Barking Up the Wrong Tree: Trade and Social Clause Links

The idea of a trade-labour standards link is not something new and has been brought up in one form or another since the 1970s. The author, Chakravarthi Raghavan, contends that UNCTAD has made a strong case for the view that the inability of industrialized countries to adjust to new competition from developing countries is due to their current macro-economic policy stance. The solution to the North's unemployment problem warrants a rethinking of their resort to trade sanctions which usually work to the advantage of the powerful and dominant.

ONE year into the World Trade Organization (WTO), and with its members and WTO officials focusing on the first Ministerial Meeting in Singapore (December 1996), the demand for insertion of a social clause in the WTO, linking trade "rights" of countries to their labour standards has again been brought up. At the year-end meeting of the General Council of the WTO, the US insisted the link between the two had been established and it should (along with trade and corruption) be part of the future WTO trade agenda to be addressed at the Singapore Ministerial meeting of the WTO. (1) A year ago, the conclusion of the Uruguay Round of Multilateral Trade Negotiations and establishment of the World Trade Organization (WTO), with its annexed agreements covering trade in goods, services and so-called intellectual property rights - a misnomer for global monopoly privileges in this area for the transnational corporations (TNCs) - had already sparked off this demand from the United States and France, with the European Union's Executive Commission leaning towards it.

The idea of a trade-labour standards link is not something new. From time to time, labour, employers and countries that once were dominant in trade but began to face rising competition from new "arrivals" on the scene, have raised the issue of differing labour standards among countries and their effects on trade.

It is often projected as an issue of "free trade" vs. "fair trade".

But these expressions are often used as slogans: whatever one does is assumed to be "free" and "fair"', while what one's partners and trade rivals do is being portrayed as "unfair" and "unfree" and their exports to one's own country to be attacked and restricted in various ways to further what is now clearly neo-mercantilist policies of the major industrial countries to further the interests of their corporations.

Previous raising of issue

Since mid-1970s, the concept of 'fair trade' and 'fair wages' has been brought up in one form or another, directed principally at developing nations and their trade and exports.

The issue has come up in the past too, including at the time of the founding of the International Labour Organization (ILO), after the first World War. At its founding, the ILO was envisaged to counter the ideological attraction of the Russian Bolshevik Revolution to the working classes of Europe and America. The trade-labour issue was brought up again at the time of the Philadelphia Declaration of the ILO after the end of World War Two.

At the time of the founding of the ILO - when there was no multilateral trade organization - the United Kingdom, which by then had lost its position as the dominant Centre and was worried about the low-wage competition from the United States and some continental countries, unsuccessfully tried to put a social clause/trade link into the ILO framework. There have also been the much earlier, and later, "pauper wage" theories against free trade.

More recently, in the 1960s, the concept of "low-wage" exports of textiles and clothing products from developing countries and their "unfair competition" with the industry in the North was used to force the "short-term cotton textiles agreement", aimed at hitting exports mainly from India, Pakistan, Egypt and Turkey who were all producers of raw cotton. With their raw material, and abundance of cheap labour, they were able to offset the North's technological and productivity advantages. A worker in the North was then attending to many more automated looms and spinning frames than the poorer-paid counterpart in the South and the less technologically advanced machinery.

That short-term agreement then became the long-term agreement on cotton textiles and clothing and was replaced in 1973 by the Multifibre Agreement (MFA) - with its theory of "market disruption" because of "low-cost" imports. The MFA was repeatedly extended, with each extension bringing in more restrictions and embracing more and more fibres. If the WTO is to be believed, all these discriminatory restrictions against the exports of the Third World countries are to be finally phased out in the year 2005.

The theory of low-wage costs and "market-disruption" used to restrict imports of textiles and clothing products from developing countries set the precedent for extending this concept, through voluntary export restraints, to hit leather, footwear and other labour-intensive product exports of developing countries. But it was done on economic grounds, however spurious and untenable the theory and grounds adduced. But it enabled compromises - reflecting the economic power equations of trade partners - to be reached in the shape of the MFA and so on.

