Laboring for Trade

Labor provisions are an increasingly important feature in trade agreements. But do they work?

How countries treat their workers might seem unconnected to the movement of goods and services across national borders. Yet in many trade negotiations, a trading partner’s labor standards are an increasingly important concern.

The fate of the pending United States-Mexico-Canada Agreement (USMCA), for instance, hinged for months on bipartisan support for the pact’s provisions around labor. In fact, the Trump Administration made major efforts to woo organized labor and ultimately secured the support of the AFL-CIO, thereby ensuring the agreement’s passage through the Democratically-controlled House.

But despite the attention paid to labor provisions in trade deals like USMCA, domestic policy, not trade agreements, might be the most direct – and most effective – way to improve workers’ lot, especially in advanced countries like the United States. As important as labor provisions have become to trade agreements, available research points to a mixed record on their impacts.

More and more common in trade agreements

Trade and labor standards have been linked concerns since at least the 19th century, according to the International Labour Organization (ILO). As early as the mid-1800s, European social activists were agitating for international labor norms such as an eight-hour work day and the abolition of forced labor. By the end of the century, countries such as the United Kingdom, Australia, Canada and New Zealand had passed laws banning the import of products made by prisoners.

But it wasn’t until the signing of the North American Free Trade Agreement (NAFTA) in 1993 that trade agreements explicitly addressed labor (technically the 1947 Havana Charter contained an article on Fair Labour Standards but did not go into effect). NAFTA included the first side agreement on labor standards, the North American Agreement on Labor Cooperation (NAALC), which established a system of “cooperative activities” that the United States, Mexico and Canada agreed to undertake together to improve worker treatment.

The floodgates opened after NAFTA. In 1996, the World Trade Organization (WTO) adopted The Singapore Ministerial Declaration, embodying a new global consensus on trade and labor. Among other things, the Declaration included a commitment to international core labor standards while rejecting the use of labor standards for “protectionist purposes.”

Today, labor provisions are increasingly de rigeur in trade deals. By the ILO’s count, 77 trade agreements negotiated globally in 2016 included labor provisions, compared to just three in 1995. Overall, says the ILO, more than a quarter of global trade pacts reached in 2016 – 28.8 percent – addressed labor standards in some way.

 

Rationale for labor provisions

Proponents of labor standards in trade agreements cite several justifications for including these provisions. The first is moral: Trade agreements set the rules for international trade, and the inclusion of labor standards reinforces the social and human rights norms valued by the international community. Some argue that rich countries like the United States have a particular duty to use their leverage and buying power to raise standards in developing nations.

Another rationale is economic. As the ILO notes, “[L]abour provisions are tools against unfair competition, the main idea being that violations of labour standards can distort competitiveness (‘social dumping’) and should be addressed in a manner similar to that employed against other unfair trading practices.” In particular, labor standards arguably prevent a “race to the bottom,” where countries compete to produce ever-cheaper goods by shortchanging their workers. Some U.S. advocates further argue that labor standards can level the field between workers in competing countries, potentially stemming the tide of offshoring from wealthier countries to lower-paying ones and protecting domestic jobs. (More on this argument below.)

A third rationale for these provisions is political. Labor provisions, especially in the United States, have become a powerful bargaining chip for competing interests, as the USMCA and other trade agreements have shown. The strength of a trade pact’s labor provisions has also become a proxy for the “fair” trade that the public increasingly wants to see; trade deals might be more likely to win public approval if its advocates can tout “tough” labor provisions that purport to protect U.S. jobs.

Carrots, sticks and helping hands

While becoming increasingly complex, labor provisions tend to fall into several basic categories. First, so-called “promotional” provisions aim to encourage countries to raise labor standards by defining a set of commitments and detailing a variety of “cooperative” activities countries might do to discuss, implement and monitor these obligations.

For instance, in the CAFTA-DR agreement involving the United States, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic, the United States agreed to finance an array of “capacity building” activities aimed at improving countries’ infrastructure around workers’ rights. These projects, according to the ILO, included “increasing workers’ awareness of their labour rights, increasing the budget and equipment of labour ministries and labour judiciaries, training labour officials, and setting up centres providing legal assistance to workers.”

While these types of provisions could be considered “carrots,” agreements can also include “sticks” in the form of “conditional” provisions requiring a trading partner to meet certain obligations before a deal is ratified. The United States’ trade agreement with Morocco, for instance, required Morocco to raise its minimum working age from 12 to 15 and to lower the maximum number of hours in its workweek from 48 to 44 as a precondition to ratification.

