Labor's Stake in the WTO

01 မတ်လ 1998

When seven years of trade negotiations at last gave birth to the World Trade Organization (WTO) in 1995, the US labor movement was one of its leading skeptics. A world trade organization, labor supporters argued, would only accelerate the headlong rush to laissez-faire by dismantling national regulations. It would overwhelm attempts by nations to defend living standards and the ability of unions to fight for wages and health and safety laws - and it would make it harder for nations to defend the rights of workers to join unions. Labor lobbied hard against the WTO.

But now, ironically, the WTO could become a critical venue for advancing workers' rights worldwide. For the WTO has the power to review nations' domestic laws that create unfair trade advantages - including, potentially, labor laws. The WTO could define fair trade to include labor standards. Such linkage would be a historic change in the world's trading regime, and labor's stake in it.

The idea of linking labor rights with trade policy has been around since shortly after World War II when efforts to create an international trading regime began in earnest. However, the WTO represents the first opportunity since 1948 to give the issue serious attention.

Proponents of linking labor rights to trade rules build on the conventional case for free trade. For international commerce to be free, markets within countries must not be rigged to encourage exports and discourage imports. This is the fundamental principle of free trade and it is the central precept of the WTO.

Labor markets are a special case, because they are not conventional free markets. Minimum-wage laws and guarantees of free collective bargaining change the wages that market forces might otherwise produce. But the economic mainstream in advanced industrial countries has long accepted that some regulation of wages and working conditions can enhance overall economic efficiency, as well as fairness. If employers are compelled to treat workers decently, they will deploy them more productively. By that logic, certain labor practices common in undemocratic countries, such as child labor, prison labor, and denial of the right to form unions, can be seen as unfair trade practices - and, potentially, violations of WTO principles that trade should reflect acceptable rules of market competition.

Since wages affect all traded products and services, labor issues are central to the ultimate credibility of the WTO as the arbiter of a consistent rule-based international trading system. To the extent that wages are artificially held down because labor rights are abrogated, an indirect subsidy is extracted from these workers by their governments' policies, which arguably violate the WTO's free trade philosophy.

During the WTO's second-year review in late 1996 in Singapore, the United States actively sought to link labor rights with trade. However, this effort was blocked by a coalition of Third World nations (who saw the initiative as a form of protectionism) and the European Union (which was then dominated by conservative governments). Nonetheless, the attempt put the US government on the side of trade-labor linkage and forced WTO members to officially consider the issue of linkage for the first time. Even Sir Leon Brittain, the Thatcherite vice-president of the EU who actively opposed trade-labor linkage, was compelled by sister EU governments to affirm that "labor standards and other apparently domestic political issues are now the legitimate concern of the WTO because they are concerns of our constituents." The United States, according to the US Trade Representative's office in Geneva, will continue pushing for linkage.

The origins of the WTO

Established in the wake of World War II, the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT) formed the third pillar of the Bretton Woods system, which included economic development loans through the World Bank and monetary stabilization via the International Monetary Fund. While the IMF and the World Bank date to the original Bretton Woods conference of June 1944, trade rules were first addressed in a 1946 meeting that set tariff levels and developed a draft charter for an International Trade Organization (ITO) that was presented at the 1948 UN Conference on Trade and Employment in Havana. John Maynard Keynes, the original architect of the Bretton Woods system, had hoped to develop worldwide trading rules that would avoid the destructive protectionism prevalent during the Great Depression, while preserving a commitment to full employment.

The ITO charter contained sections on employment, commodity agreements, business practices, international investment, and services. However, the ITO was to be stillborn. And the prominence of employment in the construction of the 1948 ITO would be lost in the creation of the 1995 WTO.

Between 1946 and 1948, the start of the Cold War had closed what, in retrospect, was a very narrow window for postwar internationalism in the United States that included an activist role for government. GATT was far weaker than the proposed ITO, but even GATT was opposed by the American right, as an infringement on American sovereignty. Conservative commentator Fulton Lewis, Jr., coined the slogan, "a GATT in your ribs," from the popular James Cagney and Edward G. Robinson Hollywood genre of the day, in which guns, in gangster slang, were called "gats."

