The Global Debate: The Linkage Between Labour Standards and International Trade

The proponents of a link between labour standards and international trade give two main reasons why they think such a link is warranted at the multilateral level. First, they argue that countries that do not comply with the CLS tend to gain competitive advantage over countries that adhere to the CLS, and that, in turn, could result in a “race to the bottom” in labour standards worldwide. What the proponents imply by this line of reasoning is that countries, by not observing the CLS, are able to reduce the cost of doing business, which may enhance their competitiveness. Second, other proponents tend to link the noncompliance of CLS to the rights of workers. These proponents contend that the fundamental principles of workers’ rights should be adhered to by all countries engaged in international trade, and the inclusion of a social clause in trade agreements will ultimately benefit workers both in developed and developing countries. They further argue that the imposition of trade sanctions on countries that do not respect the CLS should not be seen negatively but should rather be viewed in a positive light as it could influence those countries to extend the fundamental rights of workers to their citizens.

The critics of a formal link between labour standards and international trade, on the other hand, argue that the two issues are unrelated and should be kept separate. These critics argue that the true reason why some developed countries are pushing for a linkage between these two issues is the desire to protect their traditional ailing industries in sectors such as steel, textiles, and clothing, in which developing countries tend to have comparative advantage and are challenging the dominance of developed countries. In other words, developing countries see attempts to link trade and labour standards as nothing more than a protectionist measure to safeguard developed countries’ declining industries and preserve jobs that otherwise might be lost, and the differences between labour standards in various countries should be seen as a source of comparative advantage in line with traditional economic thinking.

The critics point out that if developed countries really wanted to improve the living conditions for workers in the developing world, they should abolish all the barriers that they impose on developing countries’ exports, especially on agricultural, textile, and clothing products, and that the rampant use of anti-dumping and safeguard measures should be restrained. They further argue that the solution to the problem lies not in restricting trade but in encouraging trade. The point is made that as developing countries derive more income from trade, they will improve the working conditions of their employees. They also point out that the proponents of a formal link between trade and labour standards have lost sight of the fact that it is poverty that gives rise to practices such as child labour and that poverty in developing countries could only be effectively tackled through a number of measures, including trade opportunities for developing countries.⁴

For example, could the argument be made that forced labour is undoubtedly a good example of a trade-labour linkage? To start with, forced labour is seen as illegitimate, as evidenced by the universal condemnation of slavery as a fundamental norm of international law having the status of jus cogen.¹⁶ In addition, forced labour lowers production costs since workers would be paid a lower wage, which affects the total cost of production. With regard to child labour, this definitely affects costs of production; however, there appears to be varying views in the way different cultures consider child labour and the various ways in which it is practiced.¹⁷

The elimination of forced labour, child labour, and discrimination is vital to ensure the dignity of people and also overcome the vicious cycle of poverty. Children who are made to work suffer from lack of education, with negative impacts on their health and overall development. These eventually create economic costs for countries that do not make the necessary effort to stamp out the violation of these rights.

Another core standard that could be considered trade related is that of union rights (freedom of association and the right to collective bargaining). The asymmetrical relationship between employers and employees, to some extent, affects production costs. The nature of the relationship is such that the employee cannot bargain on equal basis with the employer for wages, health and occupational hazard conditions, and hours of employment. In addition to the economic arguments, the issue of core standards calls into question the moral and legal values of their enforcement.¹⁸

Freedom of association and the effective recognition of the right to collective bargaining are at the heart of the ILO’s FPRW, and particular attention has, over the decades, been paid to these enabling rights. The ILO considers these rights as critical in enabling employers and workers to lay down the ground rules for a harmonious relationship and reconciling their differences. Freedom of association helps to secure the effectiveness of labour laws and leads to effective social dialogue. This could make a meaningful contribution to the development of economic and social policies in the areas of employment and social protection.

The proponents of the inclusion of labour standard provisions in trade agreements point to the introduction of new areas, including trade in services and protection of intellectual property rights, under the ambit of WTO as setting a precedent for the protection of labour standards in trade agreements. The argument is that intellectual property rights and worker rights are equally important and that both deserve to be protected.¹⁹

The proponents further contend that if the WTO is the appropriate venue for setting legally binding standards protecting intellectual property rights, then it and other trade agreements are the proper venues for similarly protecting labour rights. They see access to the dispute settlement processes typically included in trade agreements as a distinct advantage in ensuring that labour standards are enforced. According to Maskus (2000), the reason why the Trade-Related Intellectual Property Rights Agreement (TRIPS) became part of the WTO whilst other forms of business regulation did not is simply because intellectual property rights (IPRs) are integral to the trading system.²⁰

