CRS Report for Congress
95-826 E
July 20. 1995
Congressional Research Service The Library of Congress

Worker Rights Provisions in Fast-Track for Chile: Pros and Cons

Mary Jane Bolle

Specialist in Labor Economics

Economics Division

ABSTRACT

The report provides economic arguments for and against linking worker rights provisions to trade instruments as Congress considers extension of Presidential authority to negotiate trade agreements on a "fast-track" basis, including an agreement for Chile to join NAFTA.

SUMMARY

For the third time in five years, Congress is debating whether or not to link worker rights to trade agreements. Earlier efforts culminated, respectively, in: (1) the labor side agreement to the North American Free Trade Agreement (NAFTA) approved by Congress in 1993; and (2) the absence of any worker rights provision in the Final Act of the Uruguay Round of negotiations to the General Agreement on Tariffs and Trade (GATT) approved in 1994. This time, the 104th Congress is considering the worker rights issue in debating whether to reauthorize "fast-track" authority so the President can negotiate trade agreements on an expedited basis, including Chile's membership in NAFTA.¹

What is meant by worker rights? While there is no consensus on what constitutes internationally recognized worker rights, (a phrase generally used interchangeably with labor standards), the term is defined in Sec. 502(a)(4) of the Trade Act of 1974 (P.L. 93-618). There it includes: (a) the right of association; (b) the right to organize and bargain collectively; (c) a prohibition on the use of any form of forced or compulsory labor; (d) a minimum age for the employment of children; and (e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.²

CURRENT LEGISLATIVE ISSUES

The 104th Congress could act twice on the issue of trade-related worker rights. Worker rights could come up: (1) as a mandate that reauthorization of "fast-track" authority to negotiate trade agreements carry with it a general requirement that the President pursue -- or, alternatively not pursue -- a labor rights agenda; and/or (2) during discussion on approval or disapproval of Chile's accession to NAFTA.

Under the "fast-track" procedure, Congress delegates broad authority to the President to negotiate trade agreements, so long as the President agrees to consult with Congress during the negotiations and meets other stated requirements. Congress agrees, in return, to vote up or down the implementing legislation with no amendment, after limited debate, and within specific time periods. In recent years, the availability of fast-track authority has been an important factor in persuading foreign countries to enter into trade negotiations with the United States.

Congress first granted fast-track authority to the President under the Trade Act of 1974. It was extended in 1979, amended in 1984, completely reenacted in 1988 with the Omnibus Trade and Competitiveness Act (OTCA, P.L. 100-418), and extended again in 1991. It was used to negotiate three free- trade agreements -- with Israel, with Canada, and NAFTA -- and several rounds of negotiations under GATT, including the most recent Uruguay Round.

Fast-track negotiating authority covers two types of provisions. The first type is legislative procedures (discussed above), which were part of the OTCA and which did not expire. The second type sets the limitations and stipulations under which fast-track procedure may be used -- in this case, for example, that fast-track be used to negotiate Chile's membership in NAFTA, and that Chile be required to sign on, or not sign on, to the labor side agreement -- and the date at which the fast-track authority will expire.³

THE ESSENCE OF THE WORKER RIGHTS ISSUE

The essence of the worker rights issue is a debate over whether workers and management together will tend to raise labor standards over time as an economy matures, or whether standards need to be artificially "helped" in order to protect workers in developing countries and workers in countries with which they trade. This section provides an overview; table 1 details arguments traditionally offered on both sides of the issue.

The Economic Case for Labor Standards Rising "Naturally"

Some economists argue that labor standards rise "naturally," as an economy evolves. This happens not in the first phase of development, when economies are labor intensive, but rather during the second phase, when they become more capital intensive. During this second period, such economists argue, the relative scarcity of labor compared to capital affords labor a clout that leads to a rapid increase in both labor standards and (through increased productivity) real wages.⁴ As proof of this, economists point to the fact that real wages are eight times as high in Taiwan, and more than six times as high in Korea as they were a generation ago; at the same time, these countries have also introduced various social benefits and increased rights of association.⁵

Such economists also argue that the engine for growth is production based on a country's natural comparative advantage -- that is, production which uses the country's abundant factors (i.e., cheap labor) intensively. They also argue that a country's comparative advantage will change over time: as a country matures, its exports will evolve through increasingly capital-intensive production possibilities.⁶ Thus, changing comparative advantage sustains economic growth, an ever-increasing world economic "pie," and rising world-wide labor standards. Economic theorists, therefore, along with business owners and governments of developing nations, are against linking labor rights provisions to trade agreements. They argue that labor standards, if imposed from outside before productivity has risen, can preclude competitiveness for a country, stunting its early growth.

The Social and Economic Case For Labor Standards Needing Help

Others, representing the labor perspective, argue that changes in trade, finance, communication and technology (especially computers) are throwing disorder into patterns of world economic growth. Capital is increasingly mobile. Many production processes performed by high-wage workers can be quickly relocated to less advanced countries, where jobs earn lower wages. In essence, then, many low-skilled workers around the world in developed and developing countries alike, have become interchangeable. They have formed a single labor pool, and are therefore competing against each other.

