Commentary

Labor and Environment Sanctions Would Poison Trade Talks

By Daniel Griswold
September 28, 2001
The September 11 terrorist attacks on the World Trade Center and the Pentagon failed to knock trade expansion from the Washington policy agenda. In the next few days, the House Ways and Means Committee will consider a bill to give President Bush “trade promotion authority,” which would allow the administration to negotiate market-opening trade agreements that would then be voted on by Congress without amendment.

The greatest threat to the passage of TPA is the demand by some members of Congress that it require the use of trade sanctions to “enforce” higher labor and environmental standards in poor countries. President Bush and most Republicans in Congress want a trade promotion authority bill that, while holding out higher standards as a goal, does not include sanctions as a way to encourage them, while most Democrats insist that sanctions be an option if not the preferred tool. “What good is a ‘tool box’ if it doesn’t contain a hammer to enforce labor and environmental protections with tough trade sanctions?” demanded Democratic House whip David Bonior (D-Mich.).

The case for sanctions rests on the myth of a “race to the bottom.” Without a hammer held over their heads, poor countries will supposedly exploit the “unfair advantage” of low standards to grab investment and export markets from rich countries. But low standards appear to be more of a handicap than an advantage. Of the $1.1 trillion in global foreign direct investment flows in 2000, only 17 percent went to less developed countries, down from about 40 percent in the mid-1990s. American manufacturing companies directly invest far more in the high-standard economies of the European Union than in all of the developing world. In fact, nations with the highest environmental standards, as measured by the World Economic Forum’s “2001 Environmental Sustainability Index,” consistently attract the most FDI per capita.

Around the world, a fundamental dynamic is at work: Nations open to trade and foreign investment tend to grow faster and achieve higher incomes than less open nations, leading to higher labor and environmental standards. Through this powerful channel, globalization encourages a race, not to the bottom, but toward the top.

For less developed countries, engagement in the global economy lifts real wages and labor standards. According to a study by the U.S. International Trade Commission, wages, salaries, and labor standards are higher in export-oriented sectors than in those that produce non-traded goods. And jobs in foreign-owned affiliates generally pay significantly higher wages than do those in domestically owned firms. And rising incomes spurred by trade allow more poor families to send their kids to school, reducing child labor.

Higher incomes tend to lift environmental standards as well. A study of cross-country data by the Cato Institute found a strong correlation between high incomes and high environmental standards. In fact, higher incomes appear to be a prerequisite for higher standards. Cross-country data reveal a “green ceiling” under which nations must first raise their per capita income level before achieving higher environmental standards. In other words, while some countries have managed to achieve high per capita incomes without high environmental standards, no country has achieved high standards without high incomes.

Mexico offers an example of the race toward the top. Since the passage of NAFTA, the Mexican government has sought to raise the country’s environmental standards. One visible result is that Mexico City’s notoriously dirty air has been getting noticeably cleaner. Levels of lead, carbon dioxide, and sulfur dioxide are down significantly and the city was free of smog alerts during all of 2000 for the first time in years. Efforts to clear the air seemed to turn a corner in 1995 with the introduction of cleaner gasoline and more widespread installation of catalytic converters. Industries that ring Mexico City have either cut their pollution emissions or dispersed to other regions of the country.

Sanctions would undermine the healthy dynamic of growth and higher standards. They would punish the very export-oriented industries in poor countries that pay the highest wages and maintain the highest standards in the targeted countries. They would deprive less developed countries of the technology and resources they need to curb pollution. Brazilian President Fernando Henrique Cardoso spoke for most developing countries when he said at the Summit of the Americas in Quebec City in April, “It would be an obvious mistake — a very serious mistake, indeed — to set given standards of social development as a prior condition for free trade. This would be tantamount to making development a prior condition for development.”

The threat of sanctions would also poison any new round of WTO trade negotiations. More than three-quarters of the WTO’s members are less developed countries that would be the likely targets of any sanctions aimed at enforcing social standards. Their governments are wary of the economic damage those sanctions would inflict on their economies, and rightly suspicious that the motivation behind them would not be the new concern for higher standards but the old desire for protectionism. Holding the hammer of sanctions over the heads of less developed countries would doom any prospect for multilateral agreements to open markets abroad for U.S. exports.

The demand for trade sanctions as a tool to enforce environmental and labor standards confronts Americans with a false choice. In reality, the best policy for promoting economic growth at home and abroad — an economy open to global trade and investment — is also the best policy for promoting higher labor and environmental standards.

Daniel T. Griswold is associate director the Cato Institute’s Center for Trade Policy studies and the author of a recent study, “Trade, Labor, and the Environment: How Blue and Green Sanctions Threaten Higher Standards.”