Global Policy Forum

Social Clauses - Here to stay


By Rahul Rao *

December 1999

Part 1

On 1 December 1999 in scenes reminiscent of US civil rights and anti-war protests of the 1960s and 1970s, thousands of protesters clogged the streets of downtown Seattle where trade representatives of 135 countries were to meet for the Third Ministerial Confederate of the World Trade Organisation (WTO).(1) The comparison with the earlier civil rights and peace movements is however, illusory. Unlike in those protests, the police in Seattle did little to check the ensuing violence with fewer than 30 persons being arrested despite the magnitude of the chaos that was unleashed. Also unlike its predecessors, the Seattle protests found support from the US government expressed through its Trade Representative Charlene Barshefsky, who stated that the Clinton administration had "the fullest sympathy" for the protesters' demands.(2) Several delegations felt that the protests were stage-managed by the US administration. Indeed, trade diplomats had no doubt that the US was egging on the protesters to bring pressure on trading partners to concede American demands.(3)

Among those demands was a call for a linkage between trade and labour standards within the framework of the WTO through the mechanism of a 'social clause'.(4) So sharp are the divisions that have emerged between developed and developing countries on this issue, that they threaten to break the consensus needed for a successful conclusion of the Seattle conference. The conflict has forged unprecedented alliances between players from government, industry and labour, arrayed against one another on either side of the North-South divide.

The issue of linking international trade with labour standards was alluded to as far back as 1919, when the League of Nations was established. Article 23 of the Covenant of the League of Nations provided that: "Subject to and in accordance with the provisions of International Conventions existing or hereafter to be agreed upon, the members of the league - (a) will endeavour to secure and maintain fair and humane conditions of labour for men, women and children, both in their own countries and in all countries to which their commercial and industrial relations extend, and for that purpose will establish and maintain necessary international organisations."(5) More recently, the issue of the social clause was raised by developed countries during the Uruguay Round of trade liberalisation (1986-1993) which ended, however, without any secured commitment for future action within the GATT/WTO framework.(6)

The December 1996 WTO ministerial conference at Singapore was a turning point, although no one is certain of the road that was taken. The Declaration issued at the conference stated in material part:

"We renew our commitment to the observance of internationally recognised core labour standards. The International Labour Organisation (ILO) is the competent body to set and deal with these standards, and we affirm our support for its work in promoting them. We believe that economic growth and development fostered by increased trade and further trade liberalisation contribute to the promotion of these standards. We reject the use of labour standards for protectionist purposes, and agree that the comparative advantage of countries, particularly low-wage developing countries, must in no way be put into question. In this regard, we note that the WTO and ILO Secretariats will continue their existing collaboration."(7)

Representatives of developing countries were jubilant at the acceptance of their contention that the issue of the social clause went beyond the WTO's sphere of competence and corresponded instead with that of the International Labour Organisation (ILO).(8) They also found cause to celebrate in the commitment against any measure that would jeopardise their comparative advantage derived from low wages. Singapore trade minister Yeo Cheow Tong who also chaired the conference said: "Some delegations had expressed the concern that th(e) text (of the ministerial Declaration) may lead the WTO to acquire a competence to undertake further work in the relationship between trade and core labour standards. I want to assure these delegations that this text will not permit such a development." Malaysian trade and industry minister Rafidan Aziz echoed similar sentiments when he said: "There will be no more talk of labour standards in the WTO. No way, no discussions, no continuing work, nothing."(9)

Paradoxically, developed countries were also celebrating victory. For the first time, labour standards had been mentioned in an official WTO document. Furthermore, the clear statement of support for core labour standards by the WTO membership meant that labour standards had wormed their way into the trade agenda. The French trade minister Yves Galland was quoted as saying: "The major debate of labour standards is here to stay in the WTO. It will never go away."(10) The then acting US Trade Representative Charlene Barshefsky said: "We must recognise (that) issues of workers' welfare and worker rights are absolutely part of the trade debate, whether we like it or not ideologically….when we have such an important subject, it will always remain an important subject in the WTO."(11)

Clearly the Singapore conference had resolved nothing. Not surprisingly fissures have re-opened at Seattle, with developed countries more belligerent than ever in their demand for a social clause. In an interview to The Seattle Post Intelligencer, President Clinton was quoted as saying: "I would favour a system in which sanctions would come for violating any provision of a trade agreement… It is legitimate to say that if people are out there working and selling their products in an international arena and Americans are going to buy them…we ought not to buy from countries who violate the child labour norms, we ought not to buy from companies that basically oppress their workers with labour conditions and lack of a living income."(12)

In this paper, I explore the critical issues involved in debates over a social clause in three parts and attempt to carve out a position independent of those that have repeatedly been articulated by the North and the South. In part 1, I examine and critique the arguments of proponents and opponents of a social clause respectively. In part 2, I evaluate the success that existing trade-labour standards linkages have had in improving labour standards. I also attempt to construct a possible social clause and discuss ways of overcoming the various difficulties that are likely to be encountered in the process. Part 3 is an exploration of alternative trade and labour standards linkages in the voluntary sector. I conclude by suggesting that as these voluntary linkages proliferate as indeed they are, the debate over the social clause at the level of the state will become redundant.

