CIAO DATE: 04/03

Trade and Labor Standards: A Strategy for Developing Countries

Sandra Polaski

January 2003

Carnegie Endowment for International Peace

Executive Summary

A debate has raged between developed and developing country governments for several years over whether or not to establish a global agreement on minimum labor standards that would be enforced at the international level through the World Trade Organization (WTO) or some other mechanism. That debate has become stale and ritualized. In the meantime the world has changed. For developing countries, the environment in which global labor standards must be considered was transformed in 2002.

First, China’ s accession to the WTO means that its exports cannot be blocked arbitrarily from any member country’ s market. With China’ s huge pool of low-wage labor, it can potentially out-compete export industries in virtually all other devel-oping countries. This change will have even greater impact when the Agreement on Textiles and Clothing is phased out at the end of 2004, ending quotas that apportion market access among developing countries. These changes present developing countries with a much more difficult environment in which to plan their own development, growth, and export strategies.

In developed countries, a second set of changes has occurred that favors developing countries. These include passage of new U.S. trade legislation that allows the president to negotiate new bilateral, regional, and global trade agreements, provided that he pursues commitments from U.S. trading partners to effectively enforce internationally recognized labor rights, on a par with other negotiating objectives. In return, trading partners would gain greater access to the huge U.S. market. The European Union (EU) adopted a new Generalized Scheme of Preferences in January 2002 that doubles the tariff reductions available to developing countries on a wide range of products if the EU determines that applicant countries effectively protect basic worker rights.

These developments create a new strategic opportunity for developing countries to link trade liberalization with labor standards to both reap gains and avoid harm. For those countries that already protect their workers’ rights, there are major trade advantages to be gained in the short and medium term. For those that do not, it is time for them to reconsider their position, because labor-unfriendly states will no longer be able to compete with China simply by allowing greater abuse of their workers. At the same time, they risk losing market access advantages to other developing countries that do provide basic protections for their workers.

Beyond these recent changes in the global trading equation, there is an ongoing, underlying reason for all developing countries to protect their workers’ basic rights. Minimum protections for workers—including the right to organize unions and bargain over wages, freedom from discrimination, policies to keep children out of the work force and in school, and acceptable minimum working conditions—are all policies that directly help alleviate poverty and produce more equitable income distribution. Countries that have pursued labor market policies to guarantee worker rights have not only enjoyed greater income equity and faster poverty alleviation but in many cases have grown faster overall than those that have not. Protecting workers’ rights is a winning development strategy in itself, and one that becomes win-win if it also produces greater market access for developing country products, as is now possible with the United States and EU.

If all developing countries were to cooperate on a strategy of constructing a global labor standards regime that they themselves could help to enforce, they would all gain. It would significantly shift the terms of trade in their favor, since the value-added of their exports—and therefore their income—would increase relative to the cost of their imports from high-wage countries. They would continue to enjoy the comparative advantage of low-cost labor compared to more developed countries, but they would not face the beggar-thy-neighbor strategies whereby foot-loose investors, producers, and buyers play one low-wage country off against another, putting continued downward pressure on wages and working conditions.

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