When in 1950 the Truman administration realized that it lacked congressional support, the ITO died. In its place the key trading nations adopted the earlier and more limited 1946 agreements and established the "provisional" GATT - pending a final transformation into some type of permanent treaty obligation. It took longer than expected - 47 years - to convert the provisional GATT into a permanent WTO, whose structure and provisions are not terribly different from the original 1948 ITO, except that the primary employment purpose of world trade became lost amid the free trade ideology popularized since then.

When the WTO replaced GATT on January 1, 1995, all of the GATT rules and its 47 years of precedents were folded into the WTO. Broader in scope than GATT, the WTO establishes rules of open trade in a variety of industries, including manufacturing, services, and agriculture, as well as intellectual property. A December 1997 agreement adds financial services and banking. National laws restricting the rights of foreigners to buy banks must be swept aside. While GATT relied solely on pressure and persuasion, the WTO has the power - through its trade policy review process - to pass judgment on domestic laws, regulations, and practices that affect trade. Although the WTO has not yet added basic labor rights to the list of fair trade practices subject to its rulings, decisions about how far the WTO can go to enforce labor rights will likely be reached within the next five years.

A House for labor?

Labor's best hope for mitigating the effects of competition from low-wage countries will thus be decided under the aegis of the WTO, where the battle lines are being drawn between a handful of industrial countries that seek to link trade rules with labor rights and an alliance of Third World countries with their corporate patrons who resist doing so. (These developing nations have been joined by some industrial-country governments, notably Australia, New Zealand, and Great Britain under John Major's Tory government.)

Low wages do provide a comparative advantage, often legitimately, because they reflect lower productivity. Low wages can help poor countries promote exports and develop economically. But if the world trading system embraces rules that uphold a minimum set of labor rights, this could prevent artificially low wages. A linkage of labor rights and trade rules would help promote a "high-road" form of development in the Third World by relieving those countries of a competitive race to the bottom in which they are pressed to guarantee a union-free and regulation-free labor market to a Nike or Wal-Mart supplier. If labor rights become part of the regulatory regime governing international trade, countries that deny basic labor rights to their workers will no longer enjoy an artificial competitive advantage, and workers will be less threatened by their corporate employers with flight to low-wage sanctuaries that offer an unfree labor market through government policies that produce low wages.

The only international institution that monitors labor rights today is the International Labor Organization. Since 1919, the ILO has sought to eliminate labor practices that stifle human progress. Its constitution states that the "failure of any nation to adopt humane conditions of labor is an obstacle in the way of other nations which desire to improve the conditions in their own countries." Over the years the ILO has produced conventions that it then asks its member countries to adopt. Central to this process is a set of five categories of conventions that form what are called core labor standards, which address practices concerning prison labor, bonded labor, child labor, discrimination, and rights of labor to organize and bargain collectively.

The ILO has historically played a much less significant role in global trade than GATT because it could only resort to moral suasion. While the ILO has achieved some limited success by investigating and publicizing gross violations, and by exerting pressure on countries through human rights campaign techniques, it cannot issue sanctions or other penalties. Without the economic power to pressure nations that fail to adhere to its core labor standards, the ILO lacks any real leverage. But if the WTO were to take up labor standards, the ILO vision would receive a huge boost.

How the WTO works

Bureaucratically, the WTO is an organization of some 500 highly paid professionals, mostly lawyers, who work in a building in Geneva that resembles a stylish nineteenth-century chateau - an interior of dark wood, plush leather furnishings, and floor-to-ceiling windows. Sitting alongside the Botanical Gardens just off Lake Geneva, the building feels more like a placid retreat than a working edifice. At a distance from the hurly-burly of domestic politics, government representatives and the WTO staff make significant decisions about international trade out of the public's view. It has no written bylaws, makes decisions by consensus, and has never taken a vote on any issue. It holds no public hearings, and in fact has never opened its processes to the public. Its meeting rooms do not even have a section for the public to observe its activities. And its court-like rulings are not made by US-style due process. Yet the WTO today rivals the World Bank and International Monetary Fund in global importance, because it has a dispute settlement mechanism with enforcement powers.