Arguments of proponents
The 'fair trade' argument
The process of globalisation involves the removal of barriers to the movement of goods and capital. As a result of this, manufacturers can now locate their centres of production almost anywhere in the world and cater to markets that are not necessarily near those production units. Proponents of a social clause argue that manufacturers, in an effort to minimise their production costs, invest and set up units in developing countries which have an abundant supply of cheap, often exploited, labour. Cheap third world imports flood the markets of developed countries and are naturally more competitive than goods produced domestically. Industries in developed countries producing goods which are in direct competition with third world imports are thus hurt.

Manufacturers in developed countries try to make their products more competitive by reducing prices. The easiest way to do this is to cut down on labour costs. Ultimately, workers in developed countries suffer; they are forced to accept wage cuts and freezes, or are simply fired. The argument therefore concludes that the presence of cheap labour in developing countries is detrimental to the interests of labour in developed countries because it leads to a situation in which there is a downward spiral of labour standards as manufacturers in developed and developing countries compete with each other for larger shares of the market. A social clause, it is argued, will prevent this by setting a floor for labour standards, below which they will not be allowed to fall. Harmonisation of labour standards will ensure that developing countries do not enjoy an "unfair advantage" in attracting investment and production of goods.(13)

At one level this argument, assuming it to be valid, is ironic. If labour standards are indeed spiralling downwards, this is a direct consequence of the new mobility of capital brought about by globalisation. It may be recalled that many developing countries were drawn unwillingly into the process of globalisation. Structural adjustment packages were prescribed as the antidote to all their problems by multilateral financial institutions such as the International Monetary Fund and the World Bank. A standard ingredient of such packages was the removal of barriers to foreign capital. Developing countries can hardly be blamed for the consequences of an economic policy that they were forced to adopt.

The 'fair trade' argument consists of two propositions:
(1) The availability of abundant cheap labour in developing countries lures foreign investment and results in the establishment of centres of production there.
(2) Cheap third world imports are responsible for the unprecedented job losses in competing industries of developed countries.

Both propositions are supported by little evidence. It is true that developing countries have been increasingly successful in attracting foreign direct investment (FDI) over the last few decades. FDI flows to developing countries grew from $16 billion between 1983 and 1990, to $77.9 billion in 1994.(14) However, it is fallacious to attribute this growth in FDI flows to developing countries solely to the availability of cheap labour. In 1993, four countries (China, Malaysia, Argentina and Mexico) accounted for 63.5% of these flows and they are not low wage locations relative to the rest of the liberalised developing world.(15) If the movement of capital between countries was determined by the level of wages alone, there would have been no capital movements between developed countries. It would be impossible to explain why 70% of global capital movements take place among developed countries themselves.(16)

Undoubtedly, a variety of factors influence the decision of where to invest and commence production of goods, labour costs being only one. In many industries, the share of labour costs in total production cost is rather low and hence this is not a factor in determining the location of the industry. Also, the savings in labour costs in developing countries may be more than offset by disadvantages of inadequate infrastructure, vulnerability to bottlenecks, lower labour skills, lack of raw materials, etc.(17)

Whether the direction of FDI is determined by labour costs or not, FDI outflows seem to benefit their countries of origin. One study found that in the case of the US and Germany, FDI outflows resulted in more exports from those two countries. Only in the case of Japan did FDI outflows result in imports into Japan.(18)

The second proposition of the 'fair trade' argument may be examined with reference to the textile industry. Advocates of this argument often draw attention to trends in this industry to substantiate their claims.

Global trends in textile and garment trade
On a cursory examination of global trends in textile and garment trade, one cannot but notice two significant and apparently related phenomena - the tremendous improvement in the performance of the textile industries of developing countries and the decline of these industries in developed countries. The overall trade in the textile and garment sector from developing countries (excluding the socialist countries of Asia and Eastern Europe) increased from $33 billion in 1980 to $104 billion in 1991, leading to an increase in world market share from 28% to 40.3%.(19) Obviously, the share of developed countries dropped correspondingly. Employment in this sector in developed countries (once the third largest industrial employer in Britain and France and the largest in Ireland) slumped. About 2 million jobs were lost in the 1970s, with a decline of 25% in total employment between 1973 and 1979. In 1980, a further 100,000 jobs were lost in Britain alone.(20) If the 'fair trade' argument were valid, then competition from cheap third world imports would be responsible for these job losses.

