International Business Chapter 8 International Trade And Labor And Environmental Standards Outline Introduction Income And

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Chapter 8

International Trade and Labor

and Environmental Standards

◼ Outline

Introduction: Income and Standards

Setting Standards: Harmonization, Mutual Recognition, or Separate?

Case Study: Income, Environment, and Society

Labor Standards

Defining Labor Standards

Case Study: Child Labor

Labor Standards and Trade

Effectiveness

Hazy Borderline between Protectionism and Concern

The Specific Content of Labor Standards

The Potential to Set off a Trade War

Evidence of Low Standards as a Predatory Practice

Case Study: The International Labor Organization

Trade and the Environment

Transboundary and NonTransboundary Effects

Trade and Environmental Impacts That Do Not Cross Borders

Trade and Transboundary Environmental Problems

Case Study: Trade Barriers and Endangered Species

Alternative to Trade Measures

Labels for Exports

Requiring Home Country Standards

Increasing International Negotiations

Case Study: Global Climate Change

50 Gerber • International Economics, Seventh Edition

◼ Learning Objectives

After studying this chapter, students will be able to:

8.1 Compare and contrast the three options for setting standards in trade rules.

8.2 Give examples of the relationship between income levels and environmental

and labor problems.

8.3 Define labor standards.

8.4 State four potential problems with using trade sanctions to enforce labor

standards.

8.5 Compare and contrast transboundary and nontransboundary environmental

problems.

8.6 Explain three alternatives to trade measures for enforcing labor and environmental

standards.

◼ What Students Should Know after Reading Chapter 8

As formal barriers to international trade have been removed, new obstacles have appeared. National laws

and regulations, which are adopted strictly for domestic reasons, unintentionally limit commerce and

economic integration between nations. Conflicts emerge over different national standards. These can be

technical product standards, health and safety standards, or labor and environmental standards.

Firms that already produce to a given standard have a competitive advantage when that standard is more

widely adopted. This fact makes countries desire a wider application of their own standards. Standards

differ by income level, so wide variation in world income means wide variation in standards and the

Students have certainly heard the argument that nations are engaged in a race to the bottom. Increasing

attention to labor and environmental standards will continue to be part of the political discourse about

trade. The charge of unfair trade is frequently raised around differing labor and environmental standards.

The first problem is to define standards and the second to see if there is any evidence to support a race to

the bottom. Anecdotal evidence is widespread, but it is useful to ask students to reflect about labor and

environmental standards today. Do they think they are higher or lower than in 1950, for example? While

Chapter 8 International Trade and Labor and Environmental Standards 51

anecdotes of companies relocating to escape standards are common, and not necessarily inaccurate, the

general trend appears to move in the other direction.

It is also important to recognize that even where standards are otherwise “high,” agriculture is often not

covered by similar labor policies or labor standards. Family farms in developing countries often employ

their own children, and even in the United States the labor code exempts agriculture from many of its

standards.

Environmental problems located entirely within a specific country (non-transboundary) have the usual

external cost analysis. It is in the firm’s best interests to shift environmental costs onto the nation, but it

is in national interests to force firms to address their pollution externalities. While there may be some

situations where firms have powerful control over national policy, in general, environmental standards in

most countries have gotten tougher over time. There is strong evidence that the idea of nations becoming

pollution havens is invalid. Optimal environmental standards seem to vary across nations, with countries

prioritizing different types of environmental protection. Global welfare may be reduced by trying to

impose a single standard that doesn’t take into account local preferences, resources, and cost structures.

◼ Assignment Ideas

52 Gerber • International Economics, Seventh Edition

1. There is a misconception by the general public, students included, that economists and organizations

such as the WTO do not care about the environment. This misconception arises in part because

economists disagree with people who use environmental issues, covertly or otherwise, as trade barriers.

To dispel this incorrect notion, the instructor might ask students to visit the WTO “Environment

Gateway” where they can find a short summary of the trade and environment debate, along with links

to various cases, including the U.S.-shrimp dispute. In addition, there are sections covering the key

provisions and history of environmental concerns

in the GATT and WTO decisions: http://www.wto.org/english/tratop_e/envir_e/envir_e.htm.

2. There are many international agreements on the environment. These are not part of the WTO, and

some have been highly effective in addressing specific environmental problems. The Montreal

Protocol, for example, has been effective at reducing CFC emissions, and the long-run trends are

currently looking more hopeful for the ozone layer. Students could be assigned a specific agreement

◼ Answers to End-of–Chapter Questions

1. What are the three ways for countries to handle different standards abroad? Do standards have to be

the same for countries to be integrated?