During the Uruguay Round negotiations concerning the issue of whether intellectual property rights (IPRs) should be included in the WTO, Members, in agreeing to the inclusion, did not provide a criteria in their determination that IPRs are trade related. However, a set of criteria has been developed by Maskus, which he has applied to several standards, including intellectual property rights and labour. The criteria developed are the following: (a) determine how trade related the proposed standards are, (b) coordinate failures of countries to enforce collective interest through stronger standards, (c) determine the importance of international market or policy failures (i.e., an externality) the standards may address, and (d) consider the ability of the dispute settlement mechanism to deal with standards effectively.²¹

In relation to IPRs, Maskus’ study found that IPRs (1) are strongly trade related; (2) by including IPRs in trade agreements, it will allow for stronger, more uniform standards, and (3) standards varying from country to country introduce the possibility of policy- or market-induced failure. The study established that both trade agreements and IPRs deal with similar commercial activities. In concluding, Maskus stated that the WTO dispute settlement process will be effective in dealing with intellectual property rights violations.²²

On the other hand, the study stated that violations of core labour standards are not clearly trade related. The study further stated that the domestic sectors of the economy are the ones most likely to violate core labour standards and that the export sector is the sector that normally adheres to the core labour standards. In this respect, setting up standards that have the force of trade sanctions would, in most cases, penalise the most compliant sector. Moreover, if the most numerous violations are in the non-traded sectors, it is difficult to argue that trade-based labour standards are likely to develop stronger, more uniform standards to support the trading system.²³

Furthermore, this study maintains that incorporation of labour standards in a trade agreement may actually cause a policy failure rather than correct existing market failures. For instance, as a result of trade sanctions, employment may fall in the impacted country’s export sector and workers may be forced to seek employment in less-compliant sectors.²⁴

Lastly, the study found that trade agreements are not well suited to deal with “moral” issues such as labour rights. Since trade agreements are typically structured to deal with quantifiable, commercial transactions, they may not be well equipped to deal with the judgments necessary in enforcing core labour standards. Furthermore, because the WTO takes decisions by consensus, resistance by developing countries to addressing core labour standards within the WTO could make it impossible to put core labour standards on the WTO agenda.²⁵

Maskus’ analyses touches on a point that makes it difficult to fully incorporate labour issues in the WTO agenda—how to accommodate social issues within a system created to deal with commercial damages. Whereas the argument could be made for IPRs, the same, in my view, cannot be made for an issue with social connotations.

The arguments advanced above goes to the very heart of the question that Charnovitz raises as to: “How broad should a treaty be?”²⁶ Charnovitz’s question is very pertinent to the discussion of the issue of whether labour standards should be put on the same level as IPRs in the debate. In a globalised work full of interlinkages and the impact of policies in one country and its attendant effects on others, the framework proposed by Charnovitz for evaluating policy linkage deserves great attention. The four reasons that he advances within his framework—(1) to enhance policy effectiveness, (2) to rebalance policies, (3) to build coalitions, and (4) to gain economies of scale—in my opinion help respond to the arguments that labour standards are not to be included in trade negotiations.²⁷

Rodrik (1997) also argues that importing items from a country with lower standards than those prevailing in the United States is a little different morally from producing the product in the United States with the same lower standards. He argues that the only difference between using child labour to produce footwear in a Honduran sweatshop versus producing the footwear with the same sweatshop process in the United States is that the production in the United States is against the law. He goes on to draw a distinction between a country having a comparative advantage in producing an item based on differences in resource endowments and a comparative advantage based on lower standards.²⁸

Additionally, a group of 99 intellectuals and leaders of nongovernmental organisations, in an open letter, presented a developing country point of view. They asserted that arguments for including labour standards in trade agreements are made by one of two groups: politically powerful lobbying groups that are protectionist and morally driven human rights and other groups. They further contend that the morally driven groups are misguided because their actions may harm the developing country labourers they are trying to help by forcing them out of their jobs without providing a viable alternative.²⁹

The authors concluded that the end result of trade-based labour standards, whether protectionist or morally motivated, is protecting developed country firms from developing country competition. Many economists agree and also point out that in addition to the possible adverse impact on developing country workers, consumers in developed countries may have a more limited choice of goods and face higher prices for the goods available.³⁰

Whilst the arguments of the “no-linkage” school of thought may hold in the short term, the linkage, if effectively achieved, has great benefits in the long term for the every worker in the developing countries and every consumer in the developed world they claim should be protected. Charnovitz’s first reason why governments might want to link issues (see above) in broadening a treaty of international organisations, in this case the WTO and also the ILO, indicates how policy coordination enhances the effectiveness of policies, especially in the case of the labour standards–trade relationship.³¹

Charnovitz cites two quotations from the economist John Bell Condliffe, which are worth restating here. Condliffe stated that “It is inconceivable that international economic problems can be effectively handled unless various aspects – migration, labor, production, trade, finance, investment, and money – are considered in relation to one another”.³² Basing his further analysis on the quote above, Charnovitz examined the linkage between trade and IPR, competition policy and telecommunications, and further added that “[O]ther international organizations, besides the WTO, can seek to improve trade policy”.³³ Whereas the link between trade and IPR is considered related in commercial terms and the WTO dispute mechanism can deal effectively with IPR issues, in the same way, labour as a factor of production, even if it is stated that labour is not a commodity,³⁴ is affected by trade relations and should also enjoy the benefits of cooperation at the international level.

