International Baccalaureate, Geneva, Switzerland
The linkage between labour standards and international trade, as discussed above, has hinged on the inclusion of a social clause in the WTO Agreement. Whilst the debate is an age-old issue, the United States in particular has made requests for the establishment of a working party on the relationship between the CLS and international trade.1 Whilst the European Union has not been seen to be making much effort as compared to the United States in establishing the linkage, both the EU and the United States have included the respect for the CLS in their Generalised System of Preferences (GSP) schemes. These unilateral efforts have been instituted due to the lack of support at the international level to establish a linkage.
It is interesting to note that social clauses are not new in international trade agreements. For example, Article XX(e) of GATT 1947 contains a clause allowing Member States to take action in case of goods produced with prison labour. This chapter will review the precedents in other international trade agreements and the unilateral efforts of the United States and the EU under their respective GSP schemes. Finally, we will analyse a form of corporate social responsibility (CSR) called international framework agreements (IFAs), which although not popular is gaining attention as having the prospective to help resolve the age-old linkage issue. The IFA is the only form of CSR that would be considered in this chapter because whilst the others have long been tried—the IFAs signed to date are commitments to respect the CLS—it is beginning to emerge as the agreement with potential.
5.2 Social Clauses in International Trade Agreements: Precedents
The issue of a social clause in international trade agreements is not new. The efforts of the international community in achieving compliance and redressing the grievances of workers would be in line with the mandate given to the ILO in its Constitution: the promotion of “Lasting peace through social justice”. A number of international commodity agreements contain a social clause, and this is in contrast to the absence of such a clause in the international trade agreement. GATT 1947, Article XX allows Members to take measures against products produced with prison labour, but this is as far as the social clause goes. However, there appears to be a social dimension in the Preamble to the Agreement Establishing the WTO, which states that the Parties recognise
… that their relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand.
In 1987, the U.S., supported by the EU, made an attempt to reach a consensus on the creation of a GATT working party to review the inclusion of labour standards into the GATT. The proposal made by the U.S. for the terms of reference of the working party was
To examine the possible relationship of internationally recognised labour standards2 to international trade and to the attainment of the objectives of the General Agreement. In the light of this examination, to consider any proposals and suggestions that may be put forward with respect to issues relating to trade and the observance of internationally recognized labour standards; and to report its findings and conclusions to the Council.
In spite of the lack of consensus on the inclusion of a social clause in the multilateral trade agreement, a number of international commodity agreements, on the other hand, contain a social clause.
For instance, Article 45 of the Sixth International Tin Agreement, 1982, provides:
Members declare that, in order to avoid the depression of living standards and the introduction of unfair competitive conditions in world trade, they will seek to ensure fair labour standards in the tin industry.
Article 28 of the International Sugar Agreement, 1987, provides:
Members shall ensure that fair labour standards are maintained in their respective industries and, as far as possible, shall endeavour to improve the living of agricultural and industrial workers in the various branches of sugar production and of growers of sugar cane and sugar beet.
Article 53 of the 1987 International Natural Rubber Agreement provides:
Members declare that they will endeavour to maintain labour standards designed to improve the standards of living of workers in their respective natural rubber sectors.
The International Cocoa Agreement contains a social clause in Article 49 and provides:
Members declare that, in order to raise the levels of living populations and provide full employment, they will endeavour to maintain fair labour standards and working conditions in the various branches of cocoa production in the countries concerned, consistent with their stage of development, as regards both agricultural and industrial workers employed therein.
Even though there is no evidence of the social clauses in the agreements having been enforced, they are indication of precedents of social clauses in international agreements, and a social clause can only be considered fair by both proponents and critics if it stands a chance of being adopted and will function effectively.3
5.3 Unilateral Efforts
According to the GATT–WTO rules, international trade should not be conducted on a discriminatory basis. However, a link between CLS and trade has been established through unilateral, non-reciprocal trade preference schemes. Developed countries have used the Generalised System of Preferences (GSP) to provide reduced or no tariffs for imports from developing countries in return for compliance with CLS. GSP schemes are operated by the United States, Canada, Japan, Norway, Switzerland, Australia, and New Zealand. In the sections below, we analyse the GSP schemes of the United States and the European Union.