The social clause issue was raised again in 1978-79, just before the conclusion of the Tokyo Round of the GATT Multilateral Trade Negotiations. It was raised at the ILO by organized labour at the ILO's Textiles and Clothing Committee. It was also brought up at UNCTAD-V in Manila. But the issue was dropped when it became clear that it was unlikely to advance the cause of workers and could become a protectionist tool. By then any way, as a part of the market concessions of the Tokyo Round, the developing countries had to agree to further extensions of the six-year old MFA regime.

In the United States, under pressure from organized labour, the labour standards issue was tagged on as one of a possible "condition" in the legislation setting up the Generalized System of Preferences (GSP), a preferential trade system to provide duty-free access to exports of the developing countries.

The issue was brought up by the United States at Punta del Este at the time of the launching of the Uruguay Round, but after it got its way in the launching of the negotiations including the new areas (services, intellectual property rights and investment measures) and agriculture. The US efforts got short shrift at Punta del Este, and was remitted like several other issues, considered as "non-trade" issues, for the consideration of the GATT's permanent machinery.

While the US sporadically brought up the question at the GATT Council - during the seven and half years of the Uruguay Round negotiations - it was not really pushed.

After Marrakesh

After the conclusion of the Uruguay Round, the international organizations of workers, and some governments of the North, principally the United States and France, and the ILO Director-General Michael Hansenne, again raised the issue. It was among the several subjects that were mentioned by one or another of the ministers at the Marrakesh Ministerial meeting, to sign the Uruguay Round agreements and conclude the Round, as an item that should be on the WTO's future trade agenda. But with no consensus on any of the issues, the concluding statement of the Chair of the Marrakesh Ministerial meeting, listed all the subjects mentioned (a veritable laundry list of issues) and said that these could be pursued in the Preparatory Committee for the WTO and the WTO itself (where a consensus is needed, or at least a two-thirds majority vote at a Ministerial Conference). (2)

Meanwhile, soon after the Marrakesh Ministerial meeting, the Director-General of the International Labour Organization (ILO), Michael Hansenne (of Belgium), raised the issue at the 76th anniversary session of the International Labour Conference (ILC), where it sparked a major debate and showed deep divisions amongst governments. The employers were totally opposed and workers' organizations favoured some actions to enforce minimum labour standards, but workers groups from the South were generally mute or even opposed to any trade links. At the end of the debate though, Hansenne professed to see a consensus on the ILO dealing with the issue and, at an ILO Governing Body meeting that followed (generally confined to organizational matters), got a working party established to consider the issue. The working party is deadlocked. (3)

The Preparatory Committee for the WTO, with its plate full and finding that achieving a consensus on minimum procedural issues difficult, remitted all these new themes to the WTO General Council, along with other Marrakesh laundry list items. None of these have been seriously and formally discussed at the WTO. But in the various smaller conclaves held this year outside the WTO and Geneva (Stockholm, Vancouver) and others planned for 1996 (Brisbane and Singapore) the new items - labour standards, investment rights for foreigners, competition policy, environment and corruption - are sought to be pushed. The Uruguay Round pretence for bringing new issues through the "trade-related" phrase has been given up for the "trade and.." phraseology.(4)

During all this period, there has been a constant shift of ground by the proponents on the content of a social clause and the "labour standards". It has often been presented in terms of "accept the principle and we can discuss and negotiate the details."

International organized labour has sometimes spoken of it in terms of "fair wages" and of measures to ensure "labour's equitable share" of production and earnings. In terms of intra-developed country disputes, it has also been surfacing (as within the European Union) in terms of the differing social standards and complaints of governments lowering the standards under so-called reforms to reduce or eliminate "labour market rigidities" and attract foreign investors.

In terms of North-South relations, and in face of the virtually united opposition of governments of the South against injecting the issue into the WTO or allowing the use of WTO mechanisms and its trade retaliatory instruments for this purpose, the terms of the debate has been shifted with the Northern labour organizations saying they are not calling for "equal wages in the South", but for observance of "minimum labour standards".

