How Labor Issues Are Complicating the Latest Wave of Free Trade Pacts

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In Guatemala this April, the U.S. government made what many called a troubling decision to grant the government of Guatemala four additional months to come into compliance with the Mutually Agreed Enforcement Action Plan the two countries signed a year earlier. The plan was enacted in response to a 2008 complaint filed by the AFL-CIO and six Guatemalan trade unions under the labor provisions of CAFTA, the trade pact that binds the U.S. with five Central American nations and the Dominican Republic.

The trade unions charged that the government of Guatemala had failed to comply with its obligations to “effectively enforce” the labor rights chapter of CAFTA, which provides Guatemalan exporters with preference access to the U.S. market. Among other grievances, the unionists charged that some employers rob Guatemalan workers of their wages and pensions, and fail to pay off those rare legal judgments that are made against local companies.

Similar reports of abuses have been widespread elsewhere in the region. In 2011, the U.S. and Colombia launched the U.S.-Colombia Action Plan, intended to address concerns about Colombia’s poor record of protecting labor rights, just as the two nations were about to enact their bilateral free-trade agreement. Since then, dozens of Colombian trade unionists have been murdered, and about 1,000 have received death threats, according to trade unionists. Because of widespread fears of violence and employer retaliation associated with organizing or joining a trade union, only 4% of Colombian workers are union members, according to the non-profit U.S. Labor Education in the Americas Project.

Why have such clauses become so common in free-trade agreements? What are the international legal foundations of such labor rights clauses? Why are the governments of those Latin American countries finding it so difficult to comply with the labor rights chapters of these trade pacts? What are the implications for U.S. and other multinational firms that want to invest in those countries, and take advantage of the preferential tariff treatment provided by those pacts?

Public Pressure

“Workers have long sought to compel companies to observe basic labor standards in the workplace and to have them accept that workers possess certain rights, such as freedom of association and the right to engage in collective bargaining,” notes Janice Bellace, Wharton professor of legal studies and business ethics. “Recognizing that national legislation often is not sufficient, they have sought a way to establish certain standards worldwide.”

“Over the past 20 years, companies have been responding to pressure to be more sensitive to the conditions under which workers work, regardless of whether the company owns the place where the workers are working.” –Janice Bellace

The movement to achieve internationally accepted standards and workers’ rights arose before World War I, but it wasn’t until 1919 that the International Labor Organization (ILO) began to adopt conventions that set international standards on various aspects of working life, Bellace says. Today, there are 189 conventions, eight of which are seen as proclaiming fundamental principles and rights that should be granted to workers.

In 1998, the ILO issued the Declaration on Fundamental Principles and Rights at Work, identifying four core labor standards that all countries should promote, regardless of their level of development: freedom of association and the right to organize and bargain collectively; freedom from forced labor; the effective abolition of child labor, and non-discrimination in employment.

The linkage between free-trade agreements and worker rights provisions began during the debate over the NAFTA pact in 1994, when the inclusion of such a provision “opened the way for NAFTA to become politically palatable” to those Democrats who were suspicious of free-trade agreements, says Barbara Kotschwar, research fellow at the Peterson Institute for International Economics. Since then, such provisions have been written into numerous free-trade agreements virtually as a matter of course. In a recent report, the International Labor Organization found that the number of FTAs with provisions on worker rights had grown from just four pacts in 1995, to 21 by 2005, and then 58 pacts by June 2013.

“Over the past 20 years, companies have been responding to pressure to be more sensitive to the conditions under which workers work, regardless of whether the company owns the place where the workers are working,” Bellace notes. “Traditionally, labor laws, such as OSHA in the U.S., are directed at the employer, not the buyer of the goods made in that place. What’s interesting is that in the last 25 years, there is a great movement — among activists, NGOs and consumers — to say that big companies have a responsibility to do [these] things.”

According to Kimberly Ann Elliott, senior fellow at the Center for Global Development, a Washington-based research center, U.S. trade negotiators have insisted on including labor provisions in every new free-trade pact because the politics of trade in the United States demand it. “Past trade agreements, if they were with small, distant countries with relatively high standards, good working conditions and few sensitive exports — such as Australia, Chile, and Singapore — or those driven by foreign policy, as with Jordan, received strong congressional support,” she notes.

