Piero Esposito

University of CassinoEconomics and BusinessAcademic Year 2020/2021International EconomicsInternational Trade(International standards –lecture 8)Piero EspositoUniversity of Cassino1

Introduction: the Standards Since the end of World War II, many of the formalbarriers to trade have been removed.Conflicts remain over the standards of quality (ofthe product and of the production process), i.e.: technical product standards, health and safety standards, labor standards, environmental standards.Standards can be a barrier to trade, but it can alsoimprove the quality of production and trade.They are particularly relevant in North-South trade2

Emissions emebedded in tradedgoods and services 22% of CO2 emissions stem from goods producedin other countriesExamples: UK -22% of domestic emission 1990-2014, -11%if imports are included US 9% of domestic emissions 1990-214, 17%when trade is largestco2-importers-exporters

Setting the Standards in three waysMost regional trade agreements and the WTOagreements practice a combination of: Harmonization of standards: Two or morecountries adopt a common set of standards Mutual recognition of standards: Countriesmaintain their own standards, but accept thestandards of others as valid and sufficient Separate standards: Countries maintain theirown standards and refuse to recognize thestandards of others4

Setting Standards: efficiency and costs There are no general rules to determine whichapproach is most efficient or fairest in all cases.Each of the three mechanisms has advantagesand disadvantages– Harmonization of technical standards, forexample, leads to a larger market and greaterefficiency, but may also freeze inferiorstandards that may develop to superior ones.Higher standards or changing standards isusually costly.5

Concerns about the Standards However, differences in labor and environmentalstandards, in particular, have generated concerns. High-incomecountries fear that laxer standardsin other countries induce domestic firms to:(1) adopt lower standards to remaininternationally competitive;(2) move to countries with lax standards.fear a race to the bottom – i.e. theadoption of the lowest level of standardspossible in order to attract foreign firms. Countries6

Spread of Labor StandardsThe U.S. and many other countries today wantlabor and environmental standards included infuture trade agreements. For example: U.S.trade agreements with Canada and Mexico(the North American Free Trade Agreement,NAFTA) address labor and the environment: eachcountry must enforce its own standards or facemonetary fines.However, labor and environmental activists seefines as inadequate to enforce standards and tohinder the race to the bottom.7

Defining Labor Standards The International Labor Organization (ILO)proposed five labor standards as basic rights(revised by OECD):1. Prohibition of forced labor2. Freedom of association3. The right to organize and bargain collectively4. An end to the exploitation of child labor5. Nondiscrimination in employmentNB: ILO promotes social justice and human rightsat the international level on work matters.8

Ambiguities of Labor Standards The five standards are widely agreed upon, butalso ambiguous: what is meant by “exploitation”? Several labor standards are contentious, e.g.:- universal minimum wage level,- limits on the number of work hours,- workplace health and safety. Low-income countries are reluctant to pay muchhigher minimum wages: higher wages wouldreduce firm profits, and result in closing down ofproduction and a rise in unemployment9

Child Labor, 5-17 Age Group, 200810

Percent of Children Working, 5-17Age Group, 200811

Labor Standards and TradeThe major source of disagreementsbetween the economists for free trade andlabor activists is over the use of tradebarriers to enforce labor standards Should one country use trade barriers topressure another country into altering itslabor standards? 12

Problems with Labor Standards1.Effectiveness: (a) only large countries orcoalitions of countries can use trade barrierssuccessfully to enforce standards, sincesmall countries do not have a large enoughimpact on global demand;(b) use of sanctions could becounterproductive for boosting workingconditions: improved enforcement in thetarget country may cause producers to shiftto the unregulated and uninspected informaleconomy.13

Problems with Labor Standards (cont.)2.Hazy Borderline between Protectionism andConcern: special interests sometimes use theissue of foreign labor standards in order toattain their real goal, protection against foreigncompetition.– Producers in a high-income country with scarcity ofcheap, unskilled labor may seek sanctions against alow-income country in order to counter thecompetition posed by the low-income countryproducers with abundant supplies of cheap labor.14

