cont.) 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

10. Copyright ©2014 Pearson Education, Inc. All rights reserved. 10 Child Labor, 2008 (Millions)

11. Copyright ©2014 Pearson Education, Inc. All rights reserved. 11

12. Copyright ©2014 Pearson Education, Inc. All rights reserved. 12 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? Trade economists think such barriers are ineffective as an enforcement mechanism and only spur protectionism, deadweight losses, and other economic inefficiencies

13. Copyright ©2014 Pearson Education, Inc. All rights reserved. 13 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

14. Copyright ©2014 Pearson Education, Inc. All rights reserved. 14 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

15. Copyright ©2014 Pearson Education, Inc. All rights reserved. 15 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 Labor Standards and Trade

16. Copyright ©2014 Pearson Education, Inc. All rights reserved. 16 Evidence on Low Standards as a Predatory Practice Low standards are generally not an 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 2.There is very little evidence that countries that lower labor standards succeed in obtaining a comparative advantage in a new line of production 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

17. Copyright ©2014 Pearson Education, Inc. All rights reserved. 17 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 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 2.Lack of enforcement of standards in developing countries induce dirty rich country industries to “export pollution” and thus create pollution havens

18. Copyright ©2014 Pearson Education, Inc. All rights reserved. 18 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 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 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 – As a result, individual firms cannot move to escape the environmental regulations of a high-standards country

19. Copyright ©2014 Pearson Education, Inc. All rights reserved. 19 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 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.

20. Copyright ©2014 Pearson Education, Inc. All rights reserved. 20 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? There are three ways of enforcing sanctions without hurting international trade – Labels for Exports – Requiring home country standards – Increasing international negotiations

21. Copyright ©2014 Pearson Education, Inc. All rights reserved. 21 Labels for Exports Labeling: 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, etc. – Problems: (1) Many countries resist labeling as an infringement of their sovereignty and (2) consumers must be convinced the label provides accurate information

22. Copyright ©2014 Pearson Education, Inc. All rights reserved. 22 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

23. Copyright ©2014 Pearson Education, Inc. All rights reserved. 23 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

24. Copyright ©2014 Pearson Education, Inc. All rights reserved. 24 The Issues Environment – Does trade hurt the environment? – Does international competition weaken environmental laws? Labor Standards – Does trade hurt workers? – Does international competition weaken labor standards? Role of the WTO in both – Do WTO rules Limit countries’ abilities to raise standards? Or lead them to reduce standards (“race to the bottom”)? – Should trade policy be used to improve standards? – Should trade policy be used if countries’ standards or policies differ?

25. Copyright ©2014 Pearson Education, Inc. All rights reserved. 25 Environment The problem: Externalities – Externality is: Cost or benefit of an activity that is not borne by the actor. – Examples: Pollution, global warming, destruction of species The issues: – How should externalities be dealt with? – Is doing this made harder or easier by trade and trade policy, or by the WTO?

26. Copyright ©2014 Pearson Education, Inc. All rights reserved. 26 Environment: Examples Pollution along the Mexican border – Caused by production, for export to U.S. – Stimulated by Maquiladoras (Firms given special tariff treatment on processing for U.S. firms) NAFTA U.S. laws struck down by GATT / WTO – Tuna-dolphin case – Shrimp-turtle case Fishing for these… … hurts these US laws banned imports Struck Down by GATT/WTO !

27. Copyright ©2014 Pearson Education, Inc. All rights reserved. 27 Environment: Policies How to deal with a negative externality – Regulate: Prohibit or limit activity – Tax: Make activity more costly By setting tax equal to cost to others, we “internalize” the externality. – Hybrid: Tradable licenses Number of licenses set by regulation Market determines who uses licenses = “cap and trade”

28. Copyright ©2014 Pearson Education, Inc. All rights reserved. 28 Environment: Policies What is the “Optimal” level of a negative externality? – It is not zero! – It is found by equating marginal benefit (of reducing externality) to marginal cost (of reducing externality)

29. Copyright ©2014 Pearson Education, Inc. All rights reserved. 29 Environment: Policies What is the “Optimal” level of a negative externality? $ Zero pollution Optimal pollution Marginal benefit … Marginal cost … … of reducing pollution

30. Copyright ©2014 Pearson Education, Inc. All rights reserved. 30 Environment: More Examples Air pollution Water pollution Acid rain CO 2 emission (global warming) Destruction of rain forest Destruction of species – Endangered (sea turtles) – Favored (dolphin) Overuse of natural resources (over-fishing)

31. Copyright ©2014 Pearson Education, Inc. All rights reserved. 31 Environment: International Problems Cross-border Externalities – Contrast with local externalities Local government has ability and incentive to act – Cross-border: No incentive to incur a local cost in order to limit harm to foreigners. – Need international agreement – Example: CFCs (Chloroflorocarbons) that caused the hole in the ozone. Dealt with by Montreal Protocol (1987)

32. Copyright ©2014 Pearson Education, Inc. All rights reserved. 32 Environment: International Problems Effects on Competitiveness – Pollution tax raises costs of Exporters Import-competitors – If foreign firms are not taxed, this is viewed as unfair – Countries with weak regulations become “pollution havens” But Jones says there is little evidence that this happens – it’s not worth it – “Race to the bottom”: Countries compete by lowering their environmental standards – Solution (?): International agreement for all to tax equally Called “harmonization”

33. Copyright ©2014 Pearson Education, Inc. All rights reserved. 33 Environment: International Problems Differences in Optimal Policy – Optimal policy may depend on a country’s income – Poor countries can’t afford strict regulations – The environment is “income elastic” or a “superior good” – that is, countries demand more of it as their incomes rise. – Thus taxes on local pollution should not be the same

34. Copyright ©2014 Pearson Education, Inc. All rights reserved. 34 Environment: International Problems Example: Internal memo by Larry Summers when at World Bank: http://www.whirledbank.org/ourwords/summers.ht ml [He goes on to give several reasons.] “ ‘Dirty’ Industries: Just between you and me, shouldn’t the World Bank be encouraging MORE migration of the dirty industries to LDCs?”