In the basic architecture of the current trading regime, three minimalist GATT principles continue to operate through the WTO. The first is the famous most-favored-nation status (MFN): Products traded among GATT members must receive the best terms that exist in any bilateral trading agreement. The necessity for an MFN clause arises because countries have bilateral trading agreements. So if the United States imposes, say, a 10 percent tariff on product X from country Y, it must use that same tariff on all other members of the earlier GATT and the present WTO. Today nearly all countries are either members of the WTO or would like to be. Twenty years ago, however, only a minority of nations were GATT members and the MFN concept had more force, because those outside of GATT could not receive MFN treatment except by specific bilateral extension. The annual congressional fuss over China's trade status occurs because China, which is not in the WTO, does not automatically receive MFN treatment. Congress must choose to grant it, withhold it, or subject MFN treatment to special conditions. In lending China MFN status, the United States voluntarily allows China to receive the rewards of WTO membership as it pertains to trade between the two countries, even though China has been denied membership to the trade organization as a whole.

The second GATT standard is called non-discrimination, which demands that countries not discriminate between foreign and domestic products. Goods produced domestically and abroad must receive the same "national treatment" - equal access to domestic markets. The third GATT principle is "transparency," which requires that any trade protection be obvious and quantifiable - like a tariff. Finally, in addition to these rules, the WTO has the authority to resolve disputes and to issue penalties and sanctions.

Moreover, its jurisdiction has been extended beyond manufacturing policy to include domestic policies that affect trade. The WTO can now apply to many service industries - including banking, insurance, management consulting, and travel - the same policies that GATT applied to manufacturing. Patents, trademarks, and copyrights, the bedrock of national policies that restrict trade in intellectual property, now fall under the WTO's jurisdiction. Investment issues can also be subject to WTO rules when restrictions on investment among countries restrain free flows of capital and goods.

Any member country can challenge another's practices and file a claim, which then triggers a formal procedure for resolving the dispute. Panels are established to look at each dispute - there have been about 30 established since 1995 - and, after several layers of appeals have been exhausted, the findings of these panels are binding. While GATT had a similar process, it did not have the power to recommend and enforce penalties, sanctions, and compensation - the WTO panels do, and the signatories to the WTO have agreed to abide by the findings. So far, every country found to be in violation of WTO rules has voluntarily accepted the findings and taken steps to correct its practices. (When a country first rejects a WTO panel's findings, the organization will face probably its most difficult challenge: enforcing a finding.) Once a special panel makes a decision about a specific dispute, a country found to be in violation of WTO rules has several options, including repaying the aggrieved country for its losses or changing its policies to comply with the panel's findings. In the event that a nation in violation elects not to abide by its rulings, the WTO allows the complaining party - as a last resort - to retaliate through the use of counter trade sanctions.

The most far-reaching new power of the WTO is its jurisdiction over national policies that affect trade. This has already allowed the organization to grapple with a wide variety of issues, including: the use of growth hormones in US beef production; US chicken production methods; India's process-based patent laws that allow its domestic pharmaceutical industry to re-engineer drugs developed in other countries; EU claims that more of its cheese should be allowed to enter US markets; the way Mexico catches tuna; and Thai, Malaysian, and Indian shrimp harvesting techniques that kill sea turtles. To this list are added intellectual property claims by France over the use of its regional wine labels and Switzerland's assertion that only it can use the Swiss Army Knife appellation. As more nations learn about WTO procedures, such examples will multiply.