A further policy option for trade-linked labour standards is to include relevant clauses in regional, subregional, and bilateral trade and investment agreements. The broader emerging trade law regime in comparison with the multilateral regime is the regional model with consistent references to labour standards. These references are based largely on the 1998 ILO Declaration, and the implementation of the standards relies on domestic arrangements rather than international law. These arrangements generate only limited pressure to adhere to the international standards. Among the most important agreements of this kind is the North American Agreement on Labor Cooperation (NAALC), which is a side agreement to the North American Free Trade Agreement (NAFTA) of 1994, concerning local enforcement of CLS in Mexico, the United States, and Canada; the US–Jordan Free Trade Agreement; US–Singapore; US–Chile; and others. Labour rights provisions are incorporated also in bilateral agreements of the EU. The examples also include agreements with South Africa, Chile, and Mexico.
Failure to establish a link at the multilateral level has led to a linkage through unilateral, non-reciprocal trade preference schemes. The Generalised System of Preferences (GSP) is used in part by developed countries to provide reduced or no tariffs for imports from developing countries that respect the core ILS.
The GATT/WTO rules allow two significant exceptions to the MFN rule. The first concerns the rules under Article XXIV, which permits the creation of FTAs and interim agreements, as discussed in Chap. 6. The other exception allowed under GATT is that developed countries can grant non-reciprocal preferential market access to developing countries under the Generalised System of Preferences (GSP). It is this option of according special market access to developing countries that developed countries have used to impose labour standards on developing countries.
5.3.1 The Enabling Clause
The legal cover of the GSP scheme started with the Decision of the CONTRACTING PARTIES on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, otherwise known as the Enabling Clause. This emerged from the Tokyo Round of Multilateral Trade Negotiations. This clause basically permits developed countries to accord differential and more favourable treatment to developing countries, without according such treatment to other Members of the WTO. In other words, it provides legal cover for, most notably, trade concessions granted to developing countries under the Generalised System of Preferences (GSP) of 25 June 1971, by waiving the provisions of Article I of GATT 1994.
Paragraph 2(c) of the Enabling Clause extends such treatment to regional or global trading arrangements entered into by developing countries for the mutual reduction or elimination of tariffs and non-tariff measures. In other words, agreements entered into between developing and developed countries fall outside the scope of the Enabling Clause.
Before the enactment of the “Enabling Clause”, developing countries invoked Part IV of the General Agreement to enter into such preferential trading arrangements.4 The enactment of the Enabling Clause in November 1979 provided developing countries with a permanent legal basis for the formation of preferential trading arrangements.5
5.4 U.S. Unilateral Efforts
The GSP policy of the United States, which was inaugurated in 1974, was amended in 1984 to allow duty-free access for selected products provided that the exporting country respects internationally recognised worker rights. These include the CLS and “acceptable conditions of work related to wages, hours of work and health and safety”.6
The inclusion of labour standard provisions in U.S. trade-related legislation goes as far back as the 1890s. This started with legislation directed against the importation of goods made with prison labour. However, in the 1930s, the U.S. undertook a number of initiatives to ensure that the goods entering the territory of the U.S. were produced according to U.S. domestic fair labour standards. This included the right to organise and bargain collectively. Table 5.1 provides a brief summary of the relevant legislation from 1890.