But gaining congressional approval of agreements with countries where labor standards, or their enforcement, are well below international standards has proven more difficult, she adds, “especially when the countries also export sensitive products, particularly apparel.” The debate over worker rights in U.S. FTAs was “partisan and rancorous,” Elliott says, but the general trend over two decades has been to strengthen the labor chapter, making it more enforceable and, since 2007, to tighten the linkage between national laws and international standards.

Given widespread skepticism about free trade pacts, it seems obvious that if the Latin American governments had not promised to vastly improve their human rights records, the U.S. Congress would not have approved the Central American Free Trade Agreement (CAFTA), which passed by just one vote in 2005.“The countries had to agree; and with Colombia in particular, they put a Labor Action Plan into their [bilateral] FTA that was much more specific than you would find in most free trade agreements,” Bellace adds.

These core standards relate to the framework rules that govern labor market transactions, not to specific outcomes, such as wages, stresses Elliott. They are comparable to the rules that protect property rights and freedom of transactions in product markets, which most economists view as necessary for market economies to operate efficiently,” she adds. “And just as universality of property rights and freedom of market transactions does not imply identical laws or institutions among countries, universality of these core labor standards does not imply uniformity in the details of the protections or in the institutions that implement them.”

Case Studies

When it comes to meeting their promises, “Colombia and Guatemala would stand out as particularly egregious situations” with respect to ILO Convention 87 — workers’ freedom of association, notes Bellace. “Normally, in the United States, you may hear that someone is fired for trying to start a union; you don’t hear that people are shot for doing that. In Colombia and Guatemala, that is a frequent and documented occurrence. It stands out as an unbelievable situation.”

“Rather than being at odds, labor standards and globalization can create positive synergies.” –Kimberly Ann Elliott

Brian Finnegan of the AFL-CIO’s international division agrees, adding that the governments of these countries continue to lack sufficient resources to comply with their obligations. He cites the case of a Korean-owned plant in Guatemala that refused to open its doors to labor inspectors, according to workers at that facility. The government was unable — or perhaps unwilling — to compel the plant to open its doors, he says.

According to Bellace, “When you send out the inspector, and the company won’t let the inspector in, what is the labor ministry supposed to do?” In the U.S., the next step would be to get a court order, and companies would be expected to comply. But that is not necessarily the case in Colombia and Guatemala, she says. “So you can see the problems where the government either lacks the will, or doesn’t have control of the situation…. If you have a country like that, and the groups that are in dispute with each other are also of very different political ideologies relating to labor, you can imagine that this violent use of getting your way will work its way into the workplace.”

These sorts of conditions can put multinational corporations into a very complex and difficult bind. Bellace cites the case of a well-respected firm that “has a fine record of human rights in the U.S. and around the world,” but faces conditions in Guatemala that are “extremely dangerous, even for the company’s top managers. You could say that the company should pull out of the country, but when you have an investment in directly owned facilities, it is also difficult. And you are providing jobs for people.”

On the other hand, such conditions, along with growing competition from China and Southeast Asia-based suppliers, can easily discourage newcomers from getting their feet wet in these countries, Bellace adds. “Unless you are a very experienced company, you would probably be dissuaded from entering [that country].”

Although its details remain sketchy, the controversial Trans-Pacific Partnership (TPP) agreement, which will link the U.S. with 11 of its Asia-Pacific trading partners, will include a chapter on labor standards because American negotiators will insist on it, according to Elliott. The foundations for the current TPP talks were laid by the Trans Pacific Strategic Economic Partnership negotiated in 2005 by Brunei, Chile, New Zealand and Singapore, which included a memorandum of understanding that affirmed the parties’ commitment to the ILO core standards and provided a forum for discussion of labor issues, but included no binding obligations.

Other non-American trade agreements that bind its future partners in the TPP contain few, if any, references to these issues, beyond provisions on the temporary movement of workers — but that is a different issue from addressing the rights at work covered by labor-rights standards, notes Elliott. “Because developing countries acting collectively were able to block U.S. initiatives, there is only one limited provision in international trade rules that explicitly addresses labor standards,” adds Elliott, author of the upcoming book, The Trans-Pacific Partnership: The Quest for Quality in a 21st Century Trade Agreement.