35. Copyright ©2014 Pearson Education, Inc. All rights reserved. 35 Environment: Role of the WTO Does WTO permit limits on imports for environmental reasons? – Yes, if the imports themselves would do damage inside importing country. – No, for damage done abroad. – Any policy must not discriminate. – May not limit imports based on process by which they were produced.

36. Copyright ©2014 Pearson Education, Inc. All rights reserved. 36 Policy Options Use WTO (These options are not in fact permitted, and they are not good ideas) – Treat environmental violations as trade violations Some environmentalists would like this, because the WTO has “teeth” – Define environmentally harmful production of exported goods as unfair, and permit AD & CVD

37. Copyright ©2014 Pearson Education, Inc. All rights reserved. 37 Policy Options Carbon Tariff – If some but not all countries use carbon tax or cap-and-trade to raise price of carbon to fight global climate change – Then many would advocate a carbon tariff on exports of goods from non-participating countries – Problem: Benefits (to world) of reducing carbon may be the same But the costs (to the country) are not

38. Copyright ©2014 Pearson Education, Inc. All rights reserved. 38 Policy Options Carbon Tariff: Arguments for and against – Krugman is for Failure to use them will cause consumer substitution toward cheaper products made in countries that do not tax or restrict carbon emissions Should be legal under WTO, as “border tax adjustments” used when countries taxation systems differ – China (per Reuters) is against Calls carbon tariffs “protectionist” Predicts use of carbon tariffs would cause trade war Says not legal under WTO

39. Copyright ©2014 Pearson Education, Inc. All rights reserved. 39 Labor Standards What are they? – Formal list of “conventions” (189) and “recommendations” (203) regarding treatment and conditions of labor, established by The ILO = International Labour Organization These include 8 “Fundamental ILO Conventions” – Numbers in parentheses below: numbers of countries that have ratified the conventions (as of 4/16/2015) out of 185 members http://www.ilo.org/public/english/standards/relm/country.htm

40. Copyright ©2014 Pearson Education, Inc. All rights reserved. 40 Labor Standards: Fundamental ILO Conventions 1.Freedom of Association a.Right to Organize (153) b.Right to Collective Bargaining (164) 2.Abolition of Forced Labor a.Forced Labor (177) b.Abolition of Forced Labor (174*) 3.Equality a.Discrimination (172) b.Equal Remuneration (171) 4.Elimination of Child Labor a.Minimum Age (167) b.Worst Forms of Child Labor (179*)

41. Copyright ©2014 Pearson Education, Inc. All rights reserved. 41 Labor Standards: Fundamental ILO Conventions *Fundamental Conventions ratified by U.S.: only – Abolition of Forced Labor – Worst Forms of Child Labor United States – Has not ratified many of the conventions – But… in spite of that, US enforces many labor standards through its trade laws

42. Copyright ©2014 Pearson Education, Inc. All rights reserved. 42 Labor Standards: Found in U.S. Trade Law Freedom of Association Right to Organize and Bargain Collectively Forced Labor Minimum Age for Employment Acceptable Conditions of Work (not “Fundamental” in ILO) – Minimum wage – Hours of work – Safety and Health – Enforcement

43. Copyright ©2014 Pearson Education, Inc. All rights reserved. 43 Labor Standards: Issues Should labor standards be promoted? Of course? Yes, but only if it will help the people involved What if the true purpose is to help workers in rich countries?

44. Copyright ©2014 Pearson Education, Inc. All rights reserved. 44 Labor Standards: Issues Effect of labor standards: Minimum wage D S L w Raises wage But lowers employment And creates unemployment

45. Copyright ©2014 Pearson Education, Inc. All rights reserved. 45 Labor Standards: Issues Effect of labor standards: Legislating Better conditions D S L w Lowers wage And lowers employment D′D′ Raises costs of employers, thus lowers the benefit of hiring labor. Thus shifts demand curve down

46. Copyright ©2014 Pearson Education, Inc. All rights reserved. 46 Labor Standards: Issues Should trade policies be used for labor standards? YES, say – Most Democrats – US unions – Many NGOs (NGO=non-governmental organization) NO, say – Trade economists – Trade lawyers – Developing countries (even some of their labor unions) – MNEs – Most Republicans

47. Copyright ©2014 Pearson Education, Inc. All rights reserved. 47 Labor Standards: Issues Should trade policies be used for labor standards? PRO (assuming standards themselves are good): – Trade is the only tool (ILO is “toothless”) – WTO already does this in TRIPs – It is wrong to benefit from abuse of labor Should trade policies be used for labor standards? CON: – Slippery slope to enforcing harmful labor standards – Trade restrictions make countries poorer, hurting their workers – Trade restrictions cost everybody – Incentive for protectionist claims of low labor standards

48. Copyright ©2014 Pearson Education, Inc. All rights reserved. 48 Labor Standards: Issues What to do when labor standards are violated Example: Fires in garment factories in Bangladesh and Pakistan (see Narlikar) Stop buying the brands who manufactured there? – No. That just destroys the jobs of poor- country garment workers. Hold local governments responsible? – Yes. They need pressure to enforce labor standards.