U.S. trade and investment legislation with labour standard provisions (1890–1989)
Labour standard provisions
McKinley Tariff Act
It bans importation of goods, wares, articles, and merchandise manufactured by convict labour
Smoot–Hawley Tariff Act (Section 307)
This bans import of goods produced, mined, or manufactured by convict, forced, or indentured labour. The President is authorised to adjust tariffs to equalise differences in cost of production
Trade Act (Section 301)
The Act grants discretionary power to the President to take all appropriate and feasible action to obtain elimination of unfair practises. The United States Trade Representative (USTR) may initiate investigations of foreign labour practices, or act upon complaints from interested persons. Disputes may be referred to disputes resolution under any applicable trade agreement
International Emergency Economic Powers Act
This Act deals with extraordinary threats to US national security, foreign policy, or economy. It prohibits virtually all foreign economic transactions and allows the President to control assets. It was used in 1985 against South Africa for, inter alia, violations of workers’ rights
Caribbean Basin Economic Recovery Act
This provides (under certain conditions) for additional trade preferences to selected Caribbean and Central American countries. One of these conditions is that in granting benefits, the President must take into account the degree to which workers are afforded reasonable workplace conditions and enjoy the right to organise and bargain collectively. There is no ongoing monitoring process or complaints procedure. Ensuing negotiations under the CBI led to significant commitments by several governments such as Honduras, El Salvador, the Dominican Republic, and Haiti
Generalised System of Preferences (renewal)
Following re-authorisation, additional conditions and criteria for preferential treatment were included. It is provided that the President shall not designate any beneficiary country if it has not taken or is not taking steps to afford internationally recognised worker rights to workers in the country (including any designated zone in that country). These rights are defined as (1) right of association, (2) right to organise and bargain collectively, (3) prohibition on the use of any form of forced or compulsory labour, (4) minimum age for the employment of children, (5) acceptable conditions of work with respect to minimum wages, hours, hours of work, and occupational safety and health. An ongoing monitoring process and complaints procedure exist. Under these provisions, GSP status for particular products, sometimes only for particular products, was withdrawn from a number of countries: e.g., Central African Republic, Chile, Liberia, Myanmar, Nicaragua, Paraguay, Romania, and the Sudan. In June 1993, Mauritania was denied beneficiary status, and the position of Thailand and Indonesia was reviewed
Overseas Private Investment Corporation (renewal)
It was amended to require that investment insurance be withheld from projects in countries not taking steps to adopt and implement laws that extend internationally recognised worker rights. There is ongoing monitoring of progress and complaints procedure. Three countries were removed from eligibility in early 1987. The 1986 Anti-Apartheid Act made it incumbent on US firms employing more than 25 persons in South Africa to follow a code of conduct that includes fair labour standards
US participation in the Multilateral Investment and Guarantee Agency of the World Bank
This made US participation conditional on countries affording internationally recognised workers’ rights to their workers
Omnibus Trade and Competitiveness Act
The Act states that the principal negotiating objectives of the US regarding workers’ rights are (1) to promote respect for workers’ rights to GATT articles; (2) to secure a review of the relationship of workers’ rights to GATT articles, objectives, and related instruments with a view to ensuring that the benefits of the trading system are available to all workers; and (3) to adopt as a principle of the GATT that the denial of worker rights should not be a means for a country or its industries to gain competitive advantage in international trade. Impact of this law is as yet difficult to assess
International Development and Finance Act
This Act requires the Export–import Bank to evaluate overseas labour practices before granting assistance
5.4.1 The United States Generalised System of Preferences
The inclusion of labour clauses in FTAs signed between the United States and other countries is a recent phenomenon in comparison with the incorporation of these labour clauses in the Generalised System of Preferences (GSP) schemes. The GSP scheme in the United States was first adopted as part of the Trade Act of 1974. The GSP scheme provides preferential duty-free access for about 4,800 products from 131 designated beneficiary countries and territories. The process of labour standard inclusion began in 1983 with the Caribbean Basin Initiative (CBI), followed shortly thereafter by the inclusion of labour rights provisions in the GSP when the programme was renewed in 1984. The process continued with the passage of the Andean Trade Preference Act (ATPA) in 1991 and the Caribbean Basin Trade Partnership Act (CBTPA) and Africa Growth and Opportunity Act (AGOA) in 2000. One of the eligibility criteria for benefiting under these non-reciprocal trading arrangements was the condition that countries comply with the internationally recognised labour standards.
In 1984, the United States amended the GSP scheme by adding that a GSP beneficiary country is ineligible if the country has not taken or is not taking steps to afford workers internationally recognised worker rights. Section 502(b)(7) of Title V of the Trade and Tariff Act of 1984 provided that
[t]he President shall not designate any country a beneficiary developing country under this section if such country has not taken or is not taking steps to afford internationally recognized worker rights in the country, including any designated zone in that country.7
The rights, as defined in the law, is provided in Section 502(b)(4). And states that for the purposes of Title V, the term “internationally recognized workers’ rights include:
the right of association;
the right to organise and bargain collectively,
prohibition on the use of any form of forced or compulsory labor;
a minimum age for the employment of children; and
acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health”.