In this respect, the mutual assistance provided by the WTO and ILO in achieving each organisation’s agenda could provide one of the effective responses during economic crisis. From the angle of the WTO, better enforcement of the CLS is by fully integrating developing countries into the multilateral trading system. In the case of the ILO, its role is the creation of favourable conditions for the effective functioning of the tripartite system, in particular freedom of association, in addressing country-specific and global issues in a coherent manner to “enhance policy effectiveness”. In this respect, their effective cooperation is essential in addressing the CLS issue.

The second quote from Condliffe responds well to the claim that the WTO is not well positioned to take on the so-called no trade issues, and given the cross-cutting nature of issues, Condliffe’s statement is germane to the labour standards and trade issue. Condliffe further stated:

This does not, indeed mean that a single institution can deal effectively with such a wide range of problems on the international, any more than on the national, plane, but it does imply the necessity of close liaison between such institutions as may be handling various aspects of a related problem.³⁵

Charnovitz gives an example of how the IMF and the World Bank collaborate in policy interventions.³⁶ Writing in 1992, Charnovitz recommended that the GATT and the ILO work “to develop a voluntary code of fair labour practices for goods in international trade”.³⁷ Also, “the GATT Council should develop procedures for soliciting the input of nongovernmental organisations (e.g., business, labour, environment etc.) on an on-going basis”.³⁸ He pointed out that the very countries that criticise unilateral action on labour issues are the very ones that are blocking the establishment of a GATT group on the rights of workers. He rightly predicted that the naysayers will not have it both ways.

The events starting in 1994 with the inclusion of labour standards in the NAFTA side agreement on labour have vindicated Charnovitz’s claim that unilateral action by the United States would continue in the absence of international rules on the labour standards and trade linkage. With the increasing interdependence of the world economy and the slowly growing realisation that employment policy has an international dimension,³⁹ the labour standards and trade interlinkages issue would not only be confined to the free trade agreements signed between the United States, Europe, and other developing countries, but it could have been foreseen that it would expand also to agreements entered into between developing countries (so-called South–South trade relations).⁴⁰

The legal issues that these developments raise are a reflection of the situation in many countries. This, according to Friedman (1996), is because “[l]egal systems do not float in some cultural void, free of space and time and social context …” Inherent in this legal debate is how workers’ rights are defined under international human rights law. According to Leary (1996), “[w]orkers’ rights are human rights …”⁴³ And as can be inferred from Friedman’s view above, in this age of globalisation, when the impact of trade appears to have a direct or indirect bearing on workers, it brings the issue of workers’ rights to the trade bargaining and policy debates table. This makes the issue one that meets at the crossroads of trade law, human rights law, labour law, and public policy.

The two views raised above also indicate the role that labour rights or labour standards as human rights should play.⁴⁴ However, it is from this perspective that jurists tend to enter the debate on the social dimension of globalisation. In a world in which globalisation has transformed and provided a new perspective of work, Supiot argues that the issue is not to carry out an analysis of the transformation of work in line with the existing legal categories but to conduct a legal analysis of the transformations of work. He further states that “[l]aw can only mirror what societies believe those relationships ought to be”.⁴⁵ Supiot further explains the role of law as playing a central role in shaping the “concept of work”.⁴⁶ The idea of work with the value and dignity that it is accorded today, and which is a major theme at the ILO with its decent work agenda, has legal underpinnings.

In this line of thought, the first Director General of the ILO writing in 1921 made an observation, which is relevant to the present debate. He stated:

[j]urists have long ceased to confine themselves to studying the mechanical operation of institutions and laws. They seek to discover in each succeeding epoch the social reality which these embody.⁴⁷

Thomas elaborated on this point by stating that very often when an institution is created with modest and limited jurisdiction, the requirements of the day could lead to an increase in its authority. How true the words of Thomas ring today. At a time when the confidence in the governance system, in particular governments and businesses, are at its lowest level due to the economic policies of the last three decades, in which a push for an increased gross domestic product (GDP) growth and the so-called trickle-down effect has not lived up to expectations, the preamble of the ILO Constitution rings true more today than at its inception.⁴⁸

The inability of countries to address the job crisis not only has led to social discontent in the countries most affected by the crisis but is also having a ripple effect on the global economy. Rather than improving the lot of many people, the policies of the last three decades have led to continued growth of inequality. In the midst of the recent financial and job losses, the history of the ILO has shown how its call for putting labour at the centre of development has stood the test of times, especially more now than when it was established in 1919.