Answer: The three ways for countries to handle different standards are harmonization, mutual

recognition, and separate standards. Countries do not have to have the same standards

2. What are the advantages and disadvantages for countries that adopt the same standards?

Answer: Advantages: One possible advantage is the gain in economic efficiency from sharing the

same standard. Shared standards permit manufacturers to produce a single standard rather

than multiple standards, and this may allow firms to capture economies of scale. Also,

Chapter 8 International Trade and Labor and Environmental Standards 53

common standards have the potential to increase and expand the commercial ties between

two or more countries.

3. When high-definition television (HDTV) was first considered a possibility in the United States, the

U.S. government held a competition to select the technical standards that would be used nationwide.

Why would the government see an advantage to setting one standard for HDTV, and what are

the pros and cons for the private businesses that were interested in producing HDTV for the U.S.

market?

Answer: There are efficiency gains when two or more countries adopt the same standards. For

example, since shared standards permit manufacturers to capture economies of scale,

we would expect all 50 U.S. states to adopt the same standards. Further, the adoption

4. Why do standards vary across countries? Illustrate your answer with examples in the area of labor

standards.

Answer: Standards in general, and labor standards in particular, vary greatly. They range from

basic standard rights such as the right to be free from forced labor and the right to

representation in a union, to more contentious rights such as universal standards for

54 Gerber • International Economics, Seventh Edition

variation in incomes and living standards around the world. For example, if low-income

countries (with relatively abundant unskilled labor) were forced to pay a minimum wage

high enough to satisfy critics in high-income countries, low-income countries would

suffer when the high wage rates force employers to close down their production.

Consequently, unemployment would rise.

5. What are labor standards, and why are arguments about labor standards confined primarily to

arguments between high-income countries on the one hand, and low- and middle-income countries

on the other?

Answer: As mentioned in the text, defining labor standards is difficult given the wide variation in

incomes and living standards around the world. Even though there is a fair amount of

ambiguity attached to labor standards, most people would probably agree with the

6. Discuss the reasons why using trade barriers to enforce labor or environmental standards may be less

efficient than other measures.

Answer: First, as was shown in Chapter 7, imposing trade barriers is very costly. They create

deadweight losses at home in consumption and production. Second, only large countries,

if any at all, could use trade barriers successfully to stop the offending country. Even a

large country may be unable to use trade barriers effectively unless a large number of

Chapter 8 International Trade and Labor and Environmental Standards 55

barriers may lead to retaliation and larger trade wars, which could be very costly to all

countries involved.

7. What are the arguments in favor of using trade barriers to enforce labor and environmental standards?

Assess each argument.

Answer: Labor and environmental activists advocate for the use of trade barriers (tariffs, quotas, or

outright limitation of imports) to enforce labor standards. They argue that pressuring a

8. One common critique of the WTO is that it overturns national environmental protections and forces

countries to lower their standards. For example, when the United States tried to protect endangered

sea turtles, the WTO prevented it. Assess this claim.

Answer: The United States sought to protect endangered sea turtles that were harmed by shrimp

trawlers that do not use turtle excluder devices (TEDs) on their nets. In 1987, the

United States issued guidelines requiring shrimp trawlers to use TEDs on their nets. It

then announced in 1989 that it would ban shrimp imports beginning May 1991 from

9. What are the alternatives to trade measures for raising labor and environmental standards? What are

the strengths and weaknesses of each one?

Answers: These are: (1) Labels for exports: this is a certification process producing a label that is

attached to the good when it is produced and has been partially successful in telling

56 Gerber • International Economics, Seventh Edition

consumers that the good is produced in humane and environmentally friendly ways. Even

though this mechanism plays an important role in alleviating conflicts between trading

countries, it has its own problems. First, it has been a cause of conflict between labor and

management when foreign inspectors are allowed to intrude. Second, many countries

consider foreign intrusion as an infringement of their sovereignty. It may be hard to

convince consumers to trust the labeling information as labeling becomes more

widespread. (2) Requiring home country standards: This measure requires firms that open

operations in foreign countries to hold these operations to the same standards as their

domestic, or home, operations. In other words, a firm cannot try to cut corners or save

money by allowing its foreign holdings to operate according to lower foreign standards.

There are a few advantages of this measure: (a) it eliminates the fear of a race-to-the-

bottom by making it impossible for home-based companies to exploit low standards;

(b) it shifts the costs of improved standards to firms and consumers in high-income

countries; (c) it removes the threat that domestic firms will relocate abroad and ensures

that any relocation that takes place is due to foreign comparative advantage; and (d) it

avoids the problems of high-income countries dictating which standards are used. The

requirement of home-country standards forces firms with cross-national boundaries to

conform to whichever standards are higher. One weakness of this approach, of course, is

that it only addresses the problem of firms in high-standards countries that go abroad to

potentially low-standard countries, and not vice versa. (3) Increasing international

negotiations, possibly using the ILO for labor and creating new agreements for the

environment.