Labor Standards and The Free Trade Area of the Americas
Fear of job losses to foreign competitors has been a consistent theme in political debate and the media in recent months. The United States (US) and the 33 other democratically elected governments of the Americas are in the final stretch of negotiations to create the world’s largest common market by January 1, 2005. The Free Trade Area of the Americas (FTAA) will embrace a market of 800 million people, 31 percent of the world’s wealth and 14 percent of the planet’s geography. It is vital to public support for this epochal trade agreement that citizens of all 34 nations better understand the labor issues pending in the FTAA talks.
The economic case for expanding international trade is a well-known and powerful one. Trade accounts for 25 percent of the world’s entire output—double its share of only 25 years ago. It has consistently promoted economic efficiencies through specialization, competition and comparative advantage. It has spread the prosperity of productive employment. It has fractured monopolies and lowered costs to consumers. It is estimated that the complete elimination of current trade barriers could swiftly boost US economic growth and lift an additional 300 million people out of poverty worldwide. Yet the same economic phenomena that make trade an engine of global prosperity can also be a cause of short-term economic, political and social dislocation. The equitable distribution of trade benefits depends on political and social reforms as well as economic ones.
The goals of the FTAA, first outlined in the 1994 Presidential Summit of the Americas in Miami, are to address these issues in a comprehensive way. The parties aim to improve market access, support and strengthen democratic institutions, boost production efficiencies, provide a magnet for foreign investment and reduce trade barriers. Its vision is to create economic prosperity and help eliminate poverty in this hemisphere.
The labor issues in the FTAA talks, and in international trade generally, arise from perceptions about the large differences in the economic development of the nations seeking to lower trade barriers. There are two main issues—comparative advantage and labor standards. The issues are often confused; so it is critical to understand the distinctions between them.
Comparative advantage is the competitive benefit, which less developed countries (LDCs) feel they enjoy with a workforce willing to work for less. This apparent advantage can be misleading. The ultimate standard of international job competition is not “simple” labor costs but “unit labor cost”—the labor cost of producing a comparable product. On this basis technology-aided workers in developed countries are often more competitive than LDC workers receiving far lower wages. The prosperity-spreading effect of free trade, moreover, tends to raise “simple” labor costs in developing countries—thus further narrowing any advantage of lower wages. Japan’s experience over the last 25 years is an excellent example.
Labor standards are the rights and protections which workers enjoy in selling their services—safety and health standards, the right of free association and collective bargaining, freedom from discrimination, etc. LDCs have traditionally resisted efforts to use trade agreements to raise labor standards for two reasons: (1) reluctance to allow intrusions on national sovereignty; and, (2) the questionable belief that raising labor standards is a luxury or cost which they must postpone until after free trade has raised their levels of economic prosperity. Some of the best economic research in the world, however, including a comprehensive 1995 study by the Organization for Economic Cooperation and Development (OECD), indicates that raising labor standards in no way detracts from a country’s overall international competitiveness.
Considering these views of LDCs, and the resistance of some financial interests, it is remarkable that labor standards are included in the formal agenda of the FTAA talks at all. It has always been the rule under the 1947 General Agreement on Tariffs and Trade (GATT), and its successor the World Trade Organization (WTO), that labor standards are “not on the agenda” for global trade talks. Even as the WTO has struggled unsuccessfully in its recent Doha Round to reconcile the development needs of LDCs with the trade expansion aims of developed countries, it has continued to endorse its 1996 Singapore Declaration, which excludes labor issues from trade talks by remanding them to the voluntary processes of the International Labor Organization (ILO):
“We believe that economic growth and development fostered by increased trade and further trade liberalization contribute to the promotion of [ILO] standards. We reject the use of labour [sic] standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage countries, must in no way be put into question.”
Ironically, the exclusion of labor issues from the WTO agenda may have improved their prospects for gaining attention elsewhere—most importantly in the FTAA talks. In response to its own impatience with the slow progress of the WTO talks, the US has pursued a trade policy of “competitive liberalization” which seeks smaller bilateral and regional trade agreements as a means of promoting free trade through competition for access to the US and other markets. The politics of securing “fast-track” support for this policy in the 2002 Bipartisan Trade Promotion Authority Act (BTPAA) in turn led to a compromise with US labor interests that makes internationally enforceable labor standards a main objective for US treaty negotiators.
