Mr. Chairman and members of the subcommittee, thank you forinviting the Cato Institute to testify today at this hearing onU.S. trade policy and global labor standards. My name is DanGriswold, and I am director of the institute's Center for TradePolicy Studies.
The Cato Institute is a non-profit, non-partisan, voluntarilyfunded education institution. Through research and public events,we have worked for three decades now to broaden the parameters ofpublic policy debate to allow consideration of the traditionalAmerican principles of limited government, individual liberty, freemarkets and peace among nations.
The constituents you represent have no reason to fear America'sgrowing trade with people around the world, including trade withworkers in developing countries. Expanding trade with developingcountries not only promotes more U.S. exports, but just asimportantly it provides a wider array of affordable products forAmerican consumers-such as shoes, clothing, toys, and sportinggoods. Tens of millions of American families benefit from morevigorous price competition in goods that make our lives bettereveryday at home and the office. Lower prices and more choicetranslate directly into higher real compensation and livingstandards for American workers.
There is no 'race to the bottom'
American workers are not pitted in zero-sum competition withworkers in poor countries. There is no global "race to the bottom"on labor standards. Through specialization, global incomes andworking conditions can rise for workers in all countries thatparticipate in the global economy. American workers can competeprofitably in world markets because we are so much more productive.Because of our education, infrastructure, efficient domesticmarkets, the rule of law, political stability, and a generally openeconomy, American workers compete and prosper in a broad range ofsectors. As our country has become more globalized in the past 25years, American workers and their families have enjoyed significantincreases in real incomes, compensation, and wealth.
Nor has trade with developing countries undermined America'smanufacturing base. According to the latest figures from theFederal Reserve Board, the output of America's factories in 2006was more than 50 percent higher than in the early 1990s beforeNAFTA and the World Trade Organization came into being. Americanfactories are producing more aircraft and pharmaceuticals, moresophisticated machinery and semiconductors, more chemicals and evenmore passenger vehicles and parts than 15 years ago. It is truethat output of clothing, shoes and other low-tech goods has beendeclining, but those are not the industries of the future for theworld's most sophisticated economy. U.S. factories can produce morewith fewer workers because manufacturing productivity has beengrowing so rapidly.
If there were a "race to the bottom," then the lower wages andlabor standards in less developed countries should be attractinglarge shares of global investment. Of course, developing countriesattract foreign investment in those sectors in which they enjoy acomparative advantage, such as light manufacturing, but in fact,the large majority of manufacturing foreign direct investment (FDI)flows between rich countries. 1
When U.S. multinational companies look to invest abroad, theirprimary motivation is not a search for low ages and low standards.Far more important than lower costs are access to wealthyconsumers, a skilled workforce, modern infrastructure, rule of law,political stability, and freedom to trade and repatriate profits.That is why most outward U.S. FDI flows to other high-income, highstandard countries. Between 2003 and 2005, more than 80 percent ofU.S. direct manufacturing abroad flowed to the European Union,Canada, Japan, South Korea, Taiwan, and Singapore. 2
Openness to trade and investment leads to faster growth, whichleads to higher wages and labor standards, including so-called coreworker rights. That is why the world's most developed economies,which account for most of the world's trade and attract most of itsforeign direct investment, also pay the highest wages, and maintainthe highest labor standards related to freedom of association,discrimination, forced labor, and child labor.
Trade and globalization are raising labor standards indeveloping countries
Trade and globalization are lifting wages and working conditionsfor hundreds of millions of people in developing countries. The payand conditions offered in foreign-owned factories are almost alwaysfar higher than those offered in the domestic economy. In fact,working for multinational companies that export are almostinvariably the best jobs available in poor countries. Those jobsoffer poor workers, especially young women, their best opportunityat financial independence and the simple pleasures and dignities oflife we take for granted.
For example, apparel jobs are among the lowest payingmanufacturing jobs in our country, but they are among the bestpaying in poor countries. A recent study from San Jose Universityfound that the apparel industry actually pays its foreign workerswell enough for them to rise above the poverty line in thecountries where they invest. In Honduras, for example, wherecollege protestors have targeted its alleged "sweatshops," theaverage apparel worker earns $13 per day, compared to the $2 a dayor less earned by 44 percent of the country's population.3
Rising levels of global trade have lifted hundreds of millionsof people out of the worst kind of poverty and working conditions.According to the World Bank, the share of the world's populationliving in absolute poverty, defined as an income equivalent to oneU.S. dollar per day or less, has been cut in half since 1981, from40.4 percent to 19.4 percent. 4 Poverty has fallen the most rapidly in those areasof the world that have globalized the most rapidly, especiallyChina. It has fallen the least or actually increased in thoseregions that are the least touched by globalization, in particularsub-Saharan Africa.