Problems with Labor Standards (cont.)3.The Specific Content of Labor Standards:there is no international agreement on thespecific content of labor standards- Justifying the specific goal of sanctions to theinternational community is difficult; may lead toconflict in international economic relations4.The Potential to Set Off a Trade War: use ofsanctions is discriminatory and infraction of WTO- Sanctions may cause retaliation from thetargeted country, further hurting internationaltrade rules.15

Evidence on Low Standardsas a Predatory PracticeLow standards are generally not effectivemechanism to enhance competitiveness and toattract foreign investment.There is very little evidence that countries thatreduce labor standards succeed in obtaining acomparative advantage in a new line of production.Low labor standards are correlated with unskilled,illiterate labor force, lack of economic development(poor telecommunications, schools, and sanitation).16

Trade and the Environment:Transboundary and NonTransboundary Effects There is considerable overlap in the debateson labor and environmental standards.However, a further argument in favor ofenvironmental standards is that pollution hastransboundary effects.17

Trade and TransboundaryEnvironmental ProblemsTransboundary environmental impacts happenwhen one country’s pollution spills over into a secondcountryFor example, a shared watershed is polluted by anupstream user, or industrial production in one countrycreates acid rain in another country.Transboundary environmental impacts can occur asthe result of similar activities in many countries,leading to global impacts such as global warming.18

Claims of the proponents of tradebarriers to enforce environmentalstandards1.Withoutadequate enforcement of standards,countries engage in an environmental race tothe bottom to boost industrial competitiveness2.Lack of enforcement of standards indeveloping countries induce dirty rich countryindustries to “export pollution” and thus createpollution havens19

Pollution Havens Do pollution havens attract foreign firms? Somedirty industries did move in the 1970sfrom high-income countries to low-income ones However,there is no evidence that any countrycompetes successfully for investment on thebasis of lax environmental standards Asa result, individual firms cannot move toescape the environmental regulations of ahigh-standards country20

Alternatives to Trade Measures Currently, it is impossible to predict how, oreven if, trade rules might eventually change toaccommodate labor and environmentalstandardsAs long as there are large income gapsbetween rich and poor countries, it seemsunlikely that differences in standards willdisappear21

How to enjoy the benefits from worldtrade while resolving the conflicts overstandards? There are three ways of enforcing sanctionswithout hurting international trade Labels for Exports Requiring home country standards Increasing international negotiations Let’s examine the usefulness of each ofthese in detail 22

Labels for Exports Labeling: A certification process producing alabel attached on an exported good to indicate toconsumers that the good was produced underhumane and environmentally sound conditions Themethod is already in place in someinstances: Cambodian textile exports to theU.S., coffee imports, etc. Problems:(1) Many countries resist labeling asan infringement of their sovereignty and (2)consumers must be convinced the labelprovides accurate information23

Requiring Home Country Standards High-standard countries can require their firms tofollow home country standards when operatingabroad Pros:impedes the race to the bottom; avoids theproblem of high-income countries’ dictatingstandards Cons:addresses only firms of high-standardcountries; low-country producers are notaffected; a high-standard country firm mayoutsource production to a low-standard countryproducer24

Increasing International Negotiations Using either existing international organizations orcreating new agreements and organizations ILOcould be given a greater role and start, forexample, publicizing lack of compliance with laborstandard The WTO is not an environmental organization;however, the WTO maintains an environmentaldatabase that reports all environmental agreementswith potential trade impacts and that have beenreported to the WTO. As of 2012, there were 569 reported environmentalagreements in the WTO.25

The pollution vs development dilemma26

The pollution vs developmentdilemma The relationship between trade and growth isshaped like an inverted U: as per capita incomes rise from low levelspollution increases, beyond a certain threshold, furtherincreases in income tend to diminishpollution (Environmental Kuzents CurveHypothesis).27

Trade and Transboundary Environmental Problems Transboundary environmental impacts happen when one country’s pollution spills over into a second country For example, a shared watershed is polluted by an upstream user, or industrial production in one country creates acid rain in another country. Transboundary environmental impacts can occur as