The major thrust appears to be to get legitimacy for use of the trade instrument, rather than the ability to give or deny WTO trading rights - the right of a country to export goods to another - on the basis of purported failure of the exporting country to have labour standards or to enforce them. This gives the suggestion that the ILO should determine the observance or failure of the labour standards and, at its instance, for the WTO to allow trade retaliation or restrictions against recalcitrants.

North-South polarization

The attempt has created a sharp North-South polarization: governments of the South are overwhelmingly against such a linkage; governments of the North are somewhat divided though at some time in the future they will probably join so long as they could find a way of applying such a link only against the South; all employers (except perhaps in the textiles and clothing industry) are totally opposed. Northern unions and the international workers or organizations controlled or dominated by them favour such a link. Whereas workers' organizations in the South are divided - with some favouring linking trade with some labour standards and others opposing it - even though their voices are not heard in the international arena.

And like the debates on the trade and environment link for enabling trade restrictions on environmental grounds, the concept of a social clause in trade agreements and in the WTO, has generally divided the non-governmental organizations engaged in development activities - the development NGOs. Many Southern NGOs, even those engaged in the trade union field and working closely with organized labour groups to enhance rights of workers in their countries, have been opposed.

A high moral tone has been sought to be injected into the debate by references to child labour, forced labour, rights to form unions and bargain effectively with employers.

Far from simplifying the issue, the moral tone assumed in such matters often makes very difficult a rational discussion of the merits - both the question of the nature of the links and the usefulness of remedial instruments proposed. A high moral tone injected into an otherwise serious socio-economic issue makes reasonable compromises much more difficult. There were efforts to bring this issue up at the UN Social Summit at Copenhagen and there was a repeat there of some of the debates - within the ILO and the WTO.

But given the strong stance of the developing countries - reiterated at the meeting of the Labour Ministers of the Non-Aligned Movement in India (5), and the divisions at the Preparatory Committee for the Summit, the Director-General of the ILO, Michael Hansenne, who had earlier tried to push this issue to the Social Summit, appeared to have decided against attempting any decision at Copenhagen - preferring to pursue it within the ILO and hoping gradually to bring about some consensus.

After the Summit, when the ILO Governing Body and its working party on this resumed discussions, when governments of developing countries suggested a compromise, namely that the effects of trade liberalization and the social conditions of workers could be pursued as part of the follow-up to the Social Summit, Hansenne did not agree (and has been trying to block it). Instead he has been continuing his efforts to get a mandate for a separate committee to focus on this issue, in effect making such an Ad Hoc committee a super-committee over the ILO bodies dealing with the issue (including the Governing Body itself). This has given rise to the suspicion that the intention is to play politics to get US support, rather than serious ILO work on conditions of labour. (6)

The renewed debates and thrusts for linking trade agreements and social standards are being explained in terms of the conclusion of the Uruguay Round and the establishment of the WTO with its ideological credo of promoting "free trade and free markets" (the practice of these theories even in the North though is very different from these slogans), globalization of the world economy and trade and the operations of the transnational corporations (TNCs).

The intensification of the debate and demands for such trade-social clause links now are associated with a perception among Northern organized labour that in today's "globalized" market and trade, imports are responsible for closure of manufacturing plants and loss of jobs and that "footloose" TNCs are able to defeat efforts of labour unions to improve the earnings and working conditions of their members. There is also the perception that TNCs are shifting their production to countries with lower labour standards and enforcement and low wages.

Lack of clear evidence

A major problem in a rational consideration of the issue, and attempts to find solutions, has been a lack of clear evidence of such events and closures and loss of employment because of "trade competition" from the developing world and of such outward foreign direct investments (FDI) creating import flows and closures in the home countries of the TNCs.

Some of the evidence is of an anecdotal nature. Other empirical evidence suggests that the view that TNCs are moving their operations to the developing world and investing there and generating imports into their home bases may not even be true. One study even suggests that in the case of the US and Germany the FDI outflows resulted in more exports from the US and Germany and that only in the case of Japanese FDI (and contrary to charges against Japan) resulted in imports into Japan.(7) There is also evidence that while some TNCs engage in sub-contracting or outward processing abroad for the labour-intensive parts of the final production, others more often invest and produce abroad (with inputs from their own home base) to supply competitively to the market of the host country when supplies from the home, with transport and so on added, make it less competitive.