During a period that witnessed phenomenal growth of many countries, the financial crisis that started in the United States of America in 2007 has affected the global economy. In the recent report of the ILO Director General to the International Labour Conference, it was stated:

In this context, it is very clear that the Decent Work Agenda and a working ILO tripartism bring the possibility of better, more inclusive growth, of more peace, more equity and rights, less poverty and more stable development in economies, enterprises, workplaces and, ultimately, in society. ILO policies contribute to a world with fewer tensions, greater fairness and strengthened security. These are compelling contemporary echoes of the most striking passages of the ILO’s founding constitutional texts. With our values and policies, we are on the right side of history.⁴⁹

Why do the values and policies of the ILO make the organisation confident that it is on the right side of history? The status given to labour in the economic paradigm of the last decades has relegated labour to the position second to capital. The failure to consider labour as pivotal to the establishment of a just order⁵⁰ goes contrary to the very principles and ideals that led to the establishment of the ILO.

The call for a new model is very critical to establishing the universal and lasting peace during a period of crisis. But like the ideal of the founding fathers of the ILO, lasting peace can only be built on social justice.⁵¹ The call by the ILO for a new era of social justice with its policy prescriptions provides a path to follow in meeting the aspirations of people in both the developed and developing worlds.

The whole idea is that there should be a new pattern of growth, a different paradigm that puts employment as a target of economic policies and not only macroeconomic stability. There is therefore the need for a more pro-employment macroeconomic framework, sectoral strategies, and industrial policies that help create jobs and high productivity.

Whilst trade regulation is mostly considered only from an economic perspective, there are actions taken by governments as Contracting Parties to the multilateral trade agreement and as signatories to bilateral trade agreements and also unilateral trade measures that have social connotations to the full exercise of rights at work.⁵² Qureshi has elaborated on the concept of what he terms as ‘non-trade’ actions of trade regulation from different viewpoints:

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  Considerations which are of non-trade character, may in international trade be defined as those state actions or omissions which impact or may impact the flow of trade, but which are ‘external’ to it. They are external in the sense that they comprise non-economic, non-trade state actions or omissions which may affect other trading partners (whether state or individual), or impact the flow of international trade. Whereas the distinction between trade and trade-related matters is a strained one, the distinction between them and non-trade measures is prima facie apparent. Non-trade considerations partake of political, moral, cultural, ideological, environmental and technical character. More specifically, examples of non-trade considerations include human rights⁵³ and national security.
  
  
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  At a theoretical level, one must note that the clarity in distinguishing between trade and non-trade measures holds only at a superficial level as, ultimately, all economic activity is functional serving a particular end. The internal dynamics of economic processes are determined by the expectations that accompany them. Thus, the expectation of a certain degree of technical safety, health and environmental requirements may be rendered as integral to economic processes. Furthermore, some trade or trade-related measures or omissions may contain elements of both non-trade and trade characteristics. In such case, they may be found in either category. The element determining the characterization will depend on the persuasiveness of the case as well as the perceiver’s standpoint.⁵⁴

Qureshi’s views indicate how WTO Members use trade regulation as a policy tool to achieve not only economic ends but also social factors as a means of changing the conditions governing the international economic order with respect to goods and services.

Although the interaction between trade policy and social policy appears to be relatively new, the interlinkage is much deeper than initially thought. It is becoming widely acknowledged that globalisation, with its emphasis on economic growth and development, has social dimensions that need to be addressed. The activities of anti-globalisation movements (which are noted for demonstrating during the WTO Ministerial Conferences, the G8 meetings, and the annual meetings of the IMF and the World Bank) have raised public awareness of the social implications of the policies pursued by national governments and international organisations.

Globalisation of the world economy has also raised awareness that the chances available to people and the nature of the welfare states are formed in some ways by the policies formulated by international institutions, agencies, and forums. That these institutions and the social policies they advocate are important and have generated widespread attention is the new field of enquiry that has sprung up—‘global social policy’. The activities of NGOs and other social movements have brought the attention of the world community to the role these organisations play in shaping economic and social developments globally. Further to this is how a number of financial crises that have occurred in the last decade have highlighted the extent to which national economies and the global economy are so intertwined. These crises, and especially the recent financial crisis, have raised to greater levels the role of the policies of institutions such as the World Bank and the IMF and how these policies have contributed both to these crises and, subsequently, in easing their social impacts.