Openness to trade and the growth it brings exert a positiveimpact on the welfare of children in less developed countries byreducing rates of child labor. The International Labor Organizationrecently reported that the number of children in the workforcerather than in school worldwide has dropped by 11 percent since itslast report in 2002, to about 200 million. The number working inthe most hazardous jobs has dropped even more steeply, by 26percent. 5
Globalization is a major reason for the positive trend in childlabor. As household incomes rise in developing countries,especially wages paid to adult females, fewer families face theeconomic necessity of sending their children to work. Studiesconfirm that labor force participation rates by children aged 10 to14 decline significantly with rising GNP per capita. 6
The overwhelming majority of child laborers toiling in poorcountries work in sectors far removed from the global economy. Morethan 80 percent work without pay, usually for their parents orother family members and typically in subsistence farming.7 Most other child laborerswork for small-scale domestic enterprises, typically non-tradedservices such as shoe shining, newspaper delivery, and domesticservice. 8 A report by theU.S. Department of Labor found, "Only a very small percentage ofall child workers, probably less than five percent, are employed inexport industries in manufacturing and mining. And they are notcommonly found in large enterprises; but rather in small andmedium-sized firms and in neighborhood and home settings."9
Parents in poor countries do not love their children any lessthan we love our own. When they succeed in rising above asubsistence income, the first thing they typically do is removetheir children from working on the farm, domestic service, orfactory and enroll them in school. By raising incomes in poorcountries, free trade and globalization have helped to pullmillions of kids out of the workforce and put them in school wherethey belong.
In Central America, trade liberalization and other reforms ofthe past two decades have spurred not only growth in incomes butalso measurable social progress. According to the World Bank,literacy rates for men and women 15 and older have risensignificantly in every one of the six DR-CAFTA countries since1980. In fact, between 1980 and 2001, the average literacy rate inthe region has increased from 67 percent to above 80 percent. Atthe same time, the percentage of children aged 10 to 14 who are inthe workforce has been steadily declining in all six countries. Theaverage share of children in the labor force across the sixcountries has dropped from 17.4 percent in 1980 to 10.0 percent in2002. 10 Expanding tradewith the United States will likely accelerate those positivetrends.
It is certainly true that working conditions in less developedcountries can strike Western observers as unacceptable if notappalling. But two points need to be considered. First, wages andworking conditions are likely to be even worse innon-trade-oriented sectors, such as services and subsistenceagriculture, sectors that have been largely untouched byglobalization. Second, poor working conditions in those countriesare not a new development but have always been a chronic fact oflife. "Sweatshop" conditions persist today not because ofglobalization, a relatively new phenomenon, but because of previousdecades of protectionism, inflation, economic mismanagement,hostility to foreign investment, and a lack of legally definedproperty rights. Globalization is not the cause of bad workingconditions but the best hope for improving them.
Punitive tariffs aimed at sweatshops will only hurt thepeople we are trying to help
Perversely, withholding trade benefits because of allegedly lowstandards would in effect punish those countries for being poor. Itwould deprive them of the expanded market access that offers thebest hope to raise incomes and standards. The use of tradesanctions would target the very export industries that typicallypay the highest wages and maintain highest standards in thosecountries.
The effect of sanctions would be to shrink the more globallyintegrated sectors that are pulling standards upwards, forcingworkers into informal, domestic sectors where wages, workingconditions, and labor-rights protections are much lower. Lowerwages paid to parents would make it more difficult for families onmarginal incomes to keep children in school and out of fields orfactories. "Tough" sanctions to allegedly enforce higher standardswould be tough only on the poorest people in the world.
Demanding that poor countries eliminate child labor under threatof trade sanctions can easily backfire. In 1993, Congress seemedpoised to pass the U.S. Child Labor Deterrence Act, which wouldhave banned imports of textiles made by child workers. Anticipatingits passage, the Bangladeshi textile industry dismissed 50,000children from factories. Most of those children did not end up inschool but instead fell into prostitution and other "occupations"far more degrading than weaving cloth in a factory. 11
America's trade policy is already biased against workers in poorcountries without making it more so through "anti-sweatshop"legislation. The United States and other rich countries currentlyimpose their highest trade barriers against products of mostimportance to poor countries: clothing, textiles, and agriculturalproducts. In fact, our average tariff imposed on imports from poorcountries is about four times higher than those imposed on importsfrom other rich countries.