However, it has been found that mechanisation is a significantly more important reason for labour displacement than import competition. The automation drive that swept the textile industries of developed countries increased productivity to such an extent, that more could be produced with fewer workers. Large sections of the labour force in the industry became redundant. This was coupled with domestic recession, which hit demand. This would explain the slump in sales.(21)

Imports have hurt the textile industries of developed countries, but most of these have come from other developed producers. Most of the textile and garment trade originating from developed countries is intra-regional. In 1991, 80% of the textile and garment trade of European countries was destined towards other European countries. 50% of US textile and garment trade was intra-American.(22) Competition for the developed countries therefore comes from other developed countries. In the 1970s, Italy seized a major part of the EEC market for women's tights, which was previously dominated by France. The US has also made major inroads into the EEC market. In 1978, the US sold more 'sensitive category' goods(23) to the European Community than did any other country. In the early 1980s, the US took about half of the British carpet market.(24)

Despite the fact that technical changes, domestic recession and imports from developed countries were separately more important reasons for declining employment and labour standards in the textile industries of developed countries, producers chose to train their guns on developing countries. Their poor labour standards were cited as the root cause for problems that the textile industries were facing at home. Developing countries became the target of a series of protectionist measures that operated to stifle growth and negative any advantage that they might have enjoyed in the production of textiles. They were much easier targets than other developed countries such as the US, which had sufficient leverage to take retaliatory measures if it was hit.

These trends are not peculiar to the textile industry, but may be observed in many of the old and basic (sunset) industries of the developed world such as steel, automobiles, etc.

The 'solidarity' argument
The other argument in favour of adopting minimum labour standards enforceable through a social clause, is that failure to do so will amount to participation in the exploitation of labour. This is essentially a moral argument. While many actors in the movement for the social clause are sincere in their concern over abominable labour standards in the developing world, one is not so sure if the same can be said of official representatives of certain developed countries such as the US. It is difficult to understand what stakes the US, British, German or Japanese governments have in labour standards in India. If they have no direct, genuine interest in the conditions of workers in developing countries, then they are simply using the issue to protect the interests of their capitalists.

Experience has shown that developed countries are highly selective in linking trade with human rights in general and labour standards in particular. The US has spearheaded the economic blockade of Cuba in the guise of protesting against human rights violations there, even though there is no concrete evidence of the same. At the same time, China is given Most Favoured Nation (MFN) status, despite the fact that it has unabashedly curbed democratic opposition.(25) One of the essential labour standards which proponents of a social clause would like to include, namely the right of association and collective bargaining, is almost totally absent in most of the oil producing countries of West Asia. But no voice is heard from Europe or the US advocating a ban on the import of oil from these countries. This is understandable, considering that it is the exploitation of labour from these countries that has enriched the North to a great extent.(26)

The labour standards that are sought to be included in the social clause are based on ILO conventions. The US is a party to very few of these. The US Congress repeatedly refuses to ratify these conventions lest the ILO be able to sit in judgment over it in matters of enforcement of labour standards. The official US position is that although it is not a party to several ILO conventions, its constitution and laws guarantee labour the same rights. A recent ILO report published in November 1995, exposed the fallacy of this claim. The report contained the US position (along with that of other governments) on its intentions to ratify some 'core' labour standard conventions(27) - those for abolishing forced labour, guaranteeing freedom of association and collective bargaining and specifying the minimum age for employment. The US response was that it was unable to ratify these conventions (the very same ones that it seeks to include in a social clause and for whose non-observance it wants to sanction developing countries) because they conflicted with domestic laws and practices. The US is unable to ratify the 65 year old ILO convention on forced labour, for example, because it conflicts with the long-standing practice of sub-contracting work to prisoners.(28) It is also unwilling to ratify the convention on freedom of association because it would necessitate changes in domestic law. The argument that the US constitution and laws set higher labour standards does not seem credible when one considers that only 10% of US labour belongs to unions.(29)

Arguments of opponents
The weakness of the 'fair trade' argument coupled with the hypocrisy inherent in the 'solidarity' argument arouses in opponents of the social clause, the legitimate fear that a social clause is being proposed not in the interests of labour, but for purely protectionist motives. These opponents include state as well as non-state actors broadly (but not exclusively) drawn from the South. Their fears are legitimate because the theory that cheap imports from developing countries jeopardise the interests of labour in the North has been used to justify the protectionist measures targeted against developing countries. The use of the same justification for the social clause leads opponents to view the social clause as yet another weapon in the arsenal of protectionist measures that developed countries will be able to use against developing countries.