This explains the apparent strong link between the economic role that international economic organisations such as the WTO, for example, plays and the labour legislation role that the ILO plays. The world has changed; globalisation has brought changes and transformed the world economy. The issue of the link between labour legislation and the economic situation that was raised during the founding of the ILO, which had previously not been seriously considered, is now brought to the fore. The issue of core labour standards has helped catapult that. There is an increasing talk that flexibility is the key to economic development, and this has made many countries adopt policies on deregulation of the labour market.

The questions that this raises is, given the challenge of globalisation of the world markets and the liberalisation of domestic markets, can the same degree of social protection still be provided as before? Or must labour regulation be changed in order to stimulate competitiveness and create jobs? These questions raise the issue of the economic/social divide. The work of the WTO and that of the ILO seem to converge at the crossroads of economic development and social equity. The significance of international labour law institutions on the economic/social divide will no doubt be given attention anytime the issue of core labour standards is raised at the international level.

The many arguments put forward by the proponents of the inclusion of a social clause in Article XX of the GATT have so far based their arguments on the economic implications of lack of adherence to labour standards. With the possible exception of child labour, hardly do they comment on the social welfare implications of their arguments on the countries to be targeted. The failure to treat economic and social efficiency as equal partners is a major issue, and unless this subject is addressed, the issue of labour standards and trade cannot be adequately tackled.

The confusion stems more from trying to achieve economic efficiency in the absence of social efficiency. What many policymakers tend to forget is that the two are inseparable. There is much discussion about economic processes but little on social processes. Little can be achieved economically if the social ills of economic policies are not adequately addressed. The ILO, in its Declaration, has stated that even though economic growth is a prerequisite for social progress, economic growth alone is not in itself enough to guarantee social progress. To achieve social progress would entail laying down a number of social ground rules founded on common values. This would enable all those involved in generating the economic growth to have their fair share of the wealth. The aim of the Declaration captures the very essence of the economic-social rights debate: “[T]o reconcile the desire to stimulate national efforts to ensure that social progress goes hand in hand with economic progress and the need to respect the diversity of circumstances, possibilities and preferences of individual countries.”⁵⁷

Many developing countries recognise the need to comply with the ILO labour standards, especially with respect to child labour. However, the existence of child labour and other forms of labour exploitation is seen as the unavoidable side effect of underdevelopment and poverty and no need for government intervention. Even though it is evident that poverty results in children being sent out to work due to sheer economic necessity, the role of national governments in developing social protection measures alongside economic policies goes a long way in addressing the social implications of economic growth.

This is one area where international cooperation and action could contribute to the efforts of national governments in bridging the economic and social development gap. The continued cooperation of the WTO, ILO, and other international organisations involved in shaping economic and social policies will help address this serious issue. The examples of many countries that have been able to raise the living standards of their citizens and, in the process, reduce poverty show that government spending and regulation could, when properly designed, provide the thrust for economic growth and that markets and a combination of economic and social regulations could help promote social justice. Based on this, it is no wonder that given the nature of the issue, it clearly reveals how the imposition of sanctions advocated by some proponents is bound to have the opposite of the desired effect.

The experience of Bangladesh in 1993 is a case in point. For example, the threat of U.S. sanctions under the 1992 Child Labour Deterrence Act led the terrified owners of garment factories in Dhaka to dismiss all children below the age of 16. Anecdotal evidence suggests that many of these children met a fate worse than in the factories: ending up in workshops and factories not producing for export or as prostitutes and street vendors.⁵⁸ The emphasis on sanctions should not only be in terms of trade and the after-effects considered as social and left to governments of the targeted countries to deal with, but rather the so-called social effects should be considered in the light of whether sanctions are appropriate in correcting what may be regarded as a “social ill”.

The Asian financial crisis has shown that economic efficiency and social efficiency are bedfellows. For 30 years, the region enjoyed economic prosperity but paid little attention to social efficiency. When the crisis started in Thailand in July 1997, the IMF failed to take into account the social implications of its structural adjustment policies, which led to social upheavals. The recent financial crisis has also drawn the attention of policymakers to the importance of linking economic development to social policy.

These crises illustrate the degree to which the economies of nations are interconnected through trade, finance, and the social consequences of the crises at the national level. The world learnt a lesson during the Asian financial crisis that “social needs are not the frosting on the cake, but rather the raison d’être of economic processes”.⁵⁹ The recent crisis would hopefully continue the debate in which forces at the local, national, and global levels intersect in shaping a global social policy agenda and lead to greater engagement of all parties in finding ways of increasing the social welfare of everyone. One major way forward is the use of trade instruments in addressing the issue of compliance with the core labour standards. The example of the regional trade agreements could provide the stepping stone to reach an agreement at the multilateral level in recognising that labour standards, globalisation, and economic development are mutually reinforcing.