While anecdotal evidence can't be dismissed or wished away, such evidence is both difficult to clinch arguments about the cause-and-effect relationships and/or whether there is a net loss of employment or a shift away from one sector to another, and even more in finding solutions that would help labour - in the short-, medium- and longer-term.

Having said this, there is little doubt that (a) over the last decade or more there have been more imports from the developing world than before, (b) that generally wage levels and other benefits to workers in the South and the exporting countries are less than in the rich industrialized countries and (c) unemployment levels in the North are continuing to rise. But the growing unemployment in the North and falling share of wages and earnings of workers and lower income groups have also coincided with the new macro-economic policies of the 1980s and 1990s and it is difficult to disentangle one from the other.

Efforts at computing the links between trade liberalization and social standards of workers have shown that in most cases the import penetration in the consumer markets of the North from the developing world's exports have not been very high or significant (except perhaps in the clothing sector) and that when wages and productivity of the workers producing the same goods in the South and the North are compared, the Northern worker is by and large more productive - not because the Southern worker is lazy and the Northern worker is not, nor because of other factors, but because of the higher levels of technology and capital investment in the North. Some studies in the textiles and clothing sector even suggest that if productivity is taken into account, there may be a case for increasing the wages in the North (and reducing the returns to capital). Some on-going studies in India ( for example in the textile industry), based on comparisons using purchasing power parity, rather than nominal wages, and productivity, suggests that the worker in India is paid more than in the US or Europe. If wages are less in the South, technology and capital are costlier than in the North.

But one study using somewhat different methodologies (which have been challenged) found in the UK that while trade has eliminated some jobs, it has also created others, and often involving higher skills and earnings for the workers.(18) But the study also found that the economy was not creating enough low-skilled or unskilled jobs. The study, though, did not see trade protection as a useful remedy - noting that if low or unskilled labour goods from the South are excluded, then the South will turn to higher technology and value-added production and exports. Alternately, if the South was unable to export and sell and earn money in the Northern markets, to that extent it will buy less from the North and create unemployment in the more skills-and capital-intensive industries of the North.

There has been quite a large debate among the neo-classical trade policy economists, both supporting the view that there is unskilled labour unemployment (in Europe) and lower wages and increasing wage/income inequalities (in the US) and that this could be attributed to the import competition from the developing world (Woods 1995). But some, like Lawrence and Slaughter (1993) and earlier Katz and Murphy (1992) have found no evidence of such links - arguing among others that it is prices of high-tech goods that have been constantly falling and not labour-intensive ones (which should have been the case if there was import competition from the developing world).(9)

Neo-liberal order

But all these economists and experts in a sense belong to the current school of orthodoxy in economics and advocates of the neo-liberal order - a code word for old fashioned laissez faire.

While they all use terms like "free market" and "free trade", these have little relationship with say Ricardo's theories - which incidentally were formulated by him to bring about a better division of the benefits of the wealth creation under Adam Smith's "market theories" - away from the landed rentier classes and towards the entrepreneurial class, with workers intended to have no more than constant real wages. The current neo-classical orthodoxy has formulated theories and policies (monetarism and non-accelerating inflationary rate of unemployment or NAIRU and so on) which, whether intended or not, have created a shift in favour of finance capital, and speculative capital at that, and against manufacturing capital.

These economists are thus unwilling to look at their own fundamentals to resolve the problems of unemployment, trade and basic economics. Even the post-war "golden era" in the North - of high growth, full employment, ever-increasing wages and earnings and living standards, and development in the periphery - are now dismissed as an "exception" that cannot be repeated.

In the post-war era, US transnational capital was moving into Europe (when with US approval, Europe had set up barriers against US imports and had preferential tariffs among European states); the US TNCs were setting up production facilities to produce and supply goods to the European market which otherwise could have come from the United States. In Europe at that time, wages, and in some cases non-wage social security was certainly lower than in the US, and European goods were being exported to the US even as European trade laws discriminated against the US. Later, low-wage goods from Italy, Portugal, Spain and Greece were flowing into Northern European countries under trade liberalization. But there was no such outcry then nor anything approaching the present outrage against imports from the developing world?