Under the GSP law, the President is required to submit an annual report on the protection of internationally recognised workers’ rights in each of the beneficiary countries. The monitoring of workers’ rights is included in the United States State Department’s annual country report on human rights practices. This provision of reporting on labour practices in beneficiary countries in facilitating decisions on the granting or revoking of trade preferences is significant in bringing about compliance with the CLS.
One of the most often raised issue in the GSP annual reviews are on workers’ rights. For example, during the period 1985–1991, in the petitions filed with the office of the United States Trade Representative, workers’ rights accounted for 121 out of the 192 “country practices”. In the following investigations conducted as a result of these petitions, some countries committed themselves to improve their compliance with labour rights. Other countries lost their GSP benefits either through temporary suspension (Burma, Central African Republic, Chile, Maldives, Mauritania, Paraguay, Sudan, and Syrian Arab Republic) or, in extreme cases, permanent termination of benefits (Liberia and Nicaragua).
The GSP schemes operated by the U.S. and Europe have had ambiguous effects. Out of 63 cases reviewed between 1985 and 1995 for labour rights reasons under the U.S. GSP scheme, 12 ended in the withdrawal or suspension of GSP benefits for 10 countries, 51 resulted in a decision that the benefit-receiving country was taking steps to afford worker rights, and 7 cases are still pending (Harvey 1996). Since 1996, benefits have only been suspended for Belarus. In several instances where U.S. trade sanctions were applied or a GSP review was announced, several countries moved to reform their labour code or changed their labour practices.8 Yet it is also clear that many developing countries resent the conditionality attached to trade assistance programmes.
An analysis of the enforcement of labour rights provisions in the GSP schemes of the U.S. showed that the U.S. Government enforced the unilateral labour rights provisions less on the basis of a fair and consistent assessment of violations than with a view to U.S. foreign policy interests and domestic policies (Greven 2005).
Furthermore, there is little evidence of trade sanctions being used to effectively promote improved labour standards overseas. One recent review conducted by Elliot of countries petitioned under the GSP noted that “the 30 cases ended up being evenly divided between success and failure and, even in these cases it was difficult to know if it was the threat of sanctions or the focus of public attention that was the real motivation for change”.9 Similarly, a recent survey of U.S. economic sanctions used for a wide range of objectives over the 1970s and 1980s showed that they resulted in positive outcomes in less than one case in five.10
5.4.2 Impact of United States GSP on Beneficiary Countries
In spite of the criticisms leveled against the lack of effective enforcement of labour standards under the GSP scheme, it appears that the inclusion of labour clauses in the United States GSP scheme has led to some positive results. In several instances where U.S. trade sanctions were applied or a GSP review was announced, several countries moved to reform their labour code or changed their labour practices.
We provide some examples of how the United States GSP regime has induced change.
In the case of Chile, democratic reforms were instituted following the removal of GSP, even though the government did not take the necessary steps to improve the overall labour rights situation.11
In Peru, the trade union movement stated that the government gave more careful consideration to the GSP petition against the country than the criticism levelled by the ILO Committee on Freedom of Association and the Committee of Experts.12
Further to the filing of two petitions in 1990 and 1991, the Dominican Republic made illegal labour by debt bondage in response to the threat of losing its GSP position for sugar exports.13
In Thailand, following a petition filed in 1992, the government instituted labour legislation that included the CLS in state enterprises.14
However, the removal of preferential treatment, or even the threat of it, can have undesired or inadvertent effects. This became evident when U.S. trade sanctions were imposed on Bangladesh under the 1992 Child Labour Deterrence Act. Children working in Bangladesh’s garment industry were dismissed. But as there were no alternative jobs available to them, they staged a demonstration demanding to be given their jobs back. It was then agreed that their removal from the industry should be more gradual and tied to the availability of employment and educational facilities. The lesson to be learned from this case is that trade sanctions can at best induce a country to change its policy on child labour, but it does not yet resolve the problem. Local action is also required to effectively reduce child labour in socially acceptable ways.15
5.5 The European Union’s Generalised System of Preferences
The GSP scheme of the EU is considered a central component of its strategy towards developing countries. The main thrust of the EU strategy is to promote sustainable development in using trade as an engine in the achievement of both economic and social goals. The European Union (EU) is the world’s largest provider of trade preferences in favour of developing countries. After the recommendation by United Nations Conference on Trade and Development (UNCTAD) in 1968 that developed countries adopt generalised systems of trade preferences for exports from developing countries, the European Union became the first to adopt such a preference scheme.