The labour provisions in RTAs, in linking social development and economic development, have created a model that could be applied at the international level. Such a model is important, especially when we consider the point that was made by the ILO Director General in 1999 in the run-up to the WTO Seattle Ministerial Conference (USA). The Director General argued that to promote open trade, the world’s poor should not be overlooked. The problem in his view was that economic and social developments have not been treated as equal partners. He further stated that “Economic efficiency and social efficiency are inseparable. Social development cannot be safely dispensed with until such time as economic development has been achieved.”⁶⁰

The approach in the RTAs adds credence to the view that whereas enhanced trade seeks to promote economic development, adherence of CLS seeks to enhance social development, and it is by striking a careful balance between the two, such that one is not put above the other, that it would be possible for workers to realise the benefits of any trade agreement. What this demonstrates is the need for a framework that includes the CLS as part of global governance and global development.⁶¹

Globalisation is one of the most talked about concepts of our age. It has evoked emotions and debates across a wide spectrum of the world’s populace, from those in power to the common person on the street. For some, it is a force for good; for others, it is to be blamed for everything that has gone wrong with the established order. For example, former President Jacques Chirac of France is reported to have stated that globalisation has not made life better for those most in need.⁶³ For many, globalisation has been pushed through without adequately considering the social dimension element. It appears rather to them that only the economic aspect of globalisation is on the minds of policymakers. But what exactly is globalisation?

Globalisation as a process appears to be surrounded by confusion as to what it really means. The literature provides a plethora of definitions, but the one definition that seems to expand on the other definitions is the one put forward by the former president of the Ford Foundation, Susan Berresford:

The term [globalization] reflects a more comprehensive level of interaction than has occurred in the past, suggesting something different from the word ‘international.’ It implies a diminishing importance of national borders and the strengthening of identities that stretch beyond those rooted in a particular region or country.⁶⁴

According to Mittelman, this definition captures key features of globalisation, cross-border flows, identities, and social relations, but it is ambiguous about the nature of social relations and silent about hierarchies of power.⁶⁵ Globalisation is not a new phenomenon; its origin lies many centuries back, when people from different parts of the world came into contact through conquests, trade, and migration; the world started becoming a global village. Today, the world is much smaller than it was at the onset of globalisation. The present form of globalisation has benefited many. It has promoted freer trade, opened societies, encouraged freer exchange of ideas and knowledge. It has made innovation, creativity, and entrepreneurship flourish. In some areas, for example in Southeast Asia, economic growth has benefited millions of people by lifting them out of poverty.

The spread of information at a fast rate has made the plight of the world’s disadvantaged known globally, as for example the plight of the tsunami victims in Southeast Asia. This has resulted in greater awareness of events in other parts of the world, which has resulted in enhancing social awareness; encouraged the development of social movements; and strengthened the fight for a democratic world. Satellite television coverage of the conditions of the world’s poor and underprivileged has contributed to emergence of a global conscience, making people sensitive to the problems faced by people in other parts of the world. Fighting for the elimination of child labour, environmental degradation, and gender discrimination is unhindered by distance.⁶⁶

Why then has globalisation that has created opportunities and benefited many become a topical issue? Foremost, it might appear as if there is something fundamentally wrong with globalisation. In spite of the tremendous growth in the last decade, there are still differing levels of development. The emphasis has been more on economic globalisation, which has progressed because of technological advancement and most especially through the policies of trade liberalisation. Trade liberalisation has contributed to the rapid economic development of economies such as South Korea, China, and India, just to mention a few. But what have stayed local are the political and social institutions, which should go hand in hand with economic globalisation.

Globalisation of the economy suggests a global economic management, but existing international institutions were designed to coordinate a system of nation-states in which each state was meant to be sovereign over its own domestic economy.⁶⁷ What in effect has happened is that the global economy tends to be moving at a fast rate, with the flows of capital becoming increasingly globalised and mobile, and this has invariably impacted the other factor of production—labour, which has remained static. Capital and labour are the two main primary factors of production that fall within the linkage debate. In real terms, although labour is the most vulnerable in the globalised world, it is capital that is the most protected.

Ensuring global economic stability appears to have taken centre stage, as governments rush to stimulate growth through the use of trade, monetary, and fiscal policies. The International Monetary Fund (IMF), charged with preventing a global depression, wields great power over developing countries, formulating policies (especially urging developing countries in recession to reduce their deficits) for developing countries (which policies the developed worlds, the powers behind the IMF, would not prescribe for themselves),⁶⁸ policies that have been imposed with disastrous effects—high unemployment; poverty, invariably leading to child labour; and the very issues raised by the proponents of a linkage between labour standards and trade.

