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international economics 5th by gerberch08

Chapter 8
International
Trade and
Labor and
Environmental
Standards

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.


Introduction:
Income and Standards
• Since the end of World War II, many of the formal
barriers to trade have been removed
• Still problems with trade due to differences in:
– Laws and regulations
– Technical, health and safety, environmental, and
labor standards.

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.


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Setting Standards
• Countries can be integrated even with
different rules, regulations, and standards
– Harmonization of standards: Two or more
countries adopt a common set of standards
– Mutual recognition of standards: Countries
maintain their own standards, but accept the
standards of others as valid and sufficient
– Separate standards: Countries maintain their
own standards and refuse to recognize the
standards of others
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8-3


Setting Standards
• No general rule for best way of dealing with the
differences in standards
• Each of the three mechanisms has advantages
and disadvantages
– Harmonization may be best in technology
– Harmonization fails to recognize differences between
countries
– Mutual recognition can be better in labor or
environmental standards

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

8-4


Setting Standards
• Differences in labor and environmental standards,
have generated concerns
– (1) Firms will adopt lower standards to remain
internationally competitive


– (2) Firms will move to countries with lax standards
– Engage in a race to the bottom
• adoption of the lowest level of standards
possible in order to attract foreign firms

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8-5


Table 8.1 Income and Population by World
Bank Categories, 2007

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8-6


Table 8.2 Income Levels, Society and the Environment

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8-7


Labor Standards
• Many countries want labor and environmental
standards included in future trade agreements
• NAFTA addresses labor and the environment: each
country enforces its own standards or face monetary
fines
– Many claim this is inadequate
– Pushing to include trade sanctions to prevent race
to bottom
Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

8-8


Defining Labor Standards
• The International Labor Organization (ILO)
proposed five labor standards as basic rights:
– Prohibition of forced labor
– Freedom of association
– Right to organize and bargain collectively
– End to exploitation of child labor
– Nondiscrimination in employment
• Most agree with these rights, but a lot of ambiguity
in their interpretation
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8-9


Figure 8.1 Child Labor, 5-14 Age Group, 2004
(Millions)

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Figure 8.2 Percent of Children Working, 5-14 Age
Group

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8-11


Labor Standards and Trade
• Should one country use trade barriers to get
another country to change their labor standards?
• Showed that trade barriers are expensive
• Trade barriers often inefficient policies for reaching
goals

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8-12


Effectiveness
• Only large countries can use trade barriers
successfully, small countries can’t impact demand
• Sometimes, trade barriers will make things worse
• Producers may move to informal economy
– Part of economy that is untaxed, unregulated
and uninspected
– In developing countries this is large portion of
economy
Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

8-13


Hazy Borderline
• Special interest groups use labor standards to
obtain protection
• Large fear of developing countries who have lots of
unskilled labor
• Developing countries view use of labor standards
as protection for high income countries.

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8-14


Specific Content and Trade War
• No agreement on specific content of labor
standards, only vague guidelines
• Trade sanctions to enforce labor standards
violates WTO rules and may be at risk for
retaliation and trade war.

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8-15


Evidence on Low Standards
as a Predatory Practice


Argue that countries will purposely have low
labor standards to capture markets



Problems with argument:
– Low standards can reduce costs, but doesn’t
change country’s comparative advantage
– Reduction in labor costs usually means higher
productive costs elsewhere – hard to attract
foreign investment

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

8-16


Evidence on Low Standards
as a Predatory Practice


Argue that countries will purposely have low
labor standards to capture markets



Problems with argument:
– Low standards can reduce costs, but doesn’t
change country’s comparative advantage
– Reduction in labor costs usually means higher
productive costs elsewhere – hard to attract
foreign investment

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

8-17


Trade and the Environment:
Transboundary and Non-Transboundary
Effects
• Environmental costs are not reflected in
production/consumption
• Some believe trade sanctions need to be used as
enforcement of environmental standards
• Critics of sanctions have same arguments as with
sanctions used to enforce labor standards

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8-18


Non-Transboundary and
Transboundary Effects
• Arguments by proponents of trade barriers to
enforce environmental standards:
1) Countries engage in an environmental race to
the bottom to boost competitiveness
2) Dirty, rich country industries will “export
pollution” in countries with lower standards,
creating pollution havens
3) Poor enforcement leads to environmental
problems that spill over to another country

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8-19


Environmental Race to the Bottom
• High environmental standards reduce
competitiveness
• High standards raise national well-being
• Most countries’ environmental standards have
increased over time

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8-20


Pollution Havens
• Pollution havens is where foreign firms face lower
compliance standards
• There are no pollution havens
• Optimal environmental standards vary by country
because of differences in income and preferences

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8-21


Transboundary Environmental Problems
• When on country’s pollution spills into another
country, it is transboundary
• Trade sanctions are only successful if used by a
large country, or coalition of countries

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8-22


Alternatives to Trade Measures
• Efficient policies go to root of problem they are designed
to correct
• Trade measures create production and consumption
inefficiencies
• Root of problem often is in production or consumption of
good, not trade
– Labels for exports
– Requiring home country standards
– Increasing international negotiations

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8-23


Labels for Exports
• A label is attached on an exported good indicating
the good was produced under humane and
environmentally sound conditions
• Problems
– Many countries resist labeling as an
infringement of their sovereignty
– Consumers must be convinced the label
provides accurate information

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Requiring Home Country Standards
• High-standard countries require firms to follow home
country standards when operating abroad
• Benefits
– Impedes the race to the bottom
– avoids the problem of high-income countries’
dictating standards
• Disadvantages
– Addresses only firms of high-standard countries
– A high-standard country firm may outsource
production to a low-standard country producer

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8-25


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