Although these trade policy reviews have just begun, they offer opportunities to introduce uniform global stipulations into domestic policies, with predictable outcries and controversies. The consequent reports that will emerge are one of the WTO's levers for introducing standards for internal policies that influence trade, such as labor rights.

Labor rights and trade

The idea of linking labor rights and trade was included in the Havana charter of 1948. Article 7 of the ill-fated charter proclaimed that "members recognize that unfair labor conditions, particularly in production for export, create difficulties in international trade, and, accordingly each member shall take whatever action may be appropriate and feasible to eliminate such conditions within its territory." GATT lacked such a sweeping commitment and only allowed a country to restrict another's exports based on the use of prison labor.

The deliberations leading up to the formation of the WTO did not take up the issue of labor rights until almost the last moment. Because the Reagan and Bush administrations were uninterested, the issue did not receive attention until the late fall of 1993, and it only became a factor then because, in order to win congressional support for WTO approval, the Clinton administration needed to regain labor support lost during the NAFTA debate. When the Clinton administration did finally raise the issue of labor rights and trade, the ensuing uproar among Third World delegations forced the issue to the sidelines. It did not become part of the agreement, but the signatories agreed to take up the matter in the future.

This could be construed as either a victory or a defeat, and in fact it was both. Labor rights did not become part of the WTO. But the opportunity for tying labor rights to trade policy is significant, and subsequent maneuvers within the WTO have nudged labor's concerns closer to the playing field.

Shortly after the inauguration of the WTO in 1995, the International Labor Organization was commissioned to come up with a program for introducing labor rights into the development of WTO trade regulations. Its draft produced such a firestorm of controversy that it never saw the light of day. Even now, few people have seen it, and those who have will not talk about it. That experience has made the organization wary of treading onto this terrain unless its mandate is more clearly defined, although the issue of linkage surfaced again during the WTO's second-year review.

What next?

Organized labor and its friends would do well to make the WTO a priority issue. The labor movement's attention, divided as it is among so many demands, has not focused on Geneva in part for historical reasons. For years, the ILO afforded equal status to trade unions from communist countries. As a result, the AFL-CIO became disenchanted with the ILO and encouraged the United States to withdraw from the organization, which it did between 1977 and 1980. This Cold War legacy continues to cool the AFL-CIO's relationship with the ILO despite the potential linkage of international labor rights to trade policy and the importance of the WTO to this process. In addition, American labor should connect the WTO's interest in linking labor rights to trade with efforts to end child labor, which is certainly an issue destined to receive widespread support if the WTO begins to focus on labor practices. So far, these issues have not been integrated, and so the campaign against child labor remains a moral crusade, rooted in labeling and consumer consciousness and detached from enforceable trade sanctions and penalties.

But there are at least several concrete ways in which the WTO could soon be used to link labor rights to trade policy. The first opportunity will arise when China is proposed for admission to the WTO. Previous congressional statutes (specifically the Jackson-Vanik amendment) give Congress the opportunity to vote on China's accession to the WTO although congressional approval is not required for other countries. So if members of Congress choose, China's WTO membership could be conditioned upon the WTO's adoption of labor rights protections.

Second, future negotiations about specific products - with textiles being the most likely candidate - might tie trade rules to labor standards. The Third World's eagerness to accelerate the elimination of existing import quotas can be connected to their acceptance of labor rights as part of the WTO trading system.

The whole linkage issue won much greater prominence during the recent congressional rejection of renewal of fast-track negotiating privileges for the President. Now might be the time to press for the linkage of labor rights to trade rules in the WTO. The introduction of labor rights into the WTO framework is central to any strategy of softening global pressures on labor. It would allow the United States, for example, to file a claim against Indonesia for prohibiting trade union organization; Germany could object to Pakistan's use of children in the production of carpets; and the use of bonded and prison labor could be challenged wherever it occurs. This would be a major advance for labor in industrial countries, for human rights, and for the welfare of the most marginalized people in Third World countries.

Copyright 1998 The American Prospect