The ILO, on the other hand, established to ensure social justice for workers, has limited legal powers to enforce compliance with CLS. What in effect is happening is that one international institution imposes policies that sometimes lead to the problems associated with labour standards, and the other international organisation called upon to remedy the situation is given little or no power. We have argued above that in the globalisation process, the emphasis has been more on the economic aspect, making the other aspect—social—suffer as a result of it being subsumed under economic policy, which does not always favour labour policies. We now turn to the impact of globalisation on labour and the labour market.

Globalisation, with its emphasis on the economic aspects, has many other dimensions—economic globalisation of the world economy, rapid growth in world trade, long-term direct foreign investment by multinationals, and cross-border financial flows, including short-term portfolio capital flows. It also involves the migration of people, both legal and illegal. But it is the effect of globalisation on labour, entailing the migration of jobs from developed to developing countries, wage inequality, and, most of all, a race to the bottom in labour standards worldwide, that we would analyse.

Globalisation of the world economy, with the ongoing debate on the implications of freer trade inasmuch as it has been welcomed as a panacea for the integration of the economies of the world, has also brought in its wake a significant level of apprehension over the implications of a globalised world on employment and wages, especially in developed countries. In developing countries today, globalisation is seen as a force for good, which will lift their economies from poverty. The World Economic Forum (WEF) carried out an extensive poll on global public opinion on globalisation with over 18,000 urban respondents in 19 countries. According to the poll, support for globalisation was especially high in developing countries, with 55 % stating that economic globalisation is positive for them and their family. The WEF presented its findings at its annual meeting in New York in 2002.⁶⁹

Bhagwati (2004) calls this change in attitude towards globalisation an “ironic reversal”.⁷⁰ He argues that in the 1950s and 1960s, whilst developed countries were busy liberalising their trade, investments, and capital flows, notable figures in the developing world were strongly opposed. Bhagwati cites, as example, Brazilian sociologist Osvaldo Sunkel, who used the phrase “integration into the international economy leads to disintegration of the national economy”. What has caused the change towards globalisation is the economic success of countries in the Far East, which has become an example for other developing countries to turn more towards globalisation to take advantage of the opportunities offered by international cooperation.⁷¹

Globalisation has set in motion far-reaching transformation of the world economy. As with any other economic transformation, globalisation has generated both losses and gains. Why then is there widespread anxiety in developed countries over the impact of globalisation on the labour market? Lee (1996) states that the losses are clearly visible than the gains since the losses are concentrated among particular groups of workers. The gains, on the other hand, are less noticeable since they are widely diffused. With the continued uncertainty over the future effects of globalisation and the real effects of job losses in developed countries, for example in the United States of America, it is understandable why the issue of the correlation between labour standards and international trade has taken centre stage in recent years.

But it is the perceived fear of labour groups, most notably the labour unions in the USA, that has compounded the fear posed by globalisation. A case in point is the complaint filed by the American Federation of Labor and Congress of Industrial Organisations (AFL-CIO), the largest US labour federation, with the U.S. Trade Representative on 16 March 2004, asking the Bush administration to impose economic sanctions on China.⁷² The AFL-CIO’s 301 trade petition was rejected by the Bush administration first in 2004 and again in 2006.

In the industrialised countries, the view that labour market regulations and the welfare state are key causes of the rise and persistence of unemployment has become increasingly influential. They are seen as reducing the incentives for workers to seek work and for employers to create jobs. This has led to policy change, deregulation of the labour market, and a cutback in the welfare state in search of more flexible labour markets. A clear example is the neoliberal views of the Thatcher/Major governments in the UK from 1979 to 1997, a period that saw the deregulation of the British labour market.

These views have also spread to many developing countries, for example, since the late 1970s in China, the mid-1980s in Latin America, and 1991 in India. There has been a remarkable shift towards market deregulation and economic policy liberalisation with its attendant effects on the labour market. This trend is also seen in structural adjustment programmes prescribed by the World Bank for developing and least developing countries.

There is the fear in the developed world that increased competition from developing countries in the form of imports from countries with a lower cost of production will lead to loss of manufacturing jobs, especially in labour-intensive sectors. The recent rise in unemployment in developed countries, for example in the Eurozone as a whole, has advanced the view that has developed from the factor price equalisation theorem (FPE), also known as Heckscher–Ohlin theorem. According to this theorem, when a developed country imports labour-intensive goods from a low-wage country, the relative price of labour-intensive goods and the relative wage of low-skilled workers would fall.