Could the inclusion of Vietnam in the TPP wind up undermining the prospects for Central American countries to expand their markets in the U.S.? Ironically, notes Kotschwar, Vietnam is the one emerging textile powerhouse that has enacted extensive economic reforms and doesn’t suffer from the violence or political instability endemic to most Central American republics. Could Vietnam’s stability attract many of the labor-intensive firms that have been reluctant to invest in Central America, as a result? Some of the Central American governments are deeply concerned about giving TPP trade preferences to the government of Vietnam, says Kotschwar, but a key question remains: Will Vietnam’s socialist, one-party state be able to enact the kinds of genuine labor rights that satisfy supporters of labor rights?

Economic Implications

Is it fair to conclude that the Central American governments’ statements that they would work to comply with the agreement was a sham? “The labor situation had got to the point where many thought: If this outrageous conduct is going on and nothing is happening to stop it, then the paper the FTA is written on is not even worth it,” Bellace says.

“Normally, in the United States, you may hear that someone is fired for trying to start a union; you don’t hear that people are shot for doing that. In Colombia and Guatemala, that is a frequent and documented occurrence.”  –Janice Bellace

Like Kotschwar and Elliott, Bellace suggests that Colombia has made some progress in its efforts to comply with its commitments to protect labor rights. “Firstly, the overall situation in Colombia about the rule of law or law and order has improved, and that has had some benefits in regard to the Colombian situation,” Bellace notes. “[But] I don’t think Guatemala has improved very much, which probably has resulted in the USTR’s office saying in 2013 that they would be moving to invoke arbitration [against Guatemala],” which could lead to sanctions against that country’s government in a process that has never before taken place under CAFTA.

While the provisions of the CAFTA labor rights chapter have neither managed to spark a boom in foreign investment in the region, nor destroy the region’s economies, the region has enjoyed at least one benefit, says Kotschwar. With the upcoming implementation of the first CAFTA arbitration process, “You now have a process that sheds light on improper labor provisions.”

Both supporters and opponents of labor-rights agreements have tended to oversell their arguments, Elliott notes. “Free trade advocates argue that trade encourages growth, which, in turn, leads to higher wages and better working conditions and that no special attention to labor standards in trade agreements is needed,” Elliott says. “Conversely, labor standards advocates, led by unions and human rights groups, argue that competition to attract foreign investment or to capture a larger export market share causes countries to suppress labor standards, or at least not to raise them, leading to a ‘race to the bottom.’” Whatever their view of labor standards, most developing country governments and free trade advocates oppose including labor standards as enforceable obligations in trade agreements for fear the provisions would be abused for protectionist purposes.

It’s particularly difficult to isolate the economic impact of labor-rights provisions on foreign investment and economic development, adds Kotschwar, because the pacts were not fully implemented until 2009, during the global financial crisis. “[The downturn] was a factor that multinationals could not have anticipated,” when making their plans for Central American investment, she points out. A half-decade after the implementation of CAFTA, all of the Central American nations that belong to the pact — with the sole exception of Costa Rica — remain in or near the bottom third in the World Economic Forum’s 2014 Global Competitiveness Index.

However, according to Elliott, “there is little compelling evidence either of a race to the bottom in labor standards, or of protectionist abuse of trade-labor linkages where they exist.” She says the impact of higher standards on competitiveness is more complicated than usually assumed because “any higher costs of compliance that do occur are often offset by higher productivity. Nor do nearly two decades of experience with worker rights conditions in the U.S. Generalized System of Preferences or the range of U.S. trade agreements offer support for the concern that trade sanctions to enforce labor standards is prone to protectionist abuse.”

In the case of the Central American Free Trade Agreement, which was enacted between 2007 and 2009, economists agree that it is difficult to assess whether the inclusion of such labor rights agreements in that pact had any impact on the disappointing rate at which CAFTA’s member-nations were able to attract foreign direct investment in subsequent years. While the direct impact of labor-rights provisions is hard to discern, given the multiple factors involved in these countries’ growth, they have clearly not proved to be a panacea. “Rather than being at odds, labor standards and globalization can create positive synergies,” Elliott notes. “Trade can contribute to growth, and the jobs it creates are generally better than those in agriculture or the informal sector, but it is also associated with increased income inequality.”

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