The result of this phenomenon, this group argues, shows up in developed countries, as either a widening wage gap (as in the United States) or high unemployment (often above 10 percent, as in some European countries). President Clinton has pointed out that, "every wealthy country in the world is having great difficulty creating jobs and raising incomes." ⁷ It is pointed out that increases in productivity no longer dependably bring gains in wages and working conditions in developed countries.⁸

TABLE 1. Arguments For and Against Linking Labor Standards to Trade

AGAINST: Arguments of Business Owners, Developing Nations and Economic Theorists

1. The main purpose of trade agreements is to promote trade and economic growth. Trade agreements are probably not the best mechanism for resolving non-trade issues (such as labor rights). Non-trade issues tend to detract from the main purpose of the trade agreements while not resolving the non-trade issues.

2. The best way to improve labor standards is to permit private capital to flow unimpeded and to allow economies to export freely. As developing countries grow, they will be more likely to adopt higher labor standards. Workers do not earn high wages just because a minimum wage is ordered. Real growth in income is the result of growth in Productivity.

3. From the perspective of the international investor, strong worker protections create disincentives to invest because they reduce comparative advantage and inhibit the most efficient use of labor, thereby restraining economic growth.

4. From the perspective of economists, in the long run, unprotected economies, like unprotected industries, are able to achieve and maintain a higher level of efficiency and a higher level of growth because their natural comparative advantage is a forceful engine driving productivity growth.

5. From the perspective of the developing country, labor standards could cut off employment opportunities and delay the emergence of these countries as major trading partners.

6. Requiring international labor standards is inconsistent with the goal of reducing tariff and nontariff barriers. Requiring international labor standards is essentially disguised protectionism.

7. The issue of international labor standards raises issues of sovereignty: Does one country have the right to force its domestic policy goals on another country?

FOR: Arguments of Developed Countries, Workers, Union, and Labor Economists

1. There is a fine line between comparative advantage and "social dumping" (competing unfavorably by denying workers basic rights). Labor standards help define the boundary.

2. Labor standards for all trading partners help fend off a "race to the bottom" that comes when workers are forced to roll back minimum wages and standards so that their businesses can remain internationally competitive against businesses in countries where a lack of standards makes the cost of doing business considerably lower.

3. Many workers and unions see multinational corporations as predators. If labor standards are uniformly enforced, companies would be prevented from engaging in exploitative labor practices.

4. Global growth is a balancing act, supported by a broad base of consumer demand in developing countries. For workers to be world class consumers, they must receive a rising share of the gains from increasing productivity and economic expansion. Labor standards help promote these gains.

5. Labor standards would discourage "runaway plants" because they lessen the labor cost differences between countries.

6. Labor standards would not interfere with natural comparative advantage in various countries because minimum wages and labor standards are only one basis for comparative advantage. Others include: (a) infrastructure; (b) available workforce size; (c) workforce education; and (d) level of technological development.

7. Trade agreements are already used to protect endangered species. Why should the rights of workers be given a lower level of protection?

8. Developed nations have, through democratic evolution, made a social contract, assuring citizens a healthful environment, safe working conditions, decent retirement and health insurance, and a safety net for the disabled. One way or another the nation's products must bear the cost of this contract; they cannot compete in price with those of countries using comparable technology but producing no such contract for its citizens.

These observers argue that "periods of intensified competition caused by waves of internationalization " may "lead businesses and politicians to take a more short-term, cost-centered parochial posture, thus creating a climate unconducive to international...cooperation in social policy." ⁹ They argue that the world trading system as now constituted helps widen the gulf between rich and poor in each country. As a result, they argue, labor standards are needed to maintain a balance against the exploitation of world labor surpluses by big business, and will lead, in turn, to increased consumption and rising living standards for workers in developing countries. They are calling for labor rights provisions in trade agreements for two reasons: so that workers in economically advanced countries can maintain and protect the gains in labor standards that they have won; and so that workers in developing countries can see their labor standards rise.

RECENT HISTORY OF CONGRESSIONAL INVOLVEMENT IN THE LABOR RIGHTS-TRADE LINKAGE

During the 1980s and the first part of the 1990s, Congress took a number of actions which increased the labor rights-trade linkage. In the 1980s, amid heavy manufacturing job losses from plant relocations abroad and improved efficiency at home, Congress began inserting labor rights provisions into four laws regulating trade. A 1984 amendment to the statute providing for the Generalized System of Preferences (GSP) and a 1990 amendment to the statute providing for the Caribbean Basin Initiative (CBI) prohibit the extension of preferential tariffs under these programs to countries that do not afford their workers internationally recognized worker rights. A 1985 amendment to the Overseas Private Investment Corporation prohibited financing or insuring of projects in any country not taking steps to offer its workers internationally recognized worker rights.¹⁰ In addition, the 1988 OTCA authorized the U.S. Trade Representative to suspend trade benefits, impose duties or import restrictions, or enter into binding agreements with trading partners to counteract any "persistent pattern of conduct" that denied internationally recognized worker rights.¹¹

In 1991, congressional demands connected with a presidential request to extend fast-track for NAFTA paved the way for a labor rights provision in NAFTA. The resulting NAFTA labor side agreement mandated that each country adhere to its own labor laws, and authorized a graduated response leading ultimately to reinstitution of tariffs if any signatory displays a "consistent pattern of failure" to enforce its own labor standards.