We could illustrate by comparing two nations A and B. Nation A is a low-wage country, which specialises in labour-intensive goods, and Nation B is a high-wage country specialising in capital-intensive goods. If Nation B imports more of the labour-intensive goods from Nation A, the relative price of the labour-intensive goods in Nation B falls, which, in turn, causes a fall in the demand for labour relative to the demand for capital. Workers in the labour-intensive sector in Nation B are forced to accept a downward adjustment in their wages; otherwise, there would be a rise in unemployment.⁷⁷

The FPE theorem is based on assumptions that do not always hold in the real-world situation, but those assumptions are not analysed here. It is this fear among low-skilled workers that has caused labour unions in developed countries to generally favour trade restrictions. Even though the factor price equalisation theory states that international trade causes real wages and real income of labour to fall in capital-intensive countries such as the United States, would it not be in the interest of the U.S. to restrict trade? The answer is in the negative. This is because the loss that trade causes to labour is less that the gain received by owners of capital. So if there is an appropriate redistribution policy of taxes on owners of capital and subsidies to labour, both factors of production would benefit from international trade. The argument here is that it is not the perceived threat of “cheap” imports from low-wage countries that could cause the lowering of wages in developed countries.

The case for complying with internationally established labour standards also rests, in part, on the view that trade with low-wage countries has slowed the growth in, or even lowered, the wages of unskilled workers in industrialised countries over the past three decades. To the extent that low wages in developing countries are the result of poorly protected core labour rights, trade based on low wages is seen to be illegitimate. Bound and Johnson (1992) conducted studies to determine the source of the wage decline.⁷⁸ They decomposed the wage change for each skill category between technological efficiency, industry demand, factor supply, and allocation of employment across industries.

They argued whether the wage shifts attributed to technological change might not, in fact, be due to the influence of international factors. Others also argue that skill-biased technological change would drive up the demand for skill within each sector.⁷⁹ However, if the demand for skill is driven by international trade or defence spending, we should observe a shift in demand for skill between sectors of the economy. The evidence from the studies appears to support the view that technological change rather than international trade is the driving force behind the increased demand for non-production workers. In fact, the role of trade appears to be close to zero since most of the between sector shifts in employment were due to defence spending. Similar results were found for other countries other than the United States.⁸⁰

The concern regarding the impact of trade on labour in industrialised countries seems to be theoretically supported by the Stolper–Samuelson theorem, which holds that when trade is conducted with an unskilled-labour-abundant country, the price of unskilled-labour-intensive goods will decline domestically. Factors of production leave the unskilled-labour-intensive sector and are re-employed in the skilled-labour-intensive sectors. As production of skilled-labour-intensive goods rises, an excess demand for skilled labour emerges. The labour market resolves the imbalance by raising the relative wage paid to skilled workers, as compared to unskilled workers. ‘Firms’ economy-wide response to the change in relative factor prices is by adopting a more unskilled-labour-intensive technique of production. Therefore, the tell-tale sign that trade with unskilled-labour-abundant countries is lowering domestic wages is that the ratio of skilled to unskilled workers should fall across all industries of the economy.⁸¹

Lawrence and Slaughter (1993)⁸² found that just the opposite occurred in the U.S. economy throughout the 1980s. U.S. manufacturing firms consistently substituted toward skilled labour in spite of its rising cost. Such a pattern of behaviour by firms is only cost minimising if there has been a technological change rendering skilled labour relatively more productive. Similar patterns were witnessed in Japan and Germany. Furthermore, there does not appear to be any decline in the relative price of unskilled-labour-intensive production. Therefore, both links key to the connection between trade and factor prices appear to be missing. However, Brown (2000) argues that the growing wage inequality in developing countries is also instructive. Recent evidence finds increased wage dispersion in countries such as Chile, Columbia, Costa Rica, Mexico, and Uruguay. If Stolper-Samuelson type mechanics were at work, then we should have observed the opposite. Developing countries that export unskilled-labour-intensive goods should experience a convergence in the relative wage of skilled and unskilled workers rather than growing inequality. The fact that relative wages in developing countries follows trends in industrialised countries lends further evidence to the hypothesis that skill-biased technical change is the driving force behind changes in the relative wages rather than international trade.⁸³

It is worthy to note here that the greater portion of manufacturing in developed countries is skill- and innovation-intensive industries (e.g., the development and manufacturing of heavy machinery) that are not under threat of relocation to low-wage countries. These industries in developed countries tend to have a competitive advantage for which factors as quality of the labour force, quality of the infrastructure, access to high technologies, manufacturing and services environment play to these countries’ advantage. Irrespective of the trade with low-income countries that might affect the labour-intensive industries in developed countries, it would be incorrect to conclude that the same experience would befall the capital-intensive industries in the industrialised world.