August 3, 2020 4:47PM

If Only Senator Hawley Could Legislate Away Unintended Consequences

Seeking to prove the old adage about roads and good intentions, Missouri Senator Josh Hawley has recently introduced legislation, The Slave‐​Free Business Certification Act of 2020, that would impose steep fines and other penalties on large companies doing business in the United States, unless they regularly audited their global supply chains and certified that they and their suppliers did not utilize “forced labor.” The bill’s presumed intent is to discourage slave labor around the world – a goal that’s both laudable and, given troubling reports out of China and elsewhere, still quite important. Unfortunately, good intentions don’t usuallynecessarily make good policy, and in this case recent history shows how Hawley’s bill would likely make things worse, not better, for the world’s most vulnerable people.

The Mercatus Center’s Tyler Cowen helpfully summarized the bill’s theoretical flaws in a recent Bloomberg column, noting that the onerous supply chain regulations would most likely cause companies – worried about high compliance costs, bad publicity, and scary penalties – simply to move their supply chains “from the poorest and neediest” countries to wealthier places clearly free of “forced labor” (which, as Cowen helpfully adds, the Hawley bill defines more broadly than slavery). Sadly, forced labor remains somewhat common around the world, but an exodus of multinational capital and business practices from these places would likely lead to worse, not better, labor conditions. And, like most forms of regulatory protectionism, the law also would likely boost largest corporations (i.e., the ones with the in‐​house lobbying, legal and accounting resources to shoulder new compliance burdens) and increase prices for U.S. consumers. This is Trade Econ 101.

We needn’t, however, rely on wonky economic theory to see the likely consequences of Hawley’s legislation. In fact, recent experience with a similar policy – the “conflict minerals” reporting requirements in Section 1502 of the 2010 Dodd‐​Frank Act – shows that, contrary to some some claims that onerous supply chain reporting mandates are easy and effective, their end result would most likely be more, not less, of the very thing the mandates are trying to discourage. Section 1502 was similar to Hawley’s proposal in that it required multinational manufacturers like Apple and Intel to audit and disclose whether their supply chains utilized “conflict minerals” (tantalum, tin, gold or tungsten, which are commonly found in smartphones and other consumer electronics) sourced from the Democratic Republic of the Congo (DRC) or an adjoining country. Section 1502 also had similar intentions: the mining of these minerals reportedly funded warlords and fueled violence in the region, so a supply chain disclosure rule would force multinationals to scrutinize their suppliers and weed out the bad actors, and thus cut off the warlords’ funds.

Unfortunately, the Section 1502 rules proved to be a huge mistake. Shortly after the law entered into force, reports emerged that, instead of complying with the new regulations, global corporations simply abandoned the DRC – and its poor miners and small‐​scale purchasers – entirely. This effective embargo on the region not only devastated it further, but it actually benefited “some of the very [DRC warlords] it was meant to single out,” allowed less‐​scrupulous Chinese manufacturers to move in, and undermined civil society groups working to end horrific violence and poverty in the DRC.

Things didn’t improve in the following years, either. In fact, Hawley’s fellow Republicans in 2013 held a hearing before the House Subcommittee on Monetary Policy and Trade on “The Unintended Consequences of Dodd-Frank’s Conflict Minerals Provision,” at which several participants from across the spectrum advocated for Section 1502’s reform or elimination due to its harmful impact on the DRC. In 2014, dozens of human rights activists and academics called for the provision’s repeal because, while a few industry giants had resumed business in the DRC, most mines remained off limits and millions of Congolese miners remained unemployed (or worse). Meanwhile, armed groups and smugglers continued to thrive.

Subsequent academic work has confirmed these anecdotes – and the activists’ worst fears. A 2016 study found that Dodd‐​Frank conservatively “increased infant mortality from a baseline average of 60 deaths per 1,000 births to 146 deaths per 1,000 births over this period—a 143 percent increase,” likely by reducing mother’s consumption of infant health care goods and services. A separate study from 2016 found that the “legislation increased looting of civilians and shifted militia battles toward unregulated gold‐​mining territories” in 2011 and 2012. Another paper from 2018 found that the policy also backfired in the longer run (2013–2015): “the introduction of Dodd‐​Frank increased the incidence of battles with 44%; looting with 51% and violence against civilians with 28%, compared to pre‐​Dodd Frank averages.” Finally, in late 2019 economist Jeffery Bloem found that “the passage of the Dodd‐​Frank Act roughly doubled the prevalence of conflict in the DRC,” and “[v]iolence against civilians, rebel group battles, riots and protests, and deadly conflict all increase within the DRC due to the passage of the Dodd‐​Frank Act.”

In short, a U.S. law seeking to discourage conflict and suffering in the DRC ended up breeding more it.

It’s a depressing tale of Unintended Consequences that puts a real face on Cowen’s theory and crystallizes the flaws in Hawley’s plan to stop forced labor around the world. It also shows why alternative policies, such as the Xinjiang boycotts and targeted sanctions that Cowen suggests, are a better approach to attacking the serious issues of slavery and human trafficking. Of course, as I noted last year, arguably the best way to improve working conditions for the world’s poorest people is freer trade with least developed countries:

The lowering of U.S. trade barriers, along with American leadership in creating agreements and institutions such as the WTO, has produced immeasurable benefits for the world’s poorest people. As the World Bank noted in its Report on the Role of Trade in Ending Poverty, since 1990, “a dramatic increase in developing‐​country participation in trade has coincided with an equally sharp decline in extreme poverty worldwide,” and the number of people living in extreme poverty has collapsed. Trade has also “helped increase the number and quality of jobs in developing countries, stimulated economic growth, and driven productivity increases.”

A new report from the International Labor Organization provides jaw‐​dropping stats in this regard: Between 1993 and 2018, the share of individuals in low‐ and middle‐​income countries working in extreme poverty fell from almost 42 percent to less than 10 percent — a decline of around 600 million people. Most moved from subsistence farming to formal wage or salary work, providing themselves with first‐​time access to health care and other benefits. And, contrary to popular belief, the job creation in developing countries did not happen primarily in “sweatshop” manufacturing: The share of industrial workers in low‐ and middle‐​income countries almost did not change between 1991 and 2018, with job growth instead coming from sectors such as construction and retail trade; between 1999 and 2017, inflation‐​adjusted real wages in these countries tripled. Child labor is also disappearing: The overall number of child workers (ages five to 17) decreased by approximately 94 million between 2000 and 2016 (from 246 million to 152 million) and is projected to decline by tens of millions more by 2025. These improvements have been especially strong among women and girls, who in many countries faced truly horrible social conditions (hunger, arranged marriages, etc.) before these new jobs existed.

I can’t say I’m optimistic that the Senator – who has elsewhere demonstratedquestionable understanding of trade and forced labor (which U.S. law already restricts) – will learn this economic lesson or the unfortunate history of Dodd‐​Frank and the DRC. Hopefully, his colleagues in Congress will learn about it before millions of the world’s poorest suffer a similar fate.