While acknowledging that those opposing the social clause have legitimate reasons for doing so, it is necessary to examine their arguments in greater detail.

The 'comparative advantage' argument
This argument states that the basis for international trade is comparative advantage arising out of cost differentials between nation. It is argued that comparative advantage in the production of most goods is heavily tilted in favour of developed countries because of their command over and access to capital, superior technology and marketing facilities. The developing countries supposedly derive their comparative advantage from their vast reserves of cheap labour. Harmonisation of labour standards would have the effect of raising labour costs in developing countries, thus depriving them of the one advantage that they currently possess vis-í -vis developed countries. A social clause would therefore undermine free trade.(30)

It is well known that labour standards in the export-oriented industries of many developing countries are abysmal. India is a case in point. Child labour is rampant in many export-oriented sectors such as the carpet-weaving, diamond-cutting, glass, footwear and garment sectors. Adult labour are often not paid the statutory minimum wages or given the statutory benefits due to them. In many countries workers do not enjoy the right of association and collective bargaining. Trade unions are brutally suppressed.

The comparative advantage of these countries is therefore partly derived from the use of child labour, the miserable wage levels of adult workers, their bad living and working conditions and the denial to them of basic human rights. Governments and employers in developing countries in opposing the social clause, claim to uphold the 'national' interest. In reality, the interests of a narrow section of the population which is not affected by low labour standards and violations of human rights, are defended. It is in the interests of third world capitalists to ensure that labour standards remain low. Their opposition to the social clause obviously stems from their desire to keep wages and production costs low. Ultimately, workers carry the burden of retaining comparative advantage and upholding the 'national' interest. It would be unrealistic to expect capitalists to share in that burden by reducing their profit margins. The logic of the 'comparative advantage' argument is such, that any struggle by workers for a better life may be opposed on the grounds that it would erode the comparative advantage of the country.(31)

The 'comparative advantage' argument may be critiqued at another level. It is neither conceptually nor empirically clear that the higher labour standards ushered in by a social clause would mean higher labour costs. There is evidence that the costs of many mandated benefits are ultimately shifted to workers in the form of lower wages. In such a case, total labour costs and hence international competitiveness, are not affected by higher non-wage benefits.(32)

The 'national sovereignty' argument
It is argued that labour standards lie within the sovereign jurisdiction of national governments. A social clause would infringe national sovereignty by externalising the whole process of standard setting. This argument is unconvincing because developing countries have had no difficulty in ratifying conventions stipulating minimum labour standards drafted by an external agency - the International Labour Organisation. In fact developing countries have a better ratification record than some developed countries such as the United States. The process of labour standard setting, therefore, has already been externalised to some extent. A social clause would only have the effect of enforcing compliance with these conventions, an obligation that countries undertake anyway when they ratify them.

In reality, the argument of 'national sovereignty' is used to build national and emotional cohesion in the battle against the social clause.(33) National governments have a shameful record in implementing their own labour laws and honouring commitments made in respect of labour standards in international fora. While national sovereignty must be defended, it cannot be used as a shield by oppressive or indifferent governments to stave off international criticism and action.

Procedural difficulties
Opponents of trade - labour standards linkages raise questions regarding procedural aspects of a social clause. What standards should be incorporated into the social clause? How should these standards be agreed upon? Who is to monitor compliance with the clause? Who should sanctions be targeted against - defaulting countries or individual companies? What kinds of sanctions should be imposed? These are relevant questions, but are they the insurmountable obstacles they are so often made out to be? An attempt has been made to answer these and other questions in a later section of this paper.

*Rahul Rao, GPF Associate and IV Year, B.A., LL.B. (Hons.), National Law School of India University. The research for this paper was conducted during the course of an internship with the Centre for Education and Communication (New Delhi) in January 1998. The author is deeply indebted to the Centre for research material and to its Executive Director J. John, for research guidance and criticism. back

(1) Allan Dowd, Protesters wreak havoc at Seattle, THE ECONOMIC TIMES (Bangalore), Dec. 2, 1999, at 6. back

(2) Sridhar Krishnaswami, Seattle calm after the storm, THE HINDU (Bangalore), Dec. 2, 1999, at 1. back

(3) Priya Ranjan Dash, Curfew helps WTO meet get off the ground, THE TIMES OF INDIA (Bangalore), Dec. 2, 1999, at 1. back