Our regressive tariff system imposes punitive tariffs on workersin some of the poorest countries in the world. According to theProgressive Policy Institute, the U.S. government collects moretariff revenue on the $2 billion in mostly hats and t-shirts weimport from Bangladesh in a year than on the $30 billion in planes,computers, medicines and wine we import from France. Imports fromCambodia face an average tariff of 16, ten times higher than theaverage 1.6 percent we impose on all imports. 12
Our trade policies also hurt the world's poorest farmers andtheir children. A 2002 study for the National Bureau of EconomicResearch found that higher rice prices in Vietnam were associatedwith significant declines in child labor rates. Specifically, a 30percent increase in rice prices accounted for a decrease ofchildren in the workforce of 1 million, or 9 percent. The drop wasmost pronounced among girls aged 14 and 15. As the incomes ofrice-growing families rose, they chose to use their additionalresources to remove their children from work in the field and sendthem to school. 13 If U.S.rice subsidies are indeed depressing global rice prices, asevidence confirms, then those same programs are plausiblyresponsible for keeping tens of thousands of young girls in Vietnamand other poor countries in the labor force rather than school.14
Attempts to "enforce" labor and environmental standards throughtrade sanctions are not only unnecessary but alsocounterproductive. Sanctions deprive poor countries of theinternational trade and investment opportunities they need to raiseoverall living standards. Sanctions tend to strike at the veryexport industries in less developed countries that typically paythe highest wages and follow the highest standards, forcingproduction and employment into less-globalized sectors where wagesand standards are almost always lower. The end result of sanctionsis the very opposite of what their advocates claim to seek.
If members of Congress want to encourage higher labor standardsabroad, they should support policies that encourage free trade andinvestment flows so that less developed nations can grow morerapidly. As a complementary policy, Congress could seek a morerobust International Labor Organization that could systematicallymonitor and report on enforcement of labor rights in membercountries. Meanwhile, civil society organizations are free to raisepublic awareness through campaigns and boycotts, while importerscan cater to consumer preferences for higher standards throughlabeling and other promotions.
The demand for trade sanctions as a tool to enforce laborstandards confronts Americans with a false choice. In reality, thebest policy for promoting economic growth at home and abroad--aneconomy open to global trade and investment--is also the bestpolicy for promoting higher labor standards.
1For a more detailedcritique of the "race to the bottom" thesis, see Daniel Griswold,"Trade, Labor, and the Environment: How Blue and Green SanctionsThreaten Higher Standards," Cato Trade Policy Analysis no. 15,August 2, 2001.
2 U.S. Department ofCommerce, Survey of Current Business, Bureau of EconomicAnalysis, September 2006.
3Benjamin Powell and DavidSkarbek, "Sweatshops and Third World Living Standards: Are the JobsWorth the Sweat?" Journal of Labor Research, 2006, Volume 27, Issue2, pp. 263-274.
4World Bank, WorldDevelopment Indicators, 2006, available at devdata.worldbank.org/wdi2006/contents/Section2.htm.
5International LaborOrganization, "The End of Child Labour: Within Reach," Geneva,2006.
6Keith E. Maskus, "ShouldCore Labor Standards Be Imposed Through International TradePolicy?" Policy Research Working paper no. 1817, The World Bank,August 1997, p. 14.
7ILO, p. 8.
8"Breaking the Labor-TradeDeadlock," Carnegie Endowment for International Peace,Inter-American Dialogue, Working Papers 17, February 2001, p.17.
9 U.S. Department ofLabor, "By the Sweat & Toil of Children (Volume I): The Use ofChild Labor in U.S. Manufactured and Mined Imports," 1994, p.2.
10The World Bank, WorldDevelopment Indicators.
11 Jagdish Bhagwati,In Defense of Globalization (New York: Oxford UniversityPress, 2004), p. 71.
12Edward Gresser,Testimony before the Senate Subcommittee on International Trade,October 27, 2005.
13Eric Edmonds and NinaPavcnik, "Does Globalization Increase Child Labor? Evidence fromVietnam," NBER Working Paper no. 8760, July 2002.)