In 1994, despite announced support from the Clinton Administration for a labor rights provision in Final Act of the Uruguay Round Agreement to the General Agreement on Tariffs and Trade (GATT), developing countries out- voted developed countries, and no such provision was included. In lieu thereof, the worker rights-trade link was placed on the agenda of the World Trade Organization (WTO)'s preparatory committee as a subject to be discussed.

THE FUTURE OF LABOR RIGHTS AND TRADE: OPTIONS FOR CONGRESS

The immediate question facing Congress relates to what approach to labor rights, if any, the 104th Congress might consider in dehating the extension of Presidential fast-track negotiating authority, and Chile's membership in NAFTA. Besides the specific legislative options mentioned on p. 1, here are three other approaches:

First, the trade-labor standards issue could be set aside for the time being, while the International Labor Organization (ILO) continues promoting among countries throughout the world, ratification of the more than 170 labor "conventions" or standards it has developed. One consideration is that there is no international consensus on a set of core labor standards, and the ILO has no enforcement powers.

Second, President Clinton has proposed a voluntary code of conduct to which U.S. multinational corporations could adhere when doing business abroad. Such a code would incorporate "internationally recognized" worker rights.¹²

Finally, labor standards could be considered an element of value in consumer goods. Thus Congress could urge that goods for import into the United States be clearly labeled as to the conditions under which they were manufactured, and let consumers adjust their demand for imported products made under various labor conditions. Problems with the "Rugmark" label in India suggest that some external organization would need to assure the accuracy of labels.¹³ Labor standards would be paid for by one or more of the following: consumers willing spend extra for goods made under certain conditions; workers and employers, to the extent that decreased demand might stem from higher prices; or taxes on the general public.¹⁴

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FOOTNOTES

1-[ For more background on Chile, see Chilean Trade and Economic Reform: Implications for NAFTA Accession , by J.F. Hornbeck, June 23, 1995. CRS Report No. 95-751E, 26 p.]

2-[ For another discussion of worker rights and trade, see U.S. Library of Congress. Congressional Research Service. Trade Agreements and the International Labor Standards of the ILO , by Lois McHugh, June 30, 1994 11 p. CRS Report No. 94-535F.]

3-[ U.S. Library of Congress (LC). Congressional Research Service (CRS). Trade Agreements: Renewing the Negotiating and Fast-Track Implementing Authority, by Vladimir N. Pregel,j, Updated June 6, 1995. IB 95089, p. 2. See also LC, CRS. Trade Negotiating Authority: the 1991 Debate on Extension , by Lenore Sek, July 27, 1992. CRS Report No. 92-592E; and LC, CRS Trade Policy in the 104th Congress , by George D. Holliday, Coordinator. April 10, 1995. CRS Report No. 95-485E, p 1-8.]

4-[ Organization for Economic Co-Operation and Development (OECD). Trade and Labour Standards A Review of the Issues , 1995. p. 17.]

5-[ Freeman, Richard B. A Hard-Headed Look at Labour Standards. In International Labour Standards and Economic Interdependence (ILSEI). International Institute for Labour Studies Geneva, 1994. p 88. See also, OECD, Trade and Labour Standards, op cit., p. 21.]

6-[ Anderson, Kym. The Entwining of Trade Policy with Environmental and Labour Standards . Presented at World Bank Conference January 26-27, 1995, Session VII. p. 6.]

7-[ Senser, Robert A. Worker Rights and Trade. Freedom Review , Sept.-Oct. 1994, p. 36-39.]

8-[ USTR Official Outlines Path for WTO to Enforce International Labor Standards. Daily Labor Report , Jan. 9,1995, p. A-8.]

9-[ Sengenberger, Werner. International Labour Standards in a Globalized Economy: The Issues. In ILSEI, op. cit., p. 13.]

10-[ Portes, Alejandro. By-Passing the Rules: The Dialectics of Labor Standards and Informalization in Less Developed Countries. In ILSEI , op cit., p. 161.]

11-[ U.S. Congress. Committee on Ways and Means. Overview and Compilation of U.S. Trade Statutes, 1993 Edition. WMCP 103-1, January 6, 1993, p. 420-423.]

12-[ Administration Releases Details on Voluntary Business Principles. Daily Labor Report , May 31. 1995, p. A-4.]

13-[ In 1993 India launched a carpet certification program called Rugrnark. Under the program, government monitors are supposed to inspect exporters’ looms to certify that children are not employed, and then tag carpets with a certification seal. Factories of Children. The Washington Post , May 21, 1995, p. A-1.]

14-[ Freeman, op. cit., p. 80-87.]

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