1. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 8 International Trade and Labor and Environmental Standards

2. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-2 Introduction: Income and Standards Since the end of World War II, many of the formal barriers to trade have been removed Still problems with trade due to differences in: –Laws and regulations –Technical, health and safety, environmental, and labor standards.

3. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-3 Setting Standards Countries can be integrated even with different rules, regulations, and standards –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

4. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-4 Setting Standards No general rule for best way of dealing with the differences in standards Each of the three mechanisms has advantages and disadvantages –Harmonization may be best in technology –Harmonization fails to recognize differences between countries –Mutual recognition can be better in labor or environmental standards

5. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-5 Setting Standards Differences in labor and environmental standards, have generated concerns –(1) Firms will adopt lower standards to remain internationally competitive –(2) Firms will move to countries with lax standards –Engage in a race to the bottom adoption of the lowest level of standards possible in order to attract foreign firms

6. Table 8.1 Income and Population by World Bank Categories, 2007 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-6

7. Table 8.2 Income Levels, Society and the Environment Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-7

8. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-8 Labor Standards Many countries want labor and environmental standards included in future trade agreements NAFTA addresses labor and the environment: each country enforces its own standards or face monetary fines –Many claim this is inadequate –Pushing to include trade sanctions to prevent race to bottom

9. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-9 Defining Labor Standards The International Labor Organization (ILO) proposed five labor standards as basic rights: –Prohibition of forced labor –Freedom of association –Right to organize and bargain collectively –End to exploitation of child labor –Nondiscrimination in employment Most agree with these rights, but a lot of ambiguity in their interpretation

10. Figure 8.1 Child Labor, 5-14 Age Group, 2004 (Millions) Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-10

11. Figure 8.2 Percent of Children Working, 5-14 Age Group Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-11

12. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-12 Labor Standards and Trade Should one country use trade barriers to get another country to change their labor standards? Showed that trade barriers are expensive Trade barriers often inefficient policies for reaching goals

13. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-13 Effectiveness Only large countries can use trade barriers successfully, small countries can’t impact demand Sometimes, trade barriers will make things worse Producers may move to informal economy –Part of economy that is untaxed, unregulated and uninspected –In developing countries this is large portion of economy

14. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-14 Hazy Borderline Special interest groups use labor standards to obtain protection Large fear of developing countries who have lots of unskilled labor Developing countries view use of labor standards as protection for high income countries.

15. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-15 Specific Content and Trade War No agreement on specific content of labor standards, only vague guidelines Trade sanctions to enforce labor standards violates WTO rules and may be at risk for retaliation and trade war.

16. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-16 Evidence on Low Standards as a Predatory Practice Argue that countries will purposely have low labor standards to capture markets Problems with argument: –Low standards can reduce costs, but doesn’t change country’s comparative advantage –Reduction in labor costs usually means higher productive costs elsewhere – hard to attract foreign investment

17. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-17 Evidence on Low Standards as a Predatory Practice Argue that countries will purposely have low labor standards to capture markets Problems with argument: –Low standards can reduce costs, but doesn’t change country’s comparative advantage –Reduction in labor costs usually means higher productive costs elsewhere – hard to attract foreign investment

18. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-18 Trade and the Environment: Transboundary and Non-Transboundary Effects Environmental costs are not reflected in production/consumption Some believe trade sanctions need to be used as enforcement of environmental standards Critics of sanctions have same arguments as with sanctions used to enforce labor standards

19. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-19 Non-Transboundary and Transboundary Effects Arguments by proponents of trade barriers to enforce environmental standards: 1 ) Countries engage in an environmental race to the bottom to boost competitiveness 2) Dirty, rich country industries will “export pollution” in countries with lower standards, creating pollution havens 3) Poor enforcement leads to environmental problems that spill over to another country

20. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-20 Environmental Race to the Bottom High environmental standards reduce competitiveness High standards raise national well-being Most countries’ environmental standards have increased over time

21. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-21 Pollution Havens Pollution havens is where foreign firms face lower compliance standards There are no pollution havens Optimal environmental standards vary by country because of differences in income and preferences

22. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-22 Transboundary Environmental Problems When on country’s pollution spills into another country, it is transboundary Trade sanctions are only successful if used by a large country, or coalition of countries

23. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-23 Alternatives to Trade Measures Efficient policies go to root of problem they are designed to correct Trade measures create production and consumption inefficiencies Root of problem often is in production or consumption of good, not trade –Labels for exports –Requiring home country standards –Increasing international negotiations

24. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-24 Labels for Exports A label is attached on an exported good indicating the good was produced under humane and environmentally sound conditions Problems –Many countries resist labeling as an infringement of their sovereignty –Consumers must be convinced the label provides accurate information

25. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-25 Requiring Home Country Standards High-standard countries require firms to follow home country standards when operating abroad Benefits –Impedes the race to the bottom –avoids the problem of high-income countries’ dictating standards Disadvantages –Addresses only firms of high-standard countries –A high-standard country firm may outsource production to a low-standard country producer

26. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 8-26 Increasing International Negotiations Use either existing international organizations or create new agreements and organizations –ILO could be given a greater role and start, for example, publicizing lack of compliance with labor standards –New agreements and organizations could be created to address environmental issues