Is it not because at that time the US and Europe and the rest of the industrialized world believed in and maintained full employment? Are the current concerns related in fact to the situation of workers, skilled and unskilled, in the new situation of a neo-liberal order with high unemployment as a result of deliberate macro-economic policy? The UN Conference on Trade and Development (UNCTAD) has made a strong case for the view that the inability of industrialized countries to adjust to this competition (unlike in the 1950s, 1960s and early 1970s) is due to the current macro-economic policy stance.(10)

The Mexican crisis has sparked off a debate on the viability of the neo-liberal economic model prescribed or forced on the South by the International Monetary Fund (IMF), the World Bank and the WTO.

After some humming and hawing, the International Labour Organization (ILO) in 1995 has now raised the issue whether it is not time to return to the post-war era commitments for full employment and change in macro-economic policies.(11)

The UNCTAD 1995 Trade and Development Report, in a simulation exercise in an annex, brings out that even if the wages in the South are to be raised by 50%, it would still not make the labour-intensive sectors of industry in the North competitive, but would only destroy these industries in the South, affect the ability of Southern countries to earn foreign exchange to import capital goods and high-tech consumer goods and services from the North, and thus adversely affect both the North and the South.

Fundamental problems

There is some ongoing work at the UNCTAD to look at these fundamentals - rather than pursue whether or not there is a cause-and-effect link between imports from the South and unemployment and wage inequities in the North. But those in the North, who wish to pursue the neo-liberal order and its benefits for the rich don't favour this and are trying to kill such studies and efforts and alternate policies.

There are thus better and more fruitful avenues to pursue to deal with the fundamental problems of employment and equitable shares of the cake in the North, in the South, and between North and the South, and forge instruments for building into the productive systems and the State's tax and budget processes more equitable and equity-resulting instruments.

This is apart from the need to look at and pursue remedial actions on the moral issues that may be involved in questions of forced labour, child labour and/or restrictions on right of workers to organize and bargain effectively. But it is one thing to argue for a better functioning ILO and use of its tripartite machinery and the suasion and moral pressure of peers on recalcitrants, and quite another to invoke trade sanctions.

For, if trade sanctions are to be used, the question may be asked whether only issues where the South, or some in the South, are seen as "culprits" and "recalcitrants" on social issues are to be pursued? And is it to be done on the basis of legislation or lack of it, or its enforcement or lack of it? And if the errant industry or sector in the South is not much engaged in exports (which could be hit by trade sanctions), who will be hit and with what effect on its workers? And would it help the cause of the workers in an oppressed sector?

What about the different views, as between Europe and North America (and the UK), on the rights of workers to participate in decision-making and management at plant levels? For the more advanced industrialized societies, are they not as important as unionization and collective bargaining to ensure equality?

US not party to core ILO conventions

The United States is a party to very few of the ILO conventions, and the core conventions are not among those to which the US is a party. At the ILO the US government delegation routinely votes for new conventions, and in due course the delegations report back that the conventions have been remitted to their authorities for acceptance, ratification and so on - even though everyone knows on the US side that the Congress will never ratify them (lest the ILO be able to sit in judgement on the actual observance in the US), and the administration will never pursue them before the Congress. The US is thus guilty in the ILO of bad faith negotiations in terms of the Vienna Law of Treaties.

But there is more to it. In pushing for a WTO social clause, the US public posture is that though not a party, to the ILO core conventions, nevertheless its laws and the US constitution guarantees these rights.