The EU GSP Scheme was first introduced in 1971 and has over the years evolved considerably. In 2006, the EU undertook substantial changes to its GSP scheme (see Table 5.2). The EU’s GSP strategy towards developing countries is manifest in its relations with the Africa, Caribbean and Pacific (ACP) group of countries under the Economic Partnership Agreements (EPAs). In addition to this are the GSP schemes in bilateral and other EU RTAs.
Evolution of labour provisions in the EU GSP, from 1995 to 2002
Year entered into force
Reference to ILO instruments
Convention Nos. 29 and 105
Withdrawal of trade preferences in the case of “systematic and serious violations” of these Conventions
Convention Nos. 29 and 105 (for sanction-based labour provisions)
Convention Nos. 87, 98, and 138 (for incentive-based labour provisions)
Withdrawal of trade preferences in case of “systematic and serious violations” of ILO Conventions No. 29 and 105. Additional preferences for effective implementation of ILO Conventions No. 87, 98, and 138
1998 Declaration, all Fundamental Conventions
Withdrawal of trade preferences in case of “systematic and serious violations” of the ILO Fundamental Conventions; additional preferences for effective implementation of the ILO Fundamental Conventionsa
The EU GSP scheme comprises three separate preference regimes—(a) the GSP: this is the general GSP scheme; under this, developing countries are offered generous tariff reductions; (b) the GSP+: under this programme, the EU offers additional preferences on top of the general GSP to a group of selected developing countries that have ratified and implemented international human, labour, and environmental standards with regard to good governance16; and (c) the Everything But Arms (EBA). This is a scheme for least developed countries, under which they are offered duty-free and quota-free market access to all products, except for arms and ammunitions.17
5.5.2 The EU’s New GSP Scheme
On 31 October 2012, the EU adopted a reformed GSP law (Regulation No 978/2012) to take effect on 1 January 2014 and remain in effect for 10 years. According to the EU, a major reason for the change in regulation is the entry into force of the Lisbon Treaty. This, in the EU’s view, necessitated a redesign of the GSP scheme to reflect the new institutional arrangement. Under the new arrangement, the role of the European Parliament in trade policy has been enhanced.18
Below we provide a brief overview of the key features of the new regulation:
The number of countries that benefit from the preferential access to the EU market is reduced from 176 to 89. The reduction in the number of countries reflects what the EU considers to be countries, which do not require GSP preferences in order to stay competitive.
Countries that already enjoy preference access to EU markets under an FTA or a special autonomous trade regime: this would affect 34 countries that have signed FTAs with the EU or have other preferential market access arrangements.
The reformed GSP scheme removes tariff preferences from countries that have been classified by the World Bank as high or upper income economies in the last 3 years.
Countries that have alternative market access arrangement for developed markets: included in this arrangement are the 33 countries with their own market access regulation.
Institution of a graduation mechanism of competitive sectors: the product sections under the graduation mechanism are expanded from 21 to 32. According to the EU, this will ensure that graduation is more objective since the products in the categories are very homogenous. Furthermore, the graduation threshold will increase from 15 to 17.5 % (for textiles, from 12.5 to 14.5 %).19
GSP+ (below we discuss in detail the impact of the GSP+ on the labour and trade linkage):
Under the new regulation, the EU has the objective of furthering the promotion of core human and labour rights and also environment and good governance. To achieve this, the EU has reinforced the incentive scheme for countries to join the GSP+ scheme.
Countries that enjoy preferences under this part of the scheme are not subject to graduation.
The EU at the same time has enhanced its monitoring mechanisms to ensure that those rights and principles are upheld.20
The new regulation is intended to lead to the strengthening of the effectiveness of the EBA scheme. The beneficiaries under EBA will be reduced, leading to a reduction in competition.