Trade and Labour: Friends, Foes, or Frenemies?

Dr Maria Mexi
International Specialist on Employment and Social Policy, TASC Platform; Senior Researcher and Fellow, United Nations Research Institute for Social Development and Albert Hirschman Centre on Democracy – Graduate Institute, Geneva

Dr Andrew Silva
Research Economist on Labour, Trade and Economic Geography, TASC Platform; Assistant Professor, Department of Economics, University of Nottingham, Malaysia.

Synopsis: Exceptional events, like the Covid-19 pandemic, and broader trends, like the acceleration of new technologies and growth of trade in services, are raising further questions about the relationship between trade and labour. This piece revisits our understanding of and the possible institutional mechanisms to forge positive linkages between trade and labour.

Keywords: trade, labour, International Labour Organization (ILO), World Trade Organization (WTO), issue-linkages

Renewing the trade and labour relationship

Trade and labour are intrinsically interlinked, but the nature of their relationship, and how it should be managed in the international arena, has been long debated – pitting the two sides interchangeably as friends, foes and frenemies.

We are now facing rapid acceleration in the development of new technologies and trade in services, as well as the unprecedented impact of Covid-19 on labour markets and economies around the world. Spurring engagement of the trade and labour policy communities will be essential for advancing our understanding of and response to this important relationship. There are a variety of avenues for exploration.

To date, proposals have been put forward to strengthen collaboration between the International Labour Organization (ILO) and the World Trade Organization (WTO) and deepen the relationship between trade and labour norms by, in particular, promoting a ”committee on trade and decent work” at the WTO and including labour discussions under the Trade Policy Review, the WTO’s mechanisms for review of national trade policies (proposals which have been supported by the European Union).

Moreover, many argue that the objective of promoting the effective implementation and monitoring of labour commitments can be achieved through other (softer) tools and means, such as tapping the potential of cross-border social dialogue in multilateral and bilateral trade agreements, fostering labour-related cooperative activities via capacity building, technical assistance and mobilizing resources to address decent work deficits, and fostering voluntary sustainability standards (VSS) which aim to improve compliance labour standards across transnational supply chains, while further exploring the role of the WTO in the context of private standards within which VSS fall.

However, building these connections may not be straightforward. Revisiting our understanding of and global response to this relationship will be important to reveal opportunities for conversation and collaboration.

Revisiting our understanding of the relationship

Our understanding of the relationship between trade and labour is evolving. One key concern is the connection between trade agreements and jobs and wages. In economic theory, the positive effects of international trade should outweigh its possible negative consequences when a country joins an international trade agreement. But there has been recent evidence to the contrary.

Studies show that both developed and developing countries experience higher wage-skills premiums (the ratio of high-skill to low-skill wages, used as a proxy for the state of national labour standards) and higher wage inequality following an episode of trade liberalization. In high-skill countries higher wage inequality is generally associated with increased trade with lower-skill countries. Studies on the United States demonstrate that wage inequality has increased in tandem with increasing trade flows.

Further, in low-skill labour countries, openness to trade should theoretically reduce the skills premium, thus reducing inequality levels. But this has not been the case. For example, through trade liberalization in Columbia in the 1980s and 1990s, wages declined more sharply in sectors with larger tariff cuts. Moreover, rural Indian districts with greater exposure to trade liberalization experienced higher poverty rate growth and larger poverty gaps. At the same time, many developing countries (e.g. Mexico, Morocco, Brazil) saw simultaneous growth in the wage skill premium and sector-specific proportions of high-skilled workers. Surely, these unexpected findings in developing countries warrant further investigation.

These findings are, however, based on research targeted towards the damaging effect of import competition, and therefore paints a negative view of the impact of trade and labour. Fewer studies have focused on the effects of increasing exports on labour. However, those that exist show a positive impact. For example, recent studies have found that export expansion in the United States largely offset the job losses created by Chinese import competition. This was driven largely by jobs in services, supporting the traditional theory that trade affects the labour market in line with comparative advantage.  

Generally, however, labour advocates have long complained that trade liberalization results in a ”race to the bottom” with respect to employment conditions. It is perceived as a major factor exerting downward pressure on wages in advanced countries and increasing exploitation of workers in developing countries. They have argued that the inclusion of labour standards in trade agreements has only improved domestic labour standards in limited situations, emphasizing the need for strengthening the linkage between trading opportunities and the promotion of labour standards.

Can new research help us find a more balanced understanding of the trade and labour relationship?

Revisiting international responses to the relationship

The preamble of the Agreement establishing the World Trade Organization Agreement (WTO) notes that members’ ”relations in the field of trade and economic endeavour should be conducted with a view to raising standards of living, ensuring full employment...” Historically, efforts to strengthen labour standards within the scope of the multilateral trading system have not attracted universal support. In 1996, at the Singapore Ministerial Conference, WTO members rejected the possible use of labour standards for protectionist purposes. They affirmed that the ILO, rather than the WTO, was the competent body to discuss and address these standards, thereby leaving aside the inclusion of the so-called ”social clause” from the remit of the WTO. To date, none of the WTO agreements explicitly refer to or deal with labour commitments.

Yet, against this background, trade policy-makers are demonstrating a growing appetite to connect trade and labour rights. Over the last two decades, many governments – more notably, the US, Canada, Chile, and New Zealand – have incorporated clauses in free trade agreements (FTAs) that commit the countries party to the agreements to adhere to national and/or international labour standards, laws or conventions. Trade and sustainable development chapters (involving provisions to protect and promote labour standards as well as provisions to protect the environment) have become a standard part of recent European Union FTAs. As of 2019, one third of trade agreements in force and notified to the WTO include labour provisions. The rationale is that countries should not gain competitive advantage in trade by failing to promote good labour laws and outcomes. Yet, in practice, a key consideration is enforcement. So far, the mechanisms for holding governments to account for the labour laws they enact and the way they enforce them are lacking, critics argue. Labour clauses in trade agreements have remained cosmetic.

Bold change would require a significantly different approach to making trade deals more effective while also protecting workers.

Exploring avenues for dialogue

The Graduate Institute’s Centre for Trade and Economic Integration, Global Governance Centre and TASC Platform, with the support of the Permanent Mission of the Kingdom of the Netherlands to the UN and other International Organisations in Geneva, are joining forces to provide an open platform to explore this question. By engaging with major issues at the interface of trade and labour – such as trade in services, e-commerce, and agri-commerce – the aim is to identify positive angles to stimulate conversation and collaboration in the international arena. These could include the potential to align the analytical capabilities of International Organizations to fill some of the gaps in research and understanding outlined above; share best practices from across the labour and trade policy spaces; build capacity of political actors for better collaboration within countries; and explore possibilities or needs for adjustment within existing international standards, treaties and agreements.

By providing a neutral space for exploration, the goal is to promote closer alignment and working relationships among individuals and organizations in this space – a fundamental first step towards strengthening the trade and labour nexus.  

Image by Alexandra from Pixabay

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