Differences in labor rights and labor standards among countries at varying levels of development are growing in importance as a factor in international trade. The North American Free Trade Agreement nearly failed passage in the United States Congress because of concerns about worker rights violations in Mexico and fears that U.S. jobs would be lost as companies moved to Mexico to take advantage of lax labor standards.(1) After NAFTA's passage, worker right issues remain high on the agenda for monitoring the effects of the new trade agreement.(2)
The Maastricht Treaty on further integration of the European economy was jeopardized by Great Britain's refusal to accept the Social Chapter guaranteeing worker rights.(3) British obstinacy has led to accusations that it is attempting to lure enterprises from the Continent with promises of low labor costs and weakened unions.(4)
A stubborn recession in Europe has prompted calls for cutbacks in social benefits and trade union power.(5) Analogous to U.S. concern about job losses to Mexico, Europeans now see the newly-marketizing nations of Eastern Europe as likely prospects for "runaway shops" and attendant job losses.(6)
Mindful of consumer sensibilities and their public images, several multinational corporations with subsidiary manufacturing operations in developing countries have begun elaborating codes of conduct on worker rights.(7) Even the new Euro Disney theme park outside Paris, a project hoped to bolster the big U.S. trade surplus in services and entertainment, got off to a rocky start when the Walt Disney Company sought to enforce its personal appearance code on French employees who claimed the code violated their rights.(8)
Disparities in labor rights and labor standards clearly affect international trade and investment choices, as these examples show. But do highs standards and strong enforcement of worker rights act as a drag on trade and investment, slowing global economic development? Or do they enhance mass purchasing power and political stability, thus promoting development?
From the standpoint of international investors seeking to maximize profits, strong worker protections curb the most efficient use of labor and create disincentives to invest. Minimum wage requirements, child labor law, occupational safety and health standards, job security rules, union organizing rights and collective bargaining obligations all interfere, to a greater or lesser degree, with pure market forces. They impose costs on companies trying to compete in the global economy. From the investor's standpoint, these costs could be minimized or avoided in countries with lower standards or less stringent enforcement of labor rights and labor standards. Such countries become tempting targets for new investment aimed cost-saving systems.
Fed up with "burdensome" labor standards, many companies shift operations to countries with what they feel is a more favorable investment climate - lower wages, weaker unions and less regulations of industry.(9) Such movements are most noticed from developed to developing countries, but they also occur from one developed country to another, and between developing countries. For example, BMW is building a large manufacturing facility in South Carolina, citing lower wages and the prospect of operating without a union, in contrast to its costly labor contract with the powerful German Metalworkers Federation.(10) South Korea is concerned about job losses to other developing countries with even lower labor costs after its own long-repressed labor movement began demanding great freedoms.(11)
Free market theorists would call such transfers beneficial, reflecting a comparatively advantageous use of labor. To the extent they discipline governments into easing burdensome labor regulations, such transfer may also promote more efficiency in the production process. While there may be short-term disruptions …