(4) The term 'social clause' as used in this paper, refers to a clause in an international trade agreement which would allow an importing country (which is party to the agreement) to link imports from another party, with conformity to certain minimum labour standards specified in the clause. back

(5) SOCIAL CLAUSE IN MULTILATERAL TRADE AGREEMENTS 143 (Centre for Education and Communication 1995). back

(6) Id. at 98. back

(7) World Trade Organisation, Singapore Ministerial Declaration, para. 4. WT/MIN(96)/DEC/W. 13 December 1996. Cited from Virginia A. Leary, The WTO and the Social Clause: Post-Singapore (visited Dec. 1, 1999) . back

(8) Gustavo Capdevila, Developing Countries Block Social Clause in ILO (visited March 5, 1998) . back

(9) Martin Khor, After Singapore, the battle of interpretations begins: Labour Standards (visited March 5, 1998) . back

(10) Id. back

(11) Id. back

(12) Sridhar Krishnaswami, Clinton for sanctions for violation of labour standards, THE HINDU (Bangalore), Dec. 2, 1999, at 13. back

(13) Eddy Lee, Globalisation and Labour Standards: A review of issues, 136 INT'L. LAB. REV. 181 (1997). back

(14) C. P. Chandrasekhar, Linkage as Leverage: International Capital and the Social Clause, in LABOUR, ENVIRONMENT AND GLOBALISATION 11, 14 (J. John & Anuradha M. Chenoy eds., 1996). back

(15) Id. at 14. back

(16) Ajit Roy, Globalisation and the World Working Class, in LABOUR, ENVIRONMENT AND GLOBALISATION, supra note 14, at 39. back

(17) Effects of International Trade and International Labour Standards on Employment, Working Conditions and Development in Non-Aligned and Other Developing Countries, NAC/LM/CONF.5/DOC.5 (Jan. 19-23, 1995) (statement of the Fifth Conference of Labour Ministers of Non-Aligned and Other Developing Countries). back

(18) Chakravarthi Raghavan, Barking Up the Wrong Tree: Trade and Social Clause Links (visited March 5, 1998) . back

(19) Rajesh Mehta, Textile and Apparel Trade - Impact of 'New Regionalism', 31 ECON. & POL. WKLY. 1405, 1407 (1996). back

(20) Chris Farrands, The Political Economy of the Multifiber Arrangement, in EEC AND THE THIRD WORLD: A SURVEY 87 (Christopher Stevens ed., 1982). back

(21) Id. at 89. back

(22) Mehta, supra note 19, at 1407. back

(23) 'Sensitive category' goods refers to directly competing goods which are considered a threat by producers at home. back

(24) Farrands, supra note 20, at 90, 91. back

(25) Sharit K. Bhowmik, Social Clauses: the Indian case, 2&3 CHRISTIAN WORKER 47 (1996). back

(26) Rajindar Sachar, Human Rights and Globalisation, in LABOUR, ENVIRONMENT AND GLOBALISATION, supra note 14, at 92. back

(27) Although there is no hierarchy of conventions in the ILO (i.e. all conventions are equally important), most proposals for a social clause demand the inclusion of conventions dealing with certain basic labour rights. These are often referred to as the 'core' conventions. They have been discussed in detail elsewhere in this paper. back

(28) In several US states, prison labour is used to produce goods for the domestic market. In Oregon, jeans worth $4.5 million are made by convicts and marketed under the label of "Prison Blues". California markets its own convict-made jeans called "Gangsta Blues". In the New York prison system, thousands of prisoners produce office goods, soaps, etc. The San Francisco Chronicle reported recently that 10% of prison inmates in Arizona work for private firms, earning less than the US minimum wage of $4.25 an hour. The American Telephone & Telegraph company (AT&T) recently hired 50 inmates to market products by telephone, paying them a mere $2 an hour. It is also well known that prisoners are used to make license plates for vehicles. back

(29) Raghavan, supra note 18. back

(30) Effects of International Trade and International Labour Standards on Employment, Working Conditions and Development in Non-Aligned and Other Developing Countries, NAC/LM/CONF.5/DOC.5 (Jan. 19-23, 1995) (statement of the Fifth Conference of Labour Ministers of Non-Aligned and Other Developing Countries). back

(31) Sujata Gothoskar, The Social Clause - Whose Interest is it Serving?, in LABOUR, ENVIRONMENT AND GLOBALISATION, supra note 14, at 59. back

(32) Lee, supra note 13, at 181. back

(33) P. A. Sebastian, Beyond Government's Position, THE TIMES OF INDIA (Mumbai), Feb. 14, 1995, at 7. back

Social Clauses: Part 2
More Information on the WTO

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C íŸ 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.


FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.