The requirements of the BTPAA pose squarely for US trade negotiators the problem of finding a way of accommodating: (1) the demands of US labor advocates for higher labor standards in Latin American countries; and, (2) the intent of those same FTAA partners to insulate their comparative labor cost advantages and domestic laws from international interference. The problem is further complicated by the broad diversity of existing labor standards in the 34 nations involved. The opposition of Latin American countries to including labor standards in the FTAA agreement should not be underestimated.
Brazil, as the world’s tenth largest trading country and leader of the South American Mercosur customs union, is positioned as the principal counterpoint to the US in the FTAA talks. It is seen to have championed the interests of smaller and less developed countries in the FTAA talks; and, it was a leader of the LDC Coalition whose opposition to developed-country proposals led to the collapse of the WTO talks in Cancun in 2003. Latin American LDCs are concerned that FTAA labor provisions will be used to reduce their comparative wage advantage or as a pretext for developed-country protectionism. They resist intrusion into their sovereign rights to set domestic social, labor and human rights policies. Their constituent labor interests worry about competing with technology-aided US workers. Brazil and its coalition are resisting environmental and labor provisions in the FTAA.
The US strategy to bridge the gap between its BTPAA objectives and the views of its FTAA partners is a pragmatic and ingenious one. It aims to minimize sovereignty objections to treaty labor provisions while at the same time continuing to press the economic case on the benefits of raising labor standards within the less developed FTAA countries. The strategy has three components: (1) treaty commitment by each FTAA party that it will effectively enforce its own domestic labor standards; (2) objectives to raise and “harmonize” those domestic standards toward the internationally recognized norms of the ILO; and, (3) enforceability of treaty commitments through trade-treaty dispute processes. The FTAA would thus “internationalize” the labor standards of its constituent countries and, by measuring the effectiveness of those laws against common ILO standards, create pressures to raise standards in LDC countries.
The FTAA labor standards compromise would have several important benefits. It would succeed in the ground-breaking task of making labor standards internationally enforceable through the processes of a large multilateral trade treaty. Yet it would also allow the flexibility necessary for the broadly diverse labor standards of the 34 FTAA parties to be “upwardly harmonized” toward international norms over time. The ILO’s 1998 Declaration on Fundamental Principles and Rights at Work would provide a common reference point against which to measure upward progress.
The proposed “enforce-your-own-upwardly-harmonizing-laws” paradigm is no panacea. It will not end the debate over potential trade disruptions caused by labor mischief. Difficult issues will still remain between developed country labor advocates and those of the LDCs. Should the treaty prevent countries from relaxing their domestic labor standards in an effort to promote exports? Should labor standards be enforced through the same trade sanction procedures as other trade issues? Should dispute resolution procedures for labor issues involve judicial-style tribunals based on quantitative international norms or through more flexible diplomatic procedures? What is most important is that these questions have been transformed from objections to the inclusion of labor standards in the FTAA into a discussion over the means and timetable for implementing them. Instead of asking whether the labor standards of US trading partners should be raised, it asks instead how and how fast.
A number of factors make it likely that some labor provisions will be included in the body of the FTAA. Chief among them are the strong US negotiating position, the clear BTPAA objectives, the economic success of the North American Free Trade Agreement (NAFTA) and other American free trade agreements. The serious objections to such provisions by Brazil and other parties, on the other hand, assure that labor standards will be among the most difficult issues of the talks. The debate over FTAA labor provisions will focus on the strength and specificity of provisions, the degree to which they incorporate ILO and other international standards as well as domestic ones, and the procedures for their effective implementation and enforcement.
Negotiations over FTAA labor standards will be contentious. What is most important, though, is that negotiators not lose sight of the main prize available: the FTAA presents a unique opportunity to solidify into international precedent the idea that global labor standards can be effectively implemented, and “upwardly harmonized,” through trade agreements. This trade-facilitating model is to the long-term benefit of workers in the US and in all its Latin American partners as well.
Progress toward a common workplace jurisprudence in a global marketplace is inevitable. The question is whether this progress begins sooner or later, whether it proceeds faster or slower. The FTAA, by crafting a sensible and successful hemispheric example of an international labor standards model, can move the process closer to a worldwide starting line.