Other “sticks” include provisions calling for sanctions if a country’s commitments aren’t met and specifying the mechanisms for policing and enforcement. Among the processes detailed would be who is entitled to file a complaint and how disputes will be settled (e.g, through arbitration). Among the chief complaints of NAFTA’s critics was weak enforcement, which is one reason why this issue became a major sticking point in negotiations over NAFTA’s successor, the USMCA. For instance, while more than 40 labor complaints were filed under NAFTA, none have so far led to sanctions, a result that many labor advocates wanted to see remedied.

Impacts on workers’ conditions and on trade flows

Research on the impacts of labor provisions in trade agreements is relatively scant. For one thing, measuring the direct impacts of these provisions on workers’ circumstances is hard to do. What research there is, however, shows that labor provisions can benefit workers in developing countries, especially if they have the support of wealthier trading partners in building capacity for creating and implementing reforms.

In a 2017 survey of existing research, the ILO found that labor provisions in trade agreements can provide a modest boost to workforce participation in some countries, particularly among women, and even help ease the gender gap in wages. According to the ILO, the average workforce participation rates in countries subject to labor provisions is about 1.6 percentage points higher than in countries without such obligations. “One possible explanation for this effect is that labour provision-related policy dialogue and awareness-raising can influence people’s expectations of better working conditions, which in turn increase their willingness to enter the labour force,” says the ILO.

In certain circumstances, conditional labor provisions can dramatically benefit workers. In Cambodia, for instance, according to the ILO, labor provisions included in the Cambodia–United States Bilateral Textile Agreement helped reduce the gender gap in Cambodia’s textile sector by as much as 80 percent between 1999 and 2004. “These results are partly due to the incentive structure of the agreement, which tied export quotas to compliance with labour standards, but also to a monitoring programme (Better Factories Cambodia) that was implemented with the support of the ILO and backed by the social partners,” the ILO found.

What the evidence does not show is that higher labor standards in developing countries dampens the flow of trade by raising the price of goods produced. In fact, research shows the opposite – countries subject to labor provisions often see a slight increase in their exports. According to a 2017 analysis by the World Trade Organization (WTO), labor provisions can benefit low-income countries by “increas[ing] demand for products by concerned consumers” in richer countries, thereby leading to more trade. (Consider, for instance, the growing consumer demand for “fair trade” coffee.) Similarly, the ILO finds that countries entering trade agreements with labor provisions see a slightly greater increase in the value of trade compared to countries without such provisions.

Both the WTO and ILO analyses caution, however, that the countries seeing the biggest impacts on their workers also enjoyed strong domestic support for labor reforms. While entering a trade agreement with labor provisions might have helped catalyze important shifts in domestic policy, the agreements themselves are no substitute for domestic action. In fact, in places where domestic enthusiasm for labor market reforms are weak, the impacts of labor provisions have been minimal.

One case in point is Guatemala, where the AFL-CIO and six Guatemalan trade unions filed a complaint in 2008 alleging that Guatemala was failing its obligations under CAFTA-DR. After nine years of procedural and other delays, an arbitration panel convened under the auspices of CAFTA-DR in Guatemala failed to find that Guatemala had breached its obligations under the agreement, despite the lack of progress on systemic reforms and widespread reports of anti-union violence.

No replacement for domestic policy

The inclusion of robust labor provisions in trade agreements reinforces international norms for just worker treatment. It can also promote much-needed reforms in nations with weak standards and help protect workers from exploitation.

Wealthy countries should not, however, count on labor provisions in trade agreements as a principal mechanism for protecting domestic jobs.

For one thing, as we’ve written elsewhere on this site, companies’ decisions about where to put their factories depends on many factors other than the cost of labor, such as proximity to markets, intellectual property protections, tax and regulatory considerations, and the skill of the workforce. Second, labor provisions in trade agreements are, at best, a highly indirect way of leveling the playing field between workers from one country to another. Third and most significantly, the biggest future threat to a worker’s job might not be a lower-paid worker in a maquila but a robot.

While apocalyptic forecasts of automation’s impacts are no doubt overblown, there’s little question that advances in automation will prove immensely disruptive in coming decades. For instance, one 2018 analysis by Price Waterhouse Cooper predicts that nearly 40 percent of U.S. jobs could be susceptible to automation by 2030.

Ultimately, the best protection for workers are domestic policies that prepare workers for disruption and smooth their transition in the event of displacement. These policies can include better and more robust adjustment assistance for displaced workers; bigger government investments in career and technical education, particularly for incumbent workers; greater coordination among governments, businesses and schools so that workers have the right skills to fill gaps in the workforce; and increased public support for research into innovations that will lead to more jobs.

This is not to say that the energy spent on negotiating labor provisions in trade agreements isn’t time well-spent. What policymakers and the public need to know is what these provisions can — and can’t — do.