But a recent ILO report shows how hollow this claim is. In November 1995, in a report to the Governing Body, the ILO published (along with that of other governments) the US response on its intentions on the core labour standard conventions - those for abolishing forced labour, freedom of association and collective bargaining and the minimum age for employment - which it has not ratified. The US has told the ILO that it is unable to ratify the very same conventions (for whose non-observance it wants to sanction developing countries via the WTO) because they conflict with US domestic laws and practices.(12)

The US is unable to ratify the 65-year old ILO convention on forced labour since its trends towards sub-contracting operation of prison facilities conflicted with the convention. According an Inter Press Service story dated 16 November, in several US states, prison labour is being used for producing goods for sale in the domestic market.(13) In Oregon State, jeans worth $4.5 million, made by convicts is marketed as "Prison Blues". Its success is impelling California State to market its own convict-made jeans as "Gangsta Blues". In the New York prison system thousands of prisoners are involved in producing office goods and similar equipment. Recently, New York authorities have marketed prison-made soaps and other items, touting their origin in special catalogues. The "San Francisco Chronicle" reported recently that some 10% of prison inmates in Arizona currently work for private firms, earning less than the US minimum wage of $4.25 an hour. The American Telephone and Telegraph (AT&T) also recently hired 50 inmates to market products by telephone, paying them a mere $2 an hour.

The US has also been unable to ratify the over 30 year old conventions on freedom of association and protection of workers rights to organize and bargain collectively because it would involve making changes in its laws and regulations. If the argument that the US need not ratify the ILO standards because its own Constitutional guarantees and laws are much higher are to be accepted, as trade economist, Professor Jagdish Bhagwati asks: should the oft-repeated US view (in its trade disputes and strategic initiative talks with Japan) about the need to judge by "results" be used? And what conclusions can then be drawn from the fact that only 10% of US labour belongs to unions or from the facts about prison labour cited above? And if there is to be a trade-social clause link, who will take action against the United States (or for that matter the UK) at the WTO - where whatever the theory, only the powerful can take retaliatory measures against the weaker partners and not vice-versa? This is one of the reasons that many non-governmental activists in the South, even when they battle their governments and their "oppression" and sometimes seek allies in the North, are very chary of and opposed to international trade instruments or use of Fund/Bank conditionalities whether on labour standards or environment grounds.

In the current power structure and relations in the world, all these instruments only work to the advantage of the powerful and the dominant, and make the world more oppressive.


1. "Rocky road ahead for WTO journey to Singapore", South-North Development Monitor - SUNS No #3666, pp 2-4.

2. "Battle of words at Marrakesh over future agenda", Third World Economics (TWE) No 88/89, pp 5-6; 'Concluding remarks of Mr. Sergio Abreau Bonilla', TWE 88/89 pp 21-22.

3. "US push for labour standards at ILO", TWE 91, pp 2-3; 'ILO Working Party to reflect on social dimensions', TWE 92, pp 2-4; social clause problems dominate ILO session ', pp 5-6,8; "ILO head pushes for trade-labour links", TWE 102, pp 6-11.

4. "Forward to the 19th century". TWE 125, p 2.

5. "NAM Ministers nix ILO moves on trade-social clause", TWE 105, pp 4-11.

6. "ILO Working Party on social clause still groping for mandate", TWE 111, pp 2-4; "US to relaunch trade link issue in WTO", TWE 111, pp 4-5.

7. Gatry Hufbauer, Daris Lakdawala and Anup Malani (1994), 'Determinants of direct foreign investment', UNCTAD Review 1994, pp 39-51.

8. Wood, Adrian (1994), North-South trade, employment and inequality: Changing fortunes in a skill-driven world, Oxford, Clarendon Press.

9. Federal Reserve Bank of New York Economic Policy Review, January 1995 (report on a symposium, where most of the literature is also cited or reviewed); Robert Lawrence and Mathew Slaughter, 1993, "International trade and American wages in the 1980s: Great sucking sound or small hiccup", Brookings Papers: Micro-economics 2; Lawrence Katz and Kevin Murphy, 1993 Quarterly Journal of Economics, Feb 1993.

10. UNCTAD, "Trade and Development Report 1995 (TDR-95)", pp 119-212.

11. ILO, World Employment Report 1995.

12. SUNS #3640 9/11/1995 or TWE reference.

13. SUNS #3646 17/11/1995.

The above article first appeared in the South-North Development Monitor of which Chakravarthi Raghavan is the Chief Editor.